The Story of Life Insurance/Chapter VI

In the early '80's the Tontine bubble burst. The first policies reached maturity; and the Equitable was called upon to make good its agents' promises. As all the authorities had anticipated and predicted, it paid the surviving members only small proportions at its estimates. Its failure, indeed, was even greater than general expectation; and unexplainable on the grounds apologetically put forth.

From that time the Equitable has been called upon annually to redeem its pledges and has invariably failed, A few quotations from its own official publications sufficiently illustrate its deficiencies. In 1871, for example the Equitable issued to one "J. B.," aged forty-three, a $10,000 policy maturing in 1886. The agent estimated that Mr. "J. B." would obtain, at the end of his Tontine period, cash "profits" of $5,328. In fact, the Equitable paid him $2,931. In the same year it issued a $25,000 policy to one "J. S. T.," also maturing in fifteen years. The agent estimated cash profits of $12,142.50. The Equitable paid $6693.50. Thousands of similar instances could be specified. In general, the Equitable has seldom paid more than sixty per cent, of the estimated profits. It has averaged in the neighborhood of fifty; and frequently has ultimately paid only forty and thirty. The other New York companies have made records similarly bad. The Northwestern Mutual, although it also has failed to realize its anticipations, has made a much better showing. The Northwestern, on the whole, has played he game fairly and honestly. Its managers have run the company, not for their own advantage, but for that of their policy-holders. They have held themselves to a strict accountability. While the New York companies have gone to extremes to avoid accounting, and have paid at the conclusion of the Tontine periods whatever winnings they chose, the Northwestern has willingly rendered precise statements to every policy-holder every year. Dishonesty, under these conditions, was practically impossible.

Statistics give no adequate idea of the suffering these Tontine settlements involved. Hyde's comparatively small dividends were realized by forfeiting the policies of unnumbered smaller and more unfortunate members. Mr. "J. S. T.," whose record is quoted above, represented a class especially attracted by the Tontine scheme. He was evidently a man of large means. The New York companies have always preached Tontine, on the ground that many men were thus persuaded to insure who ordinarily would not have taken out policies at all. Such men, that is, entered the company, not for the insurance, but for the "investment." In other words, men of wealth have taken Tontine policies in order to get the profits made by closing out those less affluent than themselves. In 1878 Elizur Wright declared that, up to date, 100,000 policy-holders in the Equitable and New York Life, who had dropped their policies, "found themselves in no better position than if the companies had failed." In 1885 John K. Tarbox, insurance commissioner of Massachusetts, declared that forfeitures already set apart and divided under the Tontine system, "would have provided for dependent family support to the amount of tens of millions of dollars." In the main, lapsing members were those overtaken by misfortune. Others ceased through carelessness, misunderstandings concerning the days of payment or days of grace allowed; or temporary illness. Others had taken Tontines with inadequate notions of what they were, and then afterwards abandoned them in disgust. Many, in the hope of inordinate gain, had taken much larger policies than their circumstances justified; and after paying several large premiums, dropped out. All, of course, had absolutely no redress.

However, the lot of the survivors was almost as unfortunate. The great majority had accepted the agents' estimates as absolute guarantees. Thousands had adopted this method of providing for old age. Inevitably, when they found themselves so badly deceived, they sought redress. They bombarded the Equitable and the New York Life with protests; and personally stormed the offices. They obtained little satisfaction. Hyde, Beers, and the rest repudiated all the agents' promises; and triumphantly pointed out that the estimates had never been incorporated in the policy. Again, they called attention to the clause that virtually forced the acceptance of any apportionment made. For the next twenty years the policy-holders sought satisfaction in several ways. Through legislative investigations they tried to penetrate the Tontine secret. In 1885 the Ohio legislature authorized a committee to investigate Tontine. The New York Companies forced upon it, as consulting actuary, Mr. Sheppard Homans, the man who, above all others, devised the Tontine system and compiled the Tontine estimates. Homans led the committee by the nose. He held many of the sessions at his own office; and examined practically all the witnesses himself. The proceedings developed into merely a congress of presidents and actuaries, who, day after day, loudly sang hosannahs to Tontine. In New York, public sentiment, largely aroused by Jacob L. Greene's attacks, forced the appointment of a Tontine committee. The legislature limited the sessions practically to four days, and refused to authorize the employment of counsel. The first session, held at the Fifth Avenue Hotel, developed into a farce. William B. Hornblower, as counsel for the New York Life, and Charles C. Beaman, as counsel for the Equitable, consumed most of the time by asking meaningless questions; Chauncey M. Depew dropped in and told a few humorous stories. The committee subpoenaed Henry B. Hyde, but he had mysteriously left town. James W. Alexander appeared as the leading witness. The committee demanded certain important Equitable books; but Mr. Alexander gently postponed their presentation. It asked for the Equitable's salary list; and that Mr. Alexander also diplomatically withheld. He did, however, reveal several interesting facts. He declared that the Equitable directors had never authorized the Tontine policy; at least, that no record of such authorization existed. He added that the idea that Tontines were kept in classes was a "popular delusion." For years the Equitable, in numberless official documents, had maintained that such classes existed; and Henry B. Hyde, under oath on the witness-stand in 1877, had repeated the statement. The committee asked Mr. Alexander how the Tontine results were arrived at. "It is something of a puzzle," he replied, "to know just how the adjustment is reached." The four days having expired, the committee returned to Albany and asked for an extension of time. Senator James Husted, for years the leader of the insurance lobby, now took charge and prevented this extension. The legislature even attempted to shut off an official report. In 1887 Theodore M. Banta, the present cashier of the New York Life, informed his board that its share of the expense incurred in quieting this investigation was $7,500.


 * 1 Results of Tontine policies maturing in 1886. Page 11. Equitable Official Document.


 * 2 Ibid. Page 10.

