June 22, 2005
As Retooled Asbestos Legislation Emerges, Wall Street’s Thumbs-Up Confirms the Deal is Good for Companies, Bad for Victims
Even With Ultimate Prospects of S. 852 Uncertain, the Legislation Has Already Spurred $2.2 Billion in Stock Market Gains for Asbestos Firms
WASHINGTON, D.C. – When Congress took up a bill in April to create a national trust fund for compensating hundreds of thousands of victims of asbestos exposure, Public Citizen and other groups warned the legislation would be a boon for asbestos companies and other firms, at the expense of victims.
Wall Street has now weighed in with its review of the deal, and the stock market agrees: The companies win. As a group, major asbestos firms have already seen an average 22.8 percent gain in their stock prices as the bill, S. 852, has been introduced and then passed out of the Senate Judiciary Committee, an analysis by Public Citizen shows. The stock price gains translate into a $2.2 billion increase in market value, or market capitalization, for the firms.
The Judiciary Committee approved the bill, with amendments, on May 26. The committee report on the bill is expected to be released in coming days.
Wall Street likes the asbestos legislation because under terms of the bill, asbestos companies and other firms would reap significant windfalls. That is because their liability to victims under the proposed privately funded, publicly run national trust fund would be substantially less than otherwise expected.
“With the stock prices of asbestos firms rising with each step in the legislative process, investors are clearly signaling that the bill is a big winner for the companies,” said Joan Claybrook, president of Public Citizen. “But when the companies win, the victims lose, because victim compensation depends directly on how much the companies contribute. With hundreds of thousands of people likely to die because the industry covered up the dangers of asbestos exposure for so long, this devastating human toll should be the priority of Congress.”
S. 852 proposes to create a $140 billion fund to compensate workers exposed to asbestos, but there is concern the fund may go bust because it will not collect enough to pay all benefits.
“What we need is a system that doesn’t impose some artificial limit on corporate liability but instead compensates all victims fairly, according to the severity of their injuries,” said Frank Clemente, director of Public Citizen’s Congress Watch division. “S. 852 is all about holding down corporate liability but not nearly enough about helping people.”
The asbestos companies’ run-up in stock prices began on April 12, when Sen. Arlen Specter (R-Pa.), the bill’s chief sponsor, appeared at a news conference in the Senate’s radio and TV gallery to discuss the USA PATRIOT Act. The questions, though, quickly turned to the asbestos legislation he had been developing. “I think,” Specter said, “we are very close to a deal.”
Within hours, stock prices of asbestos-related companies surged. The bill was introduced April 19, and there were further increases around the Judiciary Committee’s May 26 approval.
An examination of stock price movements for eight leading asbestos-related companies from April 11 (the day before Specter’s announcement) through June 17 shows:
- Although firms have not benefited uniformly, as a group there have been strong gains. (Figure 1). Higher stock prices often translate into higher compensation for corporate executives, through stock options and incentive pay.
- The firms have collectively seen an average stock price increase of 22.8 percent.
One company, Owens Corning, saw its value grow by 65.6 percent. Other companies experiencing significant gains: USG Corp. (33.7 percent), W.R. Grace & Co. (22.3 percent) and McDermott (18.7 percent). (Figure 2)
The $2.2 billion gain in market capitalization represents a 10.1 percent increase in an approximately two-month (67 day) period. Expressed on an annual basis, the growth is 68.9 percent. By comparison, for 2005, the New York Stock Exchange composite index is up 0.89 percent.
If prospects for enactment of S. 852 brighten, further stock price increases are likely. The asbestos firms benefit because their contributions to the trust fund proposed to be established under S. 852 would be substantially less than payments they would otherwise be expected to make to set up their own trust funds to compensate victims. For example, seven asbestos firms will collectively realize an estimated 73.6 percent reduction in their liabilities, from $18 billion to $4.7 billion (Figure 3). Some of the biggest winners include W.R. Grace & Co., whose liability is estimated to fall 86.9 percent, from $3.2 billion to only $418 million, and USG Corp., whose liability is estimated to fall 80.4 percent, from $4.1 billion to just $797 million.
Last month, Public Citizen released a report on the asbestos legislation showing that under the guise of providing aid to victims of asbestos-related illnesses, a small group of companies has spent tens of millions of dollars to successfully lobby for relief from asbestos liability worth tens of billions of dollars.
That success in protecting their corporate interests, however, will sharply reduce the funds under the legislation that will be available to asbestos victims, the report found. An estimated 10,000 people died of asbestos-related diseases in 2003 alone. Because decades can elapse between exposure and manifestation of symptoms, experts predict the peak for asbestos-related diseases will not be reached until 2018. Disease projections vary widely, ranging from 750,000 to 2.6 million future claims of sickness and death.
The big winners under the legislation include a handful of Fortune 500 companies – Dow Chemical, Ford, General Electric, General Motors, Honeywell, Pfizer and Viacom – and at least 10 asbestos makers that have filed for bankruptcy. Public Citizen’s stock price analysis covers most of those asbestos firms. (It omits the Fortune 500 companies because their operations are more varied, and hence their stock prices are not as directly influenced by the asbestos legislation.)
 This average is not weighted by market capitalization.