Regulation

The People’s Regulator

Government regulation of business is looking pretty lame these days. After 29 workers were killed in an explosion at a Massey Energy mine in West Virginia, it came to light that the facility had accumulated more than 1,300 safety violations over the past five years but was not shut down by the Mine Safety and Health Administration – an agency labeled a “meek watchdog” in a recent New York Times headline.

It has also been revealed that Toyota managed to keep critical information about faulty gas pedals from federal regulators in an ultimately unsuccessful effort to avoid a massive recall of its vehicles. A pair of recent reports show that regulatory oversight of Citigroup was deficient both before and after the banking giant had to be bailed out by taxpayers. Again and again, it’s the same old story: aggressive corporations riding roughshod over feckless regulators.

Compare this to what recently happened when Consumer Reports issued a “don’t buy recommendation” for a Lexus sport-utility vehicle because its testing had shown a risk of rollovers. Within hours after the warning was issued, Toyota, the parent company of Lexus, announced that it would suspend sales of the GX 460. A company official stated: “We are taking the situation with the GX 460 very seriously and are determined to identify and correct the issue Consumer Reports identified.”

Toyota’s quick response was undoubtedly part of its effort to control the damage to its reputation from the sudden-acceleration controversy, but it also demonstrates the power of Consumer Reports. More than a magazine, it is a bulwark against shoddy manufacturing and dishonest practices that threaten the physical and financial well-being of the public. It is the people’s regulator.

The potency of Consumer Reports stems from its rock-solid integrity and its complete independence from the companies it is monitoring. While the magazine is often taken for granted these days, CR and its non-profit parent Consumers Union have not always been revered during their 70-plus years of existence.

The challenges Consumers Union (CU) faced in its early decades are documented in the work of Norman Silber, who wrote a dissertation on the subject in 1978 (available via the Dissertations & Theses database) which became the 1983 book Test and Protest.

CU was established in 1936 by a group of engineers, researchers, writers and editors who were unabashedly leftwing and saw their work as complementary to the growing labor movement. The organization’s mission was, Silber notes, threatening not only to manufacturers but also to the commercial media, which saw its independent product ratings as “an unfair and subversive attack upon legitimate advertising.” Many major magazines and newspapers refused to let CU advertise Consumer Reports in their pages.

CU was also an early target of the House Un-American Activities Committee, though the scrupulously non-partisan content of Consumer Reports saved the organization from serious persecution. During the anti-communist hysteria of the 1950s, Silber recounts, CU suspended its reporting on labor conditions in the industries whose products it rated. Its own staff remained unionized, though it switched from the leftist Book and Magazine Guild to the more mainstream Newspaper Guild.

CU did nothing to dilute its assessment of business practices. During the late 1950s it was especially critical of the tobacco industry for engaging in misleading advertising and for selling a dangerous product. CU also took on the dairy industry over the issue of milk contamination caused by radioactive fallout. And it began arguing for improved auto safety starting well before Ralph Nader appeared on the scene. In the 1970s CU successfully pressured federal regulators to improve standards for microwave ovens to address radiation leakage.

CU also did not flinch when the recipients of poor product ratings decided to take the organization to court. It fought companies such as Bose audio and Suzuki Motor up to the Supreme Court to protect its right to offer candid assessments.

This is not to say that CU is completely above reproach. Critics have charged over the years that the organization’s preoccupation with product testing comes at the expense of broader consumer advocacy (this is what Nader said when he quit CU’s board in 1975). And in 2007 the organization suffered a black eye when it botched its testing of infant car seats and had to issue an unprecedented apology. Nonetheless, its overall track record, up through its reprimand of Lexus, is pretty impressive.

A private organization without formal enforcement powers is no substitute for government regulatory agencies, but CU does have something to teach those agencies – above all, that a watchdog can be truly effective only when it is completely uninfluenced by the companies it is monitoring.

It also helps to be able to issue definitive pronouncements about corporate misbehavior. CU’s statement about the dangers of the GX 460 was not tentative and was not subject to time-consuming appeals.

