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 to Enron.

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 mad. One of Middle West's bankers 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 an 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


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