The Final Victory of the Establishment?

When Ebay announced its intention last week to sell off PayPal, it was giving into the so called ‘activist investor’, Carl Icahn, who had been calling for the deal for months. The Financial Times reported Icahn’s victory statement calling “for PayPal to look to consolidate the payments industry further, either through acquisitions or a merger, to fight off competition from newcomers.” That such an individual should so openly declare war on competition, with total impunity, surely means the establishment has won.

In the not too distant past such anti-competitive moves were illegal. They were recognised as against the public interest and were prevented in the UK by bodies such as the Office of Fair Trading and the Monopolies and Mergers Commission. Moreover, where such anti-competitive corporations had been established, they could be dismantled, and were, notably in the United States. Competition was recognised as the spur to innovation and improvement, which was for the common good. That lesson had been learned from the 1929 Wall Street crash and subsequent great recession.

Those protections have been more or less completely dismantled and shareholder wealth maximising corporates have been encouraged to acquire the monopolistic power to fix markets. They have also been given opportunities to exercise the same market fixing powers with privatised utilities and outsourced public services. This is the work of the contemporary establishment. It is not just the work of Icahn and the investors who pocket the illegitimate profits, but also the corporate executives who pay themselves so infamously, the politicians who ignorantly shape the legal framework, and the academics who invent the necessary theoretical underpinning to justify the whole corrupted system.

The result has been the domination of all mature markets by small numbers of major players who exercise effective control over prices and are therefore able to take what profit they like without delivering value. This site has previously flagged up the notoriously exploitative big six energy providers, big four auditors, and big four public services companies, as well as many individual companies.

Now Glencore, the world’s largest commodity trader that has featured regularly on these pages, is having talks about merging with Rio Tinto. That would consolidate its position as one of the world’s largest miners following its takeover of Xstrata in 2012. Glencore already has price fixing market shares of strategic minerals including nickel, zinc, platinum, chrome, and copper, as well as being highly influential in grain markets following its acquisition of Viterra, and of thermal and coking coal. Rio would strengthen these positions and add a dominant position in iron ore.

Glencore demonstrated its power and willingness to exploit its price fixing capability when the Russian wheat and corn harvest was threatened by drought.. Glencore bet prices would rise and made proprietary trades accordingly. Having placed their bets, they took the precaution of making sure prices went up. The Financial Times reported that the head of Glencore’s Russian grain unit encouraged Moscow to ban wheat exports, thus driving prices up. Within two days of encouragement, wheat exports were banned, prices rose and Glencore made its killing. Elsewhere in the world people who were already struggling to survive had to struggle that bit harder.

Glencore’s excess is demonstrated by its rewards to CEO Ivan Glasenberg. He took a $182mn dividend in 2013, following $173mn in 2012, paid on the $6.3bn of shares distributed to him as part of Glencore’ initial public offering in 2011. The FT had reported that the company had paid “almost no corporate taxes on its trading business for years in spite of bumper profits.”

That’s how it works. Icahn is no doubt correct in arguing that ‘competition from newcomers’ would spoil the fun for himself and other investors. But it must be a matter for some regret that other members of the establishment, notably politicians and academics, are so supportive of this anti-competitive culture.

Surely they can’t all be in it together!

One thought on “The Final Victory of the Establishment?”

  1. This is a really good tip particularly to those fresh
    to the blogosphere. Brief but very precise information… Many thanks for sharing this one.
    A must read article!

    Like

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