Saturday, May 01, 2010

Bad Citizenship Shouldn't Pay

Many of us were dismayed by the recent US Supreme Court decision which struck down a provision of the McCain-Feingold campaign reform act limiting the amount of money corporations (and unions) could contribute to candidates. The ruling essentially said that such a limitation was an infringement of the free speech provisions of the US Constitution. It's clear that a majority of the justices bought into the idea that the legal fiction of corporations as people able to enter into contracts is not a fiction, but a fact, and thus corporations are entitled to all the rights of individuals.

Well, if that's the case, then corporations must also be subject to all the laws and penalties for violations of those laws. That's why so many of us were grinning at the mere hint that the Department of Justice was considering filing criminal charges against Goldman Sachs in addition to the civil suit which has been filed by the federal government.

Of course, DOJ hasn't actually filed any criminal charges, and they very well might not. A criminal case under the current facts would be a difficult one to prove unless the current investigation (which began only after Congress insisted) yields some solid and credible information as to intentional acts of fraud.

That said, however, the Wall Street bank is taking a different kind of pummeling.

Goldman Sachs Group Inc. shares tumbled Friday on reports of a federal criminal probe into the company's conduct. ...

...investors were spooked by the news and sent Goldman's shares down $15.04, or 9.4%, to $145.20, their lowest close since last July. The stock is down 21% since April 15, the day before the SEC took it to court. ...

The latest developments will make it more difficult for Goldman to win new investment banking business, said Albrecht at Standard & Poor's.

"It's harder for the company to gain new clients that might be a little dubious about doing business with a firm that is under investigation and that has that hint of lax ethical standards floating around it," he said.

Now, investors are a funny lot. Like the corporations, they're in it for the money. If the company doesn't perform, their investments don't have the kind of returns they expected. That generally makes investors very unhappy. If they get unhappy enough, they push for a change in management or they simply dump their stock and walk away.

The same kind of investor behavior can be seen in another financial sector, even though no pending criminal investigations are in the works. Health insurers are now seeing some of the fallout from the practices of rescission and huge premium hikes in the face of the new healthcare reform law:

On Friday, shares of WellPoint, the nation's largest health insurer as measured by membership, tumbled nearly 9% to $53.80. The losses came two days after the company reported a 51% increase in first-quarter earnings. ...

Analysts said uncertainty over the effect of the nation's new healthcare law has left investors jittery.

The new law will impose billions of dollars of new taxes on insurance companies. It will guarantee insurance for millions of uncovered Americans and bar insurers from rejecting anyone because of medical conditions.

Insurers will have spend at least 80% of their premium revenues on healthcare for plans that cover individuals and small business, and 85% for policies with large employers.

Of course, the drop in investor confidence came after Anthem Blue Cross (part of WellPoint) was forced to back off the huge premium hike it announced after an investigation by the California Insurance Commission. It's pretty hard to blame just the new law for that stock plunge because of the timing.

Now, I suppose an argument can be made that these corrections are proof that the free market, unfettered and unregulated, is simply working the way it should; that these corrections keep the unscrupulous and the criminal behavior to a minimum.


During the heyday of the derivatives, investors were overjoyed enough by the unconscionable and obscene profits to drive the stock prices up and to look the other way as executives were given huge bonuses. The CEO of WellPoint impressed her shareholder-supported Board of Directors so much that she got extra millions, much of it in stock, added to her income for raising the share price.

It was only after a world-wide financial meltdown and the deaths of thousands of Americans for lack of health care caused the federal and state governments to begin investigating what went wrong that either sector began to see the drop in "investor confidence." Unfettered and unregulated capitalism just makes the rich richer and the poor dead.

Protecting its citizens is one of the functions of government. It's nice to see that function finally being exercised in the financial arena.



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