WHAT PUBLICITY CAN DO
Publicity is justly commended as a remedy for social and industrial
diseases. Sunlight is said to be the best of disinfectants; electric
light the most efficient policeman. And publicity has already played
an important part in the struggle against the Money Trust. The Pujo
Committee has, in the disclosure of the facts concerning financial
concentration, made a most important contribution toward attainment of
the New Freedom. The battlefield has been surveyed and charted. The
hostile forces have been located, counted and appraised. That was a
necessary first step--and a long one--towards relief. The provisions in
the Committee’s bill concerning the incorporation of stock exchanges
and the statement to be made in connection with the listing of
securities would doubtless have a beneficent effect. But there should
be a further call upon publicity for service. That potent force must,
in the impending struggle, be utilized in many ways as a continuous
remedial measure.
WEALTH
Combination and control of other people’s money and of other people’s
businesses. These are the main factors in the development of the Money
Trust. But the wealth of the investment banker is also a factor. And
with the extraordinary growth of his wealth in recent years, the
relative importance of wealth as a factor in financial concentration
has grown steadily. It was wealth which enabled Mr. Morgan, in 1910,
to pay $3,000,000 for $51,000 par value of the stock of the Equitable
Life Insurance Society. His direct income from this investment was
limited by law to less than one-eighth of one per cent. a year; but
it gave legal control of $504,000,000, of assets. It was wealth which
enabled the Morgan associates to buy from the Equitable and the Mutual
Life Insurance Company the stocks in the several banking institutions,
which, merged in the Bankers’ Trust Company and the Guaranty Trust
Company, gave them control of $357,000,000 deposits. It was wealth
which enabled Mr. Morgan to acquire his shares in the First National
and National City banks, worth $21,000,000, through which he cemented
the triple alliance with those institutions.
Now, how has this great wealth been accumulated? Some of it was natural
accretion. Some of it is due to special opportunities for investment
wisely availed of. Some of it is due to the vast extent of the bankers’
operations. Then power breeds wealth as wealth breeds power. But a main
cause of these large fortunes is the huge tolls taken by those who
control the avenues to capital and to investors. There has been exacted
as toll literally “all that the traffic will bear.”
EXCESSIVE BANKERS’ COMMISSIONS
The Pujo Committee was unfortunately prevented by lack of time from
presenting to the country the evidence covering the amounts taken by
the investment bankers as promoters’ fees, underwriting commissions and
profits. Nothing could have demonstrated so clearly the power exercised
by the bankers, as a schedule showing the aggregate of these taxes
levied within recent years. It would be well worth while now to re-open
the Money Trust investigation merely to collect these data. But earlier
investigations have disclosed some illuminating, though sporadic facts.
The syndicate which promoted the Steel Trust, took, as compensation
for a few weeks’ work, securities yielding $62,500,000 in cash;
and of this, J. P. Morgan & Co. received for their services, as
Syndicate Managers, $12,500,000, besides their share, as syndicate
subscribers, in the remaining $50,000,000. The Morgan syndicate took
for promoting the Tube Trust $20,000,000 common stock out of a total
issue of $80,000,000 stock (preferred and common). Nor were monster
commissions limited to trust promotions. More recently, bankers’
syndicates have, in many instances, received for floating preferred
stocks of recapitalized industrial concerns, one-third of all common
stock issued, besides a considerable sum in cash. And for the sale
of preferred stock of well established manufacturing concerns, cash
commissions (or profits) of from 7 1/2 to 10 per cent. of the cash
raised are often exacted. On bonds of high-class industrial concerns,
bankers’ commissions (or profits) of from 5 to 10 points have been
common.
Nor have these heavy charges been confined to industrial concerns. Even
railroad securities, supposedly of high grade, have been subjected
to like burdens. At a time when the New Haven’s credit was still
unimpaired, J. P. Morgan & Co. took the New York, Westchester & Boston
Railway first mortgage bonds, guaranteed by the New Haven at 92 1/2;
and they were marketed at 96 1/4. They took the Portland Terminal
Company bonds, guaranteed by the Maine Central Railroad--a corporation
of unquestionable credit--at about 88, and these were marketed at 92.
