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STOCK EXCHANGE PRACTICES HEARINGS BEFORE THE COMMITTEE ON BANKING AND CURRENCY UNITED STATES SENATE SEVENTY-THIRD CONGRESS FIRST SESSION ON S. Res. 84 (72d CONGRESS) A RESOLUTION TO INVESTIGATE PRACTICES OF STOCK EXCHANGES WITH RESPECT TO THE BUYING AND SELLING AND THE BORROWING AND LENDING OF LISTED SECURITIES AND S. Res. 56 and S. Res. 97 (73d CONGRESS) RESOLUTIONS TO INVESTIGATE THE MATTER OF BANKING OPERATIONS AND PRACTICES, TRANSACTIONS RELATING TO ANY SALE, EXCHANGE, PURCHASE, ACQUISITION, BORROWING, LENDING, FINANCING, ISSUING, DISTRIBUTING, OR OTHER DISPOSITION OF, OR DEALING IN, SECURITIES OR CREDIT BY ANY PERSON OR FIRM, PARTNERSHIP, COMPANY, ASSOCIATION, CORPORATION, OR OTHER ENTITY, WITH A VIEW TO RECOMMENDING NECESSARY LEGISLATION, UNDER THE TAXING POWER OR OTHER FEDERAL POWERS PART 3 Kuhn, Loeb; Pennroad Corporation JUNE 27, 28, 29, 30, and JULY 5, 1933 Printed for the use of the Committee on Banking and Currency 176641 U N I T E D STATES GOVERNMENT P R I N T I N G O F F I C E WASHINGTON : 1933 COMMITTEE ON BANKING AND CURRENCY DUNCAN U. FLETCHER, Florida, Chairman CARTER GLASS, Virginia PETER NORBECK, South Dakota ROBERT F. WAGNER, New York PHILLIPS LEE GOLDSBOROUGH, Maryland ALBEN W. BARKLEY, Kentucky JOHN G. TOWNSEND, JR., Delaware ROBERT J. BULKLEY, Ohio FREDERIC C. WALCOTT, Connecticut THOMAS P. GORE, Oklahoma ROBERT D. CAREY, Wyoming EDWARD P. COSTIGAN, Colorado JAMES COUZENS, Michigan ROBERT R. REYNOLDS, North Carolina FREDERICK STEIWER, Oregon JAMES F. BYRNES, South Carolina HAMILTON F. KEAN, New Jersey JOHN H. BANKHEAD, Alabama WILLIAM GIBBS McADOO, California ALVA B. ADAMS, Colorado WILLIAM L. HILL, Clerk R. H. SPARKMAN, Acting Clerk SUBCOMMITTEE ON STOCK E X C H A N G E INVESTIGATION DUNCAN U. FLETCHER, Florida, Chairman CARTER GLASS, Virginia PETER NORBECK, South Dakota ALBEN W. BARKLEY, Kentucky JOHN G. TOWNSEND, JR., Delaware EDWARD P. COSTIGAN, Colorado JAMES COUZENS, Michigan PHILLIPS LEE GOLDSBOROUGH,1 Maryland 1 FREDERICK STEIWER, Oregon 1 Alternates, serving in the absence of Senators Norbeck and Couzens. II CONTENTS Testimony of: Buttenwieser, Benjamin J County, A. J Kahn, Otto H Larsen, Otto C Lee, Henry H Taplin, Frank E Page 980, 1018, 1091, 1121, 1125 1516 957, 983, 995, 1119, 1150, 1197, 1230, 1271, 1305 1484 1327, 1491 1415, 1480, 1486 in STOCK EXCHANGE PEACTICES TUESDAY, JUNE 27, 1933 UNITED STATES SENATE, SUBCOMMITTEE OF THE COMMITTEE ON BANKING AND CURRENCY, Washington, D.C. The subcommittee met, pursuant to call of the chairman, as a resumption of hearings recessed on Friday, June 9, 1933, at 10 o'clock a,m. in the Caucus Koom of the Senate Office Building, Senator Duncan U. Fletcher presiding. Present: Senators Fletcher (chairman), Barkley, Costigan, Goldsborough, Townsend, and Steiwer. Present also: Senator Adams. Present also: Ferdinand Pecora, counsel to the committee; Julius Silver and David Saperstein, associate counsel to the committee; and Frank J. Meehan, chief statistician to the committee; Carl A. de Gersdorff, Robert T. Swaine, and M. T. Moore, counsel for Kuhn, Loeb & Co. The CHAIRMAN. The subcommittee will please come to order. We will proceed with the hearings. Mr. Pecora, who is your first witness ? Mr. PECORA. Mr. Otto H. Kahn. The CHAIRMAN. Mr. Kahn will come forward to the committee table, hold up his right hand, and be sworn. You solemnly swear that you will tell the truth, the whole truth, and nothing but the truth, regarding the matters now under investigation by the committee. So help you God? Mr. KAHN. I do. TESTIMONY OF OTTO H. KAHN, A PARTNER OP KUHN, LOEB & CO., NEW YORK CITY Mr. PECORA. Mr. Kahn, will you be good enough to give the committee reporter your full name and address, both residence and business? Mr. KAHN. Otto H. Kahn; business address, 52 William Street, and residence address, 1100 Fifth Avenue, New York City. Mr. PECORA. What is your business ? Mr. KAHN. I am a banker. Mr. PECORA. Are you a member of any banking firm in the conduct of your business? Mr. KAHN. I am a member of the banking firm of Kuhn, Loeb &Co. Mr. PECORA. HOW long have you been connected with that firm? Mr. KAHN. Since 1897. 