"Red Ink" Tontines
All attempts to kill Tontine by legislation, the New York companies successfully opposed. If a law actually got upon the statute books, they usually discovered some way of nullifying it. Only one thing could kill the Tontine scheme: a law which, like that of Massachusetts, prohibited the forfeiture of policies. All through the '70's insurance reformers sought to imitate, in New York State, this Massachusetts legislation. In the year 1879, public sentiment proved too strong and actually forced a surrender value law through the legislature. This guaranteed lapsing policy-holders the value of at least two-thirds the reserve, either in temporary or paid-up insurance. In that form it would have ended the Tontine policy; Hyde and his associates, therefore, appended an amendment which authorized policies with no surrender values, provided they contained on the margin a notice printed in red ink that all rights to such surrender values had been waived. Recent legislation on patent medicines permits their sale provided the ingredients are duly labeled on the bottle. Likewise, the legislature now authorized Tontine, provided the prescriptions were printed on the margin. The New York Life circumvented this red-ink clause in characteristic fashion. President Beers issued a policy in which not only the waiver clause, but numerous other sections, were printed in red ink. By spattering red ink all over the policy, the New York Life diverted attention from the damaging clause the law required.

Hyde Secures Immunity from Law Suits
The policy-holders, failing to obtain satisfaction in the legislature or through investigating committees, now appealed to the courts. An avalanche of lawsuits started against the Equitable and the New York Life. Policy-holders alleged fraud, misrepresentation, and failure to keep proper accountings or regular Tontine classes. At times the companies quieted prospective litigants, especially if they were influential citizens, by increasing the Tontine payments. In some instances they even silenced popular clamor by settling Tontine policies before the periods had expired. In 1887, for example, the New York Life purchased a $100,000 policy on the life of John V. Farwell, of Chicago, for $40,000. Mr. Farwell had asserted that he had been swindled by the New York Life agent, the notorious "Sam" Dinkelspiel, and had threatened suit. Such purchases were a fraud on the other policy-holders, as, according to the scheme, they were themselves entitled to the profits obtained from surrendered policies. Smaller holders did not receive such considerate treatment, and consequently many suits reached trial. The point especially aimed at was to gain access to the books; to ascertain the regularity with which they had been kept, the honesty with which the money received had been invested and disbursed. The policy-holders desired to learn the actual reasons for their small returns: whether they were explained by natural causes or extravagance and dishonesty in management. Naturally, the hostility manifested toward all investigations, legislative or judicial, impelled the desire for detailed information. The policy-holders therefore asserted that the companies were great holders of trust funds; that they had so completely failed to maintain their promises that general suspicion of improper methods existed; and that individual accounting to policy-holders must be made. The Equitable now repudiated the contention that it held policy-holders' premiums as a trustee. It interposed a demurrer in the case of Bewley against Equitable on these grounds: "The plaintiffs, as policy-holders, have no rights which entitle them to bring this action. The policy-holder is not cestui que trust. And neither the directors nor the company are trustees. The policy-holder is not a partner. He is not a creditor. He is not a member of the company. The fund produced by the payment of all the premiums does not in any sense belong to the policy-holders, but belongs exclusively to the company."

The courts generally have sustained this view. They have decided several times that the policy-holders' rights are purely contractual; and that such apportionment as the companies make must be accepted. Occasionally, however, a phrase in a decision aroused apprehension. Once or twice the Court of Appeals hinted that, in certain contingencies, an actual accounting might be obtained. Justice Peckham, in Frederick Ulman against the New York Life Insurance Company, interjected a paragraph that caused general consternation in New York. Justice Peckham called attention to the fact that the policy contract called for an "equitable apportionment" of profits. Unless proof to the contrary were submitted, the presumption that an "equitable apportionment" had been made stood in the company's favor. But, intimated Justice Peckham, should the policy-holders furnish proofs that an inequitable apportionment had been made or that such apportionment had been based upon "erroneous principles," then the court might with propriety open the whole case. Hyde and his associates promptly met this decision by practically shutting off their policy-holders from access to the courts. They secured the passage of the law which virtually prevented insurance companies from being sued. Under this law all suits for an accounting must be brought, not by the policy-holder himself, but by the Attorney-General. Probably New York State never enacted a more infamous statute than this; whether it is constitutional, has never been judicially determined. It practically gave the insurance companies a license to loot the policy-holders at will.

"Deferred Dividend," or Semi-Tontine, Succeeds the Tontine Policy
Thus Hyde and his associates completed the several links in a conspiracy that kept their policy-holders from justice. In spite of this they had to abandon the Tontine game. The public, after nearly twenty years' trial, finally grasped its meaning, and refused to purchase full Tontine policies. Hyde at once invented another new policy, similar to the old, but somewhat modified. About 1883 he announced another "great discovery"—his "semi-Tontine." In 1885 this became the "non-forfeiting" Tontine; in 1886 the "Free Tontine." This policy was practically identical with that now known as the "deferred dividend." It differed from the original Tontine in that it gave a surrender value on lapses. If you lapsed now, you did get a paid-up policy; you simply forfeited your "dividends," In the event of death before the Tontine period expired, you also forfeited all dividends. Unquestionably, the deferred dividend or semi-Tontine was a reform on the old idea, though in principle equally obnoxious. Hyde used the same methods of solicitation. His agents still canvassed by promising immense returns at the conclusion of the deferred dividend period. Hyde based his new estimates, however, upon "actual results." He took the "dividends" paid on full Tontines as estimates of probable payments upon semi-Tontines. If further evidence is required of the bad faith of all these estlmates, this circumstance furnishes it. The "results" on full Tontines were made up largely out of lapsed policies; this great source of profit, as already said, did not exist in the case of the deferred dividend. How, then, could the results of semi-Tontines be expected to equal those on full Tontines? Of course, they never have. Deferred dividend policy-holders have been just as badly misled, just as keenly disappointed, as the holders of the old Tontines.