Once official regulators show as much spunk as the likes of Consumers Union, corporations may finally start to clean up their act.

Corporate Overkill

There is so much corporate misbehavior taking place around us that it is possible to lose one’s sense of outrage. But every so often a company comes along that is so brazen in its misdeeds that it quickly restores our indignation.

Massey Energy is one of those companies. Evidence is piling up suggesting that corporate negligence and an obsession with productivity above all else were responsible for the horrendous explosion at the Upper Big Branch mine in West Virginia that killed at least 25 workers.

This is not the first time Massey has been accused of such behavior. In 2008 a Massey subsidiary had to pay a record $4.2 million to settle federal criminal and civil charges of willful violation of mandatory safety standards in connection with a 2006 mine fire that caused the deaths of two workers in West Virginia.

Lax safety standards are far from Massey’s only sin. The unsafe conditions are made possible in part by the fact that Massey has managed to deprive nearly all its miners of union representation. That includes the workers at Upper Big Branch, who were pressured by management to vote against the United Mine Workers of America (UMWA) during organizing drives in 1995 and 1997. As of the end of 2009, only 76 out of the company’s 5,851 employees were members of the UMWA.

Massey CEO Don Blankenship (photo) flaunts his anti-union animus. It’s how he made his corporate bones. Back in 1984 Blankenship, then the head of a Massey subsidiary, convinced top management to end its practice of adhering to the industry-wide collective bargaining agreements that the major coal operators negotiated with the UMWA. After the union called a strike, the company prolonged the dispute by employing harsh tactics. The walkout, marked by violence on both sides, lasted 15 months.

In the years that followed, Massey phased out its unionized operations, got rid of union members when it took over new mines and fought hard against UMWA organizing drives. Without union work rules, Massey has had an easier time cutting corners on safety.

Massey has shown a similar disregard for the well-being of the communities in which it operates. The company’s environmental record is abysmal. In 2000 a poorly designed waste dam at a Massey facility in Martin County, Kentucky collapsed, releasing some 250 million gallons of toxic sludge. The spill, larger than the infamous Buffalo Creek flood of 1972, contaminated 100 miles of rivers and streams and forced the governor to declare a 10-county state of emergency.

This and a series of smaller spills in 2001 caused such resentment that the UMWA and environmental groups—not normally the closest of allies—came together to denounce the company. In 2002 UMWA President Cecil Roberts was arrested at a demonstration protesting the spills.

In 2008 Massey had to pay a record $20 million civil penalty to resolve federal charges that its operations in West Virginia and Kentucky had violated the Clean Water Act more than 4,000 times.

And to top it off, Blankenship is a global warming denier.

Massey is one of those corporations that has apparently concluded that it is far more profitable to defy the law and pay the price. What it gains from flouting safety standards, labor protections and environmental safeguards far outweighs even those record penalties that have been imposed. At the same time, Massey’s track record is so bad that it seems to be impervious to additional public disgrace.

Faced with an outlaw company such as Massey, perhaps it is time for us to resurrect the idea of a corporate death penalty, otherwise known as charter revocation. If corporations are to have rights, they should also have responsibilities—and should face serious consequences when they violate those responsibilities in an egregious way.

Are Strange-Bedfellows Alliances the Way to Cut the Big Banks Down to Size?

glass-steagall-act Bipartisanship is rare these days, and rarer still are cases in which Democrats and Republicans come together to urge new restrictions on business. Yet here we have Democratic Senator Maria Cantwell of Washington joining Arizona Republican John McCain to propose a reinstatement of the Glass-Steagall Act. The long shot idea would turn back the clock on a key facet of ruinous financial deregulation.

In case you have forgotten, Glass-Steagall was one of the signature reforms of the New Deal era, signed into law by FDR as part of the Banking Act of 1933 (photo). Reacting to Wall Street’s excesses of the 1920s and the stock market crash, the law mandated a separation between the speculative world of investment banking and the supposedly more prudent business of commercial banking. This forced big institutions such as J.P. Morgan to spin off their securities operations, leading to the formation of firms such as Morgan Stanley.

