Wednesday, June 13, 2012

The Benefits of Planned Panics---Straight From the Horse's Mouth

The First Fifty Years of the Equitable Life Assurance Society of the United States, 1909,
Several excerpts from this official corporate history of the Equitable Life Assurance Society, published in 1909 on the 50th anniversary of its founding, seem to make unintentional references to an interrelated secret history of the company at odds with the reverential self-identity they took pains to publicize.

Coincidences point to the Equitable's engaging in speculative real estate ventures beginning well before its official chartering by a special act of the New York State legislature in 1859, and continuing for over half a century, with a particular nadir being the redevelopment of its home office block at 120 Broadway in 1913, with a massive structure whose construction resulted in the enactment of New York City's first restrictive zoning laws limiting the height and scale of future structures. The near-constant building activity was of a type specifically prohibited in Equitable's charter as a life assurance company to engage in.

But moreover, these real estate ventures seem to have been conducted within a framework of market manipulations, financial "panics" provoked by economic "stringencies," and cyclical depressions occurring over the five decades, perhaps even including the planned assassinations of Presidents Lincoln, Garfield and McKinley for the stimulus effect anticipated on trading in securities. That the Equitable consistently came up a winner in these profitable games of real-world Monopoly and one-upmanship suggests the organization stood somewhere near the epicenter of long-range, foreknowledged human activity.

From: The First Fifty Years of the Equitable Life Assurance Society of the United States, 1859-1909, [June, 1909] Paul Morton, President,

CERTIFICATE FILED JULY 26, 1859, Whereupon the Society was "duly authorized to commence the business of insurance as provided in its Charter."
OFFICE OPENED JULY 28, 1859, On which day the first policy was issued.

[page 26] On the afternoon of the same day [July 26, 1859] the following notice appeared in the New York Evening Post:
"The Equitable Life Assurance Society of the United States has completed the preliminaries of its organization, and by announcement in to-day's paper informs the public of its readiness to commence underwriting.

"This company has been built upon a sure foundation, as indeed the names of its directors sufficiently indicate. The Office of the Company for the present is at 98 Broadway, but will soon be removed to the new building No. 92 Broadway."
[page 29] The great panic of 1857 was still fresh in the minds of business men.

[page 32] On December 1rst, [1859] the office of the Society was transferred to the new building, just completed, at 92 Broadway, where four rooms were occupied.

The first directors' meeting in the new office was held on January 11th, 1860. This was also the first "Annual Meeting," and the President, in his Report to the Board said:
"A contract was made for these apartments before the demolition of the building which occupied the site, at a rent far below what they would have commanded at any time since its completion. The lease was made with the estate of the late John Suydam for ten years at $2,500, and this lease will doubtless be considered by the Board as of greatly increasing value."
[Did they illegally enter into a lease in advance of their incorporation?]


The business of the society increased so rapidly that it outgrew its second office at No. 92 Broadway in a very few years. Additional space was obtained by leasing portions of Nos. 94 and 96 Broadway, but the new accommodation soon proved inadequate, and on December 16, 1865, when the Society was less than six years old, at a special meeting of the Board, a committee was appointed to consider the expediency of putting up a building. This committee recommended the immediate purchase of a site, and the erection of a building.

It was not until September 16th, 1867, however, that the purchase of all the land for the original Equitable Building was consummated.

At the Annual Meeting of the Board held on January 15th, 1868, authority was given for the construction of the building in accordance with the plans of Messrs. Gilman and Kendall, with George B. Post as consulting architect in matters of construction.

The original building, which occupied the southeast corner of Broadway and Cedar Street, was completed and thrown open on May 1st, 1870. From time to time thereafter it was enlarged, and the whole structure was completely remodeled and its height increased by several stories in 1887, under the direction of the distinguished architect George B. Post.
[Is the following the best image the best the building-proud corporation could come up with?]

The entire block is now owned by the Society, and is considered the most valuable plot of real estate, controlled by a single owner, in the City of New York.

Near the close of the year 1868 the Society announced a new policy. This policy was a "deferred-dividend" contract.

[page 49] The Equitable Building was erected long before modern steel construction had beeen introduced, and was conspicuous for its massive walls and broad foundations. Hence it served as an object lesson---the stability of the structure seeming to typify the future strength and magnitude of the Society.