957 958 STOCK EXCHANGE PRACTICES Mr. PECORA. AS a partner? Mr. KAHN. Yes; as a partner. Mr. PECORA. What is the personnel in that firm as at present constituted, Mr. Kahn ? Mr. KAHN. Shall I read the names, or give you the paper? Mr. PECORA. If you will just give us the names. Mr. KAHN. Felix M. Warburg, Otto H. Kahn, George W. Bovenizer, Lewis L. Strauss, Sir William Wiseman, John M. Schin\ Gilbert W. Kahn, Frederick M. Warburg, Benjamin J. Buttenwieser, Hugh Knowlton, Elisha Walker. Mr. PECORA. HOW long has the firm of Kuhn, Loeb & Co. been in existence? Mr. KAHN. About 65 years. Mr. PECORA. And has its principal office during that time always been in the city of New York ? Mr. KAHN. Yes, sir. Mr. PECORA. And does it maintain offices in any other city, Mr. Kahn, at the present time ? Mr. KAHN. It maintains offices in no other city. Mr. PECORA. Has it at any time within the past 6 years maintained an office in any other city? Mr. KAHN (after conferring with an assistant). I am sorry to have paused for a moment to ask a question or two, but I wanted to be precise. For a couple of years, during 1927 to 1929, I believe, or 1930, Mr. Leith, of London, was a partner in our firm, and he resided in London. We paid the office expenses. But it would be going rather beyond the spirit of our arrangements if I should say that we had an office in London. We had no offices, so to speak, but one of our partners for 2 or 3 years resided in London. Mr. PECORA. Since 1927, and inclusive of that year, has the firm had any contract affiliation with any other bank or banking firm or banking house ? Mr. KAHN. None, sir. Mr. PECORA. HOW would you describe the nature of the business conducted by the firm of Kuhn, Loeb & Co. ? Mr. KAHN. The firm of Kuhn, Loeb & Co. buys and sells securities from and to its clients. It accepts deposits from its clients but not from the general public, and it is not in the business of soliciting deposits. It buys and sells securities on the stock exchange, again for its regular clients, but not for the general public, and does not maintain any kind of special department for the service of clients that may wish to buy securities on the stock exchange through its offices. Senator TOWNSEND. DO you maintain a stock-exchange membership? Mr. KAHN. We maintain a stock-exchange membership in that one of our partners is a member of the stock exchange. But may I finish my answer, Senator, if you please? Senator TOWNSEND. Yes. Mr. KAHN. The part of our business which I was going to complete was: That it is our function to advise our clients, or those who wish to become our clients, upon financial affairs in general. And may I emphasize the word " financial", because our business is STOCK EXCHANGE PRACTICES 959 a financial business and is not to run anybody else's business, only to run our own business as best we can in a financial way. Mr. PECORA. Does that complete your answer, now? Mr. KAHN. Yes, sir. Mr. PECORA. YOU have referred to clients. Does the clientele of your firm consist of any particular kind of persons—that is, persons engaged in any particular kind of business? Mr. KAHN. The clientele of our firm, Mr. Pecora, is primarily corporations engaged in different lines of business. We have few private clients. We have some inherited European clients, some of the leading European banks maintain relations with us and have maintained them for a great many years. But not of any significance, rather minor accounts, Generally speaking, it would be correct to say that our relationship is mainly with corporations. Mr. PECORA. With what kind of corporations? Mr.' KAHN. Eailroad corporations, and some industrial corporations. We have no public utility affiliations, and never have had any unless you consider the Western Union a public utility, or the American Telephone &> Telegraph Co. in the financing of which we have for a number of years had an interest together with others. Mr. PECORA. Would you say that railroad corporations constitute your principal corporation clients? Mr. KAHN. I should say they would constitute the majority of our clients, yes. Mr. PECORA. And has that generally been so in the past 10 years or 20 years? Mr. KAHN. Mr. Pecora, it has been so long that I should say almost since the beginning