who can act quickly and buy in quantity, and with such buyers they are generally willing to divide part of their profit, the practice being to allow a deduction of from one-quarter to three-quarters of 1 per cent, depending somewhat on the amount purchased. The sale of a large issue of bonds is an incident that in many of its aspects is quite dramatic. The purchase, in the first instance, has been quietly negotiated. The transaction having been underwritten, the "Houses of First Purchase" proceeds to enlist the services of one or more of the "Houses of Distribution." If the issue is a very large one, it is generally considered expedient to associate at least three, and sometimes four or five, distributing concerns in the business. They are selected with regard to the territory they cover. One may be strongest in New England, another in New York City, another in the Middle West, and still another in the Maryland and Pennsylvania districts. If the bonds belong to the class that can be sold abroad, a foreign house or one with strong connections in London, Amsterdam, and Frankfort may also be employed. The offering is generally made over the names of the associated houses, but a division of territory is privately agreed upon and each distributor is alloted the quantity that he expects to dispose of in a particular district. Some days before the sale is advertised the larger buyers of bonds in each district are canvassed and given opportunity to say what quantities they will buy or care to have "put down" to them, less their usual commission. Preliminary notices of the impending issue find their way into the newspapers. Public interest in the matter is aroused and frequently advance applications for large amounts are received. Sometimes the bonds are bought and sold on the so-called "curb” markets in New York, Boston, and elsewhere for delivery "if and when issued." Such transactions may antedate the actual issue for weeks, and the price established is often above that at which it is expected the bonds will be offered. The effect of such quotations in quickening public interest in the prospective sale is amazing. Finally the advertisement appears, coupled with the announcement that no applications received after a certain day and hour can be considered, and the right is reserved to reject any application and to allot less than the amount applied for. Occasionally it happens that all the bonds have been sold before the advertisement is published, in which case it is supplemented by the statement that "this advertisement is published as a matter of record only, all the issue having been sold." The publication of the advertisement under such circumstances is, of course, entirely unnecessary, and it is designed only to call attention to the success of the offering and add to the prestige of the houses concerned. Firms that have regard for their reputation will not, however, offer bonds by advertisement unless they have previously sold a very large portion of the issue. The public is capricious, and to offer an issue and not sell it would seriously injure the prestige of the issuing house. Nearly all the work of salesmanship is therefore done before advertisement or in connection with securities that are not advertised at all, being bought from one investor and sold to another. This latter class of business has enormously increased of late. Many bond houses make a practice of exchanging new securities for older ones that are perhaps better "seasoned" and therefore sell on a lower interest basis. This practice, of course, involves constant trading. 214. THE PRACTICAL OPERATION OF BOND HOUSES1 The purchasing function.-If a municipal loan is offered, the purchase is a comparatively simple matter, provided the municipality is well known to the fraternity. Then no preliminary investigation is required; a bid is made for the loan at the current market rates and acceptance on award is subject to the approval of the bidder's attorney in all respects affecting the validity of the obligation. If the municipality is not well known to the bidder, a qualified representative will, or should be, sent to learn at first hand the physical and financial condition of the city and to form an estimate of its probable future willingness and ability to meet its present and future obligations. If a corporation loan is offered, it will probably be submitted at the offices of the bankers by a representative of the company or by a promoter. If the applicant is of a social turn of mind, he will probably not lack company of his kind in the anteroom. Competition, fortunately, is keen. 1 Adapted from Principles of Bond Investment, pp. 516-22. (Henry Holt & Co., 1911.) The first step in the process of elimination (there is more elimination than acceptance) is to discard the propositions of companies that conduct a kind of business unfamiliar to the bankers. Except under unusually favorable circumstances the highest grade of bond houses will not purchase bonds of industrial corporations, mining or irrigation companies, etc. The next step is to discard loans that have not a claim on property worth, under the most unfavorable conditions, more than the amount of the obligation. Most corporations will bond themselves in as large a sum as their bankers will permit. Loans are continually being rejected because of insufficient equity in property values. The third step is to discard those propositions which do not give reasonable assurance of earning at all times at least 50 per cent more than all fixed charges, after making extremely liberal estimates for future increased operating expenses. The fourth step is to decline loans to companies conducted by men or with methods which do not meet with approval. If the house is satisfied by interview and correspondence in matters of the above nature, and if a suitable price can be agreed upon, then engineers and accountants may be sent to the plant and offices to make a thorough examination; and the members of the firm, with counsel, meet officers of the company and their attorneys to settle the matters of form. On acceptance of an issue a careful banking house may demand representation on the directorate of the