Money Wasted by Extravagance and Dishonesty
Why have all the Tontine companies failed so miserably to realize their early promises? It must be granted that from the first the complete fulfilment was impossible. When pressed, the New York companies have explained their failure chiefly on two grounds: the fall in the interest rate, thus reducing expected profits from investments; and the realization of fewer lapses than anticipated. Unquestionably, the interest rate has fallen in thirty years; but the mathematicians have demonstrated that this accounts only to a small degree for the Tontine deficits. Just how far the failure to realize innumerable lapses explains the falling off we shall never know. Hyde always kept these facts carefully concealed. The lapse rate under Tontine, as already shown, was enormous. A third factor, which the New York companies have never brought forth, better explains these small "dividends" than a decreased interest rate and unrealized lapses. That is an increase in expenses. On this point we have illuminating data. The Equitable's expense rate steadily advanced under Tontine. In 1871, when the first Tontine Savings Fund policy was issued, the Equitable spent seventeen cents out of every dollar paid in as premiums, in expenses. In 1890, the year before the first twenty-year Tontine became due, it spent twenty-five.

An especially valuable authority on the subject is Mr. Theodore M. Banta, the present cashier of the New York Life. Mr. Banta has held influential office in this company for nearly fifty years. He has witnessed the rise and the decline of the Tontine and the semi-Tontine scheme. In 1887 he presented a series of grave charges against the New York Life management. One of his severest counts was the Tontine system. He asserted that the management had become so extravagant that, had it not been for the increase in the market value of certain securities, the New York Life, at that moment, would have been insolvent. Referring to the "estimated results" made by certain experts, Mr. Banta declared that "the experts in question probably did not foresee that so large a share of the policy-holders' money would be squandered by extravagant business methods."

The Tontine and deferred dividend funds have been preyed upon and wasted chiefly in two ways. Inside rings have personally profited from them; and greater sums have been wasted in the mad race for new business.

To make the whole process understandable we must revert once more to fundamental principles. Dividends or annual savings arise primarily from two sources. The company realizes fewer death losses than those upon which it has based its premium prices; and a higher interest rate on its investments than it had assumed. The third element of possible savings is upon the loadings. These are the amounts added arbitrarily to the premiums to cover the cost of management. Obviously, the best managed companies are those that save the most from their loadings, get the largest returns from their investments consistent with safety, and so select their risks that they have the largest saving from mortality. In the main, the big New York companies have selected their insurance risks with care. Concerning certain branches of the New York Life's medical department—its South American and far eastern business, and its sub-standard risks—there may be considerable doubt; but all three do show a fair, though not remarkable, profit from mortality. The waste and dishonesty have affected chiefly those parts of the premiums which are supposed to provide for expenses and to be laid aside for investment.

Enormous Salaries Given Relatives and Favorites
Life-insurance expenses consist mainly of agency expenditures, administrative salaries, advertising, legal outlays, and taxes. Agency disbursements will be described in detail in the next chapter. Upon the salary list, millions which, under honest conditions, would have been returned to policy-holders as dividends, have been disbursed. This abuse dates back many years. Henry B. Hyde, from the very first, exacted heavy tribute. In the old times the officers regularly abstracted certain sums as secret "bonuses"; in three years the Mutual Life, as has been shown, thus appropriated $189,000, and charged it on the books as dividends paid to policy-holders. The New York Life, up to fifteen years ago, tolerated the same practice. William H. Beers, at the time he was deposed, drew $75,000 a year salary; and a bonus of $25,000. The New York companies have also multiplied offices in the most reckless fashion. The Equitable, in addition to a $100,000 president, had a $100,000 vice-president; three vice-presidents whose salaries ranged from $30,000 to $60,000 each; and secretaries, assistant secretaries, controllers, treasurers, and auditors almost without number. The New York Life had a $100,000 president; four vice-presidents receiving anywhere from $20,000 to $40,000; three second vice-presidents, each receiving from $18,000 to $30,000; and the usual assortment of secretaries, treasurers, controllers, auditors, and the rest. In many cases the directors multiplied these highly paid positions in order to find soft places for relatives and other hangers-on. John A. McCall makes his son, recently graduated from Harvard, secretary of the New York Life at $15,000 per annum; his son-in-law, vice-president at $35,000; another son-in-law, inspector of agencies at $15,000; a brother-in-law, auditor of the Paris office at $7,500; a "boyhood friend," Andrew Hamilton, lobby generalissimo at heaven only knows what compeneation. These large salaries explain to a greater degree than is commonly supposed the falling off in policy-holders' dividends. The Mutual paid in salaries to its home office more than $1,000,000 a year: nearly half what its policy-holders received in dividends.

All these officers have shown the itching palm even in ludicrous details. They have taken everything that came their way, no matter how small. They have scrambled for elections to sub-committees, and to the boards and committees of subsidiary institutions, partly for the sake of directors' fees. They have frequently quieted protesting trustees by elections to committees, especially in the allied trust companies, where fees were large and frequent. Each attendant gets ten or twenty dollars; it was commonly remarked that, unless these dignified financiers were watched closely, they abstracted more than one gold eagle from the plate. On one historic occasion an especially grasping trustee was actually forced to disgorge an extra gold piece to which he had no legal claim. Almost invariably committeemen divided among those present the fees of the absentees. A year or so ago a high financial officer of the Mutual Life attended a committee meeting of a subsidiary trust company. It was purely technical; he was the only member present. He pocketed the whole $140 fees usually allotted to a full attendance. William H, Beers, while president of the New York Life, suddenly recalled one day that, by a strange oversight, he had not drawn any director's fees for the past twenty years. He at once had the cashier draw him a check for $2,500 to square up the account. In 1904 the Equitable spent $44,000 in directors' fees. William H. McIntyre, in addition to a salary of $30,000, made $8,640 annually in director's fees in the Equitable and its allied companies.


 * 3 It is fair to add that the Mutual, since these disclosures, reduced its salary list by at least $330,000 a year.