of the firm we have specialized in the business of marketing railroad securities. Mr. PECORA. That is, of railroad financing. Mr. KAHN. Eailroad financing; yes. That is, we have specialized in that line, perhaps unduly, and perhaps to the exclusion of a good many other opportunities which might have been more tempting. We have some industrial clients, but you are right in saying that the majority of our clientele is railroads. Mr. PECORA. What is the general method, or what has been the general method by which your firm has financed railroad operations ? Mr. KAHN. May I ask, in order that I may correctly understand your question before I answer: Do you mean the general method in detail of buying railroad securities, or the general method in approaching railroads ? Mr. PECORA. Well, take the latter j>art of your inquiry, for instance, the general method of approaching railroads. Mr. KAHN. Well, I should say precisely the same method by which a lawyer approaches clients. [Laughter.] Mr. PECORA. Well, lawyers are not supposed to approach clients. Mr. KAHN. I was coming to that, Mr. Pecora. Or the method by which a doctor approaches a patient who is sick. He does not go after him. Ethically and as a standard of the legal profession you are not permitted to go after him. And I do not suppose that a doctor would be permitted to go after a patient under the ethical standards of the medical profession. For instance, he could not go 960 STOCK EXCHANGE PRACTICES if someone told him that " Mr. Smith in the next block is very sick with pneumonia, you better run in and try to find out if you cam get him." That would not be the way to do it. He gets his clients by reason of his reputation for ability and for successful cures and for sound advice given. And so it is with the lawyer. So it is with the architect. And so in our case it has long been our policy and our effort to get our clients, not by chasing after them, not by praising our own wares, but by an attempt to establish a reputation which would make clients feel that if they have a problem of a financial nature, Dr. Kuhn, Loeb & Co. is a pretty good doctor to go to. Mr. PECORA. Well, the contact having been established between doctor and patient, or in your case between banker and railroad, what is the next step in the operation of financing the railroad ? Mr. KAHN. A railroad, or some particular officer of a railroad— who, by the way, might be personally unknown to us before he was appointed to that particular position—would come t6 us and would say: " We have such and such a problem to solve, being a problem of a financial nature. We would like to get your advice as to the best kind of security to issue for that purpose—and, by the best kind of security I mean a security which on the one hand gives to the railroad the most useful instrument, not only for immediate purposes but for long-time purposes, and gives to the public the greatest possible protection without tying up the railroad unduly and beyond what is safe for it." So, he says: " Will you tell us what is the best kind of instrument to use for that purpose ? Should it be a mortgage bond ? Should it be a debenture ? Should it be a convertible bond ? Should it be preferred stock? Should it be an equity? We would like you to look into it and tell us. Here are our facts and figures. Go through them." Then we would say: " I t is of very great importance to know what kind of securities you want." And I might say that we have sometimes been stuck by not knowing what £ind of securities would be most advantageous from all standpoints to issue. There is a great deal of importance in knowing when the market is receptive for a security. We would know that in a short while from now other large security issues are likely to come upon the market. It is our business to know that as far ahead as we can. We would know what is the general disposition of the security market. Is it favorable or is it unfavorable. Is there an investment demand or isn't there an investment demand. And that situation varies. Sometimes we can sell nothing but equities. Sometimes equities are thrown into the discard and people want safety. Again, that is our job, to know. They would say: "Tell us