United States v. Connecticut National Bank – Oral Argument – April 23, 1974

Media for United States v. Connecticut National Bank

Audio Transcription for Opinion Announcement – June 26, 1974 in United States v. Connecticut National Bank

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Warren E. Burger:

We’ll hear arguments next in 73-767, United States against the Connecticut National Bank.

Mr. Shapiro, I think you may proceed whenever you’re ready.

Howard E. Shapiro:

Mr. Chief Justice, may it please the Court.

Like the case which the Court has just heard, this case is an appeal by the United States from an adverse decision by the District Court in a suit under Section 7 of the Clayton Act, challenging the merger of two banks.

Like the preceding case, it also raises questions concerning the application of the doctrine of potential competition to bank mergers.

The merging banks in this case are the Connecticut National Bank headquartered in Bridgeport, Connecticut and the First New Haven National Bank headquartered some 20 miles away in New Haven.

The Bridgeport and New Haven metropolitan areas are beyond the New York City commuter zone in the southwestern corner of Connecticut.

What we’re concerned with in this case is both the impact of the merger on the Bridgeport and New Haven metropolitan market and its impact on the State of Connecticut as a whole.

This case, unlike the preceding case involves, however, a question as to the line of commerce, a question as to the section of the country, questions as to competitive effect, regulatory effect, as well as convenience and needs.

I will describe the banks first and then I would like to briefly give an overview of the case before stating what the District Court did.

First New Haven, the New Haven Bank, has assets of $333 million, deposits of $272 million, loans of $224 million.

It’s the eighth largest commercial bank in the State.

It’s an important bank, it has a loan limit of $2.3 million and it operates some 22 offices, 17 of them in the New Haven metropolitan area.

Three of them are really over in the Bridgeport metropolitan area.

Together — well, the Connecticut National Bank, the acquiring bank is the State’s fourth largest commercial bank.

As of 1972, it had assets of $463 million and deposits of $412, loans of $253 million and a loan limit of $2.8 million.

So it too is a big and healthy bank.

It’s been expanding vigorously through the Bridgeport metropolitan area and it’s gone beyond it.

It has offices as far east as New Haven, or almost in New Haven and as far west as Stanford.

The two banks, when they’re put together, will account for about 11.7% of the total deposits in the state.

Now banking in the State of Connecticut is concentrated.

The state has, I think as of this moment, there are some 72 banks chartered in the state.

At the time of trial, I think it was 61.

There have been some new entry which I will come to in a moment.

The top ten banks account for about 83% of all of the deposits in the state and those top ten banks are therefore extremely significant in the development of banking in the state.

Lewis F. Powell, Jr.:

Mr. Shapiro, are there any standards used by the government or otherwise in determining when there is a concentration, an undue concentration of banks in a particular area?

Howard E. Shapiro:

Yes, Your Honor.

Lewis F. Powell, Jr.:

What is the test?

Howard E. Shapiro:

We have used the test of the Philadelphia Bank case.

When you have a situation in which the top ten banks in a particular area as large as the state reach 80%, the top five banks reach 40% while we think that this is a serious situation from the standpoint of concentration.

Lewis F. Powell, Jr.:

You apply that only to the state?

What would you do —

Howard E. Shapiro:

No, we would use it in a local market also.

In the local markets, the concentration is equally high.

The 11 major metropolitan areas in Connecticut, the three largest banks, with the exception of Norwalk, this is true anyway, the three largest banks account for over 80% of the deposits.

Lewis F. Powell, Jr.:

Are there any communities in Connecticut with only one bank?

Howard E. Shapiro:

There are smaller communities with one bank, yes Your Honor.

Lewis F. Powell, Jr.:

What do you do about those?

Howard E. Shapiro:

We recognize it in the local community.

There may be some small communities that can’t support more than one bank but the test really is not a mechanical one of population but a test of threat to solvency.

Congress has, in effect, prescribed in the Bank Merger Act and in Section 7 that competition shall determine what the structure of banking should be, subject to safeguards to prevent the failure of banks, to prevent insolvency.

Lewis F. Powell, Jr.:

Do you consider a ratio of banking offices to population in this equation?

Howard E. Shapiro:

No, Your Honor, we do not because the test of competition is always a test of independent decision making entities.

It’s the firm, it’s the bank which is the competitive measure.

Banking offices represent a convenience factor for the community.

Let me give an example.

Suppose you have a community with one bank that operates two offices or three offices.

Now, that simply is not a competitive relationship because the three offices are all owned by one bank.

On the other hand, if you have two banks in the community, each operating one office, then you do have competition.

So the competitive measure is not a question of ratio of offices to population, but a ratio of banks to banks.

Now, returning then to the situation in Connecticut, I have mentioned that the state’s general deposit situation is highly concentrated, the ten largest banks controlling over 80%.

The same concentration appears in the local markets and it appears particularly in the markets with which we are concerned, Bridgeport and New Haven.

The merging banks here each have very large percentages in their respective markets.

Connecticut National has about 40% of the deposits in the Bridgeport area.

First New Haven has 40% of the deposits in the New Haven area.

Now I am measuring this by deposits in the area because there are other banks, the two Hartford, well, I will come in a moment to those.

The banking structure in the state, dominated by the ten largest as we view it, has been changing.

There are two very large banks in Hartford.

They have been expanding steadily in a series of foothold acquisitions and de novo office expansions.

They moved steadily to the point where they are substantially bigger than the next eight banks.

Howard E. Shapiro:

Then you come to another breaking point in the state’s banking structure.

Below the first 10, the banks become quite, become relatively small.

So these first ten banks are probably the place where the strongest competitive potential is concentrated.

The Bridgeport and the New Haven banks that are merging here have been moving toward each others markets.

In fact, they actually were in competition with each other in an area involved in this case, a so-called four town area.

A little to the north of New Haven and somewhat to the east of Bridgeport and that aspect of the case led us to allege that there was a diminution of actual competition, but the defendants proposed to the District Court to divest themselves a certain of those offices and the District Court accepted that offer so that that actual competition factor is not itself an issue in this case.

However, what that actual competition offer does show is that these two banks were coming into conflict with each other.

These are not just potential entrants on some theory of having the capacity to enter the market.

They are next door to each other right now.

They are on the edge of each other’s markets and they are, for that reason, along with their great economic strength, the most likely entrants we contend into each other’s markets.

The District Court rejected our arguments on a number of grounds.

It found first of all that banking in Connecticut — Commercial banking in Connecticut is not a line of commerce.

It concluded that savings bank competition in Connecticut is so strong as to destroy the distinctiveness of commercial banking or rather, as I shall argue; it concluded there was a broader line of commerce called banking which included both commercial banks and savings banks.

It also concluded that the metropolitan areas in the state of Connecticut are not banking markets.

The only banking market it recognized was the state as a whole.

When we contended that if that is true then the Standards of Philadelphia Bank should apply to the concentration that appears in the state, the court rejected this view on the ground that concentration didn’t really apply here and the defendants now argue that well it doesn’t mean they are in head to head competition, it just means the state as a banking market.

The court concluded that it would be impossible for the defendant banks to enter by any means that the Government had described and I shall come to those.

It concluded that the regulatory factor showed that competition was not seriously injured by any potential competition contention of the Government and finally it sustained the “convenience and needs” defense.

Now before I go to these many issues, I think I should at least try to make an overview of what it is the Government thinks that you are doing in this potential competition cases.

We start with the premise that in the Philadelphia National Bank, this Court concluded that Section 7 applies to banking and that concentration ratio is our primary index to the diminution of competition when banks merge.

This was followed in 1966 by a thorough congressional reexamination of the problem in the Bank Merger Act of 1966.

Out of that came a conclusion that the antitrust laws remained applicable to banking, that antitrust standards should apply in banking, subject to a new defense the convenience and needs defense which was to apply.

The Bank Merger Act of 1966 also provided that the bank regulatory agencies would be permitted to intervene as parties to defend their own decisions.

Now viewing this history, the Government has concluded that Section 7 is extremely important in preventing a consolidation of banking among the various states to the point where only a few institutions dominate all of the states’ banking.

In Connecticut as a whole, the 10 largest banks have been considering merger with each other since 1968.

