The industry groupings generally followed the classification procedure used by the well known Value Line Survey. However, the industry groupings were limited by the fact that the IIS was limited to 800 stocks and the present study focused its attention on only those stocks among the 800 held by bank trust departments for which the total portfolio concentration in 1969 was about 10 percent or above. The amount of detail was limited by the resources available to the investigator and a desire to maintain the readability of this study. The data themselves are quite revealing. Comments will be made about the airline and insurance industries only. The need for more nearly complete studies of the industry ownership patterns that have developed, and will grow, merit continued and regular study. In view of the energy crisis Appendix D, Table 2-N, Petroleum and Gas Production and Distribution, is also important to public policy consideration.

Airline Holdings by Banks

The extent of the 4, 8 and 12 largest holdings and the holdings of all 50 reporting bank trust departments of six important airlines is shown in Appendix D, Table 2-A. The holdings of 10 percent or more of several airlines by two to four bank trust departments in itself may not be disturbing; further study of the appendix table shows the extent to which individual-but not identified-bank trust departments hold parts of the voting stock of the same airline. Such study does raise new and vital issues. Note that banks numbered 2 and 3 hold more than 10 percent of the stock of Trans World, Northwest, and National Airlines. Banks numbered 2, 3, and 4 hold more than 15 percent of the stock of National Airlines, and banks numbered 3 and 4 hold more than 7 percent of Eastern Airlines. If partial voting rights were included, these percentages would be somewhat larger.

The bank numbered 1 does not appear in Appendix D, Table 2-A because it does not hold as much as 1 percent of the stock of any airline included in the sample. A convenient, arbitrary rule adopted in preparing Appendix Table 2 was to list all the holdings (with full voting rights) when any bank's holdings were as large as 1 percent in any company in that industry. The case of bank numbered 2, which held more than 7 percent of the stock in Trans World and Northwest Airlines and almost 5 percent of the stock in Eastern Airlines, merits considerable thought. Eight of the 12 banks listed in this subtable hold 1 percent of the shares of two or more airlines. Debt, Control and Interlocks

Two problems related to the range of the power of banks are worthy of emphasizing. First, the commercial loan departments of these same banks are very likely to make loans to all or most of these same airlines. The degree of independence of their judgments in stock investment and in commercial lending activities merits further study. The relations of a bank with its commercial borrowers may provide it with important financial information before such information is made available to other investors through other channels of communication. Second, banks own different amounts of stock in suppliers competing for airline business such as air frame and jet engine manufacturers. The extent to which interlocking relations between bank officers (or directors) and companies in which substantial amounts of stock are held merits investigation.

The primary limitation of this table was that the bank trust department holdings of less than 5 percent was not available. At this earlier date the Chase Manhattan Bank's trust department held over 6 percent of the common stock of six different airlines, and Morgan Guaranty held over 6 percent of two airlines. These two banks between them held 13.7 percent of Trans World Airlines stock. The mutual fund complex, Waddell and Reed, held another 4.9 percent, and the Fidelity Group held 3.1 percent of Trans World. These four financial intermediaries held 21.5 percent of Trans World Airlines. Waddell and Reed held 4.3 percent in National Airlines and more than 2 percent of the stock of the three other airlines. The Fidelity group owned 8.1 percent of National Airlines and 6.6 percent of Northwest Airlines. Between them the Chase Manhattan Bank and Fidelity group held 16.5 percent of Northwest Airlines, and the four largest holders owned more than 20 percent of its stock.

OVERLAPPING OWNERSHIP WILL GROW

These overlapping financial interests are clear. What their consequences may be for patterns of competition within an industry are not so apparent yet. The fact, to repeat, that institutional holdings of common stock are growing faster than the total market value stock leads to the very likely result that such patterns of overlapping "ownership" will grow both in terms of the number of companies involved and the extent of individual portfolio concentrations.

Insurance Industry Holdings by Banks

The improved outlook for the insurance industry sometime between 1966 and 1969 made its common stock an attractive investment to bank trust departments. The extent of such holdings in 1966 cannot be estimated because of the general lack of conveniently summarized information. As shown in Appendix D, Table 2-1, in eight in

stances the four largest bank trust department holdings were 10 percent or more of the stock of five of the insurance companies in the sample. Four of the 15 banks that held at least 1 percent or larger concentrations of insurance company stocks held that percentage or more in at least two different companies. Banks numbered 26 and 28, which were probably not among the larger banks in the group of 50 included in the IIS sample, particularly liked insurance company stocks.