your best judgment as to the time when we ought to have our bond, or whatever you advise us to use, ready for disposal. We should like your opinion as to that. We should like your opinion as to what is a fair price, both to the public and the railroad, or both to the public and the seller corporation." I think it is essential that it should be a fair price equally to both, because if it is not you are liable to lose good-will of either of the two, and our business can only persist so long as we have the confidence and good-will of both our corporate clients and the public. For instance, we haven't got a show window as you have in Fifth Avenue, where goods are attractively displayed and one can look in STOCK EXCHANGE PRACTICES 961 and be enticed by quality and good taste on the part of the displayer. We have no show Avindow. Our only attractiveness is our good name and our reputation for sound advice and integrity. If that is gone our business is gone however attractive our show window might be. We hold our position, and every leading banker holds his position, solely by reason of the confidence of the community in his skill, in his sponsorship, in his integrity, in his desire to be thorough and to advise correctly. And, I might say, we hold our position subject to recall. It can be recalled by the public at any time they choose. It can be recalled by a corporation at any time they choose; if they think we are no longer the people they thought we were they are entirely at liberty to go elsewhere. And the public is entirely at liberty to go elsewhere, and both the public and corporations have done that in the past more than once. I t would be ungracious for me to mention names, but there have been ups and downs in banking prestige, and there has been a rise and fall of banking firms. I hope you will not ask me to mention any names, but the history of finance is fairly full of them. Mr. PECORA. NOW, Mr. Kahn, isn't there the fairly well recognized principle, or canon of ethics we will say, that has been developed in the banking business, in pursuance of which a private banking firm which once undertakes the financing of a corporation continues to do its financing practically to the exclusion of any others, unless it voluntarily chooses to give up the client ? Mr. KAHN. Mr. Pecora, may I use the same simile again? If I am known to be a pretty good doctor I am liable to keep my patients. If I am not, and if for any reason it is possible to think somebody is coming up who is better, the patient will quit me, he will quit me cold. And so will the financial community, and so will corporations. If we do not live up to what they believe is our capacity, and to what they believe is the value of our sponsorship, of our trade mark, they will quit us. And we have no means to prevent them. We are not tied to them and they are not tied to us through any legal instrument or any fiscal agency agreement. Senator BARKLEY. I S that cold-quitting process to which you refer reciprocal ? I mean, is there any habit by which banking institutions, like yours, quit a patient cold if there is any good reason for it? Mr. KAHN. If they find that the patient does not obey their competent advice in the one field where they ought to be competent, namely, the field of sound financing; if they find that the patient goes his own, in their opinion, dangerous, hazardous way, it is their duty to quit that patient. The CHAIRMAN. And the next step, Mr. Kahn, after you establish that relationship and are prepared to give your advice, is the question of your compensation for services, isn't it? Mr. KAHN. Yes, Senator Fletcher. The CHAIRMAN. I S that based upon any general rule or is that the result of negotiation with each individual client? Mr. KAHN. I t is the result of negotiation—which, however, by this time is pretty well stabilized and normalized. As far as railroad securities are concerned the Interstate Commerce Commission fixes the price. We do not get any commission from the railroads, no fixed compensation. We buy the bonds that we buy at a price 962 STOCK EXCHANGE PRACTICES arranged between the railroads and ourselves, and which in our judgment is fair to the railroads and to the public. And I cannot