Edison's Secretary Built a $3 Billion Utility Empire. The Depression Wiped Out a Million Investors, and Three Juries Acquitted Him.

Samuel Insull pioneered the regulated natural-monopoly utility, the model that still powers your lights, then stacked holding companies so a thin slice of equity could control billions in assets. The operating utilities survived the Depression. The holding-company pyramid did not, and 600,000 shareholders and 500,000 bondholders lost their savings. He was not a fraudster, three juries decided, just catastrophically over-leveraged.

In 1881 a 21-year-old London clerk named Samuel Insull crossed the Atlantic to become Thomas Edison's private secretary, side whiskers glued on to look older. Within a decade he was Edison's most trusted business adviser, helping build the Schenectady works that grew into General Electric. When J. P. Morgan merged Edison's company with Thomson-Houston in April 1892 and gave the presidency to someone else, Insull left. He took a pay cut to run Chicago Edison, one of about twenty struggling power companies in a city New Yorkers called a cow town, and borrowed $250,000 from retailer Marshall Field to buy a controlling block of its stock.

The company was losing money until a Christmas 1894 walk through Brighton, England gave Insull his great idea. The shops were shut, but every light inside was burning, something that never happened in America. The local utility chief told him the secret was not a flat rate but demand metering, charging different prices for off-peak use. By 1897 Insull had worked out two-tiered rates that cut many homeowners' bills by 32% within a year. Cheap off-peak power filled the wires in daytime, which filled the giant turbines he kept ordering, which lowered the cost per kilowatt-hour further still. In 1907 he merged his companies into Commonwealth Edison and secured a forty-year exclusive franchise to electrify America's second-largest city.

Insull's deeper bet was on market structure. Two companies stringing duplicate wires down the same street doubled the cost, so electricity was a natural monopoly. His solution was to give the monopoly a franchise and let the state set the rates, killing the waste of competition while capping the profit. He lobbied so hard for state utility regulation that within a few years more than thirty states passed laws modeled on the framework he championed. This is the institution that still governs your electric bill. It worked.

Then came the holding companies. To expand beyond Chicago without losing control, Insull's lawyers built Middle West Utilities in 1912, a corporation whose only job was to own the securities of other corporations. Stack enough of them and the arithmetic turns magical: hold 51% of a holding company that holds 51% of another that holds 51% of the operating utility, and a few dollars at the top control the whole pile below. By the late 1920s Insull's companies served more than four million customers across thirty-two states and generated about an eighth of the nation's electricity. The securities of the group carried a market value over $3 billion, and in the summer of 1929 they were appreciating at $7,000 a minute.

The pyramid was the efficiency, and the pyramid was the trap. Holding companies produce nothing; they live on dividends from the operating companies below and on the collateral value of the securities they hold. When the 1929 crash dragged those securities down, the banks called the loans. On April 8, 1932, following J. P. Morgan's instruction, the banks called in a $10 million note of Middle West Utilities. The empire tumbled into receivership that month. Losses approached $800 million. Insull borrowed $5 million personally, sold his four-thousand-acre estate, cashed in his life insurance, and handed his remaining property to creditors. "I wish my time on earth had already come," he said. He was, one banker put it, too broke to be bankrupt, owing $16 million more than he was worth.

Here is the telling split: the operating utilities, Commonwealth Edison and Peoples Gas among them, kept the lights on and survived. The holding-company superstructure above them did not, and it took 600,000 shareholders and 500,000 bondholders down with it. Franklin Roosevelt, campaigning in 1932, railed against "the Ishmaels and the Insulls, whose hand is against every man's." Insull fled to Europe, was extradited from Turkey in 1934, and stood trial three times. After one seven-week trial the jury took five minutes to acquit and waited two hours only for propriety before saying so. Twice more he was tried; twice more the juries acquitted him. The books were open, the structure was legal, and the only thing he was guilty of was borrowing too much against collateral that collapsed. Congress responded with the Public Utility Holding Company Act of 1935, which effectively outlawed the pyramid, along with the Securities Acts of 1933 and 1934. Insull died of a heart attack in a Paris Metro station on July 16, 1938. The accounts of what was in his pocket disagree so completely, eight francs, thirty, or twenty cents, that his biographer concluded someone had robbed the body.

The durable part of Insull's empire was the natural monopoly, and the fragile part was the leverage stacked on top of it. The operating utilities survived because they generated real cash from a real franchise; the holding companies died because they were pure claims on collateral whose value vanished. The binding constraint on a holding-company pyramid is the market price of the securities underneath it, exactly as the binding constraint on a margin loan is the price of the stock you pledged. Leverage that lets you control assets cheaply on the way up is the same leverage that forces you to surrender them cheaply on the way down, and the thing you control is not the thing you own. Insull's real invention, the regulated utility, outlived him by a century. His financial engineering did not outlast a single downturn.