Since 1969, there have been four mergers approved by the regulatory authorities among the 10 largest banks.

Now the two merging banks here are the fourth and eighth largest in the state and they are right next door to each other.

They have spread to the point where they actually competing with each other.

Each is a big, strong and healthy institution and they are well managed.

They are the dominant local banks, 40% of deposits in their primary markets in Bridgeport and New Haven.

Howard E. Shapiro:

Those markets are concentrated and each bank, therefore, can bring important new competition into the market of the other, if they will come in by independent entry.

Now those markets are attractive and each bank has strong incentives to expand into them.

So long as the attractive and profitable merger route is open, however, large banks will not give serious consideration to alternative means of entry.

Their management, anxious to find merger partners will squelch any proposals for independent entry and their managements will argue that we have to merge with other large banks because we all have to grow until we are as big as the biggest and the result is of course that the biggest becomes the measure of the size of all of the banks and you have a trend that cannot be stopped if this standard is the one to govern.

This Court rejected that view in Philadelphia Bank and I think it did so rightly.

William H. Rehnquist:

Well, if you are right as to the standard, Mr. Shapiro, why is the Government had such a miserable record in the District Courts with these challenges to bank mergers?

Howard E. Shapiro:

Because potential competition is a doctrine I think that lawyers instinctively react hostilely to.

It’s an economist’s concept.

I think part of the doctrine is very well stated, one side of the doctrine is well stated in the brief for Connecticut National Bank where the wings aspect of the doctrine is summarized.

The other aspect, the de-concentrating aspect is really not just an economist’s concept, it is a concept which is derived from Section 7 of the Clayton Act because it’s a concept which aims at Section 7’s purpose, as this Court described in Brown Shoe to stop the rising trend toward concentration so the Government has taken potential competition and argued you can use that as, you can use Section 7 through the potential competition doctrine as a device to channel the desirable expansion of banks into pro-competitive directions.

Most courts simply find this novel.

It’s much the same with many of the other antitrust laws.

In the beginning, people had difficulty with them.

But it’s a very American concept, Your Honor, that we should have an atmosphere of competition and that the structure of industry should not be decided by administrative or judicial fiat.

Someone saying as the District Court here did, that there should be four or five large banks in the state.

Rather structure is to be determined by the processes of competition and that’s what Congress decided when it made Section 7 applicable to bank mergers, not just reiterating the general view that an administrative agency must give attendance to the doctrines of antitrust but rather making it specifically applicable.

Now —

Potter Stewart:

What was the genesis of potential competition?

Was that in the Pen-Olin case?

Howard E. Shapiro:

The first statement of it was in the Pen-Olin case.

Potter Stewart:

And that was not a — it is not a genesis in economic fraternity, it was in this Court, it was a judicial genesis?

Howard E. Shapiro:

I think the Court has been ahead of the economist, Your Honor.

Potter Stewart:

Maybe.

Howard E. Shapiro:

In this respect and although there was in the Pen-Olin —

Potter Stewart:

Only ahead is not quite the right word.[Laughter]

Howard E. Shapiro:

Well, in the in the Pen-Olin decision, there actually is a reference to one of the T&AC report which initially summarized the doctrine and there are traces of it in earlier cases, although it really received its first general recognition.

Potter Stewart:

And we just first really articulate it in the Pen-Olin case, is it not?

Howard E. Shapiro:

In the Pen-Olin case.

Yes, Your Honor.

Byron R. White:

That was just one part of it?

Howard E. Shapiro:

That was one side of it, the wings aspect.

Potter Stewart:

That was the potential competition and then the genesis of the perceived potential competition, was in Falstaff?

Howard E. Shapiro:

No, no, wings —

Byron R. White:

(Inaudible)

Howard E. Shapiro:

Wings, that’s right.

Potter Stewart:

Both the actual and the perceived?

Howard E. Shapiro:

Yes sir.

There is a general review of it in the concurring opinion in Falstaff which sets forth the different categories and how they were recognized.

Well to return just briefly to my overall summary.

Potter Stewart:

And then the third, which was in the previous case, I am not sure if it is here, the possibility of the acquiree itself expanding into the other market that was in the Washington case.

Is that reflected in any decision of this Court in the Section (Voice Overlap)

Howard E. Shapiro:

No that’s a —

Potter Stewart:

It’s a brand new doctrine, it’s genesis in the Justice Department, right?

Howard E. Shapiro:

We think it is genesis in the general policy of competition.

But what we’re concerned about mainly, the reason we keep finding these genesis is that Section 7 is, as we see it, something to channel its expansive force, that the banks are undergoing now into pro-competitive direction so that you will determine banking structure by the pro-competitive entry of banks Now the large banks in this case claim that they have to merge because they have to meet the competition of the great banks in Hartford, they say —

Potter Stewart:

There is a shadow of New York City in this case?

Howard E. Shapiro:

And there is a shadow of New York City, they contend.

We have to meet that.

Well, I think the shadow of New York City is somewhat overstated, but on the competition with the Hartford Banks, they say they can’t really make it unless they can get bigger, that they can’t enter any other markets unless they get bigger.

I just like to point out that since this case was tried in Connecticut, there has now been eight new bank charters issued and five of those bank charters are in the Bridgeport metropolitan area.

Now when District Court said, “Well, you see you don’t have to worry about potential competition because there will be new banks coming in all the time.”

But of course those are very small banks and the defendants were very large banks say we can’t overcome the economic barriers to get into these markets when the little banks can and these big banks would bring a much more important competitive contribution for the very reasons they claim that they have to meet the competition of the Hartford banks which over the state wide area has such important resources.

Now what the effect of this merger trend in Connecticut is going to do is to increase statewide concentration and create a danger with the system wide pricing that is characteristic in Connecticut, but you’re going to have a statewide oligopoly.

It will deny the Bridgeport and New Haven markets the competitive benefits of independent entry by these large banks which are poised right at the doorstep and it invites other mergers from the few remaining banks.

In fact the fourth merger approved by regulatory agency was approved on April 4 and it’s a merger of the third largest and ninth largest bank in the state.

I don’t see how, under the standards the District Court adopted here, the antitrust division or the regulatory agencies are going to be able to apply the antitrust laws as they must to stop this trend and now I would like to turn specifically to the issues in the case.

Warren E. Burger:

I think we will resume there right after lunch.

[Luncheon Recess]

Mr. Shapiro, you may continue.

Howard E. Shapiro:

Thank you, Your Honor.

Howard E. Shapiro:

I was about to turn to the specifics of the case, the District Court’s rulings on line of commerce in section of the country, the problem of condition of entry, competitive effects and convenience and needs.

With respect to the line of commerce, the District Court found that there is in Connecticut a broad line of commerce called banking, consisting of the commercial banks and the mutual savings banks.

We need not, for purposes of this case, contest the existence of this broad line of commerce, or as we view the matter, under this Court’s decision in United States against Continental Can, the existence of the broader line of commerce does not preclude the existence of the more specific lines, commercial banking and other types of financial institutions.

In fact in the Phillipsburg case, this Court recognized that there was significant competition among thrift institutions for the same kind of business that the small banks in the Phillipsburg area were competing for.

Now the commercial banking business in Connecticut has been cutting into the province of the savings banks, particularly with respect to competition for real estate loans.

Today those — there’s no doubt that savings banks and commercial banks in the State of Connecticut compete for real estate loans.

They also compete for some types of personal loans and they have competed for time and savings deposits, but there isn’t a significant difference of kind involved.

Savings Banks in Connecticut are important, there are 68 of them and the have total deposits, I think slightly greater than the total deposits of the State’s commercial banks.

But Dr. Miles the Vice President of the Savings Bank Association, explaining the role that savings banks in the state said that they are focused primarily on service to the individual and the family.

95% of the business of the loans of savings banks are real estate loans and only 5% is in the other category.

64% of the business of commercial banks is in a non real estate loans.

The big area for commercial banks, the distinctive area is of course the commercial and industrial loan.

Savings Banks just are not a competitive factor in this area in Connecticut.

I think they loan some $26 million in what they classify as commercial and industrial loans and this is less than one half or 1% of their total loans.

