Strong Managers, Weak Owners: The Political Roots of American Corporate Finance

By Mark J. Roe | Go to book overview

CHAPTER 6
Insurers

AT THE BEGINNING of the twentieth century, several of the largest American financial institutions were insurers, not banks. Banks were confined to a single state, and often to a single location; insurers were not. The largest New York insurers were twice as large as the largest banks and were moving into adjacent financial areas. They were underwriting securities. They were buying bank stock and controlling large banks. They were assembling securities portfolios with control potential. Some had already put as much as 12 percent of their assets into stock. The three largest insurers were growing rapidly and seemed to be developing not into the passive institution they eventually became but into an institution that might dimly resemble the powerful German universal banks or the main bank system in Japan.

But in 1905, the industry was rocked by scandal, revealing nepotism, insider financial chicanery, and bribery of legislatures. The New York legislature responded with a political inquiry, called the Armstrong investigation after the state legislator who chaired the investigative committee. By 1906, the law prohibited insurers from owning stock, from controlling banks, and from underwriting securities. Politics fragmented and pulverized the insurance industry, limiting it to its core business of writing insurance and investing in debt.

When the Armstrong investigation began, its chief, Charles Evans Hughes, was an unknown New York lawyer with some experience in public investigations. When it was over, Hughes began a political career that took him to within a handshake of the presidency. A few years later, the investigation's themes of reform to curb financial power were echoed in the congressional Pujo investigation. For half a century, insurers were banned from owning any stock at all; serious deregulation of the ban on stock ownership by insurance companies really did not occur until the 1980s.

Today, institutional investors are criticized for avoiding an active role in corporate boardrooms. Although insurance companies, for most of the century the second-largest institution in aggregate assets, would be plausible players as active investors with boardroom presence, they have been inactive investors. Despite their size, they lag behind other institutions—private and public pension funds, mutual funds, and bank trust funds—in aggregate stock holdings. Moreover, while their holdings are not small in absolute size—they own over 5 percent of the stock market outright, and as pension

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