Millions Spent in Corrupting the Legislature and the Press
Under the head of legal expenses and advertising, the companies have concealed enormous amounts spent in corrupting legislatures and the press. The trustees have thus purchased immunity for their own dishonesty and delinquencies, and continued themselves in power. Innocent persons never bribe and seldom pay blackmail; but the managements of the New York companies have done both for thirty-five years. In 1872, for example, they collected $20,000 for legislative purposes; and the particular favor sought in this instance is a fair indication of the motives that have usually prompted such contributions. They sought the passage of a law which, in effect, would have crushed their smaller rivals and given them a monopoly. They have constantly used the official machinery of the state against the interests of their policy-holders. They have fought all liberalizing reforms. In the '70's they opposed, year after year, bills providing surrender values on lapsed policies. They have stood against all legislative attempts to prevent cheating by agents. They have opposed legislative attacks on the Tontine and deferred dividend systems. Their interests have become so diversified that they have manifested interest in numerous questions not immediately connected with insurance. They have kept watch of all legislation affecting banks, trust companies, safe deposit companies, railroads, and numerous other corporations. They have uniformly used their influence in such cases against the public good and in favor of privileged interests. They have amended the investment law twenty times in thirty years, not for the sake of protecting their policy-holders, but to permit investments along lines that guaranteed private profit to themselves. Above all, the insurance companies must control the legislature to prevent exposure. For thirty-five years have they stood on the brink of the debacle that has now arrived. In 1870 the insurance department investigated the Mutual. The Mutual, however, succeeded in stopping proceedings just as they became interesting; and in suppressing the official records. In 1877 the Insurance Committee of the Senate took several hundred pages of testimony; but just as the relation between the Equitable and certain companies wrecked during the '70's was about to be unfolded, it suddenly adjourned and submitted no official report. Expenditures for these purposes, all at the cost of the policy-holders, date back many years. Henry B. Hyde, fifteen years before he died, began contributing to state campaign funds. Since 1896, the three big companies have given sums ranging from $25,000 to $50,000 to the Republican National Committee. Hyde originated his famous "yellow dog" fund largely for legislative purposes. Mr. Hughes demonstrated that an alliance existed between the Equitable, the Mutual, and the New York Life for waging legislative warfare; that, however, is an old story. For many years Charlton T. Lewis managed the legislative campaign in their interest, Mr. Lewis was one of the most brilliant men of his time. He figured as a reformer in many lines; and was a classical scholar of recognized attainments. For nearly forty years, however, he used his splendid abilities in defending, in legislatures and out, the New York insurance companies.

The combination have paid the campaign expenses of senators and assemblymen in New York and other states; and have always controlled the insurance committees and dictated the appointment of insurance commissioners. Two insurance superintendents in New York State have been ejected from office for accepting their bribes. At the same time they have paid enormous sums in blackmail. They have patronized largely the twenty or thirty insurance papers that exist almost exclusively by so-called insurance "advertising." This, too, is an ancient abuse; we have already shown how the Mutual, in 1878, after imprisoning Stephen English, editor of the Insurance Times, for six months, finally bought him off for $35,000. Mr. Hughes recently revealed the fact that one Joe Howard, Jr., had drawn for several years $2,500 from both the Mutual and the Equitable. By referring again to the trustees' investigation of the New York Life in 1887, we learn the antiquity of this custom and also get a capital insight into the nature of Howard's services. On the subject of "blackmail," Vice-President Archibald H. Welch testified as follows:
 * One day (in 1884), Howard sent in his card to me and presented a letter from President McCurdy of the Mutual Life. The letter was to this purport: "Mr. Howard has shown me some articles which have been brought to his notice. I feel it is a matter of interest to you, and therefore give this letter with suggestion that you give him careful attention." Howard opened up a large package of manuscript made up largely of severe attacks upon this company somewhat after the manner of those which had been largely published in some insurance journals. Some things which he had had not been published. He also had some matters which are contained in this charge. Insurance journals are read exclusively by insurance men. Howard stated that the documents were to he published in a leading New York paper and other papers. If those articles had been published, it would reach a large volume of outsiders that no statement we could make would reach, and if it did reach them it would not destroy the bad effect of the attack. Howard stated that he was the correspondent of several New York, Boston, and Washington papers. We considered it to the interest of the company that these things should not spread. I recognized the fact that this company is doing business largely on public confidence. We have that confidence, and to destroy or alarm it would be very disastrous to the interests of the company. There was no question in my mind but what it was best to suppress this article. The method of suppressing it we had to discuss. It was finally arranged that Howard should receive a certain specified sum—$5,000.

We shall probably never know how much money has been spent in this fashion. That the New York Life has paid Andrew Hamilton $1,300,000 in the last ten years, for which he has rendered no accounting, has been proved; and unquestionably other disbursements have been so completely covered up that not a trace remains. The Mutual Life has wasted hundreds of thousands of dollars on its legislative agents which, in the official reports, have innocently figured as "stationery and supplies." To hide its tracks, it had forged the names of office boys, fixed up bogus vouchers, and paid bills to imaginary business houses created for this particular purpose. Its expenditures for advertising and supplies have aggregated, in one year, $1,134,000—half as much as it has paid in policy-holders' dividends; that item, it is known, contains money spent on legislatures, blackmail, and in other illicit ways. Already two former vice-presidents have been indicted for perjury and forgery in connection vith this account.


 * 4 As far back as September 18, 1878, Mr. Lewis wrote to the New York Life: "At a conference of the New York companies it was found that an addition to the subscription by the three largest companies of $900 by the New York Life and the Equitable (each) and $1,350 by the Mutual will enable us to pay C. M. Depew, Esq., ($5,000) in addition to the obligations we have already assumed." In 1882 the three companies, also on requisition of Mr. Lewis, paid C. M. Depew $5,000. In 1887, in connection with the repeal of a certain tax law, the New York Life paid Mr. Lewis $17,000 for "seven visits to Albany, $13,500, traveling expenses, $450, newspapers, $650, and three visits to Massachusetts, $2,500." Mr. Lewis received the money in bills. Mr. Theodore M. Banta put the above voucher before the trustees of the New York Life in 1887, when the following colloquy took place:
 * Q. Who is Lewis?


 * A. (Banta) A lawyer in the Equitable Building. At time, years ago, there was a chamber of Life-Insurance. It went out of existence. He was the controlling spirit in that. Me is the party who is employed to look after legislatures.