And of course savings banks don’t offer any of the special services that commercial banks do, the very special services which the District Court in this case used under the convenience and needs defense to justify the merger.

There are no savings banks trusts, there are no savings banks computer services, there are no service for savings banks corporate services to business.

Even in the loan area, savings banks are quite limited in their function, they can only loan up to 8% of their assets for personal expenditure loans.

Commercial banks are not restricted in this way.

Well, I could go on but it boils down really to again a distinction between the unique capacity of commercial banks on the one hand and the — particularly in serving commercial business and the very useful and important competition that savings banks have in the area of serving the family and the individual and those who want to borrow on real estate or for real estate purposes.

Now there is another important development in Connecticut that was quite significant in the District Court’s opinion.

The State of Connecticut adopted subsequent to the trial in this case a statute permitting savings banks to enter the area up to now exclusively the preserve of the commercial banks, the demand deposit.

Connecticut savings banks will be able, after 1976, though still not in effect yet, to offer personal checking accounts.

They will be able to offer these only to individuals, however, and only for personal use, not for business purposes.

Of course, demand deposits in commercial banks are not so limited.

Moreover, experience elsewhere has indicated that checking account powers held by savings banks does not mean a mass exodus from commercial banks to savings banks to use some of the words of Dr. Miles.

The States of New Jersey and Connecticut both permit savings banks checking accounts and they also permit them on a somewhat broader scale in Connecticut because in those states business savings accounts are allowed.

Nonetheless, looking at them only as — looking at checking accounts only as a proportion of the savings banks accounts is relative, it’s quite low, I think it’s only 5 or 6%.

So it’s unlikely that the competition, while it’s important and useful and desirable is going to destroy the distinctive nature of commercial banking in Connecticut.

Now we’ve approached this case from the standpoint of Philadelphia Bank in Phillipsburg which recognized commercial banking as a distinctive line of commerce.

We did not argue that commercial banking is a line of commerce as a matter of law.

Howard E. Shapiro:

We had, we would have objected to the introduction of evidence on this issue.

We did contend that this is the starting place.

We showed that commercial banks in Connecticut are just like the commercial banks in the rest of the country, and that therefore, there is a sufficient basis to treat them as a distinctive line of commerce.

Now, once we were past the line of commerce problem though, we had to consider the section of the country.

We approach that as we had, most other banking cases, we look to a metropolitan area or region as being a practical compromise between very large customers and very small customer banks and we suggested that the proper measure was the metropolitan area in Bridgeport and the metropolitan area in New Haven, consisting of a central city, the cities of New Haven and Bridgeport respectively and the surrounding towns and we used a general measure, the Standard Metropolitan Statistical Area or SMSA which is a useful device.

It requires that there would be a central city of not less than 50,000 population, surrounding towns of not less than 15,000 population, not more than 15,000 population, no less.

And that there be a commutation on a significant basis, 25% out from the town, in from the suburbs into the town and 15% out from the town into the suburbs.

We thought this was a practical test in this area because in this area, metropolitan areas are small.

We are not dealing with great, small — sprawling agglomerates as in Washington metropolitan area or New York City or even Philadelphia.

It was relatively small close end area.

Now the SMSA concept is not ipso facto definition of a banking market.

It’s just a tool, but we thought it was a practical one and so we used that as our test.

The District Court rejected it because we did not show what percentage of accounts from within the metropolitan area, actually were in the banks in that Metropolitan area and the reason we did not show it is because we couldn’t show it.

The only way you can get that kind of information is by taking a full scale census of the SMSA or having some wondrous computer work done by all of the banks involved at great expense.

In fact, what we did in this case, the difficulty what’s required is demonstrated by the experience that the defendants had with the New York banks.

Defendants argue New York banks are a factor in this market and they wanted to show the extent to which accounts from Connecticut.

People in Connecticut had taken their business to the New York banks.

So they asked the New York banks for statement of addresses broken down in various ways and the New York banks, the six leading banks in the country and possibly the world, the most modern world, simply could not do it in the time available at the cost involved and we had to settle for less.

So the Government, what it did do is prevail upon the defendants at least to show by a sampling of their headquarters’ offices and some of the surrounding towns just what percentage of the business arose within the SMSA in these sample offices and the results were not surprising, about 80% to use an average of the business was within the SMSA.

Now, we thought therefore that we had proved that metropolitan areas are a proper market.

The District Court rejected this and said that the only market is the state at large.

Now this is a very surprising view because it means that you don’t have local banking markets in Connecticut for any practical purpose, you just have a great big thing called the state at large.

Warren E. Burger:

You think there would be a difference Mr. Shapiro in that approach if you are in a state like Connecticut, on the one hand or state like Alaska on the other?

Howard E. Shapiro:

No, Your Honor.

The size of the state while it is a factor, well just doesn’t mean that there aren’t local banking markets.

To illustrate the defendants in this case contend that the Philadelphia bank standards should not be applied to them because on a statewide basis.

They say the state is the market but Philadelphia bank should not be applied to them because they aren’t head to head competitors.

They are not competing with each other.

So they are really kind of denying the existence of a statewide market in any traditional sense and that sense of course is that it’d be a practical compromise based on the customer-supplier relationship which measures an area of effective competition among banks.

Now, the Hartford banks in Hartford do not compete with the defendants in New Haven.

Howard E. Shapiro:

The Hartford banks, when they have an office in New Haven do compete with the defendant banks in New Haven so it is a local market that we are talking about, not a statewide.

Potter Stewart:

Well, I suppose there might be states where, as we don’t know because we don’t have a case and we don’t have any record proof, but a state like Rhode Island might just be pretty much providence and that’s it or a state like Delaware might be —

Howard E. Shapiro:

Certainly Rhode Island (Voice Overlap).

Potter Stewart:

But Rhode Island (Voice Overlap)

Howard E. Shapiro:

Rhode Island would come close although even there in the southern part of the state or out on the island that is off the coast that might be possible to say that is distinct but well, Hartford is 42 miles away or 50 miles away by car I think from New Haven and that’s a littler far to go banking.

Potter Stewart:

(Voice Overlap) Western Connecticut too.

Howard E. Shapiro:

And it sprawls, there are 11 metropolitan areas in the state and they are fairly distinctive, we contend.

Now there is the matter of the New York banks.

New York banks cast a long shadow in the banking in our country.

In fact they cast a shadow not only over Connecticut but over in New England and the Middle Atlantic States in the country at large.

They are big banks and they are doing the business on a National basis.

It’s also true that Connecticut, in its very southwest corner, there is a little panhandle that sticks out of southwestern Connecticut, kind of, into New York and that is a commuter area.

It probably runs up a little beyond Stanford and people who live in that area can get into New York City to work and do get into New York City to work and there are substantial, there are undoubtedly commuter accounts in the New York banks and a fairly reasonable number of them, a fairly high number them.

But when the defendants brought in a report through Special Masters appointed by the District Court on the effect to the New York banks, what they found was that there are about $487 million in so called Connecticut accounts and that’s accounts from the state as a whole which were in the New York banks, that is roughly 7% of the total deposits in Connecticut commercial banks, divided among the six biggest New York banks and then when we looked a little closer at it we found this.

The average size of those deposits was $20,000.00.

Now the average size of Connecticut bank deposit was $1,700.00.

This is in Government exhibit 130.

Now, what this suggests is that the New York banks are really competing for the larger business accounts, that is where the bulk of the big account is coming from, that is where the bulk of that money is coming from.

Now, New York banks compete across the country, this was recognized in Philadelphia.

In Philadelphia, the Court excluded the New York banks from the market, saying it would draw the market to a broad and it also, despite the geographic proximity, excluded other states in the Philadelphia area, I think Pennsylvania and Delaware and I think the same rule would apply here.

So under a Philadelphia test and the facts we show, we don’t think that the New York banks are the fact that the defendants make them.

Now, we did agree that the state is a section of the country, not a banking market in a traditional buyer seller sense, but a section of the country in which certain distinctive competitive effects could be measured and we argue that Philadelphia Bank would necessarily apply.

It applies because there is a competitive danger when these big banks are merging, that you are going to get a statewide oligopoly.

The defendants deny that.

