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I.F. Stone Reports: Behind the ITT Scandal

Bribery comes naturally to conglomerates. These giant holding companies, like ITT, sprawling all over the business map, expand by one form of bribery or another, some more or less legitimate, some just plain garden-variety odoriferous. In the former category was the half-billion-dollar premium1 ITT dangled before Hartford Fire Insurance Company stockholders to get control of that company’s fat cash surpluses. In the latter category were the profitable stock options and favorable employment contracts promised Hartford management by ITT to win their approval for a merger; these so “troubled” the Connecticut Insurance Commissioner, William R. Cotter, that he at first vetoed the acquisition, on the ground that these favors created a “conflict of interest.” The corruption of management to facilitate corporate takeovers appears over and over again in the comprehensive but little noticed report on conglomerates filed by a House Judiciary subcommittee on anti-trust last September 7.2

When ITT made its “noble commitment” (in the language of the famous memo written by its Washington lobbyist, Mrs. Dita Beard) to guarantee up to $400,000 to bring the 1972 Republican Convention to San Diego, it may not have been strictly a bribe. But it was certainly another “conflict of interest,” especially since it was soon followed by a Justice Department decision to drop its antitrust suit challenging the acquisition of Hartford and to file a consent decree instead, allowing ITT to keep the prize it wanted. Conglomerate operations dull the feeling for such niceties.

Writing midway in the Senate Judiciary Committee investigation of the ITT affair and the Kleindienst nomination, I would like to touch on some of the broader economic and social issues. The first is the menace to free government by holding companies grown so gigantic that they become private empires, financing the election campaigns of both major parties and in a position to treat public officials as errand boys. When the Judiciary Committee hearings were reopened at Richard Kleindienst’s request after Jack Anderson’s revelations, the Attorney General designate, in his opening statement, was quick to emphasize ITT’s bipartisanship. Of Felix Rohatyn’s private meeting with him as emissary for ITT and Lazard Freres, Mr. Kleindienst said archly:

He also, I think, by way of introduction, stated that he had no political credentials by which to introduce himself to me—that as a matter of fact he was an economic adviser to Senator Muskie in his national committee, and was on his finance committee.

Felix Rohatyn could strengthen his bipartisan credentials if he should volunteer the information, not yet elicited by the Judiciary Committee as this is being written, that ITT used its hotel subsidiary, Sheraton; to butter up the Democrats at the state capital in Hartford just as it used Sheraton to butter up the Republicans in San Diego. There were two hurdles to the acquisition of the Hartford Fire Insurance Company. One was to win or settle out of court the federal antitrust suit. The other was to get the Connecticut Insurance Commissioner to reverse himself and allow the deal, which required his approval under a 1969 “model statute” designed to protect Connecticut’s no. 1 industry, insurance, from takeover raids.

This is a story the Democrats would rather not tell and the Republicans cannot exploit because it would hurt their benefactor, ITT. The Insurance Commissioner, Cotter, was a candidate for Congress from Hartford while the merger was before him. The Democrats in the city of Hartford were embarrassed because a $15 million bond issue they had floated to build a civic center was falling short about $7 or $8 million. Just before the Insurance Commissioner reversed himself, he held a meeting with the Democratic town chairman and its corporation counsel on this problem. Ralph Nader’s appeal from that reversal as filed last January 27 in the superior court of Hartford County says:

During the meeting, Commissioner Cotter indicated a willingness to request that ITT help out with the Civic Center, in the light of ITT’s expressions of desire to make contributions to the city. The Corporation Counsel and his deputy were asked for a legal opinion whether it would be possible for a private corporation to make a “multi-million dollar” gift or charitable contribution to the City or to the Civic Center project.

During this meeting Commissioner Cotter made a telephone call to ITT in New York to arrange for a conference in his office for the following Friday. The purpose of this meeting, according to Mr. Cotter, was to ascertain “the sincerity of ITT building a Sheraton Hotel in Hartford and being a participant in some manner in the construction of the Civic Center.”