A large part of these underwriting commissions is taken by the great
banking houses, not for their services in selling the bonds, nor
in assuming risks, but for securing others to sell the bonds and
incur risks. Thus when the Interboro Railway--a most prosperous
corporation--financed its recent $170,000,000 bond issue, J. P.
Morgan & Co. received a 3 per cent. commission, that is, $5,100,000,
practically for arranging that others should underwrite and sell the
bonds.
The aggregate commissions or profits so taken by leading banking houses
can only be conjectured, as the full amount of their transactions
has not been disclosed, and the rate of commission or profit varies
very widely. But the Pujo Committee has supplied some interesting
data bearing upon the subject: Counting the issues of securities of
interstate corporations only, J. P. Morgan & Co. directly procured the
public marketing alone or in conjunction with others during the years
1902–1912, of $1,950,000,000. What the average commission or profit
taken by J. P. Morgan & Co. was we do not know; but we do know that
every one per cent. on that sum yields $19,500,000. Yet even that huge
aggregate of $1,950,000,000 includes only a part of the securities
on which commissions or profits were paid. It does not include any
issue of an intrastate corporation. It does not include any securities
privately marketed. It does not include any government, state or
municipal bonds.
It is to exactions such as these that the wealth of the investment
banker is in large part due. And since this wealth is an important
factor in the creation of the power exercised by the Money Trust, we
must endeavor to put an end to this improper wealth getting, as well
as to improper combination. The Money Trust is so powerful and so
firmly entrenched, that each of the sources of its undue power must be
effectually stopped, if we would attain the New Freedom.
HOW SHALL EXCESSIVE CHARGES BE STOPPED?
The Pujo Committee recommends, as a remedy for such excessive charges,
that interstate corporations be prohibited from entering into any
agreements creating a sole fiscal agent to dispose of their security
issues; that the issue of the securities of interstate railroads be
placed under the supervision of the Interstate Commerce Commission;
and that their securities should be disposed of only upon public or
private competitive bids, or under regulations to be prescribed by the
Commission with full powers of investigation that will discover and
punish combinations which prevent competition in bidding. Some of the
state public-service commissions now exercise such power; and it may
possibly be wise to confer this power upon the interstate commission,
although the recommendation of the Hadley Railroad Securities
Commission are to the contrary. But the official regulation as proposed
by the Pujo Committee would be confined to railroad corporations; and
the new security issues of other corporations listed on the New York
Stock Exchange have aggregated in the last five years $4,525,404,025,
which is more than either the railroad or the municipal issues.
Publicity offers, however, another and even more promising remedy: a
method of regulating bankers’ charges which would apply automatically
to railroad, public-service and industrial corporations alike.
The question may be asked: Why have these excessive charges been
submitted to? Corporations, which in the first instance bear
the charges for capital, have, doubtless, submitted because of
banker-control; exercised directly through interlocking directorates,
or kindred relations, and indirectly through combinations among bankers
to suppress competition. But why have the investors submitted, since
ultimately all these charges are borne by the investors, except so far
as corporations succeed in shifting the burden upon the community? The
large army of small investors, constituting a substantial majority
of all security buyers, are entirely free from banker control. Their
submission is undoubtedly due, in part, to the fact that the bankers
control the avenues to recognizedly safe investments almost as fully
as they do the avenues to capital. But the investor’s servility is due
partly, also, to his ignorance of the facts. Is it not probable that,
if each investor knew the extent to which the security he buys from the
banker is diluted by excessive underwritings, commissions and profits,
there would be a strike of capital against these unjust exactions?
