Martin Shkreli and Bubble Finance
The trial of Martin Shkreli has been capturing headlines for the past few weeks. The infamous “Pharma Bro” first made waves in 2015 when his company, Turing Pharmaceuticals, attained the rights to the drug Daraprim, hiking its price from $13.50 per pill to $750 per pill. The move attracted significant backlash and got the attention of major Presidential candidates. Not long after that, Shkreli was arrested by federal authorities and charged with securities fraud. His trial is currently underway and, as more details of his business history are coming to light, it’s clear that his story is just another cautionary tale of the many problems that ensue when central banks create money out of thin air.
From Humble Beginnings to Hedge Fund Guru
Shkreli’s saga begins before the financial crisis, when he worked as an associate and financial analyst on Wall Street. He founded his first hedge fund in 2006. The hedge fund was sued in 2007 by Lehman Brothers because Shkreli’s fund bet on a market decline and lost. Lehman Brothers won a $2.3 million judgment against Shkreli and his hedge fund but the firm was unable to collect before it went out of business. Shkreli got lucky there, but the close call didn’t dissuade him from continuing to strike out on his own.
He formed another hedge fund, MSMB Capital Management, and made yet another bad bet, this time owing Merrill Lynch over $7 million. Shkreli didn’t have the money, Merrill Lynch couldn’t collect, and Shkreli moved on. This time he formed two more companies, MSMB Healthcare and Retrophin that prosecutors are alleging were vehicles to raise funds to pay back investors in MSMB Capital. Retrophin was successful, but Shkreli allegedly raided it of funds in order to pay back investors in MSMB whom he still owed millions of dollars.
At Retrophin, Shkreli acquired the rights to Thiola, a drug used to treat a rare disease known as cystinuria. Patients must take 10 to 15 pills Thiola pills per day, and Shkreli increased the price from $1.50 per pill to $30 per pill. Shkreli was forced out of his position as Retrophin’s CEO after financial irregularities came to light, and has subsequently been sued by his former company. Undeterred, he founded Turing pharmaceuticals and proceeded to acquire the rights to Daraprim, repeating the price-hiking behavior he had engaged in previously.
Why Is Someone So Young Getting So Much Money?
By all accounts Shkreli is knowledgeable about pharmaceuticals and biotechnology and has a knack for being able to spot profit opportunities in those sectors. Other investors realized that he had that skill, and so they invested millions of dollars in his hedge funds and other business ventures to try to make money.
That brings up the question, though, of why there is so much money out there that a young 30-something who has been described by former coworkers as a sociopath and con artist is having millions of dollars thrown his way. The reason, of course, is that we have a central bank, the Federal Reserve System, that has flooded the financial system with trillions of dollars of money created out of thin air. Wall Street is awash with this cheap money, and Wall Street financial firms are constantly looking for ways to turn their millions into billions and their billions into trillions.
Since the end of the financial crisis traditional investment options didn’t seem to hold much promise. Pre-crisis stock market highs weren’t exceeded until 2012, and it’s only in the past two or three years that stock markets have really been on fire. Big-time investors were looking to make lots of money, and for a while hedge funds were the in thing. Investing in a hedge fund requires a great deal of wealth, and the funds themselves often take risky best or invest in complexly-structured deals. And with so much money flowing through the system after the Fed’s quantitative easing and a dearth of good opportunities, anything that sounded even halfway decent was liable to be pursued. Shkreli was showered with money even though at times he was penniless because money was so cheap that no one bothered to do their due diligence to check whether his financial claims were true.
The popularity of hedge funds was magnified by the massive amounts of money flowing to Wall Street from the Fed. Without a central bank pushing such vast sums into the banking system, interest rates would be much higher and investment opportunities and decisions would be far different than they are today. In the absence of a central bank creating so much money out of thin air, the existence and viability of hedge funds would be called into question. Shkreli may not be an angel, but the risk appetite among investors would likely be much less, and the likelihood of business ventures like Shkreli’s having so much money thrown at them would be far smaller if the Fed weren’t pushing easy money out the door.