One point of substantial concern is that the book value of the equity interest of insurance companies themselves may be only about one-third to one-fourth of the assets that they own. The high leverage ratio of insurance companies, which is appropriate for their industry, nevertheless gives the owners of insurance company shares a potential influence over additional vast financial resources.

Bank-Insurance Company Relationships

The potential dangers from the influence over insurance company loans and stock portfolios that might flow from a bank trust department's complex community of interest with specific insurance companies could well lead to further investigations and probably to legislation before the serious potential dangers result in any questionable activities. Note that banks numbered 26 and 28 between them owned about 11 percent of Aetna Life and Casualty, over 9 percent of Connecticut General Insurance, and over 8 percent of Hartford Fire Insurance. Since the IIS report, Hartford Fire has been merged into the International Telephone and Telegraph Co. (This action was approved by the Connecticut Department of Insurance in May 1970). Bank numbered 28 owned over 5 percent of two multibillion dollar insurance companies.

In order to prevent undesirable financial communities of interest among financial intermediaries, over several companies in other industries, additional study might well be undertaken in the near future. One bizarre problem is the potential ability of one group of financial intermediaries, such as commercial banks or insurance companies, to build a substantial stock voting position in another group of financial intermediaries.

Any recommendations that may result from inquiries into the holdings of bank trust departments, regulated investment companies and other financial intermediaries over nonfinancial corporations should be applied equally to each type of institution. One further point is that meaningful regulations should be applied to mutual fund complexes, that is, to groups of mutual funds that are under common management control.

Holdings Can Be Adjusted Downwards

Possible future legislation dealing with industry concentration patterns is likely to result in some stock disinvestment, but such disinvestment could take place over a period of up to 3 years after the enactment of these recommendations. The FCC has used such a procedure. In fact, if it becomes clear that the intent of Congress is to

pass some specific proposals relating to industry portfolio concentration patterns, institutional investors will start adjusting their holdings. The pattern of the holdings of mutual funds and bank trust departments is sufficiently flexible so as to permit such adjustments within about a 3-year period.

The objective is to seek to prevent the continuing growth of industry portfolio concentration patterns which will develop in the absence of legislation. Reducing the shift in economic power to a small number of financial institutions is important in the economic organization of the nation and especially to the location of power within and over corporations.

MAY REDUCE TEMPTATION

The diversity of opinions among the 10 to 20 or more large institutional investors who may control very substantial proportions of the stock of significantly competing companies in the same industry may reduce the temptation to coordinate the activities of the portfolio companies through legal means. In many major industries, such as broadcasting, air transport, insurance and oil and gas there are highly skilled regulatory agencies looking out for the public interest. Unfortunately, the number of such regulatory bodies is likely to increase because of such problems as that of maintaining the integrity of the environment and pressing upon the physical limits of available resources of many types.

The growth of patterns of concentrated stockholdings within an industry by very large financial intermediaries is one which to date seems to be beyond the scope of existing antitrust laws. Direct legislation in this new area of national concern is needed before the problems become more intense and greater divestitures would be required to restore desirable competitive patterns.

LONG-RUN GROWTH OF INSTITUTIONAL

STOCKHOLDINGS

The growth of the relative and absolute amount of stock held by financial intermediaries should be viewed from a long historical basis in order to construct a long-run projection. Both the historical and projected views show the fact that institutional holdings of shares is growing faster than the total market value of the shares of U.S. companies whose stocks are available to the general public.38 The inevitable result of the past and future conditions, that lead to the more rapid growth of institutional holdings of common stock than the total market value of U.S. traded stocks, is an increase in average portfolio concentrations and their spread through an increasing number of industries.

The original 1970 projections for the institutional holdings of stock for the years 1980 and 2000 from a 1968 base data are shown as Table 8.

"Soldofsky, op. cit. chapter V, Growth of Stock Ownership by Financial Intermediaries to the Year 2000, pp. 73-104 and pp. 208

222.