While many credited Glass-Steagall with promoting financial stability, by the 1980s commercial banks began clamoring to get back into the more exciting (and potentially more profitable) game of underwriting corporate securities and providing other investment services. Little by little, the Federal Reserve gave in, which only emboldened the big players. In 1998 wheeler-dealer Sandy Weill directly defied Glass-Steagall by arranging a merger of Travelers Group and Citicorp, thus creating the behemoth we know today as Citigroup. What was left of Glass-Steagall was repealed by the 1999 Gramm-Leach-Bliley Act.

The near-meltdown of the financial system has engendered new interest in the principles that had been embodied in Glass-Steagall. McCain and Cantwell are not the only ones talking about reviving the 1930s legislation. Several progressive members of the House made a similar proposal earlier this month. The idea has also been endorsed by former Federal Reserve Chairman Paul Volcker and prominent economist Joseph Stiglitz.

Glass-Steagall redux would not, by itself, solve the problems of the U.S. financial system, and it is not a substitute for wide-ranging reform. But it would put a significant crimp in the casino culture that has taken root throughout the banking world. Another advantage is that it would by necessity bring about a reduction in the size of many mega-institutions that are now considered “too big to fail” and thus must be bailed out when they screw up in a spectacular way.

The McCain-Cantwell bill, for example, would require the likes of Citigroup and Bank of America to decide within a year whether they wanted to focus on lending or securities. B of A, for instance, would have to give up its branches or its ownership of Merrill Lynch. At the same time, a purer investment bank such as Goldman Sachs could no longer pretend to be a bank holding company, the designation it adopted last year to qualify for TARP funds.

If the bill proceeds, it could also serve as the foundation for an aggressive left-right response to the financial mess. Ever since the Bush Administration and the Federal Reserve started on the road to bank bailouts last year, many progressives and many conservatives have expressed outrage at the practice but have generally talked past one another. This has helped the banks avoid having any serious strings put on their rescue packages. And it let them sidestep the most obvious solution to the problem of having financial institutions deemed too big to fail: cutting them down to size.

The biggest obstacle to restoring Glass-Steagall and otherwise curtailing the power of the big banks may turn out to be not the financial lobby but rather the Obama Administration, whose chief economist, Larry Summers, championed the final repeal of Glass-Steagall while heading the Clinton Administration Treasury Department a decade ago. Despite Obama’s recent swipe at “fat cat” bankers, he and his advisors seem to think that it’s preferable to let the financial leviathans remain in place while putting some modest restrictions on their operations.

The problem is that the giant banks have become increasingly addicted to activities such as trading — the main source of the supposed rebound in the sector — and show less and less interest in mundane matters such as lending to businesses and consumers. The Obama Administration thus comes across as a defender of aloof Big Finance while the country struggles to finance an economic rebound. The fact that progressives can find more common ground on this issue with someone like McCain suggests that strange-bedfellows alliances may accomplish more than toeing the pro-business centrist line.

Needed: A New Contract with Big Finance

banks A widely circulated rumor that Goldman Sachs executives were loading up on firearms to protect themselves against a populist uprising turned out to be spurious, but the leaders of the bank are clearly worried about rising discontent over Goldman’s prosperity amid continuing economic distress for most everyone else.

The announcement that Goldman’s top 30 executives will be denied cash bonuses this year is one of the most significant concessions Wall Street has ever made to public outrage. The members of Goldman’s management committee won’t be denied bonuses entirely but will receive them in the form of “shares at risk” – stock that cannot be sold for five years and is subject to recapture if the recipient engages in “materially improper risk analysis” or fails “sufficiently to raise concerns about risks.”

It is unclear whether these rules, which would require prudence rarely seen in the casino culture of investment banking, will be applied stringently. Goldman’s announcement that it will allow a shareholder advisory vote on compensation practices will make it a bit more difficult to flout the rules entirely.

