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Losses to the Public in The Insull Collapse: 1932-1946

Published online by Cambridge University Press:  24 July 2012

Arthur R. Taylor
Arthur R. Taylor
Affiliation:
Brown University
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Abstract

The purpose of this study is to trace the disposition of stockholder securities and to estimate the losses incurred by investors as a result of the collapse of Samuel Insull's utility complex.

Type
Research Article
Information
Business History Review , Volume 36 , Issue 2 , Summer 1962 , pp. 188 - 204
Copyright
Copyright © The President and Fellows of Harvard College 1962

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References

1 The total includes all common and preferred stocks, bonds, and assumed and guaranteed obligations. It does not include warrants or notes payable.

2 The total loss figure does not include loss of interest payment and dividends. Liquidating dividends, however, have been treated as a return of capital and were subtracted from the total loss figure.

3 Utility Corporations, U. S. Senate, Sen. Doc. 92, 84 Parts, Part 72-A, 70th Cong., 1st Sess. (Washington, Government Printing Office, 1928–1935), p. 156.

4 Relation of Holding Companies to Operating Companies in Power and Gas Affecting Control, U. S. House of Representatives 827, 73d Cong., 2d Sess. (Washington, Government Printing Office, 1935), vol. 5, p. 353.

5 Moody's Manual of Investments, American and Foreign,. Public Utility Securities, 49 vols. (Philadelphia, Boston, Chicago, Los Angeles, Pittsburgh, San Francisco, New York, 1933), p. 508. These volumes provide detailed information concerning the financial structure of every utility company in existence in a given year. They are indispensable to the study of any security. Hereafter the above will be cited as Moody's Public Utilities.

6 Ibid., p. 337.

7 Ibid., p. 1110.

8 Ibid., p. 2138.

9 Ibid., p. 1118.

10 Utility Corporations, Part 82-A, p. 156.

11 Moody's Public Utilities (1933) p. 2218. Utility Corporations, Part 38, p. 600; Part 42, pp. 546-548; Part 51, pp. 373, 376; Part 50, pp. 859, 870; Part 59, p. 400; Part 60, p. 365. Relation of Holding Companies…, pp. 91, 145, 177.

12 Moody's Manual of Investments, American and Foreign, Bank, Insurance Companies, Investment Trusts, Real Estate, Finance and Credit Companies, 49 vols. (Philadelphia, etc., 1933), p. 2087. This set of volumes provides detailed information concerning the securities of the above enterprises. Hereafter cited as Moody's Investment Trusts.

13 Utility Corporations, Part 38, p. 387; Part 59, p. 400.

14 “The Fall of the House of Insull,” an address delivered by Forrest McDonald before the American Historical Association at Washington on Dec. 30, 1958; see also Stock Exchange Practices, U.S. Senate, 72d Cong., 2d Sess. (Washington, Government Printing Office, 1933), vol. 5.

15 Samuel Insult's responsibility to his security holders does not extend beyond 1946. The relatively sustained prosperity of the postwar period and the policies of other managers must bear the credit or blame for what happened to the securities of companies which prior to 1932 were controlled by Samuel Insull.

16 Utility Corporations, 84 vols.; Stock Exchange Practices, 12 vols.; Relation of Holding Companies…, 4 vols.

17 Lexington Utilities Company was an operating company wholly owned by Kentucky Securities Corporation, a subholding company in the Middle West Utilities system.

18 Moody's Public Utilities (1933), p. 2203. The bonds were retired in Feb., 1940, at 103. Ibid. (1940), p. 763.

19 It should be pointed out that the lower the valuation is, the lower both the absolute loss and percentage loss are. If the very low 1932 market values were used exclusively, the Insull investors would not have lost, but gained.

20 It is important to remember that by tracing the Insull securities through the 14-year period to determine their loss in value, the system is being viewed in terms of the investor who held onto his investments in the Insull companies. The total loss figure to the public is unrelated to the number of times the securities were bought and sold in the years from 1932 to 1946. Our view is through the eyes of the investor who bought with intrinsic value and long-term expectations in mind. By determining the loss, if any, on each security as of 1946 or date of liquidation and thus discounting what happened to those who sold out before, a meaningful conclusion can be drawn. A moment's reflection on the part of the reader with a memory for the thousands of individuals involved and the thousands of ways they administered their investments will produce the conclusion that it is only in this manner that this study could have been undertaken.

21 McDonald argues (by implication) in “The Fall of the House of Insull” that had the investment trusts not been formed, there would have been no collapse.

22 Insull Utility Investments, Incorporated, was established on Dec. 27, 1928; Corporation Securities Company of Chicago was created on Oct. 5, 1929. With the exception of the capital stock of Insull Utility Investments Company, all the securities of these two companies were issued in 1930. The financing took place precisely at the wrong time and in a situation of great duress. Although the Insulls' responsibility for the issues of the two companies is inescapable, it is interesting to note the strength of earlier Insull financing which was undertaken under more normal conditions than those existing in 1932 and which sustained a relatively small loss of 15 per cent of total value. Any judgment rendered on the basis of the percentages of loss to the public provided in this study must take the above statements into account. See Moody's Investment Trusts (1933), pp. 2083, 2087.