They say Philadelphia shouldn’t apply but they do not really explain why, if the state as a market as they contend, it shouldn’t, except that they say we are not head to head competitors.

Well there are other competitive effects besides head to head.

I turn now to the problem of entry which is an important consideration here.

I think the first important thing to remember about entry in these cases is that when a merger is denied, a bank will seek an alternative way of getting into a market which it says it can’t get into.

Now that’s demonstrated dramatically in this case.

Connecticut National attempted to merge with one of the big Hartford banks.

Howard E. Shapiro:

The Department of Justice sued and they abandoned the merger.

They told the Comptroller of the Currency in Government exhibit 125, in their application that there was no way that Hartford Bank could get into the Bridgeport market, except by merging with Connecticut National Bank and then when the merger was frustrated, the Hartford Bank went in and bought a little bank in Bridgeport made of foothold entry into Bridgeport City itself and then made a de novo branch entry into the city of Fair — in the town of Fairfield which was then an open town.

So that this problem of seeking alternatives is demonstrated by this record in G. Ex. 125.

Now, there are three ways we think that people could enter in Connecticut.

First, I have to explain that under Connecticut law, there is a home office protection provision which says that a bank cannot enter another bank’s headquarters’ town so that any town that has a bank headquartered in it is closed to de novo branching.

I shouldn’t say can’t enter, I should say de novo branching.

It is close to the opening of a new branch office but there were towns around New Haven, there were towns around Bridgeport which were open for de novo entry and we contend that if you view the area as a metropolitan area, you could make effective entry into those towns and be an effective functioning competitor in the metropolitan area.

A second method for entry was by purchasing a foothold bank.

There are no foothold banks left in New Haven because the Hartford banks picked them up two years ago, but there are foothold banks in the surrounding towns and they did offer a means of entry.

Now the same thing was true around Bridgeport.

What’s happened in Bridgeport is that there were six towns open for entry, five towns open for — six towns open for entry and there has now been new banks created in those towns, Fairfield, Trumbull, some of the others and the result is that those towns are now closed to de novo branching because they’ll be a bank headquartered in them.

But those new little banks form potential foothold entrants so there is a way of getting in by that method.

Finally, there is the use of the holding company which is authorized under Connecticut law.

Connecticut does permit the holding companies.

There is no reason why a holding company could not sponsor.

I shouldn’t say sponsor, actually create a subsidiary and acquire it.

It was argued that this might be illegal but the comptroller.

I am sorry, the commissioner of banking in Connecticut testified that he had never been faced with this kind of request before.

The bank holding company law in Connecticut has only been in effect since 1969.

In fact, there were a couple of young vice presidents in the First New Haven Bank who suggested this route in 1969 but at that time, First New Haven was looking around for a merger partner and they were not about to be listened to and of course Connecticut National was also engaged in looking for a partner among the top ten so no one was going to pursue these routes.

Finally, I would like to say one brief word about the convenience and needs defense in this case.

That defense was that there would be special banking services of a kind which would serve, particularly in the interest of business but perhaps the shortest and quickest answer to the convenience and needs defense here is that the bank examiner who went out when the application for these banks was submitted, when the merger application was submitted.

The bank examiner who went out came back and said both of these banks are adequately serving the convenience and needs of their community, and they are, they are good banks and the community is well-banked.

There is plenty of alternative service in the Bridgeport metropolitan area and the other, and the final point on that issue is that if you are going to engage in a balancing of competitive effects against convenience and need, you have got to be right about the competitive effects.

Our overall position is that the District Court here was wrong on the line of commerce, was wrong on the section of the country, was wrong on the condition of entry, failed to give — failed to weigh adequately competitive effects and therefore couldn’t adequately measure convenience and needs.

Warren E. Burger:

Very well, Mr. Shapiro.

Mr. Reycraft.

George D. Reycraft:

Mr. Chief Justice, and may it please the Court.

This case was decided against the Government after a trial in which the District Court heard testimony from 24 witnesses whose testimony covered more than 2500 pages and after the District Court reviewed more than 240 exhibits, approximately seven months after the conclusion of the trial, the District Court made 293 findings of fact and taken apart from proposed findings submitted by the Government and part from those submitted from the defendants.

This lengthy record covered in detail as required by branch to the history, structure and probable future of banking in Connecticut.

George D. Reycraft:

The Government called only three witnesses in this case in chief.

The first witness was Dr. Glans who testified only as to how Standard Metropolitan Statistical Areas are delineated.

He was not offered as expert in banking markets.

In effect, he disclaimed any expertise in banking markets.

He agreed that SMSA’s are determined strictly on commuting patterns and that banking is not one of the criteria used in determining an SMSA.

He said that cities and towns in the New England area are much more meaningful ways of analyzing SMSA’s and building SMSA’s than counties as in other parts of the country because of the relatively large size of counties in Connecticut.

He testified that New Haven and Bridgeport were two separate and distinct areas, that there was very little, if any cross commuting and very little, if any, economic integration between the two.

He said that the city of — the population of the City of New Haven had declined by about 20% during the 20-year period from 1950s and 1970 and that the population of the city of Bridgeport declined by 1.4% during the same period.

The second witness called by the government was Dr. Neil B. Murphy, a former staff member of the Federal Deposit Insurance Corporation who had worked on bank mergers there.

Dr. Murphy did say the commercial banks were unique financial institutions, but he relied primarily on the demand deposit function which he says virtually unique to commercial banking.

He said its the most important service offered by commercial bank which is not authored by savings banks.

Now, its an undisputed fact as Mr. Shapiro had said that savings banks in the State of Connecticut do now have the power, effective January 1, 1976, to offer checking accounts and accept demand deposits in the State of Connecticut, thereby eliminating that most important distinction.

He generally agreed with the Government, that as Dr. Murphy that SMSA’s at the outset were at least a useful starting point for determining banking markets.

But he agreed also, Dr. Murphy that they were not used to analyze banking markets.

Dr. Murphy himself, the Government’s expert said in an article he wrote that increase in competition among commercial banks and savings type institutions or savings type liabilities suggest to some reconsideration of the product line may be an order and he said this is especially important if savings banks are successful in obtaining the checking account privilege which they now have in Connecticut as of year-end 1975.

He agreed that savings banks are reasonable substitutes for commercial banks in Connecticut for personal loans.

He agreed that savings banks in fact now treat savings deposits as it withdrawable on demand even though they do have the right to ask for a 30-day notice before allowing withdrawal.

Dr. Murphy, the Government’s expert agreed that 79% of Connecticut National’s loan portfolio now is subject to competition from savings banks.

He agreed that a commercial banker, considering a new market should take into consideration the presence of savings banks.

He agreed that the fact of the population of New Haven had declined about 20% from 1950 to 1970 meant that it was not a very good place to put a new bank office as far as retail business is concerned, and he said that they found objective evidence he would not put a bank there.

He agreed that banking in Connecticut has become more competitive between 1955 and 1971 because of more alternatives available to consumers.

He agreed that the proposed merger will have no adverse effect at the present time on small borrowers, small depositors or small businessmen in either New Haven or Bridgeport.

The third witness called by the Government was Mr. Benjamin Blackford who is President of State National Bank in Bridgeport, a competitor of Connecticut National Bank.

State National Bank is a wholly owned subsidiary of S&H Green Stamps combined Connecticut State National and S&H Green Stamps have assets in the neighborhood of a billion dollars and earnings in a neighborhood of $30 million a year compared to $3.75 million for Connecticut National Bank.

Mr. Blackford testified, if he was not familiar with the phrase Standard Metropolitan area and he did not know what made it up or what it meant.

He also testified that State National was a one price bank, that is it does not charge discriminatory prices and charge the same throughout its service area.

He said that State National is in competition with Savings Banks with one hand tied behind our back.

He said that every bank in the area he feels they compete with New York Banks for trust business.

He said State National has a lot of customers who work in New York.

He said a few of these big mutual savings bank around here gives us all the competition we need, and he said he takes into account savings bank competition when he considers opening a new branch because as he said, “If you can’t beat them on price, you got to beat on service.”

George D. Reycraft:

Mr. Blackford was a concluding witness in the Government’s case in chief.

The Government called only one other witness.