That meeting was in fact held in Commissioner Cotter’s office on Friday, May 22 [1970], one day before the Commissioner’s decision was issued approving the exchange offer [of Hartford common for ITT convertible preferred].

Nader’s appeal says “the blatant impropriety” of this procedure was compounded by the fact that Mr. Cotter “was at that very time an active candidate for Congress and was actively soliciting support for his campaign.” He reported spending “approximately $100,000,” no small sum for such a local election, which he won by a narrow margin. It is extremely doubtful that his original decision against the merger could have been reversed, at least not without a considerable public outcry in Connecticut, if ITT had said in Connecticut what we now know it was saying in its private negotiations with the Justice Department: that its inability to keep Hartford Fire would be a financial disaster for ITT, and indeed for the stock market and the country.

If ITT is that shaky, the deal was not to Hartford’s benefit. One of the first results of the takeover was an increase in Hartford dividends which added $14.3 million to its annual payouts, “virtually all of which,” according to the Nader appeal, “is paid directly to ITT as majority stock-holder.” The whole Connecticut story would make a far better GOP riposte to the San Diego revelations than Senator Dole’s silly press conference on the Democratic telephone bill, but it’s a safe bet this is one scandal the Republicans won’t air.

Another and broader example of bipartisanship is what has happened during the past two administrations to the need for action against the swift growth of conglomerates. During Johnson’s four years, litigation was held up on the plea that the law had to be strengthened. During Nixon’s Administration, changes in the law were held up on the plea that conglomerates could be blocked under existing law by Justice Department litigation. The two main test cases revolved around LTV (Ling-Temco-Vought, Inc.) and ITT, and both have now been settled by consent decrees. Thus the conglomerates avoided the danger of an unfavorable Supreme Court ruling and the hazards for the insiders of trials that would have spread their manipulations on the record and might have involved them in serious personal charges.

So almost eight years have passed without remedial action. Richard W. McLaren came in like a lion as Assistant Attorney General in charge of the anti-trust division and has gone out—a judge. His earlier zeal had earned him the applause of the trust busters. His metamorphosis recalls that of another famous Republican who began as trust buster. Stanley N. Barnes, Assistant Attorney General in charge of anti-trust under Eisenhower, was elevated to the bench (9th Circuit Court of Appeals) just six weeks after another notorious—and toothless—consent decree, that which ended the case against AT&T and its manufacturing subsidiary, Western Electric. This combination still costs telephone users hundreds of millions of dollars in rigged telephone equipment prices. The notion that the Republicans are more militant on anti-trust than the Democrats has a large mythical component.3

The Senate Judiciary Committee hearings on Kleindienst are another illustration of how little communication there is between the two ends of the Capitol. It is not the first time a Senate committee has shown itself unaware of the relevant findings of a House committee way down yonder at the other side of the building. Felix Rohatyn of Lazard Freres figured prominently in the House anti-trust report on conglomerates last September and in the almost 1,500 pages of testimony and documents it published on ITT, but he might have been Joe Blow off the sidewalks of New York as far as the senators seemed to be aware.

ITT’s greatest period of expansion was from 1965 through 1968. From 1965 on, after Lazard Freres sold Avis to ITT, this banking firm became deeply involved in ITT affairs.4 In 1967 Mr. Rohatyn, a director of Lazard Freres, also became a director of ITT and, according to the House committee report, “the major thrust in ITT’s acquisition program came after Mr. Rohatyn’s appointment and election to the ITT board. ITT’s acquisition activity greatly accelerated both in terms of numbers and size of companies acquired.” In this period ITT acquired, among many other companies, Continental Baking, Rayonier, and Sheraton, each the leader in its respective industry.

