It was so easy for investors to avoid scandal in their portfolios last year when the possible suspects were so obvious.
Valeant Pharmaceuticals Intl Inc (NYSE:VRX) and Martin Shkreli’s Turing Pharmaceuticals were doing things that obviously looked wrong, and were bragging about it. They were cartoon villains.
That’s not true this year. The people and companies getting hit by scandal this year often have the reputation of being “good guys.”
Warren Buffett of Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) is a big owner of Wells Fargo & Co (NYSE:WFC). Berkshire Hathaway is the gold standard for American business ethics.
Mylan NV (NASDAQ:MYL) CEO Heather Bresch’s father is Democratic U.S. Senator Joe Manchin. Manchin’s a guy who usually calls out others’ scandals.
Saying the names of HP Inc (NYSE:HPQ) founders Hewlett and Packard together is like saying “Randolph Scott” in Blazing Saddles.
What is an ethical investor to do?
Good Guys Gone Bad
HP recently sent software to owners of its OfficeJet printers that prevents those printers from using ink cartridges that don’t come from HP. It created a monopoly out of whole cloth, forcing customers to buy expensive cartridges whose ink costs more than gold.
It’s like my computer printer was told to start ripping me off, while I slept.
Wells Fargo sells at a significant premium to its big bank brethren due to its reputation for simple banking and honest dealing. Yet now it turns out they created millions of accounts customers didn’t ask for and charged for them? Do I have to sell my WFC stock at a loss and switch to JP Morgan Chase & Co. (NYSE:JPM), whose stock has gone nowhere this year?
Mylan CEO Bresch told the Senate “the system” is to blame for what many call its EpiPen scandal. But healthcare is 17% of the economy. Should investors avoid 17% of the economy on fear of corruption?
These are not easy questions, although some politicians have easy answers. They say to get rid of “unnecessary regulations,” like the one creating the Consumer Finance Protection Bureau that fined Wells. That would turn a lot of these black hats into white ones.
Still, do you really want to let banks create checking and credit card accounts for you without your knowledge or consent?
Unpopular Laws Create Incentives to Cheat
The EpiPen case is more complicated because Bresch has a point. Ever since passage of the Affordable Care Act, also known as Obamacare, hospitals and drug companies have been looking for ways around it. The act says limit profit margins, but management’s job is to raise profit margins, by any means necessary.
So hospitals merge to create local monopolies, and drug companies move overseas to avoid taxes while charging monopoly prices on generic drugs. When they get caught, they blame the law.
On our recent vacation, my wife and I had to use the Canadian health system, and as Americans, we had to pay for it. The bill for two doctors, three nurses, four X-rays and the afternoon’s use of the hall came to under $1,000. If that happened here, we might pay more than that in just co-pays and deductibles, because everyone is busy either passing-the-buck or covering their ass with paperwork.
That is Mylan’s defense. It raised its retail price on EpiPen to the skies so it could hand pharmacy benefit managers (PBMs) discounts that in the end let insurance customers get the product at the same copay as before. But the system paid for that.
And if you weren’t in the system — if you didn’t have employer-paid health insurance — you got the full price increase. If you had an Obamacare policy, you paid a big hunk of it because conservatives demanded such patients have “skin in the game,” again to hold down costs.
So … What Do You Do?
Business is supposed to have ethical rules that keep executives from drawing outside the lines. Banks are supposed to be fiduciaries — that means they treat your money as though it came from their own mothers. I’m beginning to think these guys would actually rob their mothers for another penny-per-share on the dividend.
Warren Buffett says he’s not going to comment about Wells Fargo until after the November elections. What does that even mean? That we should vote for the politicians in league with the crooks now, so he can be our moral arbiter later?
Mylan is dancing around, blaming the system, evading responsibility, and HPQ hasn’t even been asked to comment about the ink cartridges.
If we really are getting scandal fatigue, however, shouldn’t investors just throw up their hands, buy what seems to work, and leave our ethical baggage at the exchange door?
I’m not sure.
But HPQ is making an interesting chart pattern.
Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn.
