Frenzied Finance, Vol. 1: The Crime of Amalgamated

by Thomas William Lawson

While riding on the train on my way to my office this morning a lawyer told me the following story: A client of his, a real-estate agent, represented a corporation owning and wishing to sell a valuable Chestnut Street property. The price asked was $750,000. A representative of a New York corporation called upon him and agreed to take the property, but stipulated that the price named in the deed and receipted for should be $850,000, the difference covering his commission of $100,000. The Philadelphian, finding it impossible to induce his clients to make this concession, and the New York agent insisting upon it as indispensable to the purchase, made a trip to New York to see the principal, acquaint it with the facts, and find out whether or not some arrangement could be made by which the buyer could take care of its agent's commission. He was received by the manager of the New York corporation, but when he stated that he represented the owner of the Philadelphia property he was instantly bowed out of the office, with the assurance: "We never interfere with business in the hands of our agent." The outcome was that the sale was not consummated, because the officers of the Philadelphia corporation would not receipt for $850,000 when they were to receive only $750,000, for the reason that they could not square the transaction with their stockholders, and the buyer's agent would not consummate the deal without such a receipt, because he could not square with his client and its stockholders the payment of $850,000 with the consideration of $750,000 mentioned in the deed. This story was told to illustrate the proposition that every action has its prompting motive, and my fellow-passenger imparted to me his conclusion that the motive of the manager of the New York corporation for refusing to listen to his client was that "the scoundrel was in cohoots with the agents to share in the commission and cheat his own company." The public will in time come to look for motives, and we, fellow-editors, and the managers of mutual life-insurance companies, will be judged by what seems the most apparent motive for our actions....

Any alliance between life insurance and this modern speculative frenzy cannot be too deeply deprecated, nor too strongly reprobated. Every true friend of honest life insurance among insurance journals will demand that this great business, of all businesses, must be kept free from the contagion of corruption that has shamed finance, is covering commerce with a blighting mildew, and threatens our whole land with disaster as well as dishonor.

All this is preliminary to treating the case of the Prudential Insurance Company. I want to say here that I do not know the corporation, any of its officers, nor any one interested in the control or management of it, and personally have never had the slightest connection with its officers. I desire to prove through an outsider, some one of unquestioned authority, that the great insurance companies are part of the "System" and are engaged in manipulating the stock-market with the funds their policy-holders put in their hands as a sacred trust. In so far as the Prudential is concerned, rank and unsound as are the transactions I am about to speak of, my investigations have proved to me that this insurance corporation is only as a baby-carriage to a runaway automobile compared with the three great representatives of the "System," the New York Life, the Mutual, and the Equitable. Certain critics have accused me of being unduly emphatic in my strictures on the doings of the corporations of which I am treating. I will confess to a secret amusement at being able, in this instance, to quote the language of one of the most conservative insurance officials in America, Frederick L. Cutting, for many years Insurance Commissioner for the State of Massachusetts.

The Prudential Life Insurance Company has $2,000,000 capital stock. The stock is owned and the company absolutely controlled by a few men. This capital of $2,000,000 represents only $91,000 paid in in cash; the balance has been derived from stock dividends; that is, profits that have been made out of policy-holders. In addition to this enormous amount, there has been paid ten per cent. in cash dividends annually, so that for every thousand dollars paid in the stockholders hold $22,000 of stock, upon which they receive annually $2,200, or, as Commissioner Cutting puts it, "each year for ten years the stockholders have received in cash dividends more than twice the original investment." I commend to the policy-holders of the Prudential and other insurance corporations, and to other honest men, these tremendous figures: every $1,000 invested turned into $22,000, not in a gold or diamond mine, but in a life-insurance company where every dollar comes from the policy-holder who is supposed to pay in only enough to insure a promised payment plus provision for honest expense.

The Prudential Company owned the stock of the Fidelity Trust Company, the capital of which was $1,500,000, and the directors came before Commissioner Cutting and informed him that they proposed to double up the stock of the Fidelity Trust Company to $3,000,000; that the new $1,500,000 at a par value of $100 was to be sold for $750 per share; that the new stock was to be bought by the Prudential Company and the Equitable Company; and that with the proceeds of the sale, the Trust Company was to buy a control of the Prudential Company from its directors. The motive of this transaction was as follows: The set of men who absolutely controlled the Prudential, with its sixty millions of assets belonging to its policy-holders, proposed to control it for all time, but without tying up $7,000,000 of their own money in the business. In other words, they desired to eat their pudding and yet have it for continuous re-eating, and had found a way to accomplish this heretofore impossible feat.

By this plan the men who controlled the Prudential Company, and thereby the Trust Company, at the time the plan went into force, would forever continue to manage and control both institutions, although not one of them held a policy or any investment in the insurance company beyond the one share of stock required by law to qualify as director.

If this scheme had been consummated it would have borne to "frenzied finance" the same relationship that perpetual motion does to mechanics. By it a few men could gamble forever with the entire assets of the policy-holders of this corporation for their own personal benefit. If my readers will imagine the same scheme applied to several other great insurance companies and the men controlling them, the "System's" votaries, they will recognize the "System's" ideal world, with all the people in a condition of ideal servitude. However, this ingenious plan was forestalled because there happened to be in control of the life-insurance affairs of Massachusetts one of those old-fashioned relics of American honesty—a man who thought more of the interests of the people intrusted to his care than of the prospect of innumerable "made dollars" which might have been his had he proved more amenable. It is regrettable that he was not able to deprive the conspirators of their power to juggle with the property of the corporation, for only two weeks later they developed and executed an alternative device which practically accomplished the result which the Massachusetts authorities had declared illegal and the courts of New Jersey had enjoined.

There is food for thought here for the policy-holders of American insurance corporations who have intrusted to the "System" and its upholders the billions of their savings, to which they are adding every year hundreds of millions. To them I recommend a reading of the Forty-eighth Annual Report of the Massachusetts Insurance Commissioner, dated January 1, 1903, and the decision of the New Jersey judge who passed on the case. These men are surely not to be accused of exploiting my story. Under the head of "Control of Life Insurance Companies" in the Massachusetts Report will be found the following:

The Insurance Commissioner had the honor of addressing the insurance committee of the General Court relative to the control of life-insurance companies by other corporations or by syndicates. For some years it has seemed to impartial observers who are conversant with life-insurance matters, and have also seen the eager quest by promoters for funds to finance all kinds of enterprises, and the determined struggle to grasp every opportunity for speculation, that there would be no cause for wonder if covetous glances should be turned toward the massive accumulations of life-insurance companies. It is well, therefore, to pause and ask what would be the chances for obtaining control of them, and what might be the result of such control, and in general whether the funds of such companies are imperilled by modern methods.

Insurance corporations on a capital stock basis, on the other hand, give their policy-holders no voice in their management. To obtain control of such a company it is necessary only to control by purchase or otherwise a majority of its capital stock. If a "king of finance" should start out with the determination to secure a majority of the stock of such corporations, the chances are that in some cases at least he would be successful. He might, it is true, be obliged to pay more than the "book value" of the shares; but perhaps control of a company's assets would well be worth twice or thrice or even more than what could be figured out as the value of the stock on the books of the company. On no other theory can the figure offered for life-insurance company stock in some cases be accounted for, since these offers are not warranted by the surplus nor by the dividends paid, nor by both combined.