"Pump and Dump" Politics
Perhaps everyone's been writing about this 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.
Comments (14)
Yes, no one seems to pick up on the insider trading thing. Perhaps that's because it's (isn't it?) a matter for the SEC and the current SEC directorate is not likely to push very hard to nail Frist. I think there's some wiggle room when it comes to blind trusts.
As for Frist's using his power to reduce the numbers of uninsured... [gasps, laughs, mops brow].
Someone or other was saying that the Democrats need a "Contract for America" to take back Congress. Seems to me the matter of Frist's personal ethos and about 50 other major issues provide the substance for just such an effort. But where's the energy/savvy to push it? I continue to think we need a whole new party, one which isn't associated with decades of establishment arrogance and corruption -- in which, of course, the Dems have had not much less of a share than their confreres.
Pump and dump? Ever since the Reagan decade (no less than at the turn of the 20th century) cheating and getting away with it has been a highly esteemed way of doing business at all levels. Kind of a macho thing.
September 26, 2005 1:13 PM | Reply | Permalink
Are there congressional/federal rules for blind trusts? I would guess that senior officals in the Executive branch would have to follow some type of financial rules.
September 26, 2005 1:20 PM | Reply | Permalink
Thanks for the post. It gives me a new perspective on a possible rationale for why the Republicans have been acting the way they have the past 20 years. Pump and dump makes a lot of sense. I am sure there are many other factors, but this certainly fits the behaviors I have seen.
September 26, 2005 1:25 PM | Reply | Permalink
Of course, the problem with doing pump-and-dump on a country is that unless you intend to be dead soon and really don't like your children and grandchildren, there isn't nearly the same clean opportunity to cash out as in the corporate world. Gated communities and similar enclaves buy you a little insulation from general decline, but not as much as you'd think.
In addition, for a fair number of this regime's larger figures, opportunities for comfortable expatriation may be more than a little constrained.
September 26, 2005 1:42 PM | Reply | Permalink
Simply fascinating that Frist would rather use his insider information to dump his stock rather than using it to do something that would help out HCA over the long term - not to mention giving him a political issue to run on in 2008.
Universal health care, e.g., Hillary-care, sold as a boon for business is something that makes sense. It is ridiculous that we put businesses in charge of paying health insurance premiums as a benefit. Every business in the country would LOVE it if they could get that cost off their books.
If Frist's idea was to put up a FreddieMac style insurer and belonged to, he could have made HCA boom AND given millions of Americans access to health care.
But Republicans only think about themselves and their immediate family. And Democrats lack the vision to sell any of their policies in a creative way, or to bring together big business and the uninsured in a way that solves the health care crisis in this country.
It was always apparent that America would be destroyed from within, not by the Soviets or the Islamic Extremists. Amazing that it only took 5 years to throw away everything that had been earned since the end of WWII.
September 26, 2005 1:46 PM | Reply | Permalink
"Any other large sales of HCA in same time frame?- Any other family member selling in same time frame?"
Insider trading is a matter of public record; you can see for yourself on Yahoo! Finance. Just go to HCA and click on "Insider Transactions"; you'll get two year's worth of 'em. In short, there was heavy insider selling early this year, especially in the second quarter, although actually not much by other members of the Frist family (Sen. Frist's brother Tom is the only official "insider" listed). Researchers monitor insider trading closely--which (whatever my own dislike for my Senator) leads me to counsel caution about jumping to conclusions. HCA stock had seen a big runup, and insiders were cashing in on options like crazy. Any reasonably savvy investor, or a good advisor to an unsavvy one, could have spotted the trend without any inside info--insiders dumping a stock that might have gotten overpriced anyway. That still leaves questions about the seeing-eye blind trust, and Frist's contradictory statement about its "blindness," but so far Frist seems to me to be mainly guilty of opportunism.
September 26, 2005 2:00 PM | Reply | Permalink
September 26, 2005 2:30 PM | Reply | Permalink
I think you're onto something, here. If Frist passed inside information to his trustee, who is nothing but a money manager, then the record should show that he got out before all of the mutual funds, pension funds and hedge funds who also held the stock. Looking at what the rest of the "smart money" did would give an indication about whether or not some money was smarter than others. Unfortunately, public filings yield only quarterly sales data, so it's not exact enough for us to just do this on our own.
September 26, 2005 4:40 PM | Reply | Permalink
You've used a nice comparison between a certain corporate self oriented but parasitical immorality and individuals acting in and out of government. But that sort of comparison can be extended further into an area of even more contemptible immorality.
Rather than solely look at the pump and dump methodology, why not also look at the pillage and burn financial technique. That sort of fine maneuver practiced by one Frank Lorenzo with Eastern Airlines. Compare that to the governing policies of Republicans the last 35 years and certainly especially the malevolent policies of the current Bush group. "Starve the beast" and "drown it in a bathtub" aren't simply cute phrases as New Orleans has so clearly demonstrated. Every last drop of value there is in America in every way imaginable is being gutted, burned and pillaged. The treasury. The future national capacity in terms of the wealth and credit standing but also in terms of national resources, human, financial and geological. There's a complete disregard for anything that doesn't directly profit the very very few in control with literally everything and everyone else be damned.
