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Pump and Dump Politics

Perhaps everyone's been writing about this (I was away for the weekend, hanging out with the environmentalists) but in all the discussion of Bill Frist's sale of HCA stock, supposedly but not actually in a blind trust, I don't think I've seen much attention to the reason that the insiders, including Frist, knew that HCA was a sinking ship. According to Thompson Financial analyst Mark LoPresti, quoted in several of the stories, the key piece of inside information that Frist and the other insiders had that others didn't was this:

Uninsured patient admissions were rising faster than those of insured patients

Let's consider why it might generally be considered a conflict of interest for Frist to own so much HCA stock. The main concern would be that Frist might be in a position to use his public power to improve the financial condition of such hospitals; for example, he could push for some kind of increased coverage for the uninsured or even universal health care. He might have a public motive for doing so, but he might also have a private motive, since it would hugely benefit a hospital chain like HCA. That's the reason for putting all his stock in a blind trust, so that he won't know, and we know that he won't know, whether he would benefit privately.

But when the uninsured ratio goes up, and Frist actually knows that this will affect his own portfolio, paradoxically his reaction isn't what the normal conflict-of-interest analysis would assume. Rather than use his official power to reduce the number of uninsured, he takes a private action, and just dumps the stock. And not just any stock, this is his patrimony he's selling out. It's the stock of his own family's company. But he washes his hands of it. Leaves it to some bigger sucker.

And that, to me, is telling, and it's about more than Frist's despicable character. Because it goes to the great paradox of what is currently called "conservatism." The central constituency of the modern Republican machine is, broadly speaking, business. Yet there are dozens of policies, passive as well as active, large and small, that are going to be a disaster for American business in the medium- and long-term. Some are disasters for specific companies and sectors, others for business generally: the fiscal debacle, the burden and unpredictability of health care costs, climate change, income inequality, short-sighted energy policies designed only to boost supply, chaos in the Middle East, hostility to the U.S. everywhere, lack of access to higher ed, collapsing infrastructure, etc. Somehow, in a way that would not have been the case in previous decades, business leaders and many investors seem bizarrely unconcerned about these trends.

And why is that? I suspect it's integrally related to the "pump and dump" culture that has infiltrated business, a mutation of the cult of "shareholder value." (Pump and dump refers to the practice of talking up a stock or making earnings appear high, then selling just before the inherent weaknesses in the company become apparent. On the Yahoo! Finance message board discussing HCA, Frist is referred to lovingly as the "Pump and Dump Drama Queen.") Investors as well as executives don't look at a company as something to build for the long term; they need to beat their numbers in the current quarter. And for the most part they assume that by the time things get tough, they'll be out. The insiders will bail out before the suckers; the CEO will move on to some other company. Or, if worst comes to worst, he'll retire with a nice package guaranteeing health care, use of the company plane for life, and a nice package of stock to sell when someone else turns the company around.

(I'm sure there are many books that can help explain this culture; I don't read very much about business but I found Roger Lowenstein's Origins of the Crash readable and enlightening. Bernie Ebbers and Dennis Kozlowski are not uniquely bad actors, they're just the ones who took it the furthest over the line of the law.)

And what is our political culture except another version of pump and dump? Everything from war to tax policy to energy policy to the Medicare bill is a short-term effort to boost the president's political stock, with the long-term costs left to some bigger sucker.

I don't consider myself anti-business or anti-corporate. But there's much that's sick about much of American business now, even after the crash, a short-term, short-sighted culture of irresponsibility, exemplified by insiders dumping the stock of their own company and their own family just ahead of bad news. And if that's the culture of business that most strongly influences our politics, then we do need an anti-business politics. But I wish we could find a way to infuse both business and politics with more of a culture of long-term responsibility and honesty.

Posted by Mark Schmitt on September 26, 2005 | Permalink

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Comments

Frist's family's HCA's seeing a higher percentage of uninsured patients might seem like something new, but this challenge has been afflicting hospitals in major urban settings for years. HCA had managed to dump the challenge onto others for many years while they acquired hospitals, but ultimately the states where they were buying hospitals apparently started making them take uninsured patients rather than just moving them to public hospitals after performing wallet triage. Most of these for-profit hospitals had claimed for years that they could provide better, cheaper care than the public hospitals they wanted to push out of business. It would seem they can't. I'm sure Frist's family is just working on some way to claim that for-profit hospitals should receive a higher reimbursement rate from the government and insurance companies because they're such...ah...such...umh...nice guys, yeah that's it. Frist wont' tell you for-profit hospitals are vampires sucking the life out of the nation's health care system.

