As I alluded to last week, if you think the Enron story is unique,
then you”re not familiar with some of the great stories of Wall
Street history. In fact, I”m a little surprised no one has
mentioned Samuel Insull, in the wake of the current mess. Insull
wasn”t all that bad a guy, in hindsight, but his story carries many
similarities.
Insull was born in Britain and moved to the U.S. in 1881, where
he became an assistant to Thomas Edison. Edison had invented
electric light in October 1879 and had begun to put his utility
empire together, by building the first electric power plant in New
York City in 1881-82. Then in 1884, Edison, not known for his
organizational skills, made Insull his business manager.
In 1889 Edison Electric became Edison General Electric Co.
(and later, just General Electric – 1892) as J.P. Morgan and his
minions moved in on the new game. [Morgan, himself, was still
mostly involved in consolidating railroad holdings at the time, so
associates like Henry Villard were more active in management.]
Samuel Insull was eventually forced out and headed west to
Chicago, where he quickly built an empire in the burgeoning
power business. Insull was a big inventor in his own right,
having designed the world”s first steam-engine turbine, and
working with Edison obviously picked up a trick or two. From
his Chicago base, he developed ways to power rural areas, and
do it efficiently, and by 1912 he had created Middle West
Utilities, which would eventually control 12% of the nation”s
power market.
By the time the roaring twenties rolled around, the electric power
industry in America was dominated by three giants, The
Southern Company (James Duke), Insull”s Middle West (which
also operated in parts of Canada), and the Morgan Group (later
operating as United Corp. and including companies like
Consolidated Edison and Public Service of New Jersey).
This era was a period perhaps best characterized by Senator
George Norris of Nebraska, who once said, “The early twenties
brought the American people to their knees in worship, at the
shrine of private business and industry.” Norris added that with
regards to the power trust, it was the “greatest monopolistic
corporation that has been organized for private greed.It has
bought and sold legislatures. It has interested itself in the
election of public officials, from school directors to the President
of the United States.” [Gee, is this the 1920s or 2002?..source:
Charles Geisst.]
Meanwhile, due to his poor early experience with the New York
/ Wall Street investment banking crowd while serving as Thomas
Edison”s partner, Samuel Insull was highly suspicious of them.
“Bankers will lend you umbrellas only when it doesn”t look like
rain,” he once observed.
But as the utilities began to gain influence and expand, the
industry came under increasing fire, as the press would often
sensationalize the titans. Insull, for example, made generous
contributions to the Republican Party, while pretending he had
no thought of buying influence. Actually, the campaign
contribution situation (again, a la Enron) became such a big issue
that the chairman of the Illinois Commerce Commission, Frank
Smith, was prevented from taking a U.S. Senate seat he had won.
For Insull to expand his utilities empire, it became necessary to
borrow huge sums of money. But because of his disdain for the
New York crowd, he chose to deal locally with banks like
Continental Illinois. And as Insull”s biographer Forrest
McDonald relates, building a pyramid, as Insull would do with
his holdings, was as easy as 1-2-3. A Chicago banker once
mentioned to Samuel at a party, “Say, I just want you to know
that if you fellows ever want to borrow more than the legal limit,
all you have to do is organize a new corporation, and we”ll be
happy to lend you another $21,000,000.” Insull”s bookkeeper
recalled that the “bankers would call us up the way the grocer
used to call my mamma, and try to push their money at us. ”We
have some nice lettuce today, Mrs. McEnroe; we have some
fresh green money today, Mr. Insull. Isn”t there something you
could use maybe $10,000,000 for?”” [Robert Sobel]
Of course the debt came into play because the power business
required huge outlays for plant and equipment. But the New
York boys were losing out on the business to the locals in
Chicago and they were pissed. One of Middle West”s banker”s
noted at the time, “These New York fellows were jealous of their
prerogatives, and if you wanted to get along you had to be
deferential to them and keep your opinions to yourself. Mr.
Insull wouldn”t, and that made bad blood between them. Real
bad blood.” [Charles Geisst]
Meanwhile, as to the actual business of power generation, Insull
was a skillful operator and his plants were the most efficient in
the nation, producing electricity at less than half the
competition”s rates. He was also a generous man, treating his
employees with kindness, while from time to time buying back
shares to distribute to them. But there was this ongoing problem
with New York.