The Hartford Fire Insurance Company, which the House report does not discuss, was the biggest prize of all. That merger united the nation’s eighth largest industrial corporation with the fourth largest liability and property insurance company. The earnings of the firms ITT agreed to sell in the consent decree were estimated at about $35 million a year, while Hartford earned about $105 million, or three times as much. Even more attractive was Hartford’s cash flow of about a billion a year in premiums and its huge “surplus surpluses,” i.e., balances over and above those required by law. One exhibit in the Connecticut litigation discloses that an ITT executive estimated in a memorandum to Harold S. Geneen, its president, that Hartford “could comfortably invest $250 million of its assets in the acquisition of other companies.”5

These surpluses, which of course provide extra protection to policy-holders, make insurance companies a favorite target of the conglomerate operators. Obviously it is bad public policy to allow insurance companies to become part of larger speculative razzle-dazzle operations. This is a point that merits study and remedial action.

A related point is the role played by the big banks and banking houses in conglomerate operations. The House report shows that the big conglomerate managers, brilliant as they may be in financial manipulations, could not operate without open lines of credit from their banks and access to funds and securities in the trust departments of their bankers. Essentially the conglomerate enables the bank to do what the reform legislation of the Roosevelt period—the Securities Act and the Glass-Steagall Banking Act—forbade. The purpose was to correct the evils of the Twenties and keep deposit banking separate from stock market speculation. The big bank can do through its satellite conglomerate—Chase Manhattan with Gulf and Western is an outstanding example—what it cannot do directly.6

The conglomerate opens rich sources of profit, legitimate and illegitimate, to its bankers, whether they are deposit or investment bankers. Banking officials and partners can play the market on the basis of inside information. The bank derives revenues from all kinds of services as the conglomerate swallows up one business after another. This was the case in the relationship of ITT with Lazard Freres. “During the period 1964 to 1968,” the House report said (p. 151), “the merger and acquisition function became increasingly important in relation to its other business. From January 1, 1964, through September 5, 1969, Lazard Freres received $16,058,243 in merger fees. During this period, the firm’s gross income increased roughly 2 1/2 times, 256 percent, while at the same time its income from merger and acquisition services increased nearly 6 times, 584 percent.” ITT was its major customer for these services.

  1. 1

    Like almost everything else in such deals, this too was done with funny money. ITT paid for Hartford’s common stock not with cash but with paper, a new issue of ITT convertible preferred. Ralph Nader’s brief in his current Connecticut challenge to the acquisition questions the ultimate profitability of the deal to Hartford stockholders.

  2. 2

    For a swift summary see the special issue of my Bi-Weekly last September 20, “US Capitalism’s Dirty Underwear,” which was devoted to the House report.

  3. 3

    That consent decree, too, was arranged with an Attorney General, Herbert Brownell, by an AT&T vice-president at White Sulphur Springs over the head of the anti-trust division, as in the ITT case. Barnes was angry but perhaps appeased by his judgeship. However, Victor Kramer, the Justice Department lawyer in charge, did what so rarely happens in Washington—he put conscience ahead of “the team.” He refused to sign the decree and left the department. The whole story may be found in Joseph C. Goulden’s Monopoly, Chapter 5, (Putnam, 1968).

  4. 4

    See Investigation of Conglomerate Corporations, a Report by the Staff of the Anti-Trust Subcommittee, House Judiciary Committee, 92nd Congress, 1st Session, pursuant to H. Res. 161, pp. 150-7. Dated June 1, 1971; released September 7, 1971.

  5. 5

    ITT Exhibit 5, cited at page 39 of the Nader appeal, No. 166205, Nader v. Cotter, Superior Court, Hartford County.

  6. 6

    Since 1945 the vast expansion of pension funds has added a new dimension to the problems of monopoly and speculation. These funds now amount to over $100 billion, about 80 percent of them held in banks. Morgan Guaranty alone manages about 13 percent of all pension funds held by banks. Trust funds are supposed to be kept separate from other banking operations. But the House report showed that Chase Manhattan used its Fiduciary Investment Department in an attempted corporate takeover in which Gulf and Western was participating. Chase Manhattan signed an agreement to exchange 1,500,000 shares of Pan Am in its pension trusts for “the highly volatile and speculative” stock warrants of Resorts International, Inc. This owner of the Nassau gambling casino tried, according to the House report, to get control of Pan Am until stopped by the SEC.

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