When you read the Wall Street Journal article on a company that gathers political intelligence and sells their knowledge to well-heeled customers, don’t get upset with the company or their customers. Check out Buying ‘Political Intelligence” Can Pay Off Big for Wall Street.
If that irritates you, perhaps the cause is a regulatory structure that can make or break a company based on one single decision. Huge fortunes ride on decisions made every hour.
The front page article in last week’s paper reports that the SEC is investigating an outfit called Marwood Group. They gather all the public information they can find on decisions the FDA, and presumably other regulators, might make. If I read the article right, their focus is health care issues.
They read the tea leaves and report back to their subscribers, who then make their own investment decisions.
Marwood’s reading of the tea leaves on one company’s new drug indicated the FDA would likely delay approval.
If approved, it could have meant a billion dollars a year of sales. That’s incredibly huge. The company’s stock was up a lot. If the decision was delayed, the stock would drop. Some hedge funds shorted the stock and made a fortune when the stock tanked the day that the FDA delayed approval.
Now the politicians and the SEC are up in arms. One senator is calling for regulation and the SEC has lots of subpoenas out.
Here’s how the company describes itself, according to the WSJ article:
Michael McKeon, a spokesman for Marwood, declined to discuss the investigation but said in a statement that Marwood “is a best in class research firm that monitors a broad range of health-care issues including decisions by the FDA for more than 100 clients in the health-care space, basing all of our analysis on public records, public meetings and our team’s deep experience and understanding of how the FDA works.” The SEC declined to comment.
This is what the business model looks like:
The political-intelligence business has expanded rapidly over a decade as government decisions have come to play a growing role for some on Wall Street. Investors spend more than $400 million a year for such intelligence, according to Integrity Research Associates, which follows the research industry. Its founder, Michael Mayhew, said hedge funds tell him the “single largest source of gains for them has been what’s going on in Washington.”
When a decision by the government regulators can make a company’s future (a billion dollars of sales per year for 7 years is a really bright future) or trash your stock (a 46% drop in stock price in one day) it makes a tremendous amount of sense for investors and business people to pay good money to sort out what the regulators may decide.
Don’t call that capitalism. Don’t call that the free market. It’s crony capitalism at best or something beyond.
The solution is not to pour regulation on people sorting out what the heavy hand of government may do. Perhaps it might be more effective to change the process so billions of dollars don’t ride on each of a dozen decisions made by close of business today.