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When Icons Fall

FTX, Carnegie and Samuel Insull

According to Professor Andrew Odlyzko, an expert on historical manias, “gullibility” is an underappreciated driver of asset bubbles:

Gullibility is the principal cause of bubbles. Investors and the general public get snared by a “beautiful illusion” and throw caution to the wind. Attempts to identify and control bubbles are complicated by the fact that the authorities who might naturally be expected to take action have often (especially in recent years) been among the most gullible, and were cheerleaders for the exuberant behavior.”

The past 18-24 months have proven that there were/are high levels of “gullibility” in crypto and finance more broadly, as evidenced by boy genius SBF turning out to be anything but praiseworthy. In fact, gullibility levels with SBF were so high that supporters simply ignored his very questionable comments about FTX, the crypto industry, and more. For instance, Sam Bankman-Fried even admitted that crypto was a “perpetual motion machine” last year on Bloomberg’s Odd Lots podcast:

Yes, Sam Bankman-Fried, we do know “how this plays out”. Bankruptcy and alleged fraud! But more on that later…

The objective for today’s newsletter is to put the SEC’s recent crypto crackdown in historical context, discuss the rise and fall of another American business icon, and reveal the commonality between SBF and Andrew Carnegie. That said,

  1. Samuel Insull’s Utility Empire
  2. Andrew Carnegie and Sam Bankman-Fried

Samuel Insull’s Utility Empire 

Although not well known, Samuel Insull may have affected the utilities industry more than anyone else in America. The empire builder established several business paradigms for utilities that exist in today’s utility markets, including the use of AC/DC in distributing power. Originally hired as Thomas Edison’s personal secretary, Insull climbed up the ranks to the number three spot at General Electric by 1892. At the age of 32, he left to take over Chicago Edison which was about 2% of the size of GE. Soon, however, Insull would sit atop a utility empire unmatched in size.

Insull quickly became a household name, with Insull’s biographer writing:

“In the hero-worshipping postwar decade, Insull became the Babe Ruth, the Jack Dempsey, the Red Grange of the business world. The people—butchers, bakers, candlestick-makers who invested their all in his stocks—fairly idolized him, and even titans viewed him with awe. He measured up to America’s image of itself: a rich, powerful, self-made giant, ruthless in smashing enemies, generous and softhearted in dealing with the weak. His doings, small and large, became a great spectator sport, and they were reported and followed accordingly.”

Insull was also at the heart of calls for government regulation. As you’d expect, however, this approach was not altruistic in nature. Samuel Insull and other smart utility managers understood the benefits of regulation for utility businesses. Insull noted in 1898 that regulation would legitimize utility firms’ monopoly status and deter those who distrusted non-competitive businesses. Regulation also helped utility companies to raise larger sums of capital more easily since investors trusted regulators to monitor the companies financial accounts.

Remember, this was the pre-SEC era and there were no mandatory “public disclosure of accounts”. That said, knowing that federal regulators were reviewing utility companies financial accounts provided investors with a false sense of security.

“[Investors felt] their investments in a utility company was not as speculative as those in unregulated companies… Without a doubt, utility stocks and bonds only became securities for the “widows and orphans” after regulation helped ensure their safe and secure status.” (Smithsonian)

Operators like Insull were using a new innovation to finance this rapid growth: the holding company. The holding company structure helped larger utility companies like Insull’s retain cash for operations, fund expansion, pay out attractive dividends and achieve economies of scale. By 1932, just eight holding companies controlled 73% of America’s utility business.

Insull aggressively purchased other utilities, creating a gas and electric empire extending over thirty-two states. As cash dried up, Insull also switched from cash dividends to stock dividends, using the inflated stock valuations in lieu of cash to keep the machine going. After a takeover attempt, Insull created two additional layers of holding companies to try and retain control.

Stacking these structures created massive amounts of leverage, to the point where he controlled an empire of $500m in assets with only $27m in equity. This leverage was fine in the upmarket, but a market decline would cause significant problems. When asked in a Forbes interview about the leverage in his holding company, Insull responded that “a slump or calamity that would be disastrous [for electric utilities] is practically inconceivable”. Turns out this disastrous slump was actually pretty conceivable. Enter: 1929 Crash.

During the Great Depression, Utility revenues did hold up better than manufacturing, but even a slight decline caused significant pressure on the company. Insull’s company had pledged its stock as collateral to New York banks, and eventually the company went under when England announced that it was leaving the gold standard.

“In late 1931 and early 1932, investors, business executives, and ordinary citizens looked on in horror as Samuel Insull’s grand and seemingly invulnerable electric utility holding company empire foundered without warning and slipped into receivership. This debacle wiped out the holdings of 600,000 shareholders and 500,000 bondholders, most of whom believed that they had entrusted their savings to a safe and secure electric utility enterprise.” (Cudahy & Henderson)

As the banks started uncovering the issues with leverage, the state initiated criminal proceedings, and Insull immediately fled the country, believing there was no way he could get a fair trial. Like many of the “missing” crypto founders facing charges today, newspapers reported on the suspected whereabouts of Samuel Insull and published documents like the document below:

He was eventually extradited and faced trial but was exonerated on all charges. One juror that had served as a sheriff commented he had “never heard of a band of crooks who thought up a scheme, wrote it all down, and kept an honest and careful record of everything they did.”