 * Mr. Banta said that $100,000 was paid in 1887 by the three companies to Davies, Cole, and Rapallo for services in connection with the repeal of chapter 534 of the laws of 1880; of which the New York Life paid $17,241. He submitted a large number of vouchers showing the legislative activities of the combination extending back twenty years. Thus, under date of May 5, 1885, the following was addressed to the New York Life by the Equitable:


 * "Please send check to order of Henry B. Hyde for $1,438.59—legal services and disbursements for company's account"; and, December 29, 1885: "Please draw checks to order of Thomas Jordan, Cashier (of Equitable), for $7,106.70 as below: Law expenses, $3,968, Advertising, $1,986.70, Miscellaneous, $1,152." In 1886, the New York Life paid the following voucher: "J. W. Alexander, of the Equitable, check 34,330 sent to him 'personally' and not officially, $7,402." Again the New York Life paid money to the Mutual, such vouchers as these being put in: "To H. J. Cullen, $7,500, May 28, 1884. Note: Legal services and expenditures. This was given to Major Ulrich of the Mutual Life after Cullen had endorsed it and cashier had certified the endorsement so that currency could he drawn."

Most Attractive Investments Neglected; Millions for Wall Street
Hyde and his competitors also anticipated great Tontine and deferred dividend profits from excess interest earnings. At present the New York companies base their premiums upon three and three and one-half per cent. That they must earn to maintain solvency; anything beyond is theoretically returned to the policy-holders. Thus they have an absolute standard of investment earnings; the unpardonable sin is the realization of less than three per cent. If they have securities yielding less than this minimum, they have a deficit in the reserves which must be made up from other sources—that is, the surplus. Because these companies have this great accumulation to fall back upon they have sunk millions in investments that do not realize the interest rate needed to maintain solvency. For at least twenty years the New York companies, to a great extent, have deliberately closed their eyes to the safest and most profitable investment opportunity—mortgage loans on New York real estate; and have placed their policy-holders' premiums in Wall Street securities which return relatively a much lower rate. Thirty-five years ago the Equitable, the New York Life, and the Mutual invested more than sixty per cent of their funds in mortgage loans; now they have only about fifteen. The New York Life sins most grievously. It has total assets amounting to $390,000,000; and only $23,000,000, or less than six per cent, invested in first mortgages. Both the Mutual Benefit and the Northwestern, on the other hand, have more than fifty per cent of their assets thus put away. First mortgages are especially valuable assets for life-insurance companies. When made with honesty and judgment, they combine safety with liberal returns. Moreover, the insurance company, unlike the national bank, does not need "quick assets," It is not subject to "runs." Its contracts mature regularly; and it knows years in advance what its cash obligations will be. For five years preceding the present upheaval, the New York Life practically refused even to entertain applications for mortgage loans. Instead, it established a branch office in the heart of Wall Street; placed in charge Mr. George W. Perkins, a member of the firm of J. Pierpont Morgan & Company; and invested exclusively in stock-market securities.

These managements do not like mortgage loans, simply because they do not afford opportunities for personal advancement and reward. They cannot manipulate them; cannot buy and sell them at will; there is "nothing in it" for themselves. In saying this we need not necessarily imply that trustees directly profit by the sale and purchase of these securities—though that has happened. The impelling motive is more deep-seated. If they invest in realty loans, they remove themselves from associations with the great men of the time. They do not associate with great bankers, railroad owners, captains of industry. They will not obtain appointments to the boards of great corporations; have their names put down for syndicate participations; be taken in, when great enterprises are floated, on the ground floor, nor obtain tips on the stock market. For example, Mr. James H. Hyde held directorship in some fifty corporations; largely traceable to investments held by the Equitable Life. He demanded, and obtained, election on the Pennsylvania board simply by virtue of the Equitable's large holdings in Pennsylvania stock. All investments are made by finance committees; the members of these finance committees invariably hold directorships in endless banks, trust companies, railroads, and miscellaneous corporations. They get these positions, and the enormous opportunities for personal profit furnished thereby, simply by virtue of the investments they make for their insurance companies. In other words, to advance themselves, they sacrifice millions in interest earnings for their policy-holders. Of forty-five leading life-insurance companies, the Equitable Life has realized the smallest investment returns. Close competitors for this position are the Mutual and the New York Life.

Dividends Eaten Up by Depreciating Office Buildings
Instead of buying first mortgage liens, the New York companies have preferred investments directly in fee property. They have had a mania for enormous office buildings. Three together, in the last thirty-five years, have put not less than $100,000,000 into property of this kind. Henry B. Hyde originated this reform. He erected the first Equitable building largely for the purpose of display, as an outward manifestation of the Society's greatness and stability. He believed that the average American would rather insure in a company dwelling in a splendid monument of this sort than in one with unpretentious headquarters. As soon as he had finished the first Equitable building, he therefore put up a counterpart in Boston. Others followed in Philadelphia, Chicago, and other large cities of the West. He also erected monuments to the Equitable in Paris, Berlin, Madrid, Vienna, Melbourne, Sydney, and other foreign places. The New York Life and the Mutual have followed his example. The New York Life has buildings in Belgrade, Budapest, and Amsterdam; the Mutual has one at Cape Town.

On these buildings the policy-holders have lost in a variety of ways. In the first place the buildings have, as a rule, tremendously depreciated in value. The total cost of the present Equitable building in New York was $18,000,000. Its present value, on the Equitable's own estimate, is not more than $15,000,000. Only the phenomenal growth in Broadway land values has saved the policy-holders from a much greater loss. The New York Life's Broadway building cost $7,121,000; the company now claims a valuation of only $5,000,000. The Mutual's main office building in New York cost $17,277,000; the Mutual has written off more than $6,000,000 in the last seven years. Many of the foreign buildings show similar depreciations. The Equitable's Melbourne "advertisement" cost $2,864,000; the Society at present gives it a value of only $2,000,000. The first New York Life building in Paris cost $l,102,000; in 1891 the French government valued it at $470,000. The present Paris building cost $2,500,000; the company now gives it a value of $1,300,000. The Equitable has invested $37,884,000 in its fifteen office buildings; the insurance department, in order to give them an earning power of three per cent, has placed the value at $26,000,000—a loss of $11,500,000. Should the properties actually be sold, the depreciation would probably be even larger.