While the ultimate impact of the Goldman move is uncertain, Britain and France are putting a real and immediate dent in bloated banker pay by imposing a 50 percent windfall tax on bonuses. Financiers in London and Paris are up in arms over the moves, with one investment banking chief telling the Financial Times that as a result of the tax the “contract between government and business is broken.”

And what exactly is that contract? As far as the financial sector is concerned, the traditional contract was that banks were expected to provide the capital needed for the “real” economy, and government did not regulate the market too strictly. A decade ago, financiers got the regulatory regime loosened even more, which in the United States meant an end to the separation between commercial banking and investment banking. The new contract seemed to be that a fully liberated financial sector would magically create wealth to make up for the travails of the productive portion of the economy.

The crisis of the past two years put an end to that notion, and the contract we’ve been left with seems to be little more than an obligation by government to prop up a teetering financial sector with bailouts and access to virtually free funding. There is no quid pro quo imposed on bankers, who are allowed to deny credit to businesses and individuals alike and use their cheap money to rack up trading profits. And those profits serve mainly to pay for outsized bonuses for the bankers themselves.

It’s always been questionable whether big finance capital served a legitimate social purpose. Now it is clear that the big banks exist mainly for the enrichment of their own executives. About half of total revenue at these banks is set aside for compensation of executives and other employees.

That’s why Bank of America and Citigroup are so eager to repay their bailout money and free themselves from the constraints of the federal pay czar. And it’s why the big banks have felt no compunction about opposing the financial regulatory reforms now before Congress.

While financial industry lobbyists twist arms behind the scenes, Goldman is playing good cop with its bonus restrictions and the quasi-apology its CEO Lloyd Blankfein issued in November. Yet neither voluntary actions by the likes of Goldman nor modest regulatory reforms are sufficient. The current “contract” between big finance and not just government but all of society needs to be rewritten, and this time we shouldn’t let bank lawyers draft the document.

Regulating Murder

death-cigarettes Despite a long-running war on crime and billions of dollars spent each year on the criminal justice system, murders keep on happening. Instead of trying to end all homicides, perhaps the solution is to give up on abolition and simply regulate the practice: discourage the murder of children, put strong warning labels on guns, impose a tax on killers.

Ridiculous? Yes, but this is roughly what the federal government has just done with the tobacco industry, which legally ends far more lives each year than all the non-corporate murderers in the country combined.

The legislation just signed into law by President Obama — the Family Smoking Prevention and Tobacco Control Act — is billed as an aggressive move to bring the coffin nail industry under federal control for the first time. It starts off with what amounts to a 49-point indictment of tobacco products as a public health menace. Use of these products is called “inherently dangerous,” “addictive” and a “pediatric disease.” The tobacco industry, it is noted, still spends vast sums “to attract new users, retain current users, increase current consumption, and generate favorable long-term attitudes toward smoking and tobacco use.”

All of this is certainly true, but it seems odd to follow this denunciation with legislative language that imposes restrictions on the noxious industry but does not seek to put it out of business. In fact, the law can be seen as conferring some degree of legitimacy on tobacco producers. For example, the industry is given a statutory role in the Tobacco Products Scientific Advisory Committee, which has to be consulted before any new industry regulations are promulgated. Fortunately, the three seats on the committee given to tobacco manufacturers and growers are non-voting positions, but it is still unseemly — to put it mildly — to have representatives of such a notorious industry so involved in government oversight.

According to Corporate Accountability International, which has played a central role in promoting tobacco control policies: “Not only is the inclusion of the industry on this committee akin to letting the fox guard the henhouse, it runs counter to a treaty provision that obligates ratifying countries to safeguard their health policies against tobacco industry interference.” Kathy Mulvey of CAI adds: “U.S. policymakers must now gird themselves for inevitable attempts by Big Tobacco to delay and thwart [the law].”

The ability of a notorious industry to go on influencing policy is reinforced by the fact that the law generally treats tobacco companies in a way that is not greatly different from other regulated corporations. The Food and Drug Administration is instructed to collect “user fees” from tobacco companies — as if they were pharmaceutical manufacturers seeking to get new drugs approved. Unless tobacco companies plan to “use” the FDA in some way, the fees should at least be called something different; perhaps reparations.