That was Mr. Peter Stass, the President of Lafayette Bank and Trust Company who is called in rebuttal.

Mr. Stass also said that he did not consider the SMSA concept one way or the other as being the market of Lafayette.

He testified, “I think we have our own description of what our market is” and he said that the bank’s market was primarily where it had its offices.

He testified also that competition — that his competition included every other bank and he specifically include savings banks within that competition.

The defendants and intervenor called 20 witnesses, including two economists, one Dr. Burton J. Peck, the Chairman of the Economics Department of Yale University and the other Dr. Charles Dopes, the former Chairman of the Economics Department of University of Bridgeport.

Both of these witnesses who detailed familiarity with the market and the area, geographic area in Connecticut and both of whom are experts in structural competition and potential competition testified that as economist, they saw no adverse effect on the structure of potential competition or any of its parts on the proposed merger.

Dr. Peck took the Government’s assumptions on the significance of potential competition and he applied them to Connecticut.

He assumed that commercial banking was a line of commerce.

He assumed that entry into the close towns of New Haven and Bridgeport might occur sometime in the future and he assumed that potential competition has some significance in the field of banking.

He prepared a detailed study of the structure of potential competition in Connecticut based on these three assumptions of the Government and concluded that even on these assumptions the proposed merger will have no adverse effect on the structure of potential competition in Connecticut.

He found that following a proposed merger that would be no less than four firms identified by the Government as potential entrants in each for the major banking markets in Connecticut.

The District Court found based on Dr. Peck’s testimony that no first rank potential entrant would be eliminated by the merger and then the 21 of 40 closed towns, there are now 48 closed towns of 169 that theoretically eliminated potential entrant ranked seven out of ten.

The court also based on Dr.Peck’s testimony that in 52 open towns, nine potential entrants identified by the Government as having statewide expansion capability would remain after consolidation.

In 15 large towns in Connecticut with over 50,000 in population, Dr. Peck testified and the District Court found that there are no fewer than four banks identified by the plaintiff as capable of expanding in the statewide systems which would remain as potential entrants after the proposed consolidation.

For example in Hartford, First New Haven ranks fifth in size among the ten largest theoretical potential commercial bank entrants.

At the present time, First New Haven would rank no better than fourth among theoretical potential entrants into Bridgeport.

Now, Mr. Shapiro has said First New Haven is the most likely entrant into Bridgeport.

I simply don’t understand that.

Hartford National which has $1.7 billion of assets is not now in the City of Bridgeport and on the Government’s theory that is the mostly likely entrant into Bridgeport.

Under the Government’s theory, the second most likely entrant into the city of Bridgeport is Union Trust Company with over $700 million of assets.

It is not now in Bridgeport.

Under the Government’s theory is the third largest potential entrant into Bridgeport is Colonial Bank and Trust Company of Waterbury which is larger than First New Haven.

The District Court found based on Dr. Peck’s testimony before the merger, there are five potential entrants into New Haven ranked by the government as capable of becoming statewide banks.

After the consolidation there would be four.

The District Court found that since five of Connecticut’s largest commercial banks already operate in New Haven, they have more impact on competition there than there is possibility of potential entry by Connecticut National.

The five banks in New Haven now are Connecticut Bank and Trust Company —

Byron R. White:

Mr. Reycraft, if there is a difference between actual potential entry and perceived potential entry, to which of these concepts is your present argument more relevant to?

It’s the perceived —

George D. Reycraft:

Mr. Justice White, the Government offered no evidence on perceived potential entry.

Byron R. White:

Well, that may be evident but that isn’t — I am asking what about what you’re talking about?

Who is the most likely potential entrant?

Is that record both of these concepts?

Is it relevant to the (Voice Overlap) or not?

George D. Reycraft:

I understand Mr. Justice White that in analyzing either of these concepts, the Government does look at who is the most likely and then —

Byron R. White:

Why is that significant when you are talking about an actual potential entrant?

George D. Reycraft:

I deny that Connecticut National is national potential entrant into New Haven.

The discussion of potential competition in the State of Connecticut was based on the Government’s assumptions, namely that —

Byron R. White:

Well, let’s assume though that you have four actual potential entrants if you could — I know you say that it still here, assume that they were.

Would it make any — and that you could rank them first, second, third, and fourth in terms of the likelihood of the entry.

Does it really have to be the most likely the —

George D. Reycraft:

I think the most important thing that the Government is to show Mr. Justice White is that the potential entrant, the claimed potential entrant would have entered the town, but for the acquisition.

I say of course that the Government did not prove that.

New Haven is a closed town and Connecticut National could not enter New Haven.

Byron R. White:

What if — but the Government could show and did show it.

It really wouldn’t make so much difference if it was the first or the second or the third most likely entered, would it?

George D. Reycraft:

Well, I would think so Mr. Justice White.

Byron R. White:

Why?

That’s what I am asking.

George D. Reycraft:

I would think so because if the most likely entrant is the one who is most likely — I do not know what’s to add to that, and the question is, what is the importance of eliminating a less likely entrant if the fourth most likely entrant is being eliminated theoretically then there are three left who are more likely.

Byron R. White:

That’s what we perceived (inaudible) but if someone actually would have been (inaudible) even the third most likely.

Actually, if you could prove that these are very likely independent and it is like (inaudible)

George D. Reycraft:

Yes, Mr. Justice White, I think that if the Government had proved that Connecticut National would have entered the city of New Haven by other means then they would have advanced their cause.

I agree with you they did not prevail.

Byron R. White:

That the Hartford Bank would not be so — would be a substantial if the Government loses something.

George D. Reycraft:

Well, I think that it is a question of fact as to whether they would have entered and in my conception of the evidence in this case, the Government didn’t make a serious attempt even to prove that they would have entered.

Byron R. White:

Other than just the so called argument and objective facts of the bank has a capability?

George D. Reycraft:

Well, on objective facts Mr. Justice White, I would say that the objective facts as to likelihood of entry would be based upon the size of the potential entrant and that the larger the entry the more likely —

Byron R. White:

That’s a fact, we believe that but it still would mean that the bank (Inaudible)

George D. Reycraft:

If the Government is correct that New Haven banks can enter the City of Bridgeport and if First New Haven was eliminated as one of the less firms which would have, but did not then the reserve question, Mr. Justice White, I would say that would — the Government would argue so that was a loss of competitor in that area.

Byron R. White:

I would have said you wouldn’t agree with it.

George D. Reycraft:

[Laughter Attempt] I would agree that six competitors generally mean more competition than five.

It’s a question of substantiality however, whether the likelihood of that, elimination of that possibility would substantially lessen competition and that is what I say the Government has failed to prove.

Professor Stokes, who is on leave from the University of Bridgeport, also testified that the proposed merger would have no effect on the structure of potential competition in Connecticut.

The defendants and the intervenor called 18 other witnesses who were bankers and businessmen from the City of New Haven who testified generally on competition and generally agreed that commercial banks and savings banks were in very substantial competition within the state.

The structure of Bank in Connecticut is highly competitive.

The number of commercial banks has increased during the last 11 years and the alternatives available to consumers has increased in majority of Connecticut’s 169 towns.

As of year end 1963, there were 64 commercial banks in Connecticut, as of the close of the record there were also 64 commercial banks in Connecticut.

Since the close of the record as Mr. Shapiro has indicated eight new commercial banks have been chartered, so there are now 72 commercial banks in Connecticut compared to 64 twelve years ago.

So that this alone demonstrates that the most likely entrance in the commercial banking in the City — in the state of Connecticut are investors and not other banks.

There has been no occasion in the history of banking in Connecticut when any bank holding companies or bank has followed the route proposed by Mr. Shapiro which is to the so called holding company new charter route.

The State Commissioner of Banking testified that it had never happened in the State of Connecticut.

He said that if it were done, it would result in a beguile call of fury from other banks with litigation.

The State of Connecticut also has a form which applicants for a new bank charter are required to fill out.

That form says this bank is not be to organized for the purpose of selling, merging or combining with any state bank or trust company or national bank now in existence.

So in order to file a procedure that the Government is suggesting in this case, it would require full statements by the applicants in order to get a state bank charter.

