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IS IT HARDER TO BE SUPERIOR?

There can be no doubt, looking at the data that Fortune gathered on the largest holdings of the largest trust departments, that cracks in a few big blocks would do broad damage. Fourteen out of the seventeen banks included in the data have I.B.M., the market's biggest stock, as their No. 1 holding (the other three have it in second place) and better than half have 7 percent or more of their commonstock assets in that one company. (One bank, Chemical, has 13 percent.) The tendency to bunch their investments in the same few big stocks suggests that the banks have created a kind of neutralized environment in which any one bank will find it extremely difficult to achieve a standout performance. These circumstances should logically prove most adverse to the banks that in the past have done better than others.

Morgan, however, disagrees that superior performance has become harder to achieve; one of its executives describes this premise as another example of the "mythologies" that are forever being created by Wall Street. It is Morgan's contention that the banks will continue to "mix" their stocks in significantly different ways and will continue to disagree about certain important stocks-as, for example, they are now disagreeing about Polaroid. Other banks also react testily to the thought that they have been "neutralized" and predict that the men will keep separating themselves from the boys.

Still, the banks do not feel at ease with the present degree of concentration, since they appreciate all too well the drastic price changes that can take place if a stock goes bad and everybody, as the saying goes, tries to get through the door at once. "Yes," says Quintin Ford, head of trust investments for Bankers Trust, "it does bother me that everybody is doing the same thing." But he finds "solace" in the quality of his research and is none too surprised that research leads other banks to so many of the same stocks.

There is in that statement the roots of a serious thought about the role that the banks are currently playing. It can be argued that they are focusing attention on the differences that exist between good and bad businesses, and are compelling the business world to recognize that smart money is not easily drawn into businesses that produce an inadequate return on capital. Take the top steel companies, for example. Maybe they would be cheap if on their dividends alone they provided investors a good return. But short of that point, why should any informed investor put his money into a business that makes only 5 or 6 percent on its equity capital, and that must, because its capital needs are inexhaustible, continually retain a major part of its stockholders' earnings to reinvest at those preposterously low rates?

COURTING POLITICAL TROUBLE

The two-tier market, however, has created a situation in which not only the bad businesses but also a lot of pretty good ones are in danger of being denied capital, and that puts the banks' concentration in a much more unfavorable light. Indeed, the strongest argument for saying that the banks' policies are irrational is that they probably are politically intolerable. The economic system can stand a lot of things that have been going on in the stock market, but it probably cannot stand the institutions all buying the same stocks.

Right now, shock waves from the two-tier market are being felt by venture-capital firms, who can neither in most cases take their investments to the public market nor merge them into bigger companies; those companies do not want to swap their stock when they think it is underpriced. As a result, the venture-capital firms are not freeing up capital with which to move into new investments.

Most larger companies have probably not been pinched for capital yet; they have been helped out by both the strength of profits and the ceiling on dividends. But a capital-spending boom is under way, just when companies have got their debt-equity ratios in decent shape and would like to keep them that way. A time will surely come when a good number of companies will want to sell stock or convertibles, and it is then that a two-tier market will begin to bind.

At such a point Washington could be heard from, and there might be a close race between Wright Patman's Banking and Currency committee and the Securities and Exchange Commission to get into the act first. Patman's committee has long been angry about the concentration of trust assets in the big banks, and there is no reason to think it will remain mute on this new angle. The SEC, meanwhile, approaches almost all problems involving the stock market or Wall Street from the perspective of how these will affect the country's capital-raising mechanism. Obviously it has something to think about here.

WHY US?

The banks certainly do not want any new battles with Washington. Yet they seem curiously unable to take this problem as seriously as they should. Joseph Alaimo, head of pension investments in Continental Illinois' trust department, said recently that there was nothing he would like more than to see the lower-tier stocks rise and do well. But he could not see why Continental Illinois should suddenly desert the investment policies with which it feels comfortable and go down to pull off the rescue. In other words, why us?

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One answer may be "who else?" From time to time, market commentators forecast hopefully that foreign money will come pouring into the market. But it is not widely recognized that foreigners were buying U.S. stocks at record rates in the first quarter. They have also lately somewhat depopulated the lower tier by going after several whole companies, including Gimbels, but that is not the kind of help that chief executives of lower-tier companies have in mind.

There is always the possibility that the individual investor will abandon the habits he has formed over the last fourteen years and will once again become a net buyer of stocks. He began his selling, after all, in 1959, just after p-e ratios reached the relatively high levels near which they have since held. Now there is obviously a new p-e situation and maybe the individual might be lured back in. Unfortunately, that scenario would sound more likely if inflation fears were not so great and bond interest rates not so high.

The other answer to "why us?" is that some shopping in the lower tier just might be a pretty smart thing for the banks to do. Certainly they would be better off going voluntarily after the low-tier stocks than being pushed into it by Washington. And just as certainly there are companies down there any bank could live happily with, which is not something that at these price levels, and in this strange market, can be said with quite such conviction about the upper-tier stocks. Who knows? From about any angle, the lower-tier companies could turn out now to be the "right" stocks to buy.

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Appendix C

Excerpts from 1968 House Banking and Currency Staff Report on Director Interlocks for Large Banking Institutions

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