Another problem is that the law mentions that any restrictions on tobacco industry advertising and promotion must be consistent with the First Amendment. You can be sure that the industry will be screaming loudly that the law violates its free speech rights (granted by misguided court rulings). This is another drawback to regulation rather than criminalization.

While some players in the tobacco industry have ardently opposed federal regulation throughout the 15-year campaign to bring it about, some shrewd parties eventually realized that government intervention was inevitable and jumped on the bandwagon. Tobacco giant Philip Morris (now part of Altria) took this tack back in 2000, reaping years of improved p.r. and now a law that allows it and its competitors to continue selling their deadly wares with restrictions that are far from fatal to their profits. As much as corporations like to complain about regulation, sometimes it is their salvation.

The Two Tim Geithners

Will the real Timothy Geithner please stand up? In recent days it has seemed as if two men with the same name are serving as Secretary of the Treasury. On the one hand, we have the wimpy Tim Geithner, who let AIG get away with its bonus outrage and who has come up with a new scheme to get rid of toxic assets of banks that is a massive giveaway to hedge funds. On the other hand, this week has seen the lionhearted Tim Geithner, who is proposing what appears to be an audacious expansion of federal regulation of financial markets.

The wimpy version has been around for quite a while, characterizing the Geithner who headed the Federal Reserve Bank of New York for five years before he was chosen for Treasury. A look through the online archive of the New York Fed turns up the texts of numerous speeches in which Geithner acted as a cheerleader for the forms of financial “innovation” that paved the way to the current calamity of the world economy. Geithner was not oblivious to the escalation of risk that derivatives and the like were creating, but he expressed confidence that the system could accommodate it. At most, some tinkering with the regulatory structure might be necessary.

For example, in a May 2006 speech to the Bond Market Association, Geithner stated: “The efficiency, dynamism and resilience of the financial system are strategic assets for [the] U.S. economy. The relatively favorable performance of the U.S. financial system is the result both of the wisdom of past choices made to foster a very open and competitive financial system, but also is the result of good fortune and some of the special advantages that have come from the unique role of the United States and the dollar in the world economy and financial system.”

Later in the same speech, he suggests that “we need to be creative in identifying areas where market-led initiatives, rather than new laws, regulations or formal supervisory guidance, are likely to be successful and possibly more efficient in achieving certain policy objectives.”

Compare this to the Tim Geithner who just told the House Financial Services Committee that “our system failed in basic fundamental ways…To address this will require comprehensive reform. Not modest repairs at the margin, but new rules of the game.” These rules would: give the feds the power to seize failing non-bank entities, create a kind of super-regulator to oversee all large financial entities, impose stronger capital requirements, tighten hedge fund registration requirements, extend regulation to credit default swaps and over-the-counter derivatives, etc.

All these proposed measures are welcome and long overdue, but they may not go far enough. Perhaps what we have here is the wimpy Geithner only giving the appearance of being bold. The Treasury Secretary (and presumably the Administration) would have us believe that banks, insurance companies and other financial institutions can continue gambling with other people’s money as long as they put more of it aside in reserves, act in a somewhat more transparent manner and pay more attention to risk management.

If there were a truly intrepid Geithner, he would be talking about regulations that put an end to the most speculative financial transactions, rebuild a wall between commercial banking and investment banking, and dismantle huge financial institutions such as Citigroup. That Geithner has yet to appear on the scene.

Pump and Slump: Will Citi Sleep with the Fishes?

A couple of years ago, the mighty Citigroup traded at around $50 a share. Today, March 5, the price hovered around $1 and for a while was below a buck. In other words, one of the largest financial institutions in the world is in effect a penny stock. At one time, a descent to that level would have been enough to get a company delisted from the New York Stock Exchange, but standards have been relaxed.

