Legal Reform Tempts Wall Street

Like the proposed elimination of the dividend tax, President Bush's endorsement of tort reform has been greeted with open arms on Wall Street. But just as the dividend proposal hasn't spawned a sustained rally in stocks, tort reform probably isn't a panacea for the market's long-term ills.

Since Bush made his State of the Union address calling for caps on medical liability awards, a number of experts have grown excited about the possibility of tort reform in general, which they say would remove a big drag on the economy.

Big court judgments have repeatedly caused wild rides in stocks in recent months. In October, a California judge ordered Altria(MO), formerly known as Philip Morris, to pay $28 billion to a sick smoker, sending shares falling sharply before the award was reduced to $28 million. Altria is fighting the ruling.

Shares of Halliburton(HAL) and Honeywell(HON) have been similarly volatile as the pair face significant asbestos liabilities stemming from acquired companies. Halliburton recently said it would pay about $4 billion to settle about 300,000 claims, with much of that coming from the firm's insurers.

More Bubbles

In a recent research note, Morgan Stanley analyst Steven Galbraith said "the legal liability bubble has escalated to Nasdaqian proportions" and that "popping it would make a dividend cut seem like small change."

To support his argument, Galbraith cited data from Tillinghast Towers Perrin, an independent adviser to the insurance industry. The firm's study showed that tort costs amounted to just 0.6% of gross domestic product in 1950 but that they now represent about 2% of GDP, as people have sued over everything from asbestos to tobacco to spilled hot coffee.

"We can safely say that tort reform would be one of the most positive changes we can imagine for markets," Galbraith said. "Conversely, lack of progress could be every bit as damaging to market confidence as last year's corporate perp walkathon."