The Comptroller of the Currency has only charted three banks in the state of Connecticut since 1963 and two of these banks were what are called interim banks which were formed for the purpose of facilitating the elimination of minority shareholders in a bank holding company in Hartford.

For the State as a whole, commercial banking options for retail customers have in increased in 94 of the 169 Connecticut towns and they have decreased in only three towns between 1955 and 1971.

There are more alternatives today in Fairfield County in 19 of 23 Fairfield County towns than they were in 1955 and a more alternatives in 22 of 27 New Haven County towns than 1955.

Among the 119 towns in Connecticut outside Fairfield and New Haven counties, the number of commercial banking options has increased in 53, remains unchanged in 65 and decreased in only one such town.

Even Dr. Murphy, the Government’s expert witness conceded that banking in Connecticut has become more competitive since 1955.

The Government has raised essentially four issues here, whether the two banks are significant potential entrants into each others markets, whether Standard Metropolitan Statistical Areas are really without more banking markets, whether the two banks are significant potential entrants into other local banking areas in Connecticut, and fourth whether existing competition from savings banks and existing competition from New York Bank should be totally disregarded in determining the impact on the structure of potential competition in Connecticut.

Now, the District Court found against the Government on all of this issues which are essentially factual, which are factual issues.

The Government’s argument on Standard Metropolitan Statistical Areas apparently was important to it in this case unlike its position in the Philadelphia National Bank case, Philipsburg, Brown Shoe and Nashville because it could not show that these banks were likely entrants into the home office cities of the others because they were closed.

In order to show an entry into a banking market, it was necessary to show that entry into a suburban town somewhere near New Haven would be adequate.

The only witness who testified that SMSAs where banking markets was Dr. Murphy who did testify he had the no familiarity with geography of the banking in Connecticut.

Dr. Peck who was familiar with the area who teaches at Yale University said that the acquisition of for example a small bank in Woodridge, Connecticut would not be ineffective entry into the New Haven area and to compete with First New Haven National Bank.

The Woodridge Bank and Trust Company has about $8 million assets.

It has about one office.

George D. Reycraft:

It is not allowed to branch into New Haven because that’s a closed town of the eleven towns in the New Haven Standard Metropolitan Statistical Area, six are closed.

In the Bridgeport Standard Metropolitan Statistical Area, six out of eight of the towns are closed, so that new entry into those towns is not legally permissible at the present time.

On the question of banking markets, both the Government and the defendants in this case agree that the State of Connecticut is appropriate area to look at in appraising this particular bank merger.

The reason is because as defendants, we apply this Court’s test in the Philadelphia National Bank case which is at the relevant section of the country to look at as a area within which state law permits banks to branch or merge and that’s subject to home office protection is the State of Connecticut.

Now, we don’t say that the State of Connecticut is a banking market in which First New Haven and Connecticut National compete as Mr. Shapiro does.

He goes from the assumption that if Connecticut is banking market therefore everybody in the state must compete within it.

The facts are and he concedes the facts are that they do not.

Connecticut National’s primary service area is Fairfield County where most of its offices are located.

First New Havens banking area is essentially southern New Haven County and there is a small area of interaction between them and the four town area that Mr. Shapiro described, but other than that they are not in competition with each other.

There are smaller banks in the state which do operate strictly on a local basis.

For example, Woodridge Bank and Trust Company that we have referred to operates strictly in Woodridge.

The Government’s own exhibit show that in the town of Fairfield, Connecticut National’s Fairfield office gets only 77.1% of its business from writ — people who has statement addresses in the town of Fairfield and is highly localized.

They show that 83.1% of the deposits of Connecticut National Trumbull office originate in Trumbull.

So for the small customer, he is limited to the area in which he lives.

For the larger customers, however, the choice has increased dramatically.

New York banks as much as Shapiro has conceded obtained close to $500 million of banking business from the State of Connecticut.

Now that’s just banking business that we are able to prove as a result of a survey done with the assistance of a Special Master.

We served deposition notices and subpoenas on New York banks and while we encountered a good deal of resistance and it took a good deal of time, we were able to prove nearly $500 million of banking businesses which these banks alone get out of the State of Connecticut.

This is significant for commuters also between New Haven and — between Connecticut and New York, the choices are substantial.

The Government’s own exhibit showed that there are 50,000 people who cross commute between Connecticut and New York.

About 25,000 go from Connecticut to New York and about 25,000 come back from New York to work in Connecticut.

There is substantial cross commutation and the Government’s evidence shows that it’s increasing.

Now, if these commuters or these cross commuters represented only one employed person per household of five, that would be the equivalent of the city of 250,000 people which is larger either the city of New Haven or the city of Bridgeport.

In Fairfield County, the combined circulation of the New York Times and the New York Daily News exceeds by six to one the circulation of the only local newspaper circulated in Bridgeport which is the Bridgeport Post Telegram.

Television advertisement by New York banks saturates the lower Connecticut area.

The New York banks do advertise of personal loans, retail loans, savings deposits.

Now, we say for this reason that the Government’s statistics, their so called concentration ratios are highly suspect or highly attenuated not only for the reason of the effect that New York banks have on Connecticut, but also because of savings bank competition.

If a banker in New Haven were considering entering the City of Bridgeport, he would have to consider the fact that when he went into Bridgeport, he would be competing with Connecticut Bank and Trust Company with 1.8 billion of assets, Hartford National with 1.7 billion of assets.

With Connecticut National, he would be competing with people’s savings banks with over 700 million of assets and the Government’s own evidence shows that over 70% of this business is in competition with savings banks.

So, whether the Court decides that savings banks should be included in the line of commerce or analyze it strictly in commercial banking terms, the effect of that competition from savings banks is a real thing.

George D. Reycraft:

A banker in New Haven thinking of entering Bridgeport would be foolish not to consider that competition for that amount of his business.

I will leave the rest of my time, Your Honor, to Mr. Loevinger.

Lee Loevinger:

Mr. Chief Justice and may it please the Court.

Let me first to answer a question which I believe was asked by Mr. Justice Stewart as to the genesis of potential competition.

My research indicates it has been considered in six cases of which the first the El Paso case.

The six cases are El Paso, Continental Can, Penn-Olin which was the third case, Proctor and Gamble, Ford and Falstaff.

Falstaff is the first case in which in this Court gave rather plenary consideration to it.

The cases are discussed, beginning at page 76 of our brief in this case.

The six cases just mentioned are summarized at pages 82 and 83.

Now, it seems to me that there has been some — there’s obviously a conflict as there are always is in cases coming to this Court, but there is a matter here that involves an apparent conflict of philosophy between government agencies.

Clearly, the banking agencies, Comptroller of the Currency, and the Department of Justice are in conflict and it has occurred to me that it might be useful if I could without really tying anybody down to anything, try to analyze the phases of this conflicting philosophy.

The Department argues in this case that if large, healthy banks like Connecticut National and First New Haven are permitted to expand by merger.

That the result will be a statewide structure in which most local markets will be nominated by a few large banks.

Now, I suggest that this is a much more likely result if these banks are not permitted to expand by merger.

As the Department itself admits, there is in the nature of local markets, there are relatively few banks.

You can’t talk about local banking markets and banking as one of the most competitive fields in the United States.

You can’t talk about local banking market because all you were taking about the national beer market as you are Falstaff.

In fact a remarkable coincidence is that in Falstaff there were 10 actual or potential competitors in a national beer market where as in a tiny little state like Connecticut, the third smallest state in United States, they are still talking about 10 competitors.

Well, when you get it down to little local markets, you don’t get large numbers and if you confine these banks by forbidding mergers which you aren’t going to get are dominant local banks.

There is simply no question about this in my mind.

Let me try to illustrate it by posing two alternative concepts.

These are admittedly highly hypothetical.

They correspond only roughly to reality because you can’t construct a hypothetical that really corresponds to all of the aspects of reality.

But let us a take a state that has 50 towns in it.

Each one of which has two banks, so that there is competition among each of these two banks.

There are no large dominant banks, no large dominant cities.

Every bank has approximately 1% of the banking business in the state.

According to the Department’s theory, the state is competitive because nobody has more than 1% but every single banking market in the state, each town is concentrated because there are only two banks, and two banks have a 100%.

