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These Professors Make More Than a Thousand Bucks an Hour Peddling Mega-Mergers

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Jesse Eisinger and Justin Elliott report in ProPublica:

IF THE GOVERNMENT ENDS UP approving the $85 billion AT&T-Time Warner merger, credit won’t necessarily belong to the executives, bankers, lawyers, and lobbyists pushing for the deal. More likely, it will be due to the professors.

A serial acquirer, AT&T must persuade the government to allow every major deal. Again and again, the company has relied on economists from America’s top universities to make its case before the Justice Department or the Federal Trade Commission. Moonlighting for a consulting firm named Compass Lexecon, they represented AT&T when it bought Centennial, DirecTV, and Leap Wireless; and when it tried unsuccessfully to absorb T-Mobile. And now AT&T and Time Warner have hired three top Compass Lexecon economists to counter criticism that the giant deal would harm consumers and concentrate too much media power in one company.

Today, “in front of the government, in many cases the most important advocate is the economist and lawyers come second,” said James Denvir, an antitrust lawyer at Boies, Schiller.

Economists who specialize in antitrust — affiliated with Chicago, Harvard, Princeton, the University of California, Berkeley, and other prestigious universities — reshaped their field through scholarly work showing that mergers create efficiencies of scale that benefit consumers. But they reap their most lucrative paydays by lending their academic authority to mergers their corporate clients propose. Corporate lawyers hire them from Compass Lexecon and half a dozen other firms to sway the government by documenting that a merger won’t be “anti-competitive”: in other words, that it won’t raise retail prices, stifle innovation, or restrict product offerings. Their optimistic forecasts, though, often turn out to be wrong, and the mergers they champion may be hurting the economy.

Some of the professors earn more than top partners at major law firms. Dennis Carlton, a self-effacing economist at the University of Chicago’s Booth School of Business and one of Compass Lexecon’s experts on the AT&T-Time Warner merger, charges at least $1,350 an hour. In his career, he has made about $100 million, including equity stakes and non-compete payments, ProPublica estimates. Carlton has written reports or testified in favor of dozens of mergers, including those between AT&T-SBC Communications and Comcast-Time Warner, and three airline deals: United-Continental, Southwest-Airtran, and American-US Airways.

American industry is more highly concentrated than at any time since the gilded age. Need a pharmacy? Americans have two main choices. A plane ticket? Four major airlines. They have four choices to buy cell phone service. Soon one company will sell more than a quarter of the quaffs of beer around the world.

Mergers peaked last year at $2 trillion in the U.S. The top 50 companies in a majority of American industries gained share between 1997 and 2012, and “competition may be decreasing in many economic sectors,” President Obama’s Council of Economic Advisers warned in April.

While the impact of this wave of mergers is much debated, prominent economists such as Lawrence Summers and Joseph Stiglitz suggest that it is one important reason why, even as corporate profits hit records, economic growth is slow, wages are stagnant, business formation is halting, and productivity is lagging. “Only the monopoly-power story can convincingly account” for high business profits and low corporate investment, Summers wrote earlier this year.

In addition, politicians such as U.S. Senator Elizabeth Warren have criticized big mergers for giving a handful of companies too much clout. President-elect Trump said in October that his administration would not approve the AT&T-Time Warner merger “because it’s too much concentration of power in the hands of too few.”

During the campaign, Trump didn’t signal what his broader approach to mergers would be. But the early signs are that his administration will weaken antitrust enforcement and strengthen the hand of economists. He selected Joshua Wright, an economist and professor at George Mason’s Antonin Scalia Law School, to lead his transition on antitrust matters. Wright, himself a former consultant for Boston-based Charles River Associates, regularly celebrates mergers in speeches and articles and has supported increasing the influence of economists in assessing monopoly power. “Mergers between competitors do not often lead to market power but do often generate significant benefits for consumers,” he wrote in The New York Times this week.

A late Obama administration push to scrutinize major deals notwithstanding, the government over the past several decades has pulled back on merger enforcement. In part, this shift reflects the influence of Carlton and other economists. Today, lawyers still write the briefs, make the arguments and conduct the trials, but the core arguments are over economists’ models of what will happen if the merger goes ahead.

These complex mathematical formulations carry weight with the government because they purport to be objective. But a ProPublica examination of several marquee deals found that economists sometimes salt away inconvenient data in footnotes and suppress negative findings, stretching the standards of intellectual honesty to promote their clients’ interests.

Earlier this year, a top Justice Department official criticized Compass Lexecon for using “junk science.” ProPublica sent a detailed series of questions to Compass Lexecon for this story. The firm declined to comment on the record.