Growth Paths Projected

Figures 1 and 239 show the projected growth paths from the 1968 base data; these figures differ in that Figure 1 carries the projections to 1980 only and Figure 2 carries them to 2000. The differences in the clarity of the detail and perspectives make each of these figures useful. Both figures present actual stock holding for each institution at the end of each year from 1960 through 1972. At the date that the original projection was made, the actual values for 1968 through 1972 were not available. Com"See Appendix D, pp. 373–374.

parisons of the straight lines, from 1968 through 1972, with the actual results suggest the success and errors of the projections. (Straight lines on these semi-logarithm charts represent constant growth rates.) The projections for the total market value of all stocks, noninsured pension funds, and property and casualty insurance companies have worked out rather well to date. The projections for mutual funds are much higher than their 1972 year-end value, and the projections for life insurance companies and state and local retirement funds are substantially below their projected levels.

STATE REGULATIONS LIBERALIZED

When projections are not confirmed by experience, they should be changed. Whether or not the change in the 20year growth pattern of mutual funds will be permanent or temporary is still an open question. A part of the morerapid-than-projected growth for life insurance companies may be due to the success of variable annuities, and continued liberalization of state regulations governing the percentage of their assets that may be held in the form of stock. The increase in the sales of variable annuities may be reducing the total market values for mutual funds because the former may be a rather good substitute for the latter. Furthermore, insurance salesmen's commissions are substantially higher than those of mutual funds salesmen. In addition, many mutual funds have changed to a "no load" or no commission basis.

The slope of the line representing the total market value of all securities is lower than that of most of the institutional investors. This condition implies a lower growth rate for total market values of shares than for institutional holdings. This observation about relative growth rates is much more important for the purposes of this paper than the exact projections and their accuracy to date.

INSTITUTIONAL HOLDINGS RISING

Three views of the increases in aggregate portfolio concentrations are noted. First, Table 8 shows that the total institutional holdings of stock was 23.2 percent of the total market value of all shares in 1968. The projections in Table 9 show this percentage rising to 36.3 percent by 1980 and to 55.2 percent by 2000. Figure 3 taken from the earlier study shows separate projections based upon SEC and NYSE data. The SEC-based data did not result in what appeared to be reasonable projections, but the NYSE-based projections lead to a range of 29.5 to 37.5 percent for 1980 and 46 to 58 percent for 2000 for the comparable values of the NYSE-listed stocks in the hands of identified institutional owners.

The actual percentages of NYSE values held by the institutions from 1968 through 1972 are as follows:

funds and estates were included in institutional holdings, the 1968 percentage would have been increased about 12.7 percentage points to a total of 35.9 percent. By 1980, institutional holdings including personal trust funds and estates administered by banks may be approaching 50 percent of the entire market value of stocks.

PROJECTIONS STILL REASONABLE

The projections made several years ago for 1980 institutional holdings of stock still appear to be quite reasonable and the path marked from 1968 through 1972 leads to no important revisions of the overall projections for the year 2000.

An important but neglected point is that these projections are made in terms of the total values for shares listed on the markets and for the institutional holdings of some part of these values. Portfolio concentration percentages are prepared on a different basis than the overall dollar-based projections just discussed. The portfolio concentration percentage for each individual company irrespective of its size is developed. The average value of these individual company concentration percentages is calculated from these data. A given total market value of stocks is compatible with a considerable range for the average portfolio concentration percentage. High portfolio concentrations for small and medium-sized, rapidly growing corporations probably affect the average value and skew the distribution, as suggested by the data in Tables 5 and 10.

HISTORICAL AND PROJECTED CONCENTRATIONS

The author's study prepared in 1970 included a figure that represented estimates of both the historical and projected cumulative portfolio concentrations. Those estimates, which are shown as Figure 4, also included estimates of the percentage of the total value of stocks held by the institutions for 1966, 1980, and 2000. A major problem with these earlier estimates was the inadequate information about the extent of the common stock administered by bank trust departments.

The special data provided to Senator Metcalf by the SEC from the IIS report provides a basis for very rough estimates of cumulative portfolio concentration ratios as of late 1969. The data included in Table 5 are increased by 2 to 4 times to adjust for the underestimation due to the IIS sampling. These estimates for 1969 portfolio concentration ratios are shown as Table 10. If these data were plotted on Figure 4, they would fall close to or around the 1980 projection.

A tabulation from Wiesenberger's data for total portfolio concentration for stocks held by mutual funds alone and not included in the IIS sample, which are shown as Appendix D, Table 1-C, gives some support to the estimates shown in Table 10.

Table 10.-ESTIMATED PORTFOLIO CONCENTRATION
RATIOS AS OF LATE 1969