Frenzied Finance Part 43

The interviews of 1892 and 1896 are both matters of record. My position in each instance was well understood, and several insurance officials who know the facts as well as I do have, since the publication of the company's statement, come to me and offered to back up my a.s.sertions with their own. American manhood is certainly not extinct when men are willing to sacrifice their careers to set a wrong right.

The manner in which the great companies have met my rejoinder to President McCall will afford my readers an excellent ill.u.s.tration of how the "System" goes after a man who has excited its antagonism.

A few days after the publication of the December issue of _Everybody's Magazine_, containing my fac-simile of President McCall's letter to policy-holder DeRan and his two letters to me, the Life Insurance Underwriters met and "resoluted" that I had applied for insurance in the New York Life Insurance Company in 1892, and being asked if I had ever been refused insurance, had replied in the negative. Investigation showed that I had been refused four years before by two other companies, whereupon my application was rejected and I was practically black-listed, and so could not secure life insurance in any American company. By way of corroborating this plausible story two letters, purporting to have been written by agents of the two companies to their head officers without my knowledge, were incorporated in the resolution.

The letters stated that the writers could secure me for a large amount of insurance if the companies would accept the risk. The virtuous corporations were alleged to have replied that Mr. Lawson had been refused life insurance before, and for good reasons was not desired as a risk. This resolution was then published throughout the press of America in the news columns, and to all but those initiated in the desperate practices of the "System" and its votaries, it was conclusive evidence that an unprincipled man had been convicted, red-handed, of fraud.

You who read this statement of mine doubtless found the resolutions in your own paper, and thought it ordinary news-matter printed because of its public interest. This notice was an advertis.e.m.e.nt disguised as news, and inserted through the "System's" professional character a.s.sa.s.sinator, whose head-quarters are in Boston, a person who will occupy a prominent part in the chapters of my story wherein I treat of the crimes of Amalgamated. The publication cost the insurance companies $2.50 per line of the policy-holders' money, while advertis.e.m.e.nts that I insert in the course of my private business cost me but 75 cents per line.

HOW THE "SYSTEM" MAKES ITS PROFITS

It appeared that I had sinned still further, for had I not questioned the virtue and integrity of the New York Life's securities? To policy-holder DeRan, Mr. McCall had stated, over his own signature, that the New York Life did not and could not own stock securities. (See the DeRan letter on page 428.) I proved from the regular insurance reports that millions of the New York Life's bonds were no more than disguised stock securities, created by the new device of depositing stocks with a trust company at an inflated price and issuing against them a receipt which is arbitrarily called a "bond." I mentioned, as an ill.u.s.tration, the Northern Pacific-Great Northern-C., B. & Q. Collateral 4s, created out of the stock of the Chicago, Burlington & Quincy and other railroads. I could have selected a much worse type of security, just as, instead of the typewritten letter of Mr. McCall, I might have published others of a more personal nature.

Against me out sallied 2d Vice-President Perkins, brother of George W.

Perkins, 1st Vice-President of the New York Life (J. Pierpont Morgan's partner), and at a banquet in Philadelphia boldly answered my aspersions by declaring that the bonds I named "are printed in the list of holdings which the company publishes in detail, and has published for the last five years, in order that its policy-holders may be informed of its affairs in the minutest detail." The convincing logic of this rejoinder the dullest will appreciate, but for a moment I must stop to remind Mr.

Perkins that the publicity on which he plumes himself is really not an expression of the New York Life's individual frankness, but merely an observance compelled by the law.

All this recapitulation has been for a purpose. My readers will bear in mind before taking hold of my next exhibit that the great insurance companies have published me as a falsifier, who since 1892 has been refused insurance and black-listed for good reasons, and have claimed that Mr. McCall's letters were circulars sent me by mistake. We are still considering the problem--_are the men who run our great insurance companies honest?_ Well, look at the reproduction on page 442 of a doc.u.ment that is now in my possession and has always been since the date when it was delivered to me by one of the three great representatives of the "System," the Equitable Life Insurance Company.