THE STRIKE OF CAPITAL
A recent British experience supports this view. In a brief period last
spring nine different issues, aggregating $135,840,000, were offered
by syndicates on the London market, and on the average only about 10
per cent. of these loans was taken by the public. Money was “tight,”
but the rates of interest offered were very liberal, and no one doubted
that the investors were well supplied with funds. _The London Daily
Mail_ presented an explanation:
“The long series of rebuffs to new loans at the hands of investors
reached a climax in the ill success of the great Rothschild issue.
It will remain a topic of financial discussion for many days, and
many in the city are expressing the opinion that it may have a
revolutionary effect upon the present system of loan issuing and
underwriting. The question being discussed is that the public
have become loth to subscribe for stock which they believe the
underwriters can afford, by reason of the commission they receive,
to sell subsequently at a lower price than the issue price, and
that the Stock Exchange has begun to realize the public’s attitude.
The public sees in the underwriter not so much one who insures
that the loan shall be subscribed in return for its commission as a
middleman, who, as it were, has an opportunity of obtaining stock
at a lower price than the public in order that he may pass it off
at a profit subsequently. They prefer not to subscribe, but to
await an opportunity of dividing that profit. They feel that if,
when these issues were made, the stock were offered them at a more
attractive price, there would be less need to pay the underwriters
so high commissions. It is another practical protest, if indirect,
against the existence of the middleman, which protest is one of the
features of present-day finance.”
PUBLICITY AS A REMEDY
Compel bankers when issuing securities to make public the commissions
or profits they are receiving. Let every circular letter, prospectus
or advertisement of a bond or stock show clearly what the banker
received for his middleman-services, and what the bonds and stocks net
the issuing corporation. That is knowledge to which both the existing
security holder and the prospective purchaser is fairly entitled. If
the bankers’ compensation is reasonable, considering the skill and
risk involved, there can be no objection to making it known. If it is
not reasonable, the investor will “strike,” as investors seem to have
done recently in England.
Such disclosures of bankers’ commissions or profits is demanded also
for another reason: It will aid the investor in judging of the safety
of the investment. In the marketing of securities there are two classes
of risks: One is the risk whether the banker (or the corporation)
will find ready purchasers for the bonds or stock at the issue price;
the other whether the investor will get a good article. The maker
of the security and the banker are interested chiefly in getting it
sold at the issue price. The investor is interested chiefly in buying
a good article. The small investor relies almost exclusively upon
the banker for his knowledge and judgment as to the quality of the
security; and it is this which makes his relation to the banker one of
confidence. But at present, the investment banker occupies a position
inconsistent with that relation. The bankers’ compensation should,
of course, vary according to the risk _he_ assumes. Where there is
a large risk that the bonds or stock will not be promptly sold at
the issue price, the underwriting commission (that is the insurance
premium) should be correspondingly large. But the banker ought not
to be paid more for getting _investors_ to assume a larger risk. In
practice the banker gets the higher commission for underwriting the
weaker security, on the ground that his own risk is greater. And
the weaker the security, the greater is the banker’s incentive to
induce his customers to relieve him. Now the law should not undertake
(except incidentally in connection with railroads and public-service
corporations) to fix bankers’ profits. And it should not seek to
prevent investors from making bad bargains. But it is now recognized
in the simplest merchandising, that there should be full disclosures.
The archaic doctrine of _caveat emptor_ is vanishing. The law has
begun to require publicity in aid of fair dealing. The Federal Pure
Food Law does not guarantee quality or prices; but it helps the buyer
to judge of quality by requiring disclosure of ingredients. Among the
most important facts to be learned for determining the real value of a
security is the amount of water it contains. And any excessive amount
paid to the banker for marketing a security is water. Require a full
disclosure to the investor of the amount of commissions and profits
paid; and not only will investors be put on their guard, but bankers’
compensation will tend to adjust itself automatically to what is fair
and reasonable. Excessive commissions--this form of unjustly acquired
wealth--will in large part cease.