In addition to the Equitable Building on Broadway the Society owns another building in New York, which is occupied by a large part of its working force, and is also used for filing cabinets, card-indexes and the storage of its books and vouchers. The Society also owns office buildings in Boston and St. Louis.*

[*The income from the latter investment becoming inadequate, the Society leased it to responsible parties for ninety-nine years, at a rental which will yield an income of $50,000 per annum----a satisfactory return. The lessees, moreover, have agreed to make improvements which will enhance the value of the property and the security of the transaction.]

[page 54] The year 1873 was marked by one of the severest financial panics ever experienced in this Country. It resulted from over-expansion, wasteful living, and an inflated currency. The failure of Jay Cooke, promoter of the Northern Pacific R.R. was followed by many disasters. The New York Stock Exchange was closed for ten days, and the whole country suffered. Severe depression resulted, and continued for several years. In 1881 the crops were poor, and in 1882 the crisis in France had a disturbing influence. The United States successfully resisted these adverse influences until 1884, when, as we shall see later on, the Society was called upon to weather a second financial tornado.

But to return to the Panic of 1873: There were many failures in quick succession among banks and business firms, and so widespread were the losses that confidence almost ceased to exist. Hardly any of the great financial institutions were thought to be certainly safe. But the strength of well-established and soundly conducted life insurance companies became clearly manifest. The strain upon other financial institutions brought into strong relief the special advantages enjoyed by life insurance companies during such periods of excitement and disaster. Not one of the well-established companies was even embarrassed. The market value of their assets declined, but as they were in receipt of cash incomes in excess of their disbursements it was not necessary for them to sacrifice any of their investments.

[page 85] A SECOND PANIC

The second severe panic encountered by the Society culminated during this anniversary year [1884]. It was precipitated by the failure of Grant and Ward, followed by that of A. S. Hatch, president of the Stock Exchange, and that of many other bankers and brokers. The Marine Bank and the Metropolitan Bank closed their doors, and many other financial institutions were ruined or seriously crippled. But, "It's an ill wind that blows nobody any good," and the Society made a number of good investments at very low figures, one of them of extraordinary value. This was the building owned and occupied by the Metropolitan bank, on the corner of Broadway and Pine Street adjoining the Equitable's property; for the intervening lots had been acquired, and the enlargement of the Equitable Building was already projected.*

[page 86] [*In this connection President Hyde made the following prediction: "The opportunity of purchasing the Metropolitan Bank Building at a reasonable price was one not to be lost; for such an opportunity only presented itself in consequence of an unexpected and unforeseen combination of circumstances . The wisdom and full importance of this action can only be thoroughly appreciated by looking into the future, and contemplating the further growth of the Society, and the continuing extension of its business."]
[So, when wide market forces had driven confidence to its lowest ebb, Hyde & Company were privately planning the erection of the most grandiose headquarters building ever built up until that time in Manhattan. Was it any coincidence that the Metropolitan was one two banks so weakened that it would fail? Covet not your neighbor's Broadway frontage for a Delmonico's, sayeth the Lord!]
During that trying period the Society met the difficulties that confronted it with the same efficiency that had characterized its management during the panic of 1873; and while market values were rapidly tumbling, the fact that the insurance offered by strong life insurance companies is always unshrinkable---worth at such times, as at all others, 100 cents on the dollar----was made clearly manifest.

The depression which followed the panic of 1884 reached its lowest point in 1886.

On May 1st, 1887, the Society took possession of the new rooms added to its offices in the enlarged building, which was completed during the following year.

[page 87] The Depression of 1890 and the Panic of 1893.

Another period of financial disturbance was encountered in 1890. The stringency in the money market became so alarming that the Government was forced to purchase bonds and to anticipate the payment of interest in order to furnish relief. Late in the year the report that a great English banking house was in financial difficulties created alarm on both sides of the Atlantic and resulted in serious financial disturbances and heavy business depression which lasted during the two following years and culminated in the memorable panic of 1893. During this panic the Reading Railroad was seriously embarrassed; the Cordage Trust collapsed; thirteen Stock Exchange houses failed, and there were fifteen thousand commercial failures.

[But hey---who's keeping score?]