Posted by: PrahaPartizan | Sep 26, 2005 5:33:15 PM

As a health-care worker, I can attest to the veracity of PrahaPartizan's comments above. But I think we need to look at this as part of a bigger picture: how empires collapse. Part of the pattern is that elites become more interested in perpetuating their power, and feeding their greed, than in contributing to the empire. You see this kind of feeding frenzy, in which the elites gorge on the rotting carcass. Eventually the whole structure collapses. I think that's what we're seeing here, in the whole Republican-corporate hegemony. It exists only to consume, not to create new value (either for business or society).

Posted by: Rebecca Allen, PhD | Sep 26, 2005 6:21:46 PM

short-term effort to boost the president's political stock, with the long-term costs left to some bigger sucker.

I think this sort of what Perlstein had in mnd with the Superjumbo.

Literally, Boeing took a great gamble that netted great rewards. Now, thirty years later, they barely tinker with it, lest that make them undeperform 'quarterly expectations'.


I think the short-term/long-term dichotomy is Wall Street's contribution to it all.

Posted by: me | Sep 27, 2005 12:31:25 AM

Brilliant!

Posted by: casey | Sep 27, 2005 1:56:48 PM

Your post reminds me of a post from Digby a while a go. Digby noted that (and I paraphrase) the GOP has been successful in the same way that Enron was successful. You can only defy the basic rules of accounting for so long. At some point GOP fiscal policy, which bears more than passing resemblence to Enron's accounting practices, will be exposed and we will have a crisis. The "smartest men in the room" are at it again. Great post.

Posted by: Anonymous Liberal | Sep 27, 2005 4:11:46 PM

Great post. And re: Anonymous Liberal's comments above and Frank Rich's column on Sunday (9/25), the resemblances to the practices of the Enron era go even farther.

First is the rationale that old rules did not apply – that you could spend freely and cut corners and avoid sacrifices of any sort because the bounty of a new and huge opportunity awaited just around the corner (and always just around the corner). Any embellishment, shortcut, or outright lie would be forgotten in the wild success that would soon follow. And while the people at the top did reap great rewards, the rank and file were ultimately ruined because they were so foolish as to believe their leaders’ rosy promises.

Any attention to inconvenient facts was derided as a failure to understand the new ways of the world, while a specious breed of “optimism” took over – one that was merely hubris combined with wishful thinking, an increasingly desperate hope that the manipulation of appearances could not just influence reality, but become reality.

We can only hope that, as with Enron, the truth eventually not only comes to light, but remains there.

Posted by: SER | Sep 27, 2005 4:21:53 PM

I think your on to something here, but I think the problem is deeper than you think.

To give some background - bear with me I'll get back to the subject - my father was a scientist and scientists tend to have a different perspective than everyone else. First they think of money as fairyfloss - they think in terms of real absolute limits not financial or political ones. Secondly, they think everyone can be wrong - opinion polls have nothing to do with the truth. And third, the absolute worst that you could be - you would be disowned if you were - is a salesman.

But today we live a world ruled by salesmen. And there are not enough scientists around today who resent it. (Despite the best efforts of the Scientific American).

But the biggest con of all, is the story that what is good for "General Motors is good for America". It has been taken too literally and it has been forgotten that the interests of a Business in particular, and the interests of business in general, are two different things. To the extent that capitalism works it works through representing and balancing COMPETING interests. And interests that aren't represented in the market (future generations?) need to be if the market is to work for everyone.

Getting the balance and competition back in to business, AND ensuring that the referee is unbiased should be PRO-BUSINESS agenda. And we finally need to evaluate and give externalities the central role in the economic system that have in the roles of real people instead of pretending they don't exist.

I'm afraid if that isn't done somewhere along the line a nasty populist revolution is brewing.

Posted by: reason | Sep 28, 2005 9:09:06 AM

I hope someone smarter than me will discuss the manager-owner IT, tech, and telecommunications business culture of the late '90s.

Because the shelf-life of technological innovation is so short (and the enthusiasm of investors so great over that short life), managers had a strong inducement to "pump-and-dump" during their window of opportunity, that is, before another technological solution ate their lunch.

Businessmen became short-term players.

Posted by: Ellen1910 | Sep 28, 2005 2:14:32 PM

And all of this while we have the first "MBA" Administration. I really think that it has been obvious for a quarter of a century at least that something is seriously wrong with business education in this country. After all someone has to learn this behavior. I don't think its inate in Capitalism or it would turm up everywhere.

Posted by: richard lo cicero | Sep 29, 2005 11:11:05 AM

Universal health care can be a great impact on health care system. It is unfortunate to hear so many lack health insurance. We really need to improve our health care system. Health insurance is a major aspect to many and we should help everyone get covered.

Posted by: California Health Insurance | Nov 18, 2005 4:31:10 PM