The Indianapolis times., 1928-11-20
The Holding Company Game

We warn you that what is printed below is no
light Indian summer reading But only through read
ing and studying such presentation can one under
stand how the real, big money is made out of the
utility business
Accordingly if you will have the patience to spend
little time on mathematics, you will why the
testimony from such the Electric Bond
and Share Company is so important toward full
understanding of that great subject which is power
The Electric Bond and Share Company, its
name indicates is in the financing end of the utility
business 1t has refused to testify, ION advice OF
counsel" at the federal trade commissions hearing
in Washington.
Whether that testimony can be compelled yet is
to be determined. Anyway, by studying the mathe-
matica picture presented below, one will be able to
find out utility financing, through what is known
as the holding route pyramids into vast incomes the
governmentaly limited earnings of a utility company
1t should be bornain mind that control of utility
or any other corporation is held through what is
known as voting common stock.
The customary return to public utility allowed
by governmental authority is per cent. That is
the base.
Suppose a involving power company group
with an aggregate investment of $1,0OO0000O0. The
return at per cent is $80,0O0,000.
The capital of the company is raised as fol-
lows: $6OO0O000O in per cent bonds imposing
nual interest charge of $36 900 0OO $2OOOOO in per
cent preferred stock, imposing annual charge of
$14DOOOOO: $2OOOOOOOO in common stock held by the
promoters; $1,OOO,OOO,00O capital; fixed charges
$5oyOO0,OOO.
Since $8000o000 IS the amount the company is per-
mtted to earn and since $5O,OOO,OOO is required to
meet the bond and preferred stock obligations then
$3o000O0O is left out of the $80000000 for dividends
the stock. That figures Is instead of per
cent to the promoter.
But in this hypothetical case the promoters do not
want to tie up $2OOOO0OOO. So they recapitalize
follows $10OO00O in per cent collateral trust bonds
debentures, which would require an annual outlay
for interest of $6OOOO0O $5oOOOO0O in per cent pre-
ferred stock imposing annual charge of $3,5OOOCO;
s5o;0OOO0O in common stock, held by the promoters;
e2oOOOOOOO capital; fixed charges, $95OOOOO
That having been DONE with $5OOOOOOO held
by the promoters and with the additional $9,500000
Of fixed charges taken care $2O5000OO is left for dv
derids on the common stock of the holding company
That figures 40 per cent on the $5OOoOOOO investment
But instead of letting it go at that, the promoters
organize a superholding company, and raise the
s5oOOOOOO required to take up their common stock
follows $250OOOOO in per cent bonds, imposing an
annual interest charge OF $1,5OOOOO $125OOOOO in
per cent preferred STOCK imposing an annual charge
Of $685. 900; $1250000O in STOCK held by the
promoters 1000 capital fixed charges, 375 0OO
After the additional fixed charges of $2375O00 are
taken care Of $1S125OOO is left for the promoters
who with $125OOOOO invested, hold the common stock
the control That rate of return is 145 per cent
BY a process similar to that what vaguely is re-
ferred to the power trust has been created in
this country, with the public carrying the major por
ton of the investment receiving thereon fixed returns
of and per cent the holding company promoters
keeping control and getting vast percentages of
turn on their comparatively small investments.
Public utility promoters will not admit that such
process is in any way nlegitimate. This newspaper
admits that the whole subject is a confusing one,
containing many elements for dispute.
But we do contend that it is proper subject for
public investigation
And when great figure in the utility financing
game, like the Electric Bond and Share Company,
hides behind its counsel refusing to submit to such
investigation, it certainly throws itself open to
picion