I have a contempt for Republicans because as they've demonstrated for more than ten years now, they vote as a solid block in protecting these reprehensible practices that are so destructive to America. As much as they claim to be patriotic their actions are solidly protective of the piece by piece dismantling of all things of value that are America. From sea to shining sea. From the military, to the Constitution, to the Bill of Rights, to the protection of religious diversity, to the almost poetic pursuit of happiness.
The "flag" is melodramatically revered but "the republic, for which it stands" is not. Republicans with disdain for the republic.
September 26, 2005 5:06 PM | Reply | Permalink
I believe the major corporate heads of Northwest Airlines sold some 75-80 percent of their stock earlier this year, ahead of their filing for bankruptcy and their requiring suicidal concessions from mechanics and flight attendants (also the pilots). Welcome to the Third-World America, George Bush's America.
September 26, 2005 5:13 PM | Reply | Permalink
I think you are making too much of this. Frist timely sale was likely the result of a phone call from his brother or other family insider (remember there was an insider fire sale underway) who told him it was time to get out. This is the toughest part of any potential prosecution for insider trading. Someone has to rat, and the fewer people involved, such as in a family situation, the less likely they will find a rat. Of course, we can always hope for some good ole' fashion obstruction, ala Martha,...
I'm not holding my breath.
One thing however is clear. Frist's trusts were not blind.
So here is my question. What was the legal compulsion for Frist to form the "blind trust" anyway? Was it a federal statute with penalties for non-compliance, or Senate ethics rules? If it was the former, Frist is definately in trouble;if the latter, again, I'm not holding my breath.
September 26, 2005 6:29 PM | Reply | Permalink
Who is looking into this trade? The best bet for a real investigation is proably the U.S. Attorney for the Southern District of New York. That office probably has more experience with insider trading of any office. Depending how the trades were done there may be a number of stockbrokers behind the eightball.
September 26, 2005 6:36 PM | Reply | Permalink
The question is why did the stock go up so much? HCA issued $900m of new shares and refinanced debt in the last six months. The income for the first quarter was manufactured from accounting gimmicks. Anyone who read the financials knew it.
Focus on the big picture. The president wanted Americans to invest social security money in the stock market without a propectus. Even investors in Pets.com were entitled to a prospectus.
We should have been given cash flow and risk analyses, economic forecasts, projections of short and long term stock prices, an study of conflicts between government and corporate policies, evaluation of future marketability of shares and a host of other information.
As potentially the biggest class of investors in the world, we were entitled to have the best information available and we got zip. You better believe that Goldman Sachs and Merrill Lynch studied the impact of privatizing social security on the market.
Then again, this is the same president who did nothing while two Texas companies, Enron and Reliant, committed one of the worst acts of financial sabotage in American history. Enron and Reliant stole billions from Californians and no one went to jail.
Do you really think that the Enron employees swindled that kind of money without the boss knowing? Read the Enron financials. If Enron hadn't attacked California, it would have been bankrupt before November 2001.
What has your government done to make sure no one can jeopardize your supply of electricity?
Remember Global Crossings? Terry McAuliffe was bought off cheap with his $10m windfall. For every dollar made by a Democrat in the great telecom swindle of the 1990s, a Republican made ten.
The smart money is not going into the stock market. Check if your state pension fund is investing in private equity firms like the Carlyle Group. How much of the savings from lower taxes on investments is invested in the US?
Guardian
MSNBCWe're all being swindled. Who do you think benefits from the underfunded IRS and SEC? The government is run by and for the wealthy. Period.
September 26, 2005 7:02 PM | Reply | Permalink
From a May 26, 2005 Street.com article, "Hospitals Brace for Medicare Blitz":
"Congress is currently weighing a bipartisan bill that would dramatically alter the entire Medicare payment system. Under the proposal, Medicare would pay hospitals on the basis of their cost to treat patients rather than the amount they charge to do so….
Already, industry executives look skittish. Since CMS first made its recommendations in early March, senior managers at a number of hospital chains — including Community (CYH:NYSE - commentary - research), LifePoint (LPNT:Nasdaq - commentary - research), HCA (HCA:NYSE - commentary - research) and Triad (TRI:NYSE - commentary - research) — have been shedding large amounts of stock. All of those stocks set new 52-week highs this spring but have since begun to retreat.
Shares of industry leader HCA, where insider selling has been especially pronounced, fell 1.2% to $53.01 on Wednesday. The stock is now off 6.5% from the peak it hit last month."
September 27, 2005 9:12 AM | Reply | Permalink