Penny stocks have traditionally been associated with unscrupulous brokerage practices, such as the “pump and dump” scheme graphically illustrated during some episodes of The Sopranos (photo). A look back at the record of Citi during the past decade does not suggest a moral compass much different from the wise guys of Northern New Jersey. As U.S. PIRG Education Fund notes in its recent report Failed Bailout, Citi helped crooked companies such as Enron carry out deceptive transactions and itself set up scores of entities in offshore tax havens such as the Cayman Islands in order to avoid both taxes and oversight.

Citi’s actions had an impact beyond its own unjust enrichment. As Multinational Monitor editor Rob Weissman and his colleagues show in their new report Sold Out, Citigroup played a key role—thanks to $19 million in campaign contributions and $88 million in lobbying expenditures—in bringing about the demise of the Glass-Steagall Act and other deregulatory moves that paved the way for the current meltdown of the financial system.

Yet Citi’s management is, to a great extent, no longer in control of the company’s fate. Today it is the federal government that is in effect trying to pump up the bank and its stock. The Obama Administration, regrettably, is perpetuating the idea that Citi is too big to fail and thus requires a seemingly unlimited commitment of public resources.

Unfortunately for U.S. taxpayers, the pumping will not be followed by a timely dumping of the federal holdings in Citi at a fat profit. In fact, the federal capital infusions, loss-sharing agreements and loan guarantees are not stabilizing the company and pushing up its stock price. The more the feds put into the bank, the less the market seems to think it is worth. This downward move is attributed in significant part to short-selling of Citi’s common stock by hedge funds. At one time, those funds were apparently in cahoots with Citi. Last fall the Senate Permanent Subcommittee on Investigations charged that Citi was one of the banks that had helped offshore hedge funds engage in tax avoidance. I guess there really is no honor among thieves.

The U.S. government is now in the ridiculous position of having made commitments potentially costing hundreds of billions of dollars to a bank that the stock market, as of today, thinks is worth a total of only about $5 billion. As long as the Administration avoids the seemingly inevitable need to nationalize and reorganize Citi and the other large zombie banks, its strategy amounts to little more than “pump and slump.” Despite the efforts of the feds, the bank whose motto is “the Citi never sleeps” may soon be sleeping with the fishes.

The Corporate Crime Fighting Budget

The call to boost taxes on the wealthy to start paying for healthcare reform is not the only refreshing thing about the budget outline just released by the Obama Administration. There is also a marked shift toward tighter regulation of business. Here are some features of what might be called the Corporate Crime Fighting Budget:

Cracking down on corporate polluters. The Environmental Protection Agency—a joke during the Bush Administration—is slated for a 34 percent increase in funding. This would result in a hike in the budget for core functions such as enforcement to $3.9 billion, an all-time high for the agency.

Cracking down on abusive employers. Obama wants the Department of Labor—another agency enervated by the Bush crowd—to get a smaller increase than EPA, but the additional funds are intended to rebuild DOL’s responsibilities in workplace monitoring. The budget document proposes to “increase funding for the Occupational Safety and Health Administration, enabling it to vigorously enforce workplace safety laws and whistleblower protections, and ensure the safety and health of American workers; increase enforcement resources for the Wage and Hour Division to ensure that workers are paid the wages that are due them; and boost funding for the Office of Federal Contract Compliance Programs, which is charged with pursuing equal employment opportunity and a fair and diverse Federal contract workforce.”

Prosecuting white-collar crooks. The section on the Justice Department in the budget document says that the Administration will seek [not yet quantified] “resources for additional FBI agents to investigate mortgage fraud and white collar crime and for additional Federal prosecutors, civil litigators and bankruptcy attorneys to protect investors, the market, the Federal Government’s investment of resources in the financial crisis, and the American public.”

Thwarting purveyors of tainted food. The Administration plans to “take steps to improve the safety of the Nation’s supply of meat, poultry and processed egg products and to ensure that these products are wholesome, and accurately labeled and packaged.” The proposed budget for the Agriculture Department “provides additional resources to improve food safety inspection and assessment and the ability to determine food safety risks. This will lead to a reduction in foodborne illness and improve public health and safety.” The Food and Drug Administration, which is under the auspices of the Department of Health and Human Services, would also get a hike in funding.