Now, let us take an alternative thing.

Let us say that by some miracle of legal transmutation, administrative and legal action that there are a whole lot of mergers in this state and that the 50 or rather the 100 banks in the state merge into 10 statewide banks, 10 much larger statewide banks and that as a result of this, they decide to branch out, and so each of them establishes branches in a number not in all, but in a number of states, so we end up with let us say hypothetically each town has five banks.

Lee Loevinger:

There are 250 banking offices in the state, as opposed to a 100 banking offices previously.

Now, the Department tells us that the difference in banking offices don’t make any difference, but each town now has five baking offices, each representing a different bank.

The state on the other hand has only 10 banks.

The same number as competitors that were nationally in Falstaff.

On the state basis, they would say that there is concentration because 10 banks have a 100%.

Indeed there is likely to be some asymmetry and it is likely that five banks have a little bit more than 50%, so they tell the state bank that this is concentrated.

On a local basis, there is less concentration certainly because each locality has five banks, although five banks still have a 100% which according to the definitions and test we have been given is still concentration and yet I submit to the Court “Which way is the public being better served?

Having five alternatives, five competitors available in every town to every bank customer or having two little banks?”

Now, I submit that this is the basic conflict in philosophy between the Department of Justice and the Comptroller here.

That the Department says that a larger number of smaller limited service, limited competition banks is preferable whereas the Comptroller without making any arbitrary commitments as to number says that a generally smaller number of larger full service, fully competitive banks will better serve the public interest.

Now, reality is always far more complex than these hypothesis, but I think that what this does illustrate is that simple per se rules just don’t work and very often will in fact work to frustrate the very objective that they are thought to be serving.

Indeed, in some respects you can see this in Connecticut here.

We have been given a test by Mr. Shapiro that the market is concentrated if the top ten have 80% or more or if the top five have 40% or more of the market and he applies this and says “We’ve got a concentrated market in Connecticut.”

Well, let’s look at the facts.

The Connecticut National and the First New Haven, the merging banks here, their share of commercial bank deposits and I refer only to those because I don’t think the line of commerce makes any difference here, that their share of commercial bank deposits from 1959 to 1972 declined from 13.8% to 10.3%.

They have a declining share of total state commercial bank deposits.

The Hartford National and Connecticut Bank and Trust, the two giant Hartford banks have 34.5% in 1959, but 41.3% in 1972.

Consequently, if you are looking for the 40% test of the top five, you can add any other three to the Hartford Bank and CBG and you get over 40%.

Now, I submit again that this simply beggar’s common sense that you cannot say because the two leaders are increasing their percentage that their competitors should be precluded for merging.

If there is any sense at all to this notion of structure as a test of competitive performance, it must be that increasing concentration forecloses merger to those who are in the increasingly concentrated segment to the growing segment of the market not to those who are in the diminishing segment.

Simply makes no sense to say that because our two big competitors are increasing their share, that therefore, we will foreclose the opportunity to merge to the two smaller banks and indeed this is the very hypothesis that was rejected in Brown Shoe in the quotation that I read earlier and that is cited in our brief.

Justice White asked, “What is the difference between the first and the second in rank and perhaps those lower in rank among potential entrants, either from the viewpoint of a perceived or an actual future potential entrant?”

I think I might answer that slightly differently than Mr. Reycraft.

I think there is a difference.

I think we all generally agree or at least we assume as a matter of antitrust law that if you have more competitors, you have more competition.

If have only got one or two competitors, you are less likely to have strong competition in a market than if you have 10 or 15 in most markets in most circumstances at least.

However, what is true of the actual competitors is not necessarily true of potential competitors.

Potential competitor exerts whatever influence he exerts by virtue of the perception of those in the market.

The perception of those or in the case of the actual potential competitor as a future possibility, but the perception of those in the market is obviously fastened on the number possible entrant and whether there are 15 or 20 or 30 lined up behind them which seem to make a very little difference.

Indeed, if you will look at the economic literature on the subject, it does indeed say and there is even some recognition in the decisions of this Court that the significant potential entrant is the most likely potential entrant and maybe this holds true of the first or second, I don’t know how far down the line you go, but after you pass one or two potential entrants, those in line behind really lose all significance.

Byron R. White:

Well, are you suggesting — I guess you won’t find that implications with respect to couple of reflective perceived entries?

Can you suggest where it is at (Voice Overlap)

Lee Loevinger:

Well, it is — the cases referred to the most likely entrant Mr. Justice White.

Byron R. White:

(Inaudible)

Lee Loevinger:

This may be the discussion in those cases.

I do not recollect with that degree of sharpness, but the distinction between the actual or perceived and the dominant or potential entrants is something that really did not emerge until your Falstaff decision.

Consequently, these distinctions are not drawn in the earlier decisions and that indeed, I am not sure that this is the case for example in the leading case, the El Paso case is perfectly obvious that the Northwest Pipeline Company was the most likely entrant because they were in there just trying their hardest to get into the market.

There isn’t any question that they were an actual potential entrant ever since and I think that the matter was well summarized in the words of the Court, “unsuccessful betters are a competitors no less significantly than successful ones” and this really is the genesis of the whole potential competition doctrine.

Byron R. White:

But they are well perceived?

Lee Loevinger:

They were perceived indeed, yes, and as I say I think the distinction between the actual and the perceived entrant was not drawn until we came to Falstaff.

Now, it is interesting that plaintiff argues that commercial banks are significantly different than savings banks and should be excluded from the line of commerce and yet plaintiff or the Department also argues the importance of business financing by commercial banks is what makes them significant and makes — and gives them particularly unique quality.

Yet, when we come around and talk about the advantages of these mergers, when we talk about the services and the competition to be secured from these mergers, the Department tells us that “Well, this is just a matter of convenience and needs and does not have anything to do with competition.”

Now, I submit they can’t have it both ways.

If it is, business financing, business services that make commercial banking a unique line of commerce for the antitrust laws which have to do with competition and competition only, then they can’t turn around and say but when you show us that a merger gives you greater services to the business community that is an unimportant for purposes of competition.

If it is important for purposes of distinguishing the line of commerce as a line — as a competitive line of commerce, it is also important for appraising the effects of the merger upon competition in the line of commerce as well as the section of the country.

Now, the Department also argues that competitive effect may be found in a section of the country that is not a market.

I confess that there is part of this that eludes me.

I have always understood from all the prior decisions of this Court and I have searched the decisions of this Court on this subject, the section of the country and relevant geographic market review synonymously.

In some cases, one is used after the other in parenthesis.

This Court has never differentiated and what it said in the Philadelphia Bank case was that we were to look to the area in which the impact of the merger would be felt in order to determine the relevant geographic market or the section of the country.

Now, that is what the Court did here.

The Court said that in the state of Connecticut, there are two dominant statewide banks, Hartford and CBT and that if we permit this merger there will be another statewide bank that will increase the number of statewide competitors to three.

Therefore, the impact of the merger will be felt in the state as a section of the country.

That is why I would look to this.

Now, this doesn’t mean that aren’t local markets.

I think that is complete non-secreter.

There may well be in local markets, if two banks within New Haven or within Bridgeport were seeking to merge, I think we might well look to Bridgeport or New Haven as markets because that is where the impact of the merger would be felt.

But simply because the impact is felt on the state level, the court properly applying the teachings of this Court in Philadelphia said that’s where I look to see what impact this merger is going to have.

To conclude from this that every firm within that market is necessarily an actual competitor is again a complete non-secreter.

And as in my brief, I referred to Von’s Grocery, although I think it is a little easier for me to talk about the Washington metropolitan area because I know it better.

Lee Loevinger:

In Washington as in Los Angeles there are half a dozen, I don’t know how many, but a certain number of grocery chains that compete throughout the metropolitan area.

We are all familiar with them.

I don’t need to name them.

We probably buy groceries there everyday.

These are competitors and there’s no doubt in my mind that Metropolitan area as in Los Angeles is a relevant market with respect to possible merger of these grocery chains.

This doesn’t mean that a grocery store in Bethesda is a competitor of one in Alexandria or one is Silver Springs is a competitor in Bethesda or Alexandria, or in False Church or anywhere else and yet these communities are separated no further than Bridgeport and New Haven.