This doc.u.ment speaks for itself. My readers are aware of the negotiations and investigations which precede the making of an insurance contract. To them and to the "System's" votaries I recommend the exhibit and the underwriters' resolutions as a simple lesson in frenzied finance.

My charge that the directors of the great life-insurance corporations of America use the funds of the companies they control in stock speculation for their personal benefit is but one contention in my argument against the character of their management. Here I formally add another charge: It is that in the placing of loans, in the purchase of properties and securities, and in the underwriting of enterprises, there are enormous profits made, directly and indirectly, which are pocketed by individuals and are never shown on the books of the corporation.

The basis of life insurance is security. A policy-holder pays his premium to enable the corporation accepting it to make good its contract with him when death or time matures it. The vast sums in the possession of the three great companies are acc.u.mulated to safeguard their policy-holders, and should be invested only in securities of tried and solid worth, which will bring in no more nor less than the going rate of interest. There must be no experiments and, above all, no speculation.

But what do we find? The positions of managers and manipulators of these huge h.o.a.rds of the people's money have become the greatest financial prizes of the day. New and ingenious methods of graft have been devised in connection with them. The vast revenues of the insurance companies have become the "System's" most potent instrument in working its will in the stock world.

[Ill.u.s.tration]

[Ill.u.s.tration]

Their investments, largely in the securities of properties or corporations in which the "System's" votaries have large interests, are fertile sources of profit to the "insiders." The groups of banks and trust companies affiliated with them are the medium through which access to the coveted insurance funds is obtained, for these inst.i.tutions are allowed by law to use money for speculative purposes, which the insurance concerns are prohibited from doing.

The immense opportunities for profit afforded by the control of these great money h.o.a.rds are taken advantage of in various ways. Let me ill.u.s.trate one or two of them. Rogers, Rockefeller, Stillman, and Morgan buy the capital stock of three railways at a fair valuation, say, $20,000,000 apiece, $60,000,000 for the three. Owning all, or nearly all, the stock, they can put its price on the stock-exchanges to any figure they desire, say, $60,000,000 for each railway, or $180,000,000 in all. They proceed to deposit the stocks of the three roads in a trust company, issuing against them $180,000,000 of what they call "bonds." An "underwriting" syndicate is then organized. This is composed of certain individuals and corporations who agree that when these bonds are offered to the public at $180,000,000, the portion the public does not buy, they (the "underwriters") will purchase on the basis of $120,000,000; in other words, they guarantee the sale of the bonds at $180,000,000. In return they "make" on all the bonds sold the difference between the price to them, $120,000,000, and the price the public pays, $180,000,000. Let us a.s.sume that the public takes up the issue greedily and the full price, $180,000,000, has been secured. The original owners, Rogers, Rockefeller, etc., have made $60,000,000, the difference between the first cost and $120,000,000, the cost to the "underwriters," while the "underwriters" have made $60,000,000, the difference between $120,000,000 and the $180,000,000, the cost to the people. In looking over the list of subscribers to these bonds, you will note that the largest purchases have been made for the great insurance corporations and the banks and trust companies owned or controlled by them and "The System." If, in the instance I am using for ill.u.s.tration, a president or vice-president of one of the great insurance companies is known to be willing to subscribe for, say, $10,000,000 for his insurance company; $5,000,000 for his princ.i.p.al trust company, which is owned by the insurance company; $1,000,000 apiece for five other banks and trust companies, also owned or controlled by the insurance company; and can influence five other affiliated inst.i.tutions to subscribe for $1,000,000 apiece, he controls, as will readily be seen, a purchasing power of $25,000,000, and is sought for as an underwriter, if he is not already an owner. For this $25,000,000 which his inst.i.tutions buy he "draws down," as his personal profit, 33-1/3 per cent. "underwriters'"

commission, or over eight millions of dollars.

In taking this amount, he is not _robbing_ his insurance company, in the common acceptance of the term in this era of "frenzied finance," though he has absolutely appropriated to himself a profit which belongs to it and not to him.