But the policy-holders have lost not only in capital value. For years many of these buildings have earned much less than the interest rate upon which the companies have based their premiums. In 1887, Theodore M. Banta declared that the New York Life's Broadway building did not earn enough to pay taxes and the cost of keeping it clean. One of the most serious charges brought against President Beers was the loss on this structure. John A, McCall had hardly taken office, however, when he started a building several times larger than the old one. On this the New York Life realizes about two and one-half per cent. Its Minneapolis building pays two and one-half; those at Montreal and St. Paul only about one. The Equitable, after reducing its building valuations from $37,000,000 to $31,000,000, was still unable to earn, on the majority, the interest rate on which it had based its premiums. On nine of them it earns anywhere from 1.56 to 2.98 per cent. Let us trace the history of one of these structures, showing precisely how the policy-holders have suffered. The Equitable erected the Boston building in the '70's at a cost of $2,342,979.73. It then calculated its premiums at four per cent. That is, the income from this structure should be some $93,700. In fact it earns only about $23,300. Here is an actual loss of $71,400 on this one piece of real estate, an amount which must be obtained elsewhere to make solvent that particular asset. It comes out of the surplus—upon the money that is laid aside for "dividend" purposes. Properly invested, that $2,342,000 should yield more than four per cent, and thus contribute some surplus itself. But, far from increasing policy-holders' dividends, it decreases them. In fact, these office buildings have constantly prevented policy-holders from receiving the benefit of other investments more advantageously made. The Mutual Life, and to a less extent, the New York Life, have frequently realized good profits from the sale of general securities. Such profits, which otherwise would have been returned as "dividends," have been used instead to wipe out losses on real estate. From 1895 to 1905, for example, the Mutual sold securities for $12,786,000 more than it paid for them. That handsome profit ought to have benefited the policy-holders. But $9,000,000 was used to reduce valuations on real estate, and thus bring it to a better percentage showing.

Why the Office Buildings Have Not Paid
The policy-holders have not realized profits upon these buildings largely because they have been managed dishonestly. Henry B. Hyde first showed how to use them for private profit; and his competitors have proved apt pupils. He charged the Equitable Society itself an enormous rental for space occupied in its own building; but foisted upon it, at absurdly low prices as tenants, favored persons and corporations in which he had a personal interest. In the early '70's he founded the Mercantile Safe Deposit Company, owning the majority of the stock himself. The Equitable Society obligingly fitted up special quarters for this in its own building, and installed an expensive plant of safe deposit boxes and vaults. The Equitable, for the last fifteen years, has received net rentals for this establishment amounting to $230 per annum—not enough to pay for maintenance, light, heat, and janitor services. The Hyde family and their associates, however, have received in the neighborhood of $87,000 a year. The Equitable Society, that is, furnishes the entire plant, rent, and largely the maintenance; the Hyde interests take all the profit. This arrangement continues until the year 2001, when the lease, with its renewals, expires. Hyde himself also rented, on similar terms, choice quarters in the Boston building for safe deposit purposes. In this case the Equitable has not only obtained no rent, but has expended thousands of dollars for the benefit of the Safe Deposit Company. The Hyde family and their associates, however, net some $36,000 a year. This arrangement will expire about two centuries hence. Hyde also rented himself spacious quarters in the Equitable's St. Louis building—again for safe deposit purposes—paying, therefore, $100 per annum. Henry G. Marquand, famous as a patron of art and a donor of private chapels to theological seminaries, was Hyde's most conspicuous partner in this Missouri enterprise. For years, the directors and many officers of the Equitable knew nothing of these leases. They were not kept among the Equitable's official papers. Superintendent Hendricks finally discovered them in the personal possession of William H. Mclntyre, for years Henry B. Hyde's confidential man.

About 1885, the New York Life followed in Hyde's footsteps. It leased the basement in its Broadway building to the Manhattan Safe Deposit Company for $12,000 a year; although a well-known dry-goods firm had offered it $22,000 for the same quarters. The Manhattan Safe Deposit Company consisted of the New York Life and its high officers and trustees. But this business did not go well; the Manhattan Safe Deposit Company got deeply into debt. When failure became inevitable, the New York Life purchased, at par, the stock with which its own trustees found themselves encumbered. The policy-holders, that is, kindly relieved their own trustees of a very bad investment. In the Mutual Life Building there are also safe deposit companies, in which Mutual directors hold office and stock; but full details concerning these have not yet been obtained.

Fifty Trust Companies and Banks Feeding on the Policy-holders
Henry B. Hyde also originated the subsidiary trust company. Back in 1870 he organized the Mercantile Trust Company, and installed it in the Equitable Building. Later, he added to the Equitable the American Deposit & Loan Company, the Western National Bank, and large interests in some fifty other financial institutions. In 1888 the New York Life organized, for similar purposes, the New York Security & Trust Company; in 1892 the Mutual started the United States Mortgage & Trust Company. Together, the three now own largely in nearly fifteen allied financial institutions. They have kept on deposit in them not far from $75,000,000, always at low interest rates, usually two per cent. We need only recall again the fundamental investment conditions under which life companies operate to detect the fraud. The New York companies must earn at least three per cent to maintain solvency; under present investment conditions they can readily get four and one-half; and yet they have placed in these allied institutions nearly $75,000,000 at about two per cent. The policy-holders annually lose nearly $2,000,000 in this way. For these balances there is no legitimate justification. Insurance companies need not carry large bank balances in order to provide against heavy and unexpected calls. The Equitable has a regular weekly cash income of $1,500,000; its weekly expenditures are less than $1,000,000. Neither do they need large balances as a basis for loans and other banking accommodations; they themselves have more available cash than they can use, and should look for opportunities to lend, not borrow. Better managed life companies do not carry such great balances. The Northwestern Mutual, for example, has had for several years, less than two per cent of its assets in bank; whereas the Equitable has had more than nine. But in all cases the New York companies are large holders of stock in the favored depositories. Invariably, prominent trustees, usually members of the finance committees, personally hold stock, and, as trustees of the subsidiary concerns, practically direct their affairs. In many cases they left this money with the distinct promise that they would not draw against it. In 1903, for example, President Alexander, in a letter to vice-President Hyde, described the Equitable as "strapped for money by engagements already made," and declared that he was straining every nerve to raise $1,000,000 by a specified date. At that time the Equitable had bank balances of $37,000,000, nominally subject to check. The New York Life for several years carried anywhere from $3,000,000 to $13,000,000 with the New York Security & Trust Company, in which the company and nearly all the leading trustees held stock. The Mutual Life left for years flat sums ranging from $250,000 to $8,500,000 with from fifteen to twenty banks and trust companies, in practically all of which the company and the directors personally owned shares.

