I've mentioned Sam Insull a few times, usually as a proto-
THE following analysis of the Insull collapse is written for the use and contemplation of those who are interested in the causes, methods, and results of business decadence; in those factors which have shaken the very foundations upon which the continuity of modern industry hinges — namely, accumulation of savings applied to large industry and directed by individual initiative, judgment, and, we hoped until recently, integrity. The complete breakdown of faith in this system, unfortunately justified, as expressed in lack of confidence, the fruits of which all markets, banks, and business in general are reaping at present, may spread untold ruin among the most cherished and essential institutions of security and stability — banks, insurance companies, private property, in fact the whole industrial and credit structure of production and distribution.
Unless we are ready to try new principles and ideas according to which the sins of the few will not necessitate repentance by society as a whole, remedies will have to be found; ways must be devised to check individual tendencies to digress from methods that ensure the preservation of industry and to eliminate those elements of instability which are due, not to faults of the system, but to the weaknesses in the mental fibre of individuals in positions of leadership. However, a pious desire to do something constructive is not sufficient; we must know the nature of the germs which have weakened the system. The Insull incident is a case study; perhaps it does not represent the general or average; on the other hand, the financial practices which it reveals are by no means rare occurrences.
I
‘All the important properties in the Insull group of public utilities,’ proclaimed Samuel Insull in a pamphlet dated October 31, 1930, ‘. . . have the advantage of Insull policies and management. Thus, there has grown up an institution — based upon the experience and upon the financial, engineering, organization, and executive ability of its personnel — which has made a notable success in utility management.’ The pamphlet went on to explain the increasing complications of the corporate structure: ‘To maintain this institution and to perpetuate it in behalf of the public served by the various operating companies of the Insull group of utilities, in behalf of the hundreds of thousands of investors in those companies, and in behalf of the men and women who make up the various organizations, there were organized two investment companies — Insull Utility Investments (Inc.), incorporated in December 1928, and Corporation Securities Co. of Chicago, incorporated in October 1929.’
The results of this solicitude for the public weal are expressed in the auditors’ or receivers’ reports as of the day receivers were appointed in April 1932: —
1. Insull Utility Investments (Inc.): Total liabilities, $253,984,341.61; total assets, $27,473,364.80, most of which is pledged or loaned, leaving unpledged securities with a market value (April 16, 1932) of $1,646,580.84, which have now proved absolutely worthless, as against funded debt of $58,645,028.77 and capital stock of $148,036,572.93. In other words, there is nothing for total investors’ book equity of $206,681,601.70.
2. Corporation Securities Co. of Chicago: Total liabilities, $142,374,979.58; total assets, $13,146,482.66; assets pledged to secure notes payable, $12,041,017.51; leaving $112,768.12 for liabilities of all kinds, excepting secured notes, of $126,966,716.35. The receivers could not even afford to hire the services of accountants to audit the books.
3. Middle West Utilities Company: No assets to cover preferred and common stocks carried at a book value of $220,924,641; furthermore, the equity available behind the outstanding gold notes to the amount of $40,000,000 has declined in value to a point where it is doubtful whether they will realize much in liquidation.
The above indicated deficits are not the measure of investors’ losses in these three companies. The actual loss cannot be calculated accurately for two reasons: in the deficits given there is duplication on account of inter-company holdings of stock; and again, the stated value of capital on the books of the companies does not correspond to the price paid by a great many investors who bought the securities on the exchanges at inflated quotations, the inflation being effected, as will be shown later, by the accounting methods of the companies.
The total loss involved in the Insull debacle goes beyond the annihilation of the assets of the three largest and topmost holding companies. Though the most important of Insull’s corporate progeny, they are not the only ones to come under the care of receivers. There are a dozen or more others just as emaciated which have staggered their way into the hands of courts of equity, and many of them probably will not survive the operations administered by courts, counsel, and committees. In view of the total amount of Insull holding-company securities outstanding in the hands of the public, the realized loss resulting from the collapse will be in the vicinity of $700,000,000.
We need not consider separately every one of the companies now in receivership, because they are, almost without exception, wholly owned subsidiaries of the three parent companies mentioned above, and their degeneracy is reflected in their parents. The same disease afflicts the whole clan of Insull holding companies, and a diagnosis of the illness of the parents will explain the decadence of the family.
At the time they went into receivership, the major Insull holding companies were completely empty — mere corporate skeletons. This condition cannot be explained by a casual reference to the general decline in security values. Though this decline in the last three years has been great, values have by no means reached the zero level. The earnings of operating companies have fallen 10 to 20 per cent from their high points of three years ago, but they still show substantial net incomes, they still pay dividends, and their stocks, correspondingly, possess real value. In view of this, how does it happen that the Insull holding companies, which were supposed to have their foundation on the sound basis of utility properties, show an absolute wastage of assets? The discrepancy shown by the complete annihilation of holding-company equity in face of the comparative soundness of operating utilities must be explained by conditions other than the decline in market values.
II
The portfolio of the three largest Insull holding companies consisted of three types of investments: securities of operating companies, securities of subholding companies, and each other’s stocks. The first still have value, but are pledged to banks, or lent to affiliates, which have in turn pledged them to cover short-term debts. Therefore they are not available as a part of investors’ equity. The sub-holding-company securities and the investments in each other’s stocks, the greater part of which is also pledged, are absolutely worthless.