The Regulatory Fallout

How does this relate to the current regulatory crackdown in crypto today? Well, the collapse of Samuel Insull’s Utility empire is a perfect example of how a high-profile bankruptcy/collapse can spur stringent regulations. When Insull’s empire collapsed, the public outrage and backlash was deafening. President Franklin Roosevelt used Insull as evidence in his calls for greater regulation. In fact, Insull’s collapse inspired many crucial pieces of FDR’s “New Deal” legislation.

“Insull’s rise and fall coincides exactly with the ups and downs of the electric utility holding company. The abusive practices of the Insull holding companies, bound up with their eventual collapse, are often cited as the driving force behind several pieces of New Deal legislation, including the Public Utility Holding Company Act of 1935 (PUHCA).

The PUHCA essentially eliminated sprawling, interstate holding companies of Insull dimensions in the gas and electric industries. Further, the accounting and disclosure requirements of the New Deal federal securities laws now ensure that investors can more easily ascertain the amount of debt in proportion to equity carried by a holding company.(Cudahy & Henderson)

What about FTX? Similar to Insull, Sam Bankman-Fried tried to champion crypto regulation through hefty political donations, lobbying and working with regulators to set favorable policies. This was a key reason why politicians and regulators viewed SBF so highly. However, in Twitter DMs with a Vox reporter after the FTX collapse, SBF revealed the true intention behind his “calls for regulation”.

Sounds familiar!

Sam Bankman-Fried and Andrew Carnegie 

After selling Carnegie Steel to J.P. Morgan for $13 Billion in 1901, Andrew Carnegie became the world’s richest man. Upon achieving this status, Carnegie retired and dedicated the rest of his life to giving away that same fortune through initiatives like building 1,869 public libraries across America.

Andrew Carnegie became the world’s wealthiest after selling Carnegie Steel to J.P. Morgan for $13 billion in 1901. After achieving this status, Carnegie retired and spent the rest of his life funding philanthropic endeavors like the establishment of 1,869 public libraries. Why libraries, you might ask?

“As a poor working boy in a city that charged for using its library, Carnegie could not afford to borrow books. Then a wealthy manufacturer opened his private library to the city’s working boys one day each week. Carnegie credited this experience of self-education with arming him to succeed in business. Equally important, it inspired him to fund the construction of public libraries.” (Bloomberg)

Callous Businessman, Generous Philanthropist

Caption: “You have qualified thoroughly as modern philanthropists, now why not do some good?”

Wow, Andrew Carnegie sounds like a great guy! I bet a big philanthropist like himself would treat his own employees well, or at least decently. Wrong…

In 1883, Carnegie allegedly utilized a drop in steel prices to negotiate a 20% pay cut with the labor unions at his Braddock, Pennsylvania plant. Since the alternative was closing the factory, workers surrendered. Yet, three years later, Carnegie still closed the factory – just 10 days before Christmas – after discovering a competitor had lowered pay by 15%–20%.

Carnegie’s plant manager posted a sign that the plant would be closed for renovations for an indefinite period and that 1,600 men would be left without work. However, Carnegie’s true objective was to drive out the unions. When the plant eventually reopened, Carnegie only hired non-union workers.

“By February of 1885, with the men facing starvation and freezing temperatures and no money to buy food or coal, they agreed to come back in under individual contracts, their wages decreased by up to 33%. The union was crushed forever at the plant” (Scotsman)

Bit of a prick, right? Well, this ruthless approach was actually the objective – not byproduct- of Carnegie’s “Gospel of Wealth” philosophy. Simply put, Carnegie aimed to squeeze maximum profits out of his company and employees in efforts to generate more wealth for philanthropic ventures. In Carnegie’s mind, busting unions and forcing employees to work in squalor conditions was merely collateral damage in pursuit of greater charitable actions. In his book, Gospel of Wealth, Carnegie wrote:

[The man of wealth] is strictly bound as a matter of duty to administer [wealth] in the manner which, in his judgment, is best calculated to produce the most beneficial results for the community…. “the man of wealth thus becoming the mere trustee and agent for his poorer brethren, bringing to their service his superior wisdom, experience, and ability to administer, doing for them better than they would or could do for themselves”.’

Shady Businessman, Effective Altruist

So, what does this have to do with Sam Bankman-Fried? Like Carnegie, SBF was a billionaire with questionable morals that practiced large-scale philanthropy. In SBF’s case, he adhered to the “Effective Altruism” movement that aims to invest time and resources in a manner that improves the greatest number of lives. In fact, its proponents have taken inspiration from Carnegie’s Gospel of Wealth, calling Carnegie’s libraries “one of the best historical examples of effective altruism”. A New Yorker article wrote:

“For a time, the [effective altruism] movement recommended that inspirited young people should, rather than work for charities, get jobs in finance and donate their income… Effective altruism, which used to be a loose, Internet-enabled affiliation of the like-minded, is now a broadly influential faction, especially in Silicon Valley, and controls philanthropic resources on the order of thirty billion dollars.”

As it turns out, Sam Bankman-Fried was big on effective altruism. SBF had promised to donate billions to important causes, and like Carnegie, viewed business as the means for maximizing wealth to spend philanthropically.

Also like Carnegie, SBF’s “philanthropic” endeavors did not align with his personality and/or business ethics. Sure, SBF may have claimed to be really interested in using his billions to make a difference. Or… SBF knew that would look great publicly, and helped mask the uglier, more truthful intention: to fool the media.


Effective altruism is version 2.0 of Carnegie’s Gospel of Wealth. However, SBF is not Andrew Carnegie 2.0 because his legacy is forever tarnished. Andrew Carnegie was not the best employer (or person), but he did leave a legacy behind that reaches beyond his business success.

Missed last week’s article? Catch up here