In other words, the New York companies have furnished working capital, at low rates of interest, to some fifty allied institutions. These institutions lend this money out at a profit; and use it in other money-making ways. New York Life officers admitted that they left from $3,000,000 to $13,000,000 with the New York Security & Trust Company, that it might have an available capital upon which it could rely in making loans. Whenever the trust company had a good opportunity to make large loans, the New York Life increased its deposit for that particular purpose. In return, the trust company paid the New York Life one half of one per cent less than it obtained itself; in other words, it made one half of one per cent out of millions that belonged to the policy-holders. Mr. McCurdy, Mr. Hyde, and Mr. McCall attempted to justify this practice on the ground that their insurance companies, as large stock-holders themselves in the trust companies, obtained profits in the shape of dividends, and also in the increase in the value of their stock. Both these arguments are inadmissible. Every investment must stand on its own merits; large profits on trust company's stocks do not justify large losses on trust company deposits. Moreover, even allowing for the dividends received, the companies have not found their trust company affiliations profitable. The Mutual's net return, after deducting its loss on deposits from its profits as dividends, is little more than three per cent; the Equitable's, little more than one. Again, the increase in the value of the stocks cannot be admitted as an asset. The quotations of the trust company stocks depend largely upon insurance affiliations and deposits; withdraw these, and the value is problematical.


 * 5 Since the recent disclosures the New York companies have materially reduced these bank balances.

Policy-holders' Profits Transferred to Allied Trust Companies
In other ways the trust companies prey on the policy-holders. The Mutual Life, for example, purchases the debentures of the United Sates Mortgage & Trust Company. This latter corporation invests largely in western mortgages. It obtains from four, four and one-half to five per cent; and sells these—or debenture certificates based upon them—to the Mutual Life at four. In other words, it takes the policy-holders' money, invests it at four and one-half per cent, and pays the policy-holders four—thus making from one-half to one and one-half per cent itself. The Mutual Life could make all these loans directly; The Northwestern Mutual and the Union Central hold similar securities in large amounts, but do it without such expensive intermediaries. The Mutual has invested $6,000,000 in this way. Both the Mutual and the Equitable buy mortgages on similar terms from the Title Guarantee & Trust Company, of New York, and the Lawyers' Mortgage Company. Notwithstanding the fact that they have their own machinery for lending on New York City real estate, they prefer to give the profit to companies in which Hyde, McCurdy, et al. have pecuniary interests. The Equitable, in other ingenious ways fleeced its policy-holders through the trust companies. In 1905, for example, it had advanced not far from $7,000,000 to its agents against future commissions. Since 1894, the insurance departments have refused to admit these as valid assets. The ingenious Henry B. Hyde then adopted the plan of assigning these loans to the Commercial Trust Company, of Philadelphia, Virtually—though this was not the precise form of the transaction—he deposited the money in the trust company at three per cent interest. The trust company lent it to his agents at five. That is, its stock-holders make a two per cent profit on this large sum.

Insurance Companies Benevolent "Grandmothers"
Life-insurance trustees have also diverted to their trust companies profits that belonged to policy-holders. They have used the latter's credit in underwriting syndicates, and then given part of the profits to these allied institutions. Trustees have obtained favors in the shape of loans. They have borrowed large sums in the names of their stenographers, frequently on insufficient collateral; and have let the loans run for years, sometimes not even paying interest promptly. Through the trust companies they have used the policy-holders' money in speculative enterprises. If the thing went well, the trust company kept the profits; if ill, it was sometimes turned over to the parent insurance company. Indeed, the officers of the United States Mortgage & Trust Company commonly referred to Mutual Life as their "grandmother." If a speculative enterprise turned out badly, the "old lady" sometimes relieved them of it. In 1899, for example, the United States Mortgage & Trust Company reorganized the Washington Traction & Electric Company. The public refused to invest, and the trust company found itself inconveniently loaded up with $1,000,000 unsalable bonds. The "old lady" obligingly purchased these, although it already had $2,000,000 which it had taken as the result of a syndicate participation. In 1894, Henry B. Hyde discovered that the Western National Bank, in which he and the Equitable owned stock, was practically insolvent. It had reached this condition by lending $600,000 on a wildcat land scheme in Kentucky. Mr. Hyde quietly transferred this collateral to the Mercantile Trust Company, paying the Western National Bank cash. Later, he spent through the trust company enormous sums in a useless attempt to make the collateral valuable. After his death, James W. Alexander had the whole obligation, amounting to $2,600,000, transferred to the policy-holders of the Equitable Society. The New York Security & Trust Company has also found a benevolent "grandmother" in the New York Life. It also reorganized a street electric system, this time in New Orleans. After the reorganization, the company went into a receiver's hands, and the New York Security & Trust Company had some $3,800,000 in unsalable securities. The New York Life kindly relieved it of the burden; and afterwards sold the bonds at a loss of $326,000 to the policy-holders.


 * 6 It is fair to add that the present management of the Equitable has repudiated this obligation.

Profits from Speculative Syndicates
Trustees have also plundered the policy-holders by the purchase and sale of securities and through engagements in speculative enterprises, such as syndicates and joint accounts.