23 Moody's Investment Trusts (1933), pp. 2083–2084.

24 The figure would be much larger but for the extensive intrasystem ownership. A majority of the 3,684,807 shares of common was owned by seven other Insull companies and the Insull family personally, the largest block, almost a million shares, being held by Corporation Securities Company of Chicago. In addition, a considerable amount of the preferred series was intrasystem owned. Only a small amount of the debentures was so owned. Moody's Public Utilities (1933), p. 2218; Moody's Investment Trusts (1933), p. 2087; Utility Corporations, Part 38, p. 600; Part 42, pp. 546-548; Part 50, pp. 859, 870; Part 51, pp. 373, 376; Part 59, p. 400; Part 60, p. 365; Relation of Holding Companies…, pp. 91, 145, 177; Stock Exchange Practices, U. S. Senate, 72d Cong., 2d Sess. (Washington, Government Printing Office, 1933), vol. 5, p. 1565.

25 Moody's Investment Trusts (1934), p. 2055; (1938), p. 1676; (1939), p. 1345; (1943), p. 1278.

26 Moody's Public Utilities (1933), pp. 511, 1118, 1119, 1122.

27 Ibid. (1936), p. 2263.

28 Moody's Public Utilities (1933), p. 1119; (1936), p. 2263; (1946), pp. a79, 1020, 1925.

29 The National Electric Power Company and its system was acquired late and toward the end of the development of the Insull system. It was acquired almost in an off hand manner, most of the financing taking place under the former owners. This has given rise to an opinion that most of the securities of those companies controlled by the National Electric Power Company should not be included in this study. Despite the merits of this view, the National Electric Power Company group has been included. By 1932, the public regarded these companies as Insull-owned. Their future was tied securely to that of the Insull empire as a whole. As the disintegration took place, it is impossible to say how much public psychology and ties to the Insull system had to do with the difficulties of the National Electric Power group and how much the known weakness of the pre-Insull financing had to do with it. It could be argued further that the act of acquiring the National Electric Power group placed total responsibility for it and its securities upon the Insull interests.

30 Moody's Public Utilities (1933), p. 2250; (1937), p. 1174.

31 Ibid. (1933), pp. 2162, 2217; Utility Corporations, Part 38, p. 587; Part 42, pp. 546-548; Fart 50, p. 859; Part 59, p. 400; Part 60, p. 362; Moody's Investment Trusts (1933), pp. 2083, 2087; Relation of Holding Companies…, p. 506.

32 Moody's Public Utilities (1946), p. 604.

33 Ibid. (1933), p. 508.

34 Utility Corporations, Part 59, p. 400; Part 60, p. 460; Moody's Public Utilities (1933), p. 2218; Relation of Holding Companies…, pp. 144, 177, 352, 506-507; Moody's Investment Trusts (1933), pp. 2085, 2087.

35 Moody's Public Utilities (1934), p. 2385; (1937), p. 1917. This was necessitated by the acquisition of Public Service Company of Northern Illinois. Ibid. (1938), pp. 2108-2109; (1939), p. 1817; (1946), p. 22. For the purpose of this study, the common stock was valued at $125 per share.

36 Moody's Public Utilities (1933), pp. 228–234; Utility Corporations, Part 38, p. 592; Part 59, p. 400.

37 Moody's Public Utilities (1933), pp. 228–234, 1119; (1935), pp. 1955-1960; (1936), p. 1094; (1940), p. 782; (1944), p. 767.

38 Moody's Public Utilities (1936), p. 1093; (1937), pp. 695-696; (1946), p. 637.

39 Moody's Public Utilities (1933), pp. 2251, 2284; (1946), pp. 269-270; Relation of Holding Companies…, pp. 91, 145, 506; Utility Corporations, Part 38, p. 591; Part 59, p. 400.

40 Moody's Public Utilities (1933), p. 2240; (1942), pp. 745, 751.

41 Ibid. (1933), p. 2198; (1936), p. 1063; (1937), pp. 661-662; (1941), p. 610; (1946), p. 719.

42 Ibid. (1933), p. 2187; (1936), p. 1049; (1943), p. 998; Utility Corporations, Part 59, p. 400.

43 Moody's Public Utilities (1933), p. 2312; (1936), pp. 1117-1118.

44 Ibid. (1933), p. 2307; (1936), p. 953.

45 Moody's Public Utilities (1933), pp. 2185, 2251, 2259.

46 The Insull companies had pledged large amounts of securities with banks as collateral for loans. When the disintegration came, the collateral was foreclosed. There can be no completely decisive appraisal of the financial vitality of the Insull empire until it is known how the banks fared with the foreclosed properties. It is unlikely, however, that this study will ever be undertaken, due to the lack of centralized and public sources.

The author's opinion, based on a random and incomplete sampling, is that the banks sustained relatively little loss in most cases. See Stock Exchange Practices, p. 1513.