[page 88] Times were hard, but nevertheless the Equitable continued to advance, showing a steady increase in business and financial strength. This is illustrated by the following extract
"The Society presents as the result of its transactions for 1893 advancement in every point affecting growth and material prosperity, and this during a period of commercial depression more severe than has been experienced within this generation----a period of such general stagnation of business and shrinkage in the valuations of all securities that only those pursuing the most conservative methods have passed through it unscathed."
As soon as the influence of the Panic of 1893 had worn off, a long period of financial prosperity ensued, and the Society's growth in magnitude and strength was continuous.

[page 92] President McKinley was shot on September 6th, 1901, while attending the World's Fair at Buffalo, and died eight days later. The tragedy caused profound agitation, and again a panic was feared,

[page 93] It so happened that at that time the management of great corporations of every kind had fallen under a torrent of criticism, and at length attention was turned to the great life insurance companies. This led to the appointment b the New York Legislature of an investigating committee composed of members of the Senate and Assembly. This committee was charged with the duty of examining the companies, studying life insurance methods, and offering amendments to the insurance laws of the State.

[page 94] If this committee had not been restricted to an examination of the insurance companies and their administration, it would have become apparent that the evils complained of were not peculiar to life insurance. On the contrary, it would have been seen that most of them had originated in financial and legislative circles , had extended to railroad corporations and industrial combinations, and had finally involved insurance companies. But as the committee was forced to abandon any line of investigation as soon as it passed outside the life insurance field, many of the facts developed were misinterpreted for a time by those who failed to look beneath the surface. Moreover, this misapprehension was intensified by sensational and extravagant articles published in certain of the newspapers. The effect was unfortunate; the policyholders of many strong companies became apprehensive, and great numbers who were timid or misinformed surrendered their policies ,to the injury of the companies and to their own serious detriment.

[page 104] Moreover, towards the close of the year, [1907] irregularities in the management of a group of banks, and great stringency in the money market, created widespread apprehension. Runs on prominent trust companies and banks followed; the Knickerbocker Trust Company was forced to close its doors temporarily, and a number of failures ensued.

[page 105] Those who had not seen the great panics of 1873 and 1893 called this the "Panic of 1907." And it really deserved the title, although the crisis that threatened was averted, and recovery was rapid. Nevertheless, values were seriously affected, and it became almost impossible to borrow money on the best securities, even at exorbitant rates of interest.

Again the Society did public service, ,furnishing financial relief to thousands of people throughout the country by making loans to a large number of its policyholders at 5 per cent. interest, on the sole security of their policies.

Over $9,000,000 was thus advanced during the last quarter of the year. In addition to this, many loans which matured at that time and which under normal conditions would have been repaid to the Society, were renewed.

This money stringency extended into 1908, and large sums were advanced by the Society during that year also. In the first quarter (in addition to the many old loans renewed) new loans aggregating over $5,000,000 were made to policyholders.

These loans ranged from a few dollars in the smaller cases to sums above $50,000 in the largest cases. They were made to all sorts and conditions of men, from laborers and small retail merchants, to prominent financiers, at a time when business men, and particularly manufacturers with pay-rolls, found it almost impossible to secure sufficient funds from their banks to meet current obligations.

It is not to be inferred from all this that the Society advocates the mortgaging of policies ----the borrowing of money by husbands and fathers from wives and children. The fact that a policy may be used as collateral security for a loan enables a man at times to save a policy which might otherwise be lost, or to bridge over [page 106] some temporary period of financial peril; but in general the Society fully endorses what Mr. Cleveland has said on this subject:
"A policy was made to hold. This loan system is not good. Let every policyholder think twice before he gives way to the temptation of borrowing on his policy. Sometimes it cannot be avoided; but often it can, if a man thinks twice. There is many a way to tide over a tight place without letting your policy get out of your hands."
But in spite of the depression following the panic, and the excitement incident to a presidential election, the year 1908 proved far better for life insurance than 1907. This is illustrated by the Society's experience. Its new business, which had shown a decline in 1906, amounted to $73,279,540 in 1907, and exhibited an increase of nearly 25 per cent. in 1908, aggregating $91,262,101 for that year. Moreover, the expenses were less than for the previous year, notwithstanding the larger amount of insurance written. On the other hand, the terminations were nearly five millions less than in 1907.

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