[In]Securities Guest Blog: Breathless by Aegis Frumento Esq

April 2, 2020


During the Spanish Flu pandemic of 1918, turning blue was the surest sign that you would die.

"Cyanosis," writes John M. Barry in his comprehensive history The Great Influenza, "occurs when a victim turns blue because the lungs cannot transfer oxygen into the blood. In 1918 cyanosis was so extreme, turning some victims so dark -- the entire body could take on color resembling that of the veins on one's wrists -- it sparked rumors that the disease was not influenza at all, but the Black Death. . . . Doctors today looking at pathology reports of lungs in 1918 would immediately designate the condition as ARDS." 

ARDS -- acute respiratory distress syndrome -- causes the lungs to deteriorate to the point they stop working. In 1918, there was nothing doctors could do to stop the process, so death -- a painful and hideous death in which all of one's internal organs were starved of oxygen -- followed inevitably. And since history repeats itself, today ARDS is also how Covid-19 kills you. That is why you are warned to go to a hospital if you develop shortness of breath, because that's the first symptom of ARDS.

Things are a little better today than they were in 1918, but only a little. There is still no cure for ARDS and no way to stop the lungs from deteriorating once ARDS has set in. But today, unlike in 1918, we can keep patients alive until they recover their own ability to breathe. If they ever do. According to the CDC, up to 85% of Covid-19 patients admitted to the ICU developed ARDS, and from 39% to 72% of those die anyway. https://www.cdc.gov/coronavirus/2019-ncov/hcp/clinical-guidance-management-patients.html. Those morbidity rates are not remarkable.  Even in normal, non-pandemic, times about 50% of patients with ARDS do not survive notwithstanding the best ICU treatment.  

That best ICU treatment, the only way to treat an ARDS patient, is to hook her up a machine that pumps oxygen into her lungs, hopefully enough to keep her alive until she recovers on her own or dies anyway. That machine is what we now call a ventilator.

That about half of all ARDS patients die even on a ventilator is a grim statistic. On the other hand, it also means that half live who otherwise would die. And that is something.  As Gov. Cuomo said in a briefing last week: "I don't accept the concept of, 'Well, these were people who were old, and death is inevitable.' Yes, death is inevitable for all of us. Just not today, right?" Which, as any Game of Thrones fan will tell you, is the only thing you say to Death.

Ventilators were perfected it in the 1940s, too late for the Spanish flu pandemic. They were never simple machines, and although they have become more compact and common than the early-model iron lungs, they have also become more electronically sophisticated. See http://rc.rcjournal.com/content/56/8/1170. In a normal market you could buy one for about $25,000. According to the governor, competition has jacked up the price to about $45,000. To compound that problem, most of them are made in China, and they need them for themselves.

It has been remarkable to see the response to shortages of other medical supplies, such as masks, gowns, and other protective gear. Sewers are making masks and gowns and an army of quarantined owners of 3D printers has enlisted to create makeshift N95 respirators. https://www.nytimes.com/2020/03/31/science/coronavirus-masks-equipment-crowdsource.html. But you can't hand-build ventilators in your basement. And even if GM has been ordered to make ventilators instead of trucks, who knows how long they will take to roll off the assembly line. New York projects it will need 40,000 ventilators to meet the projected demand at the apex of the pandemic in just a few weeks, and it only has 16,000. It may be able to get by putting 2, 3 or even 4 patients on one ventilator for a while, but it's not a great solution. Which means people will die.

But there never should have been a shortage to begin with. Not only have epidemiologists been predicting a pandemic like this one for years, they also predicted that ARDS would be its end-stage consequence. Acting on those predictions, towards the end of the Bush administration and well into the Obama administration, the federal government actually had contracts out to acquire 70,000 scaled-down emergency ventilators for less than $3,000 each -- not from China but from a small California firm, Newport Medical Instruments. Newport agreed to develop and manufacture those ventilators for a thin profit, expecting to make it up in volume sales to developing countries around the world.

But the ventilators never came, and not because Newport couldn't build them. Newport was acquired by large public company, Covidien, which was then itself acquired by an even larger public company, Medtronics. As is the case in modern capitalism, there's always a bigger fish, and the bigger fish in this case decided that a cheap $3,000 ventilator was not the kind of competition it wanted for its own $25,000 ventilators. So, Covidien and Medtronics begged out of the Newport contract, claiming it wasn't profitable enough. And, the government, instead of saying (as no doubt Medtronics would have said), "Who cares about your profits? A deal is a deal," let them get away with it. See https://www.nytimes.com/2020/03/29/business/coronavirus-us-ventilator-shortage.html.

Of all the stories of the pandemic that I have read in these past weeks, none makes me angrier than this of the 70,000 cheap ventilators that might have been. It just leaves me breathless, and not a good way.

Albert Camus in The Plague writes that "Pestilence is in fact very common, but we find it hard to believe in a pestilence when it descends upon us. There have been as many plagues in the world as there have been wars, yet plagues and wars always find people equally unprepared." 

They find people unprepared because people have a hard time imagining things that they don't personally experience. Out of sight, out of mind is a psychological truism. Daniel Kahneman in Thinking, Fast and Slow calls the syndrome "what-you-see-is-all-there-is," or WYSIATI. It is instinctive. We must overcome the WYSIATI instinct with analysis and imagination, that is, with work. If we don't, we will inevitably make decisions based only on what is staring us in the face. Tomorrow's threats, out of sight, will always find us unprepared.

The reporting in the Times makes it perfectly clear that the development of a $3,000 ventilator was sacrificed to maximize the profits of a large corporation. Maximization of profits is a short term goal that benefits the short-term interests of transient shareholders and entrenched management. To sacrifice a long-term public good -- a strategic stockpile of inexpensive ventilators that could be deployed immediately in response to a pandemic that we all knew (or should have known) was coming -- for the sake of short-term profits is an example of WYSIATI thinking at its worst. 

But a corporation is not a person, or at least it should not have the psychological impairments of a person. It is an institution; and what is the point of having institutions if they just mimic the WYSIATI instincts of the rest of us? We should demand better from them, be they governments or corporations. This is just one of the object lessons that I hope those of us who live to see the other side of this will take to heart.


Aegis J. Frumento

380 Lexington Avenue
New York, NY 10168

Aegis Frumento is a partner of Stern Tannenbaum & Bell, and co-heads the firm's Financial Markets Practice. Mr. Frumento represents persons and businesses in all aspects of commercial, corporate and securities matters and dispute resolution (including trials and arbitrations); SEC and FINRA regulated firms and persons on regulatory compliance issues and in SEC and FINRA enforcement investigations and proceedings; and senior executives of public corporations personal securities law and corporate governance matters.  Mr. Frumento also represents clients in forming and registering broker-dealers and registered investment advisers, in developing compliance policies, procedures and controls, and in adopting proper disclosure documents. Those now include industry professionals looking to adapt blockchain technologies to finance and financial market enterprises.

Prior to joining the firm, Mr. Frumento was a managing director of Citigroup and Morgan Stanley, a partner and the head of the financial markets group of Duane Morris LLP, and the managing partner of Singer Frumento LLP.

He graduated from Harvard College in 1976 and New York University School of Law in 1979. Mr. Frumento is a frequent author and speaker on securities law issues, and is often quoted in the media on current securities law developments.

NOTE: The views expressed in this Guest Blog are those of the author and do not necessarily reflect those of BrokeAndBroker.com Blog.

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