Restricting plunderers of national resources. The section of the budget document on the Interior Department outlines the Administration’s intention to rein in the windfalls long enjoyed by extraction companies with leases to drill and mine on public lands. The plan includes “a new excise tax on offshore oil and gas production in the Gulf of Mexico to close loopholes that have given oil companies excessive royalty relief” as well as the imposition of user fees and more realistic royalties for oil and gas drilling on federal lands.

Controlling drug and healthcare price gouging. The general framework for healthcare reform released by the Administration as part of the budget document contains plans to slow down the growth in Medicare costs. This includes a proposal to force providers of privatized coverage under the name of Medicare Advantage to participate in competitive bidding. Medicare drug costs would be reined in by tightening oversight of Part D spending and by preventing brand-name pharmaceutical companies from paying generic drug producers to keep their low-cost products off the market.

To these should be added tax proposals that would put an end to various boondoggles that have enriched oil companies, hedge funds and other anti-social elements. Some of Obama’s proposals (especially regarding healthcare) do not go nearly far enough, but the budget as a whole represents a major break from the priorities of the Bush Administration. Though you would hardly know that from the geeky, matter-of-fact way it is being promoted by Budget Dirtector Peter Orszag (photo).

Budget documents are, of course, merely wish lists conveyed by the executive to the legislative branch. In the short term, the main impact of Obama’s blueprint will be to launch a massive wave of business lobbying. Now it is up to Congress to resist the entreaties of those paid persuaders and make it clear that the days of unchecked corporate giveaways have come to an end.

The Banality of Corporate Evil

Our culture worships spunky small businesses and entrepreneurship. Stewart Parnell epitomized that ideal and was living the good life in Lynchburg, Virginia until last month, when his Peanut Corporation of America (PCA) was linked to one of the biggest salmonella outbreaks—at least eight deaths and more than 500 illnesses—ever to occur in the United States.

According to federal officials, PCA knowingly shipped contaminated peanuts as well as peanut butter and paste on numerous occasions, including 32 truckloads meant for the school lunch program. PCA also provided tainted raw materials for many large food processors, which have issued a cascade of product recalls. PCA is now the subject of a criminal investigation, and this week Parnell (photo) was compelled to appear at a Congressional hearing, where he grim-facedly invoked the Fifth Amendment and declined to answer questions.

He had reason to look grim. The House Energy and Commerce Committee released several e-mail messages sent by Parnell, including one in which he told his plant manager to make shipments (his exact words were “let’s turn them loose”) despite some test results showing evidence of salmonella. In another he complained that those problematic results were “costing us huge $$$$$.”

This was also a week when the chief executives of the country’s largest financial institutions were called before Congress and pelted with questions about bonuses paid out amid the massive federal bailout of the industry. But these days everyone expects executives of large corporations to be reprobates.

The Parnell situation is more chilling. He is the head of a privately held company with annual revenues of only about $25 million, which makes it a small business by contemporary standards. PCA had almost no public profile until last month, and Parnell’s only previous time in the national spotlight (though a much dimmer one) was in 2005, when Bush Administration Agriculture Secretary Mike Johanns appointed him to the Peanut Standards Board. (Parnell was just ousted from the panel by the USDA, which also announced that it is seeking to debar PCA from doing business with the federal government.)

According to the Atlanta Journal-Constitution, PCA was built by Parnell’s father, Hugh Parnell, as an outgrowth of his ice cream sandwich business. The company later got caught up in the takeover wave that swept through the small world of peanut processing. The Journal-Constitution reports that PCA was sold in 1995 to Morven Partners, the vehicle set up by billionaire investor John Kluge to take over various nut companies such as Jimbo’s Jumbos.

Jimbo’s, by the way, was mentioned in one of the e-mails released this week by the House. In it Parnell said: “We need to find out somehow what our competition (JIMBOS) is doing [about salmonella] and at the very least mimic their policy.”

Stewart Parnell and his brother Hugh Brian Parnell, the Journal-Constitution goes on to report, became management consultants for Morven until the late 1990s, when Stewart repurchased PCA.

