Holding Companies: Last Mile

When Jerome Frank became Chairman of SEC in 1938, the most difficult job before him was to enforce the anfractuous provisions of Ben Cohen's Utility Holding Company Act, especially to "integrate" the holding companies under famed Section II. Last month he reported that "the back of the integration problem was definitely broken." This week, with a 5-0 decision in favor of forced competitive bidding for utility securities, he had finished the whole job. Chairman Frank was ready to don the robes of Federal judgeship.

It had been a long, slow, bitter and devious fight. Yet the outcome, which was a 100% New Deal victory, contained unexpected cheer for Wall Street, too. On the same day that Frank announced he had broken the problem's back, utility holding company preferred stocks began to go up. A flock of them--Standard Gas, Engineers Public Service, Electric Power & Light, Commonwealth & Southern--made new highs for the year. Some brokers reported that 75% of their buying orders were for utility holding company preferreds and bonds. Most succinct explanation for this backhanded phenomenon was that of Shearson, Hammill & Co.: "About the only conclusion one can draw from the activity in utility holding company preferred stocks is that the parts of the various utility holding companies are worth more separately than when united in a single . . . system."

Meanwhile some of the commons behind these booming preferreds made new lows for the year. Reason for this selectivity: in dissolution, the holding company preferreds would emerge with back dividends paid up, and with ownership of their ex-systems' operating companies' common stocks, which are worth scrambling for. But the holding company commons are too far under water to get much once they lose operating control. Wall Street thus confirmed the fact that the Holding Company Act was achieving its goal.

The bells began to toll for the holding companies last month, when SEC told $589,000,000 United Light & Power to dissolve its scattered system. United bowed, agreed to integrate around its Kansas City property, prepared to sell its outlying properties and use the money to pay off its own bonds. Next came the turn of $766,000,000 Standard Gas & Electric, which has already cooperated to the extent of having paid off $6,500,000 of its bonds with 40% of its original holdings of San Diego Gas & Electric.

Standard's Leo Crowley said that his senior security holders would become equity owners of everything except Standard's rich Duquesne Light (in Pittsburgh, which nets $10,000,000 a year); and that Standard, debt-free, would be pared down to Duquesne. This plan, said Crowley, affords"full value for the note and debenture holders and substantial intrinsic value for the holders of prior preference and preferred stocks." This meant there was no value for Standard common. Said Crowley: "Some people may think I'm foolishly liquidating myself out of a job."

Philadelphia's rich United Gas Improvement, having first threatened to sue SEC for ordering it to sell its Connecticut property, about-faced into the procession, announced it would sell.

Next crackdown hit two of the industry's three recalcitrants--Engineers Public Service and Commonwealth & Southern. (The third, Electric Bond & Share, has been growing more compromise-minded.) E.P.S. was told to choose between a system based on its Virginia or on its Gulf States properties. Crying "unconstitutional," E.P.S. threatened suit. C. & S. was told to base its future on its southern or its northern properties (the proceeds of the sale could be used to pay off some preferred arrears). Replied C. & S.'s spokesman, Lawyer George Roberts: "To say that we were shocked ... is to put it mildly." He also threatened to carry the fight to the Supreme Court. The market reacted skeptically to these threats of litigation. E.P.S.'s and C. & S.'s preferred rose, their common fell, both movements anticipating dissolution.

Thus was the Section II problem's "back broken." A louder crack accompanied the death of another institution: the freedom of the utilities to place their financing where they see fit. In February 1940 Morgan, Stanley sold $25,000,000 of Dayton Power Co. bonds. The bankers consented to having their $100,562 fee "impounded" while SEC decided whether they were an "affiliate" of Dayton Power, or if there had been an absence of arm's length bargaining (required by the Act) in preparing the deal. Fortnight ago SEC dropped a bombshell on the corner of Broad and Wall Streets by finding--unanimously--that Morgan, Stanley is an affiliate. Dayton, against its wishes, was $100,562 richer.

The Commission's argument went like this: Dayton is a subsidiary of Columbia Gas & Electric. Columbia is a subsidiary of United Corp. (which owns 19.6% of its common). Morgan, Stanley was formed by J. P. Morgan to take over its underwriting business, and leading Morgan partners have had a financial incentive to get business for it. Final question was whether United Corp., which J. P. Morgan put together in 1929, is subject to Morgan political control. Describing the demeanor of United's George Howard toward Morgan's George Whitney as one of "courteous fealty," SEC decided there was control. It added that Morgan, Stanley had, since its formation in 1935, obtained substantially all bond underwriting done by all the companies in the United system; and that it has headed no utility financing outside the United group.

Morgan, Stanley answered with a stinging charge that this decision "belongs to the world of make believe. . . . We desire to state that in no conceivable way can it be properly held that we have ever been affiliated with the Dayton Company or any other public utility company." This week Morgan, Stanley had not decided whether to take the matter to court. If SEC is right, and Morgan, Stanley owes its utility business to J. P. Morgan's holding company affiliations, the disruption of the relationship will oust Morgan, Stanley from its No. 1 position in the utility underwriting field.

But that question became academic this week. For Chairman Frank's curtain line, SEC decided (as Wall Street long feared it would) that all utility securities under the Act shall henceforth be subject to competitive bidding, whether the bankers are "affiliates" or not. This decision meant that the coming spate of security distributions that must accompany the breakup of the holding companies will be an investment bankers' free-for-all--and an open field for new regional utility combinations too. SEC defended itself against two frequent assertions: 1) that enforced securities auctions "interfere with free enterprise" (Massachusetts, cradle of enterprise, has had such a law for years); 2) that they will slow up defense ("competition is the essence of that free enterprise, or American way of life which we are intent on defending").

But these were not likely to be the most immediate consequences of competitive bidding. The rule will denude the investment bankers of their remnant shreds of influence over utilities; but it will also make the big insurance and trust companies more formidable monopolists of the best security issues than ever. The bankers will become mere bone-fed finders of private placements. Since the insurance companies have already been put on the spot before TNEC for absorbing so huge a share of U.S. investment opportunities (TIME, March 10), SEC's new rule will doubtless hasten the day when insurance, too, will pass under Federal control. The Government's attacks on the power of Wall Street always wind up by increasing its own.

This week Chairman Frank still awaited the Presidential order that would send him to the bench. The President seemed to be in no hurry. Although Frank's utilities job was done, he is still wanted in Washington because SEC, Treasury and Federal Reserve have a great deal of interdepartmental work to do on fiscal policy for defense. Frank may stay on the job until the President can find a replacement for Ben Cohen at the London Embassy. Then Cohen can return and be Chairman of SEC.

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