company until such time as the company shall have discharged its bonded obligation. There is a difference in the degree of care exercised by various houses. The ultra-conservative will not permit their names to be associated with "construction propositions." They will consider for purchase the obligations of only seasoned companies with established earning power. The reactionary effect of the stringent requirements of bond houses is of inestimable benefit to corporation finance, but its good influence has a wider sphere; it embraces municipal corporations and municipal finance. American bond houses have put municipal bond buying on an entirely different plane from what it was in 1875. In this they have been helped by, and have helped, the development of municipal bond law. In these days cities and towns that have had much experience placing bonds will be certain in advance of their advertisements for bids that the loan has been issued in conformity with the exacting requirements of the bond attorneys. Certain strong Canadian houses command such respect in their country that they have been able to direct the legislation of the Western provinces to the end that the Western loans may be more acceptable to the investors in the Eastern provinces and in England. The advisory function. This advisory and directive function is more prominently operative in bond selling than in bond buying. It has its source in the statistical departments which every house of quality must maintain. It finds its chief expression, as already stated, in tabloid investment lessons, printed in the advertising columns of newspapers and periodicals, or with somewhat greater fulness in pamphlets and monographs. If a prospective client has an investment policy that is apparently not suited to his particular needs, the home office may tactfully direct his attention by letter or through their representative in his territory to a means by which he may better his position. Some bond houses maintain a daily news sheet for the benefit of their salesmen in which are printed, not only pertinent items of current interest, but timely discussions of different problems. The banking function.-Illustrative of the relation between house and client, there has arisen the demand that banking departments be established for the safe-keeping of funds destined, upon enlargement, to go into investment, and also to accommodate those who wish to purchase securities before they have sufficient funds to pay in full for them. From the necessities of these two situations it is only a short step to the conduct on a small scale of a bank deposit subject to check. But properly and ordinarily the banking department of a bond house is conducted as a matter of accommodation to its customers and not primarily to do a general banking business. From these beginnings it sometimes has happened that a full-fledged bank has been evolved, in which the savings, deposit, and trust functions of the bank have balanced, nominally at least, the sales function of the bond house, but an exception of this sort would only prove the rule. Although bond houses are banks, technically, and are entitled to their common designation, "bankers," nevertheless, on the principle that security selling is not best undertaken by obligor companies, but is properly left to the bond houses which make it a profession, so the general banking business is best left to banks proper. The bond houses as fiscal agents.-Because of purchasing, advisory, and banking functions bond houses are called upon to act as fiscal agents for corporations, municipalities, and even states. The long standing friendly banking relations of the older firms with the Western cities recall the fact that interest, and sometimes the principal, of the loans of these cities are payable at the offices of the bond house. Here and there an Eastern institution is met that will not buy Western municipals which are not payable in the East. This is not so much to save the cost of conversion into New York funds, for that might be arranged in the price, as because of the inconvenience and possible loss of interest in shipping the bonds West for collection. Some of the older bond houses act as depositories for Western cities. In general the conduct of the bond houses as fiscal agents has merited the trust placed in them. It is natural that private corporations will look to the bond houses as their financial agents. The disposition of a company's funded loans is not merely a matter of merchandising; it is natural that the relationship begun by the purchase of bonds and banking representation on the directorate shall be continued indefinitely in the thought of future financial needs. Just as the great railroad systems have their long-established financial connections with certain large houses, so the public-service and other private corporations form alliances with the bond houses. The continuance of such relations implies conformity on the part of the obligor corporations with the policy of the bond houses. This also tends toward a betterment of financial conditions throughout the country. The selling function.-American banking houses are not eleemosynary. Whatever may be their usefulness in the community, it is the result of that enlightened self-interest which used to be expressed in the phrase "Honesty is the best policy." Their reason for being is to make money by selling bonds, and the competition is getting keener every day. Many of the ordinary effects of competition are noticeable in the bond business. There is standardization of wares and policies, there is diminution in ratio of profits. But two ordinary effects of competition are conspicuously absent. There is no deterioration of the product and no tendency toward consolidation among the vendors. There are some who profess to see in the gradual evolution of the bond business a tendency to relinquish direct selling from house to client through traveling salesmen in favor of distribution on a commission basis, through local independent bankers. This may come. If it should, it would be one of the evil effects of competition. It would relieve the "retail" houses of a large part of that sense of |