Martin Shkreli sums up what financialization has done to our country

Martin Shkreli, dubbed by many “The most hated man in America” got a taste of justice recently after he was arrested for securities fraud, and has been fired from his position of CEO at KaloBios. There has been widespread joy at this news, and rightfully so, but I have a somewhat different take on the whole situation.

Shkreli was a hedge fund manager who founded the company Turing Pharmaceuticals where he made headlines by raising the price of a drug, Daraprim, by over 5,000% That’s not an error, the price was jacked from $13.50 per pill to $750[1], an increase of 5,455% Daraprim is “the only approved drug for a life-saving parasitic infection called toxoplasmosis”[1] something that impacts many, especially those with AIDS and cancer. Shkreli drastically raised the price of a drug that many people simply have no choice but to buy, helped by the fact US drug market is extremely monopolistic, (more on this in another post) and faced no real competition for the drug. There is no other way to describe this besides price gouging.

This caused a national outrage, made worse by his defenses of his actions, and his remorseless, condescending, often immature and combative attitude. The best example of this being a tweet Shkreli posted saying, “And it seems the media immediately points a finger at me, so I point one back at ’em, but not the index of pinkie”[2] Not exactly the most becoming of responses.

He’s claimed his motives were altruistic and that actually he should’ve raised the price more. Despite whatever he may say about making drugs more available, R&D investment etc etc Shkreli has made it very clear in numerous public statements that maximizing profit has been, and is, his ultimate goal.

While his criticism has been near universal, and I’d say justified, there’s something I want to keep in mind about all this:

Despite the intense hatred he’s received for his price gouging, that is not what got him in legal trouble. He got in trouble for securities fraud.

It seems he looted $11 million from another drug company he was CEO of, Retrophin, to pay back investors in one of his hedge funds that lost money. It has been said “Shkreli essentially ran his companies like a Ponzi scheme, where he used each subsequent company to pay off the defrauded investors in the prior company”[3] Note: He was fired as CEO of Retrophin in 2014 after “the board concluded that Shkreli had committed stock-trading irregularities and other violations of securities rules.”[4]Now, this is wrong and he should be punished for it, but it was this and not the price gouging of a life saving drug, that landed him behind bars.

Basically: Despite all the public outcry, it wasn’t until he impacted rich people that he got in actual trouble.

 

Shkreli didn’t create this drug, or have anything to do with its creation. He simply bought the drug, jacked up the prices for his profit, (and to pay off his hedge fund) didn’t improve the drug or add any value. This whole situation sums up perfectly what financialization has done to our country. Now, there is obviously a role for finance to play in our economy, but it should be limited to that role. If left unrestrained and unregulated we end up with a finance class dominated by Martin Shkrelis…Looking to get their hands on everything to inflate the price for their profit, with no care or remorse.

Sound harsh? Remember our last housing bubble: banks making incredibly irresponsible loans, bundling said loans into deceptive packages to sell to investors, lenders pressuring appraisers to inflate housing prices and blacklisting those who refused to play ball. People were encouraged to treat houses as an investment. Buy a big one. Put everything you have into it. Put those additions on to boost its value more. Sell it in 30 years and retire a millionaire! Can’t afford it? Don’t worry! Housing prices will go up forever!

Sure, people got houses out of this…but how many couldn’t afford them and went into debt to do so? How many people defaulted, had to foreclose, saw their retirement get wiped out? Big finance didn’t care, they got their sales, their profits, hedge funds benefited, investors benefited from the booming stock market, the executives got their quarterly bonuses.

Remember the dot.com bubble: Investment banks threw money at hair brained, (often in the red), internet companies, inflated the price of their stocks using fraudulent techniques[5] and sold them to investors. Inevitably, most of these companies quickly went under, wiping out trillions of dollars of wealth in the stock market crash it brought, caused a recession, but the investment banks didn’t care. They made their killing with the massive IPOs they hyped up and sold, the execs got their quarterly bonuses.

The early 80’s deregulation fueled the Savings & Loan crisis, where many S&Ls took on unsound lending, investment strategies and fraud. This led to a housing bubble, as well as a boom for S&L owners, investors and sellers of junk bonds. The biggest name in all this, Charles Keating, ran his S&L over $100 million into the red with his debt based, reckless investments, sold to unsuspecting buyers. Seriously, a sales document from his company once noted “always remember the weak, meek and ignorant are always good targets.”[6]

Financial companies have speculated on oil prices, driving up the price of gas[7][8][9], speculated on food prices, driving up the price of food, (which, while difficult for developed countries, led to mass starvation and even political unrest in some poor countries)[10][11] and some even bet against their own assets!

