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 BankersWe 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.
CHAPTER VI
WHERE THE BANKER IS SUPERFLUOUS
The abolition of interlocking directorates will greatly curtail the bankers’ power by putting an end to many improper combinations. Publicity concerning bankers’ commissions, profits and associates, will lend effective aid, particularly by curbing undue exactions. Many of the specific measures recommended by the Pujo Committee (some of them dealing with technical details) will go far toward correcting corporate and banking abuses; and thus tend to arrest financial concentration. But the investment banker has, within his legitimate province, acquired control so extensive as to menace the public welfare, even where his business is properly conducted. If the New Freedom is to be attained, every proper means of lessening that power must be availed of. A simple and effective remedy, which can be widely applied, even without new legislation, lies near at hand:—Eliminate the banker-middleman where he is superfluous.
Today practically all governments, states and municipalities pay toll to the banker on all bonds sold. Why should they? It is not because the banker is always needed. It is because the banker controls the only avenue through which the investor in bonds and stocks can ordinarily be reached. The banker has become the universal tax gatherer. True, the pro rata of taxes levied by him upon our state and city governments is less than that levied by him upon the corporations. But few states or cities escape payment of some such tax to the banker on every loan it makes. Even where the new issues of bonds are sold at public auction, or to the highest bidder on sealed proposals, the bankers’ syndicates usually secure large blocks of the bonds which are sold to the people at a considerable profit. The middleman, even though unnecessary, collects his tribute.
There is a legitimate field for dealers in state and municipal bonds, as for other merchants. Investors already owning such bonds must have a medium through which they can sell their holdings. And those states or municipalities which lack an established reputation among investors, or which must seek more distant markets, need the banker to distribute new issues. But there are many states and cities which have an established reputation and have a home market at hand. These should sell their bonds direct to investors without the intervention of a middleman. And as like conditions prevail with some corporations, their bonds and stocks should also be sold direct to the investor. Both financial efficiency and industrial liberty demand that the bankers’ toll be abolished, where that is possible.