REAL DISCLOSURE
But the disclosure must be real. And it must be a disclosure to the
investor. It will not suffice to require merely the filing of a
statement of facts with the Commissioner of Corporations or with a
score of other officials, federal and state. That would be almost as
ineffective as if the Pure Food Law required a manufacturer merely to
deposit with the Department a statement of ingredients, instead of
requiring the label to tell the story. Nor would the filing of a full
statement with the Stock Exchange, if incorporated, as provided by the
Pujo Committee bill, be adequate.
To be effective, knowledge of the facts must be actually brought home
to the investor, and this can best be done by requiring the facts to
be stated in good, large type in every notice, circular, letter and
advertisement inviting the investor to purchase. Compliance with this
requirement should also be obligatory, and not something which the
investor could waive. For the whole public is interested in putting
an end to the bankers’ exactions. England undertook, years ago, to
protect its investors against the wiles of promoters, by requiring
a somewhat similar disclosure; but the British act failed, in large
measure of its purpose, partly because under it the statement of facts
was filed only with a public official, and partly because the investor
could waive the provision. And the British statute has now been changed
in the latter respect.
DISCLOSE SYNDICATE PARTICULARS
The required publicity should also include a disclosure of all
participants in an underwriting. It is a common incident of
underwriting that no member of the syndicate shall sell at less than
the syndicate price for a definite period, unless the syndicate is
sooner dissolved. In other words, the bankers make, by agreement,
an artificial price. Often the agreement is probably illegal under
the Sherman Anti-Trust Law. This price maintenance is, however, not
necessarily objectionable. It may be entirely consistent with the
general welfare, if the facts are made known. But disclosure should
include a list of those participating in the underwriting so that the
public may not be misled. The investor should know whether his adviser
is disinterested.
Not long ago a member of a leading banking house was undertaking to
justify a commission taken by his firm for floating a now favorite
preferred stock of a manufacturing concern. The bankers took for their
services $250,000 in cash, besides one-third of the common stock,
amounting to about $2,000,000. “Of course,” he said, “that would have
been too much if we could have kept it all for ourselves; but we
couldn’t. We had to divide up a large part. There were fifty-seven
participants. Why, we had even to give $10,000 of stock to----(naming
the president of a leading bank in the city where the business was
located). He might some day have been asked what he thought of the
stock. If he had shrugged his shoulders and said he didn’t know, we
might have lost many a customer for the stock. We had to give him
$10,000 of the stock to teach him not to shrug his shoulders.”
Think of the effectiveness with practical Americans of a statement like
this:
=A. B. & Co.=
=Investment Bankers=
=We have today secured substantial control of the successful
machinery business heretofore conducted by ---- at ----, Illinois,
which has been incorporated under the name of the Excelsior
Manufacturing Company with a capital of $10,000,000, of which
$5,000,000 is Preferred and $5,000,000 Common.=
=As we have a large clientele of confiding customers, we were able
to secure from the owners an agreement for marketing the Preferred
stock--we to fix a price which shall net the owners in cash $95 a
share.=
=We offer this excellent stock to you at $100.75 per share. Our own
commission or profit will be only a little over $5.00 per share, or
say, $250,000 cash, besides $1,500,000 of the Common stock, which
we received as a bonus. This cash and stock commission we are to
divide in various proportions with the following participants in
the underwriting syndicate:=
=C. D. & Co., New York=
=E. F. & Co., Boston=
=L. M. & Co., Philadelphia=
=I. K. & Co., New York=
=O. P. & Co., Chicago=
Were such notices common, the investment bankers would “be worthy of
their hire,” for only reasonable compensation would ordinarily be
taken.
For marketing the preferred stock, as in the case of Excelsior
Manufacturing Co. referred to above, investment bankers were doubtless
essential, and as middlemen they performed a useful service. But they
used their strong position to make an excessive charge. There are,
however, many cases where the banker’s services can be altogether
dispensed with; and where that is possible he should be eliminated, not
only for economy’s sake, but to break up financial concentration.