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.