To say that we have a relevant geographic market for purposes of a merger case does not mean that every from within that market is an actual competitor and the argument which is founded upon that attempted logic is utterly without foundation and is a complete non-secreter.

Potter Stewart:

Now Mr. Loevinger, the statute talks about lessening of — on the effect maybe to lessen competition in any section of the country?

Lee Loevinger:

Country, yes sir.

Potter Stewart:

And I would agree with your understanding that the section of the country is the equivalent of what the geographic market phrase you find in Court opinion and so on.

But the lessening of the competition has to be in the section of the country or the geographic market whichever one you want to choose which implies that there is a competition in that geographic market and that’s just relevant isn’t it?

Lee Loevinger:

That is correct sir and in fact — but has been admitted by the Department, what Court found here is that there is no actual competition at all between the geographic, between the merging banks.

Therefore, the Court said, in fact, the total phrase in Philadelphia as I recall was we look to the area of competitive overlap and the area where the impact of the merger may be felt.

Since there is no area of competitive overlap, the Court said I look to the area where the impact of the merger may be felt.

Potter Stewart:

And he found the whole state?

Lee Loevinger:

And he found the whole state, that is correct.

Potter Stewart:

And yet he certainly didn’t find that there was face-to-face competition in all the state, not just the opposite.

Lee Loevinger:

He found that he is not.

That’s correct sir, yes, sir.

Byron R. White:

Well, they found that there was some face-to-face competition which he probably got rid off?

Potter Stewart:

Well, yes.

Lee Loevinger:

Now there is non-involved in the cases that come to this Court (Voice Overlap)

Byron R. White:

When he looked around, he did find face-to-face competition.

Lee Loevinger:

No, as a matter of fact the Comptroller found out and eliminated it sir.

Byron R. White:

Alright, but it was there?

Lee Loevinger:

There was some that was eliminated.

Yes, sir.

Byron R. White:

It was there.

Lee Loevinger:

It’s not here now.

Byron R. White:

And it might have been argued that if the merger hadn’t been proposed, maybe in 10 years there would have been more face-to-face competition in some other sections of the state?

Lee Loevinger:

Indeed, the Department of Justice tried to argue that and that was disproved because of the Home Office Protection Law.

This is one of the —

Byron R. White:

But there weren’t many open towns then?

Lee Loevinger:

There just weren’t any places left that they would have there.

This is one of the interesting aspects of this case, of these two cases as it comes to this Court, it is an aspect which all together distinguishes both cases from Briley (ph) incidentally.

In Briley there were simply no question that the holding company could have entered Briley de novo as far as the law is concerned.

I don’t comment on the economic factors, but clearly they could have entered Briley so far as the law is concerned.

In both of these cases, there are legal barriers which would have to, which would require to be circumvented and I respectfully suggest that is somewhat unseemly of the Department of Justice to be arguing that the banks should resort to legal strategy as to circumvent the requirements of the state law which are designed to protect state banks and to maintain the dual banking system which has given us the tremendous amount of competition that in fact we do have now.

Indeed, as Mr. Freeman said –Mr. Freedman said, “Congress did not give the control over albeit to Section 7.”

Let me reply that Congress certainly did not give the Department of Justice control over banking entrant.

On the contrary, it’s specifically provided that the Department of Justice should comment only the competitive factors involved in bank merger cases and that the decisions should be made by the Court as I have pointed out.

In Whitney, this Court said that the lower court should not even get into this matter.

That these are matters for administrative weighing before they ever come into the court and there are whole series of cases cited in our brief beginning with the Walker Bank case decided by this Court in which the Courts have said that when any of the banking agencies attempt to evade or circumvent the state law restrictions which are incorporated by reference by the federal law that they are acting beyond their power and acting improperly and that the courts will prevent them from doing so.

It seems to me to be unseemly for a government agency now to be suggesting that the banking agencies or the bank themselves should be attempting to do that which this Court has strongly suggested in Walker Bank and other cases that the banking agency should not be engaged in.

Warren E. Burger:

Thank you Mr. Lee Loevinger.

Mr. Shapiro, you have five minutes left.

Howard E. Shapiro:

Thank you, Your Honor.

First I would like to address the question of markets.

Dr. Peck who’s study of potential entrants was referred to by Mr. Reycraft conceded that his study did not undertake a study of banking markets.

He simply looked at towns as geographic entities.

He also stated that he did not consider the question of the effect of actual entry.

He was simply looking at the potential entrants from the standpoint of the so-called perceived effect and finally he said at the close of his cross-examination that he wasn’t all concerned with concentration, he considered it unimportant in banking.

So, that I don’t think that Dr. Peck’s studies really focused on the market question that he should have focused on in trying to determine who is the potential entrant.

Now who is the potential entrant?

The Government’s theory was that the most significant potential entrants were in the top 10 banks in the state.

Of those top 10 banks, two of them, the big Bridgeport Banks we said were already in the Bridgeport in New Haven areas.

Potter Stewart:

The big Hartford banks?

Howard E. Shapiro:

The big Hartford banks.

I am sorry, Your Honor.

Hartford National is actually in — Hartford National is not in Bridgeport, but it is in Fairfield.

Howard E. Shapiro:

So we say it is already in the metropolitan area and of course the other bank is in both New Haven and Fairfield.

Now, eliminating the top two, that leaves eight and if you eliminate the banks that are not in New Haven or Bridgeport, you get a very small number left and of those we then look to see who was large and close by.

And the most obvious entrants were the Bridgeport bank moving over to New Haven and the New Haven bank moving over to Bridgeport and we said they are the most significant entrants.

Now, Mr. Reycraft suggested that the test should be whether the banks would have entered, but for the merger, but we suggest that that test would be a test of certainty which would not fit the purposes of Section 7.

The real test is whether — a test which would fit the purposes of Section 7, is whether if the merger route is closed, it is probable that the banks would enter given their incentive and capacity.

And this is we think we demonstrated that they had the incentive and that they had the capacity that means of entry did exist if they were encouraged to do it and we think this was demonstrated by the experience of the Connecticut National attempt to merge with the big Hartford bank.

The Hartford bank which said it could not get in to Bridgeport did try to get into Bridgeport and did succeed in doing so.

In fact, in this case, in addition to offering to divest themselves of the banks which were the subject of actual competition in the four-town area.

The defendants at pages 40 and 41 of the record also said that if they were allowed to merge, they would get themselves in the Hartford.

They said it would be difficult legally, but they would attempt to find the way, again proving that if the merger route is closed, people will seek an alternative.

Now, counsel for the Comptroller has set forth what he views as a difference between the Department of Justice and his agency over banking policy.

We suggest that it is not a question of banking policy.

It is a question of whether the Bank Merger Act of 1966 which makes Section 7 controlling is going to be controlling as Congress intended.

In the Comptroller’s brief at page 54 there is a note 23 which says that he favors merger over entry by de novo methods or by new charters.

He has an affirmative policy in favor of merger.

Now, the Department of justice believing that Section 7 is controlling here feels that the test is not whether there is going to be simply local oligopolies immune from competition by expanding banks.

We favor the expansion of the statewide bank.

We favor its entry into local markets that is our policy, but the question is how it gets in.

If it goes in on a small basis and has to fight in that local market it’s going to upset the status quo.

It’s going to bring the benefits of competition to that market.

If it walks in by buying a large share it’s going to settle down and we are going to have in the local market the same kind of oligopoly we had before.

We encourage de novo entry, we encourage foothold merger.

That is why we have not challenged the expansions by the big Hartford banks because they always were careful to stay on a small scale when they went into new markets and to the extent that has happened in Connecticut, we have had an increase in local diversity which we favor, but the question is always how the expansion is achieved?

Now, the Comptroller mentioned the Washington area as an example of how market should be defined.

Well, I suggest that the Washington area is a good analogy for considering a metropolitan area as a banking market.

In this sense, the suburban banks in Washington cannot get into the Central City.

The Central City banks cannot get into the suburbs and yet there is genuine competition among those banks.

Thank you, Your Honor.

Warren E. Burger:

Thank you Gentleman.

The case is submitted.