This condition is strikingly illustrated by the difference between book values and market values of operatingcompany and holding-company securities in the portfolio of Insull Utility Investments (Inc.). On April 16, 1932, of the total book value of investments stated at $237,892,050.00, operatingcompany securities accounted for $119,003,904.92 and holding-company securities stood at $118,888,145.08. And yet the market value of the former was $25,613,731.00 and that of the latter only $4,788,536.47. Therefore, at that time, the market value of operatingutility securities had declined to a little less than one fourth of their book value, while the holding-company investments had declined to approximately one twenty-fourth of their book value. Since April 1932, conditions have so changed that the operating-company securities are worth more and the holding-company securities are worth nothing.
Why this striking contrast? After all, were not the sub-holding-company securities ultimately based also on operating properties which still possess value? The solution of this anomaly will be found in the multifarious financial practices in which Samuel Insull indulged for many years prior to the panic of 1929. The germs of decay had been implanted during the period of prosperity; but they remained undetected as long as the Bacchanalia lasted.
The dissipation during the years of speculative revelry will be described subsequently. Here we must indicate the disposition made of the assets which still possessed value in spite of the market decline since 1929. These were pledged with banks and others against substantial loans. During two years of depression, 1930 and 1931, Insull Utility Investments (Inc.) alone obtained net capital funds from loans (still outstanding in April 1932) of $41,585,020.53. Corporation Securities Co. of Chicago and Middle West Utilities Company also had loans outstanding of $15,408,263.23 and $33,304,906.82 respectively, making a total of more than $90,000,000 for the three companies. Since 1929 the whole Insull holding-company system is estimated to have obtained nearly $130,000,000 in loans by pawning away most of the investors’ possessions. Of all this money, only an infinitesimal amount is left.
This enormous sum, in addition to considerable amounts of capital receipts from stock subscriptions, was dissipated in two years of depression. It would tax the ingenuity of a master magician to spring a disappearing act of such dimensions. But Insull managed it. In fact, the only reason why the amount was not much more is that he could not obtain any more loans.
III
The Insulls have shown a discreet disinclination to explain this situation. The auditors and the receivers of the companies in bankruptcy have presented a mass of facts without attempting to analyze and interpret them. From close scrutiny one can detect in them clear evidence of certain recurrent practices which explain the dissipation of these huge sums.
In the first place, large amounts of cash dividends were paid out, even though the companies possessed no net cash income after interest charges and expenses had been defrayed. In fact, since the cash dividends received on securities owned were mostly from subholding companies which had not actually earned them in operation, but had declared them out of capital after making proper accounting entries, lnsull Utility Investments (Inc.) and Corporation Securities Co. hardly covered their operating expenses during their existence. Yet they paid over $16,000,000 in interest and over $12,000,000 in cash dividends, most of which came out of capital receipts. This condition was hidden from the public by the introduction of non-cash and unrealizable items into the income account.
Commissions to outsiders and advances to officers of the different companies, made either directly or through subsidiaries, to carry on speculation in stocks, also consumed a part of the proceeds from loans. The good faith of some of these transactions has been questioned by a Cook County grand jury. Payment of contractual obligations arising out of property acquisitions, usually at exorbitant prices, as will be shown later, accounts for an additional part of the cash outlays during 1930 and 1931.
Quantitatively the most important, and the least comprehensible, method of wastage consisted of pegging transactions by the companies of their own or each other’s securities on the stock exchanges. In 1930 alone, lnsull, Son & Co. (Inc.), a wholly owned subsidiary of lnsull Utility Investments (Inc.), bought 1,193,590 shares of the latter’s stock — nearly one third of the total outstanding — at a cost of $66,421,769.88, most of these funds being obtained through advances from the parent and affiliated companies. Approximately $50,000,000 was realized by reselling some of the stocks to the public at prices lower than cost. The rest was transferred to lnsull Utility Investments or Corporation Securities Co. of Chicago at cost or higher than cost. lnsull, Son & Co. thus registered a ‘profit,’ though at the time of transfer the stocks were worth little more than half the price paid.
These onerous transactions are inexplicable. The details of the situation add to their mystification. The average consideration received for all issues of lnsull Utility Investments common stock, excepting stock dividends but including those issued in exchange for sundry investments, was about $28.85. And yet the company bought large blocks of its own stock for the treasury at prices varying between $55 and $65 a share. The funds used were the proceeds of the bank loans obtained by the pledge of all the valuable assets. Thus the company had been emptied of all good assets in order to buy its own stocks which were worthless at prices which were twice what they realized at the time of original issue....
....MUCH MORE
Which included a back-link to, among other self-reverential hyperlinks:
SoftBank’s Masayoshi Son Sees AI Evolving To A Point Where Your Happiness Will Be its Greatest Reward
Having observed Mr. Son and his position in the parade—from Drum Majorette leading the way, to being the guy cleaning up after the elephants, and then back to the front— we had this introduction in February 2024:
Since the time he almost went broke after the dot.bomb bubble burst (he had briefly been the richest person in the world) I've come to realize this guy isn't some great visionary/grand strategist; he's just leveraged beta. Making big bets, all geared up, on whatever is at the head of the passing parade.
That said, he owns 90% of ARM Holdings and I don't.
Bastard.
The Insull references go back to 2007's "Politics and the Electricity Market":
From the Zanesville Ohio Times-Recorder:
Subtle changes buried in an energy bill plotting the future of Ohioans’ electricity rates guarantee that today’s prices will never fall and make it nearly impossible for producers of green power to gain a foothold in the state, a newspaper reported Monday.Maybe it's time for me to brush up on G.E., Insull, the Traction companies et. al.
If interested, see also the excellent "Democracy Means Agreeing with Me: Electrification Past and Present" posted July 19 2025 and July 2020's "There Is No Free Market for Electricity: Can There Ever Be?".