Even some academic specialists worry that the research companies buy is slanted. “This is not the scientific method,” said Orley Ashenfelter, a Princeton economist known for analyzing the effects of mergers. Referring to one Compass study of an appliance industry deal, he said, “The answer is known in advance, either because you created what the client wanted or the client selected you as the most favorable from whatever group was considered.”

In contrast to their scholarship, the economists’ paid work for corporations rests almost entirely out of the public eye. Even other academics cannot see what they produce on behalf of clients. Their algorithms are shared only with government economists, many of whom have backgrounds in academia and private consulting, and hope to return there. At least seven professors on Compass’s payroll, including Carlton, have served as the top antitrust economist at the Department of Justice. Charles River Associates boasts at least three.

“There are few government functions outside the CIA that are so secretive as the merger review process,” said Seth Bloom, the former general counsel of the Senate Antitrust Subcommittee.

ONE EVENING IN 1977, University of Chicago law professor Richard Posner hosted a colleague from the economics department and a young law student named Andrew Rosenfield at his apartment in Hyde Park. The leading scholar of the “Law and Economics” movement, Posner wanted to apply rigorous math and economics concepts to the real world. “Why not see if there are some consulting opportunities?” he mused. The three of them agreed to form a firm, throwing in $700 for a third each. They called it “Lexecon,” combining the Latin for law with “econ.”

The trio then shopped their services to a dozen law firms, which all turned them down. “If you had to value the firm at the end of the tour, you’d have to say it was zero,” said Rosenfield.

They went back to their academic work. Not too long after, AT&T called Posner to ask if he could consult on its antitrust defense. The government was trying to break up Ma Bell. Posner agreed. So began a long and mutually beneficial relationship between AT&T and Lexecon.

Soon after its founding, Lexecon hired one of Chicago’s most promising young economists: Dennis Carlton. He had grown up in Brighton, Mass., earning degrees from a trifecta of elite local institutions: Boston Latin High School, Harvard, and MIT, where he would later endow a chair. He played basketball in his spare time. “Backaches have temporarily sidelined me from embarking on my second career as a basketball player in the NBA,” he joked in a 40th reunion report to his Harvard classmates in 2012. (After a short interview with ProPublica, Carlton subsequently declined comment, citing client confidentiality.)

Ronald Reagan appointed Posner to the federal bench in 1981. Posner left Lexecon. “Andy and I were young,” Carlton said. “Gee, we wondered: Is the firm going to survive? Not only did it survive, but it did very well.”

Lexecon capitalized on the Eighties merger explosion. M&A was rising to cultural prominence as the domain of swashbucklers. Corporate raiders enlisted renegade lawyers and brash investment bankers to take on stalwart names of American industry.

Behind the scenes, the less-flamboyant economists gained influence. From the time antitrust laws began to be passed, in the late 19th century, until the 1970s, courts and the government had presumed a merger was bad for customers if it resulted in high concentration, measured at thresholds much lower than the market shares for the dominant companies in many sectors today.

Led by University of Chicago theorists, a new group of scholars argued that this approach was overly simplistic. Even if a company dominated its industry, it might lower prices or create offsetting efficiencies, allowing customers more choice or higher quality products. In 1982, William Baxter, Reagan’s first head of the Justice Department antitrust division, codified the requirement that the government use economic models and principles to forecast the effect of mergers.

Lexecon seized the opportunity. “We were not just going to talk about economic theory but show with data that what we were saying could be justified,” Carlton said. By the late 1980s, the top four Lexecon officers were each making $1.5 million a year, according to a Wall Street Journal article.


ANY MERGER OVER a certain dollar size — currently, $78 million — requires government approval. The government passes most mergers without question. On rare occasions, it requests more data from the merging parties. Then the companies often hire consulting firms to produce economic analyses supporting the deal. (Sometimes the government hires its own outside academic.) Even less frequently, the government concludes it can’t approve the merger as proposed. In such cases, the government typically settles with the two companies, requiring some concession, such as sale of a division or product line. Just a handful of times a year, the government will sue to block a merger. Recently, the Obama administration has filed several major suits to block mergers, as companies in already concentrated industries propose bigger and bigger deals. According to a tally from the law firm Dechert, the government challenged a record seven mergers last year out of a total of 10,250.

Recent research supports the classic view that large mergers, by reducing competition, hurt consumers. The 2008 merger between Miller and Coors spurred “an abrupt increase” in beer prices, an academic analysis found this year. . .

Continue reading. There’s a lot more.

The process is broken, Congress is too corrupt to act, and the US is being looted.

Written by Leisureguy

25 September 2017 at 5:06 pm

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