It must not be supposed that such transactions as this I have outlined are conducted in the simple ABC fashion I have set down here for purpose of ill.u.s.tration. No "one man" appears through any deal. The purchases and sales are usually made through dummies, and the final recipient of the "made millions" carefully conceals all the phases of his partic.i.p.ation.

Let us take another type of transaction. An insurance company owns two adjoining pieces of unimproved city real estate, for which it paid $250,000 apiece, but which are now worth $500,000 each. The directors of the corporation formally decide to dispose of these holdings, and sell the first piece to a trust company, which is owned or controlled by the insurance company. One of the "System's" dummies or an officer or director of the corporation agrees to take the other at the same price.

This is a perfectly legitimate transaction, and the insurance company shows a half-million profit on its investment. The next step is this. On its piece the trust company erects a two-million-dollar building, procuring the money from the insurance company at a low rate of interest. Thereupon the value of the adjoining piece bought by the "System's" votary jumps fifty per cent., so he has made $250,000 without risking a dollar. At the same time there have been several other profitable transactions between inst.i.tutions and individuals. The agent who disposed of the two pieces of real estate and who is "in" the transaction receives a generous commission for making the sales; the trust company's representative has his own "draw-down," and there are further commissions to the agents who borrow and loan the money and control the erection of the building.

My readers may well ask, Are these merely ill.u.s.trations, or do such things really take place? I unqualifiedly reply that deals similar to these have occurred repeatedly and that the principle and procedure set forth are the rule and not exceptional. Here is a minor episode of which I have personal knowledge. A well-known man made direct application to the Mutual Life Insurance Company for a loan of $400,000 on a valuable city business block which he owned. He was told that the corporation had no funds available for that purpose. The refusal was authoritative and definite. A few days later a lawyer and real-estate agent came to his office and said to him: "I'm informed that you want $400,000 on your property. I can let you have it, or $500,000 if you need that much."

"Good," said the would-be borrower, "I will take it. Whose money is it?"

"The Mutual's."

"My dear fellow," said the would-be borrower, "how can that be? I was there at the office a few days ago and was a.s.sured I could not have the money."

"That's all right," was the answer. "Of course you could not get the money. The right party did not see the right party. D'ye understand?"

He understood.

A recent issue of the _Insurance Register_, of Philadelphia, in criticizing my comments on President McCall and life insurance, makes the following significant admissions in regard to the conduct of these great corporations:

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 princ.i.p.al, 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 a.s.surance: "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 ill.u.s.trate the proposition that every action has its prompting motive, and my fellow-pa.s.senger 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 amus.e.m.e.nt 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 Ma.s.sachusetts.

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 a.s.sets 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 inst.i.tutions, 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 a.s.sets 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 Ma.s.sachusetts 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 Ma.s.sachusetts 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 Ma.s.sachusetts Insurance Commissioner, dated January 1, 1903, and the decision of the New Jersey judge who pa.s.sed 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 Ma.s.sachusetts 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 ma.s.sive acc.u.mulations 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 a.s.sets 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.

Is there aught to prevent a bold manipulator from entering this inviting field and purchasing a controlling interest in the stock of enough such life-insurance companies to make their combined a.s.sets aggregate one hundred million dollars of the more than six hundred millions of a.s.sets of stock life-insurance companies doing business in Ma.s.sachusetts?

This accomplished, he transfers his rights to a "trust," or an a.s.sociation, or trust company, which is not only a bank of deposit, but is also engaged in brokerage schemes, in financing large enterprises and promoting all kinds of corporate consolidations, and underwriting their stock for a consideration. The central controlling trust company, or whatever it may be, becomes a medium through which the investments of the controlled insurance companies are made; all sales of their securities pay tribute to its treasury; all funds awaiting investment are deposited in its keeping; the most valuable of their securities are turned into cash, and then used by the controlling power for such purpose as it sees fit. All these things are conceivable, and their accomplishment would be a no greater task, seemingly, than some of the gigantic "operations in finance" of the last few years.