In the Equitable the syndicate dates back many years. Records of eighteen exist in Henry B. Hyde's time. In its only legitimate form, the syndicate is a combination of investors, personal and corporate, for the actual purchase of securities. It is thus only another manifestation of the magnitude of modern business enterprise. A great railroad, for example, offers $50,000,000 in bonds in a single issue. Manifestly, few bankers are strong enough to assume such a large flotation without promises of support. The banking house therefore forms a syndicate among certain investors, each agreeing to take a certain proportion at a specified price. Among the largest investors are the three big New York insurance companies. If they actually take the bonds at the price at which they have subscribed, and place them away in their vaults for investment, the operation is entirely free from criticism. But that is precisely what they have not done. Indeed, according to modern Wall Street ethics, the purchase of syndicate securities at the original subscription price is regarded as distinctly bad form. The presidents and treasurers plaintively declared that had they thus mortally offended the bankers, they would have received no more participations. They are expected to buy these securities, not at the price at which they have subscribed, but at one higher.

The members of underwriting syndicates are not primarily customers. They are guarantors. They put down their names for certain allotments merely to assure the success of the flotation. The bankers pledge themselves to sell the securities, if possible, in the general market. Only in the event that it does not take them, do the syndicate members actually buy. Speyer & Company, for example, purchase from the Republic of Cuba $35,000,000's worth of bonds at eighty-nine. In order to safeguard themselves, Speyer & Company form a syndicate, the members of which agree to purchase at that price. With this assurance, Speyer & Company can continue the operation in complete safety to themselves, for they have an assured sale. However, they have no intention of selling directly to the syndicate members. They dispose of the whole allotment to the general public at prices varying from ninety-one to ninety-seven. The difference between the eighty-nine at which the syndicate subscribed and the price at which the general public purchases is profit. This, Speyer & Company divide among the members of the syndicate. It is their compensation for the guarantee. They have theoretically assumed a considerable risk; that is, had the public not taken the bonds, the syndicate would have had to, and realized a loss. This has actually happened. J. P. Morgan & Company, for example, three years ago formed an underwriting syndicate to guarantee $50,000,000 International Mercantile Marine bonds. The public did not buy; and many disgruntled participators, including the New York Life and the Mutual, have large blocks of these unsalable securities on hand. Essentially, in other words, syndicates are purely speculative.

Trustees of life-insurance companies, who have thus speculated, have enjoyed unusual advantages. Their syndicate speculations have usually turned out fortunately. That is because they have had at hand large purchasers of securities—i. e., their own life-insurance companies. Their syndicate gamblings have been most unsportsmanlike; for they have bet upon "sure things," The syndicate managers always expect that the companies will purchase largely in the market; and that is the reason they have let the insurance magnates in. They have always placed these opportunities for profit where they would do the most good. In the Equitable they have selected James H, Hyde, James W. Alexander, Chauncey M. Depew, William H. McIntyre, and other members of the finance committee; in the Mutual, Richard A, McCurdy, Robert A, Grannis, Frederic Cromwell, George G. Haven, A. D. Juillard, and others similarly high-placed. These gentlemen, as participators in syndicates, made profits contributed, to a considerable extent, by the purchases which they made for their own insurance companies. Take that very case of the Cuban bonds. They all subscribed at eighty-nine; but the Mutual Life purchased its bonds in the open market at ninety-two. The directors salved their consciences by admitting the Mutual Life itself into the syndicate as a participator in the profits. The Mutual, that is, usually played two rôles: as a member of the syndicate and as part of the "general public" which purchased the securities. The Equitable did not usually observe such niceties. Years ago, Henry B. Hyde formed his own syndicates; purchased securities at ground-floor prices, and sold them to the Equitable at generous profits. He called his syndicates "Louis Fitzgerald and Associates," and "George H. Squire and Associates." His son, following the parental example, named his "James H. Hyde and Associates." In some cases he gave the Equitable itself a share of the swag; more frequently he did not. In 1902 James H. Hyde formally notified Kuhn, Loeb & Company in future to put all participations usually assigned the Equitable, in his own name; his object in this was to get the profits himself instead of giving them to the policy-holders. Let us trace a few of these operations. On June 11, 1902, "James H. Hyde and Associates" subscribed to $1,000,000 Metropolitan Street Railway bonds at ninety-four; seven days later they sold the same to the Equitable at ninety-seven and one-half—pocketing profits of $30,000, without risking a dollar of their own. On October 28 they obtained $1,250,000 Oregon short line bonds at ninety-six: five days later they sold them to the Equitable at ninety-seven. Mr. Hyde and Mr. Alexander made $25,044 by this deal. Occasionally, syndicate managers required working capital, and then issued "calls" to the members. Frequently, they needed this only tempurarily, and returned it after concluding the transaction. In such eases the "old lady" supplied the cash. Thus, in 1901, J. P. Morgan & Company allotted the Equitable Society a $1,500,000 participation in Chicago, Burlington & Quincy bonds. The Equitable itself, however, got only $500,000; James H. Hyde, James W. Alexander, Louis Fitzgerald, Chauncey M. Depew, and other members of the finance committee took the lion's share themselves. When a "call" for cash was made, however, the Equitable paid not only its own proportion, but that of these philanthropic trustees. Later, the Equitable purchased all the bonds at a price much in excess of that paid by the syndicate. In this transaction, in which the Equitable had supplied all the cash, it realized in profits $7,729; and Messrs. Hyde, Alexander, Depew, and the rest, for which they had not risked a single dollar, some $28,000. The trustees exclaim that the policy-holders have lost nothing; that they have good bonds, usually worth more than they have paid for them. But they have lost. That their own trustees might profit, they have paid excessive prices for their investments. In some cases they have received bad securities: the old Henry B. Hyde, syndicates frequently forced undesirable bonds upon the Society.

Why the Mutual, the Equitable, and the New York Life make relatively the poorest showing on investments of some forty American life companies must now be sufficiently apparent. Why they have generally failed to make good their agents' "estimates" of profits is also partly explained. The greatest source of extravagance and waste, however—the millions spent in the solicitation of new business, the mania for size—still remains to be described.