Hugh Brian Parnell told reporters that work and family occupy his brother Stewart’s time. “He doesn’t drink, smoke or socialize,” Huge was quoted as saying. “He’s a family man. You never see him without a grandchild around.” The Associated Press quotes a neighbor of Stewart’s as saying: “He’s always been an upstanding, generous person and a pillar of the community.” Parnell and PCA didn’t have a much of a presence in the business community in Lynchburg, where the company has its modest headquarters. “This episode is the first time I’ve heard of them,” the president of the city’s chamber of commerce was quoted as saying.

Even less is known about Parnell’s associate David Royster III, who reportedly financed the acquisitions that allowed PCA to reach its current size. Royster is one of the younger members of a family that operates a variety of apparently respectable businesses in Shelby, North Carolina.

The apparent fact that supposed pillars of the community can engage in outrageously reckless business practices shows that there is sometimes a fine line between the aggressive pursuit of profit and behavior that can legitimately be called evil. Those who would venerate entrepreneurship should keep in mind that it can also have a dark side.

Merger of Miscreants

Monday may be remembered as the day when American big business announced some 50,000 layoffs, but one large company seemed to take a step toward growth. Pharmaceutical giant Pfizer unveiled plans that day to acquire its smaller competitor Wyeth in a stock and cash deal estimated at $68 billion. Pfizer crowed that the merger would create “the world’s premier biopharmaceutical company.”

While the deal may grow Pfizer’s revenues, it’s unclear who will benefit. The combined workforce of the two companies will be slashed by nearly 20,000 jobs. This will continue a policy of downsizing pursued by Pfizer CEO Jeffrey Kindler (photo) since he came to the giant drug firm from McDonald’s, of all places, in 2006.

Although Pfizer claims that the merged company will be better positioned to “respond more quickly and effectively to meet changing health care needs,” it is doubtful that patients will gain much from the creation of the mega-corporation. Pfizer has been feasting on the profits generated by Lipitor, but the company’s patent rights to the cholesterol drug expire in 2011 and there is nothing major in its pipeline to replace it. Even the Wall Street Journal editorial page sees the Wyeth acquisition as a sign of the “decline of innovation” in the drug industry.

Rather than developing new breakthrough products, companies like Pfizer seem mostly preoccupied with their legal issues. Kindler’s background, after all, is in litigation rather than science or even finance. Apart from patent issues, he has had to contend with the company’s regulatory problems. In fact, while everyone was focused on the merger, Pfizer announced that it had agreed to pay $2.3 billion (a record amount) to settle federal charges in connection with its off-label marketing of the now-withdrawn painkiller Bextra. The revelation was buried in a long press release announcing the company’s fourth-quarter financial results.

Bextra is not Pfizer’s only controversy. In October, for example, the New York Times published a story alleging that the company had manipulated the publication of scientific research to bolster the use of its epilepsy treatment Neurtonin for other disorders while suppressing research that didn’t support those uses. In 2006 the company was accused of testing an unapproved drug on children in Nigeria.

Pfizer’s bride-to-be Wyeth (formerly known as American Home Products) also has a record that is far from unblemished. The summary of legal proceedings in the company’s last annual financial report goes on for 14 pages. Most of the lawsuits are product liability cases involving hormone therapy, childhood vaccines, the anti-depressant Effexor, the contraceptive Norplant and, most importantly, the combination diet drug known as fen-phen, which was withdrawn from the market more than a decade ago after reports that its use was linked to possibly fatal heart valve damage. The findings unleashed a wave of tens of thousands of lawsuits against the company, including a case in Texas in which a jury awarded a single plaintiff more than $1 billion in damages. The company set up a $3.75 billion fund as part of the attempted resolution of a national class action case. Another $1.3 billion was added to the fund in 2006. Many plaintiffs opted out of the class and negotiated individual settlements with the company.

Big mergers are often justified with the claim that the combination will enhance product innovation. The main synergy likely to emerge from the marriage of Pfizer and Wyeth will be in its litigation department.