He “Insullted” Wall Street and Paid the Price
Many a picture has been painted of Sam Insull—swindler, simpleton and genius among them. But scapegoat seems the most probable. During the 1920s, Insull knew electricity, turned it into a convenient profitable commodity, and then got zapped by his own voltage after he tried to take on Wall Street. When his multi-billion-dollar electricity pyramid toppled, resulting in millions of losses to investors, he was microscoped from top to bottom and blamed—basically because big figures were involved. Everything he had accomplished for the industry, and for that matter, for America, via his role in the evolution of electricity, was forgotten—and he was branded a crook that cheated an unassuming public.
Insull built a lot during his lifetime, but what he didn’t build—namely, Wall Street banking connections—cost him his empire. What he had going for him were a few basic good ideas, one of which was building a large consumer base for electrical power in order to cut rates and increase profits. Eventually, his electricity firms, with $2.5 billion in assets, served 4.5 million customers—nearly 10 percent of America’s power in 1930! Rates were reasonable and profits immense.
Insull formed his first holding company, Middle West Utilities, in 1912, raising money through stock sales and then using the money to expand operations—not line his pocket. Financing rarely posed problems for Insull—but here’s where he went wrong. Instead of appealing to first-line Wall Street investment banks like the House of Morgan and building strong relationships with them, he used local Chicago banks for loans and local small-time investment bankers to underwrite security issues. Why go all the way to New York for money? The answer is simple. Staying local works fine when things are going your way, but not so well when times are tough, either because the economy is bad or because of a firm’s own internal problems. Top financing sources can sustain a firm in tough times and may do if the firm has built a solid relationship with them. Schlocky financing sources do not have the capability to finance anyone in tough times.
Sober, hard-working, confident, and born in 1859 to a poor minister, mustached Insull came to America from London at 21 to work with his idol, Thomas. A. Edison, never having enough time to marry until he was 40. Though Insull’s cockney accent was barely understandable, he served as Edison’s personal secretary and business manager for years. At 30, Insull was picked to head Edison General Electric Company, but four years later, when J.P. Morgan took over the firm in organizing General Electric, Insull was left behind.
Not easily dismayed, Insull bought into a small electric firm, vowing to make it the largest electrical power station in the country, which he did via expansion within two years. Middle West Utilities, his holding company, came next. He became one of Chicago’s most prominent citizens—until his empire began to slide.
Because of the holding-company structure, Insull owned minority interests in each holding company. So when Cleveland banker Cyrus Eaton on one side, and the House of Morgan on the other, began battling each other for large blocks of lucrative Insull securities, Insull got worried and figured the only way to defend his stocks from raiders was to build a pyramid which intertwined his assets! Though he knew little of stock operations, he believed that—through pyramiding—he and his friends could control all of his companies by exchanging their utility holdings for stock in one major, all-encompassing holding company.
In 1928, he created Insull Utility Investments (IUI) to manage the Insull group of public utilities. Insull turned over his and his associates’ holdings to IUI, in return for controlling interest in IUI. IUI stock was floated to the public at $12 per share and closed at $30 on its first day of trading—and within six months, $150, one of the original hot initial public offerings. Insull didn’t like such an overly-optimistic market, which sent his personal fortune—on paper—to $150 million. He figured the bubble had to burst. But while waiting, he took advantage of the speculative binge by refinancing Middle West Utilities, splitting its stock 10-for-1 and retiring its debt. Then he formed another top pyramid company intertwined with IUI, hoping again to put control of his empire out of reach of outsiders. But his pyramid was too big and was now a prime target for Wall Street.
Weakened by the 1929 Crash and forced to continuously defend his securities from raiders, draining cash and credit, Insull was forced to borrow some $48 million including some from unfriendly New York banks like Morgan—using his stock as collateral. When the market collapsed again in 1931, while Morgan men intentionally sold short Insull securities, his stock finally gave way—and the bankers took their collateral. When further credit was denied by all, Insull’s top firms went into receivership and he was left holding the bag.
Insull was wanted for mail fraud and embezzlement. But he had fled Chicago for Europe. As he travelled throughout France and Greece, the government tried to extradite him. Romania offered him a cabinet level position as head of electricity, which he was lucky or smart enough to turn down. Ultimately, the Turkish government arrested him in Istanbul as he disembarked a cruise ship. Extradited to the US, he was tried and, though acquitted on all counts, his reputation was ruined, and he died a broken man—a scapegoat.
There are a great many lessons to be learned from Sam Insull’s life. First, note many folks assume that if they are major movers in industry, they can conquer Wall Street—few succeed. Main Street is straightforward, and Wall Street is tricky. Second, debt is always dangerous, but if you can’t master Wall Street it’s doubly dangerous. Third, if you’re going to borrow big money and sell stock, it really is worth it to pay the price and build relationships with the top financing firms. Debt is both Wall Street’s carrot and its stick.
Insull had initially planned on retiring in the 1920’s. Had he done so, he would have quit a rich hero instead of ending up years later with a crook’s reputation. Why didn’t he quit? He finally decided to hang on long enough to turn his empire over to his son. That decision cost him his reputation. Insull took the often tried and unnatural approach of handing his world to his son, and en route, hung around too long. It cost both his son and him everything but their lives.