Specifically, by the late 1920s, Wall Street”s representative in the
area, Cyrus Eaton of Cleveland, began buying up shares in all of
Insull”s operations. Fearing that he was about to be taken over in
a hostile bid, Insull had to come up with a way to protect his
holdings and so he kept consolidating his companies and
entangling them, one inside another, loaded with debt, in order to
make them less attractive for any acquirer. Then in December
1928, Insull and his Chicago-based investment bankers, Halsey,
Stuart, formed a new company, Insull Utility Investments, which
owned large blocks of shares in all the companies under the
Middle West banner. Insull would gain a majority interest in
order to beat back the raiders.
The stock, I.U.I., was offered at $12 a share and finished the first
day at $30. Within half a year (spring 1929) it was $150.
Insull”s other holdings soared as well, with Middle West Utilities
rising from $169 to $529 during the period January through
August.
But in order to finance this increasingly complex operation,
Insull and Halsey, Stuart organized another company,
Corporation Securities of Chicago. Historian Robert Sobel
explains:
“Just as in the past Insull firms bought and sold securities from
each other, so I.U.I. and ”Corp.” were completely inter-
connected. I.U.I. owned 28.8 percent of Corp., while Corp. held
19.7 percent of I.U.I. Together they controlled four great
holding companies: Middle West Utilities (111 subsidiaries);
People”s Gas, Light & Coke (not the soft drink.8 subsidiaries);
Commonwealth Edison (6 subsidiaries); Public Service Co. of
Northern Illinois (1 subsidiary). In addition, these four holding
companies together controlled Midland United Company (30
subsidiaries). The entire complex had assets of over $2.5 billion,
and served more than 4.5 million customers.”
But, as you can imagine while strength in one of the holding
companies translated into strength in the others, the same
happened in reverse in times of weakness. [Mr. Subliminal.
Enron.] And while Samuel Insull may not have been doing
anything illegal, you can see why some have called the decade of
the 1920s “the greatest era of crooked high finance the world has
ever known.” [Charles P. Kindleberger]
Well, you have to know by now this story ends badly. While
I.U.I. stock held up well in the immediate months after the Crash
of ”29 (as did most of the market, you”ll recall from past pieces),
by 1932 the New York Boys were on the prowl and smelled
blood when it came to Insull”s operation. They sought revenge
in the form of a “bear raid,” betting that the stock price would
fall. Continental Illinois had given the New Yorkers an in when
it allowed them into a I.U.I. debt deal and once the foot was in
the door, the rest was a piece of cake. The whole pyramid
collapsed, as the Depression caused a dramatic falloff in the
power business and Insull couldn”t service his huge debt load.
In the investigations of the Crash that followed, Insull was
charged with mail fraud and embezzlement, among other things,
but instead of facing the music he fled to Greece, which didn”t
have an extradition treaty with the United States. Eventually,
however, political pressure forced him to return back to the
States where, ironically, he was exonerated on all charges. The
sad part, though, was that his reputation was forever ruined
because of his initial move.
The post-mortem on this whole era is harsh when it comes to the
banking crowd. As Charles Geisst notes, “financiers were still
able to accomplish privately what Progressives feared most –
pillaging the economy without regard for the consequences, all in
the name of private profit.” And Charles R. Morris adds that,
“the destructiveness of the utilities” financing wars suggests
near-total irresponsibility on the part of the bankers.”
A result of this mess was the Public Utility Holding Company
Act of 1935, which stipulated that all holding companies owning
public utilities register with the SEC. This gave the SEC the
authority to break up large empires. But even outgoing SEC
chairman Joe Kennedy said at the time that the SEC shouldn”t be
allowed to do this.
As for Samuel Insull, biographer McDonald writes, “For his 53
years of labor to make electric power universally cheap and
abundant, Insull had his reward from a grateful people: He was
allowed to die outside prison.” [Maury Klein]
Samuel Insull died penniless in a Paris metro station.
Sources:
“Monopolies in America,” Charles Geisst
“Wall Street: A History,” Charles Geisst
“The Great Bull Market,” Robert Sobel
“Manias, Panics, and Crashes,” Charles P. Kindleberger
“Money, Greed, and Risk,” Charles R. Morris
“Morgan: American Financier,” Jean Strouse
“The American Century,” Harold Evans
“Rainbow”s End,” Maury Klein
Notes: Unlike the executives at Enron, Samuel Insull made up
some of the investment losses of his own employees as a result
of the collapse of his empire out of his own pocket.
Also, it pays to have the first name ”Charles” if you”re going to
write a Wall Street history book.
Brian Trumbore