Remember the bankers that insisted they still be allowed to receive large bonuses, and did, even as their company got bailed out? Stephen Schwarzman, with a net worth of $11 billion[12] said a proposal to raise taxes on hedge funds was comparable to Hitler invading Poland.[13]Mitt Romney’s bluntly stating he disregards nearly half the nation since, in his eyes, they are irresponsible, dependent and entitled? (A bloc of people that consists of many working poor and elderly). Romney’s close friend Ed Conard not only defended all the financial madness of our last bubble, but said that it’s actually good for the middle class…going so far as to claim Warren Buffet needs to “Quit taking a victory lap,” in regards to his charitable donations, since “That money was for the middle class.”[14]

These comments strike me as either cognitive dissonance, or delusional, given the shrinking and weakening of the middle class over the last several decades, despite increasingly pro wealthy/investment/finance politics of the era. This disconnect is exemplified by a crashed secret meeting of top bankers/finance/wall street people, which saw jokes made about seven figure bonuses and getting bailed out.[15] Jokes or not, a little disturbing to see this at a time when unemployment was 8.3%, most people saw falling wages and everyone left, right and center were livid about the bank bailouts. All this isn’t new either. Charles Keating not only refused to accept responsibility for his actions, but blamed the regulators for causing his companies trouble, said they had a personal vendetta against him, and resorted to paying off, (or is it contributing to?) five senators to stop the regulators.

It’s true this does not apply to every bank/investor/financial institution/finance person. In fact it doesn’t even apply to the majority of them. However, when you have a large, unregulated financial sector the worst rise to the top. Those who will seek predation over production, will go to any length to make a dollar without any regard to the consequences or remorse. Those who in fact seem to take a personally combative view of it all, a “me vs everyone else”, social darwinian view. People who blast others for being entitled and irresponsible while flying to the government on a private jet to ask for a bailout. People who say the government can’t spend a penny on the people, while tens of trillions have been spent on bailing out and propping up their companies.

So, Martin Shkreli isn’t an extreme outlier. He isn’t a rare exception. He actually sums up what financialization of the economy brings out in society. While we should be appalled by his actions, we shouldn’t be surprised.

 

 

References/Sources

1: http://www.huffingtonpost.com/entry/reviled-pharma-ceo-martin-shkreli-resigns_567445fee4b06fa6887d23f8

2: http://www.dailymail.co.uk/news/article-3243938/Ex-hedge-funder-32-hated-man-internet-defends-jacking-prices-AIDS-medication-5500.html

3:http://www.cnbc.com/2015/12/21/martin-shkreli-fired-as-ceo-of-kalobios-pharmaceuticals.html

4: http://www.bloomberg.com/bw/articles/2014-10-02/biotech-company-retrophin-fired-ceo-because-of-stock-irregularities

5: http://www.rollingstone.com/politics/news/the-great-american-bubble-machine-20100405?page=3

6: http://articles.latimes.com/1990-09-19/business/fi-692_1_bond-sales-program

7: https://www.imf.org/external/pubs/ft/wp/2014/wp14218.pdf

8: http://www.peri.umass.edu/fileadmin/pdf/research_brief/PERI_AFR_Research_Brief_June20.pdf

9: http://www.nytimes.com/2012/04/11/opinion/ban-pure-speculators-of-oil-futures.html?_r=0

10: http://www.huffingtonpost.com/johann-hari/how-goldman-sachs-gambled_b_633436.html

11: http://science.time.com/2012/12/17/betting-on-hunger-is-financial-speculation-to-blame-for-high-food-prices/

12: http://www.forbes.com/profile/stephen-schwarzman/

13: http://fortune.com/2011/12/20/the-triumph-of-blackstone-on-wall-street/

14: http://www.nytimes.com/2012/05/06/magazine/romneys-former-bain-partner-makes-a-case-for-inequality.html?login=email&_r=3&pagewanted=all&&mtrref=undefined

15: http://nymag.com/daily/intelligencer/2014/02/i-crashed-a-wall-street-secret-society.html#

 

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