Judged by what has happened in other fields, this trust would not only control these vast a.s.sets, if the plan should be executed, but would control them without individual liability on the part of its managers.

THE PRUDENTIAL MERGER CASE

Is there really any danger, it may be asked, that any trust or syndicate will attempt to control the stock and a.s.sets of life insurance in this way, or is this simply the presentation of possibilities? As an answer to that question here follows a plain, unvarnished story of what has been attempted and what has taken place within the past year between one of the life-insurance companies doing business in Ma.s.sachusetts and a trust company with which it has close relations.

In October, 1902, the Insurance Commissioner received from the president of the Prudential Insurance Company of America a letter, transmitting a copy of a circular letter addressed "To the field and home office staff" of the company. That circular letter disclosed a plan of mutual control between the insurance company and the Fidelity Trust Company, a corporation organized under the laws of New Jersey. It stated that:

"The capital of the Fidelity Trust Company is about to be increased from $1,500,000 to $3,000,000, the new stock being sold at $750 per share. This will result in giving the Fidelity Trust Company a capital of $3,000,000, a surplus of $13,000,000, and a considerable amount of undivided profits, making this company, from the standpoint of capital and surplus, as large if not larger than any similar inst.i.tution in the country. Sufficient of this stock will be taken by the Prudential Insurance Company to give it, together with its present very large holdings of Fidelity stock, absolute control of that company. A very large portion of the balance of said stock is to be taken by the Equitable Life a.s.surance Society of New York, which will give to that company a very substantial interest in the Fidelity Company, and therefore justify it in materially increasing its business with the Fidelity. The bulk of the new money thus to be received by the Fidelity Trust Company is to be used by it in the acquisition of a controlling interest in the entire capital stock of the Prudential Insurance Company.... A contract has been entered into between the Fidelity Trust Company and a large majority of stockholders in interest of the Prudential, in which the latter have contracted to sell their holdings of Prudential stock, or as much as may be necessary, to the Fidelity Trust Company on or before May 1st next, at $600 for every $100 of par value.... While by this arrangement the Prudential Company will control the Fidelity, and, on the other hand, the Fidelity will own a majority of the capital stock of the Prudential, the annual meetings of the two companies will be so arranged and other arrangements be so made that the Prudential will forever be the dominant factor, as of course it should be. The officers of the Prudential are united in their belief that this move is of the greatest possible interest to its stockholders, as well as to all of its policy-holders and its great army of employees. The consummation of this arrangement insures the continuance of the present management of the Prudential, both in its home office and in the field. The advantages of the plans of the trust company are too obvious to need comment. It is expected to consummate this entire transaction between the two companies on or about February 1, 1903."

The Insurance Commissioner of Ma.s.sachusetts, on receipt of this circular, wrote United States Senator John H. Dryden, president of the Prudential Insurance Company of America, declining to approve of the proposed exchange of stock on the ground that the merger was antagonistic to the interests of policy-holders, inasmuch as it forever deprived them of the power to dislodge the management from the control of the inst.i.tution. The minority stockholders pet.i.tioned the New Jersey courts for an injunction to restrain the Prudential and the Trust Company's directors from carrying out the proceeding for mutual control, and Vice-Chancellor Stevenson enjoined the corporation from executing its project. However, the reciprocal control was effected by the sale of enough Prudential stock to the Fidelity, whose capital was increased for the purpose of purchasing it, so that the Fidelity lacks but eight shares to control absolutely the Prudential. As the situation stands now, the Prudential directors control the Fidelity, and the Fidelity holdings, with eight shares more, control the Prudential. Practically the ring is about as hard to break into as the plan enjoined. Those who control the Fidelity can always "dominate" the insurance company.

Minority stockholders and policy-holders alike are practically in the hands of the trust company for all time, and the insurance company's a.s.sets can be managed as the majority of the trust company's directors dictate.

The director goes on to explain the relations between a life-insurance company and a trust company, which, in the light of recent exposures, seems prophetic.