emphasize too much that the element of reciprocal fairness is of the essence of any banker's business. And if it is violated the banker will pay the price. But we agree with the railroad upon a price which we, reciprocally, consider a fair price, to the railroad and to the public, under the prevailing condition of the investment market. For instance, a railroad will go to the Interstate Commerce Commission and say: " We wish to issue such and such bonds. We have been offered such and such a price by Kuhn, Loeb & Co." The Interstate Commerce Commission, as you well know, investigates the matter and gives its decision. Nothing is said in the contract as to the price at which those bonds which we have bought, we will say at 95, shall be issued to the public. But it is very well understood by practice and by usage at what price the securities will be offered to the public, what spread shall be allowed between the price at which we bought them and the price at which the public shall get them. And that spread is, I can say more than generally, and somewhat uniformly, known to the Interstate Commerce Commission. If we buy bonds at 95 the Interstate Commerce Commission would say: " Now, how much spread do they count on making as between the price at which they buy them from you and the price at which they sell them to the public? " Of course, that would be disclosed. If that spread should be unreasonable we get a pretty strong hint that it is unreasonable, and we better had obey that hint. Senator TOWNSEND. On what basis is the spreadfixed? Mr. KAHN. The spread is fixed upon, first, reasonable compensation for the originators. Second, reasonable compensation for those who are called distributors, or who may be called underwriters, for their risk, for their effort, and for their responsibility. Again, that has become pretty well stabilized and normalized by usage. In the case of railroads almost unifom. In the case of coporations other than railroads it is a matter of negotiation depending upon the risk involved, the responsibility involved and the greater or lesser difficulty of placing the securities. The CHAIRMAN. Say you pay 95; what would be a reasonable spread between that and the price the public pays ? Mr. KAHN. A reasonable spread, Senator, dependent upon the kind of issue, dependent upon the size of the issue, dependent upon the prevailing conditions in the market, would be between 2*4 and 2y2 percent gross, out of which would come all expenses, out of which would come the compensation to the distributors, and out of which would come, Senator, not merely the originator's compensation for his work and his effort, but would come the compensation for the fact, which is not very generally known, that the originator, however many syndicates he may form, remains responsible with his entire fortune and good name to the railroad company for the contract which he has made, for the money which he has undertaken to pay, until that money is paid. He cannot say to the railroad, " I have divided that up amongst five or six hundred people; you will get your money from Tom, Brown, Smith, and Jack." They would say, " We do not know them. You are responsible to us for every one of your 600 subparticipants, distributors, or underwriters. We STOCK EXCHANGE PRACTICES 963 look to you, and to you only. And if any of them fail, if any of them are not solvent, you are responsible, and you only." Our responsibility frequently extends to 5 or 6 weeks in having the syndicate stand in the breach, and during that time the originators are responsible for every single participant in that syndicate, for his solvency and for his making good. Senator COSTIGAN. Does the percentage vary, with the amount involved ? Mr. KAHN. NO ; I should not think, Senator, it would vary materially with the amount involved. It would vary with the amount involved only to the extent of the increasing difficulty and risk if the amount is unduly large. It would not vary if the amount was unduly small. And we would not charge a man more because he sent us a small issue. We might charge him more if he sends us a large issue, an issue of unusual size, because it involves unusual effort, unusual responsibility, unusual risk. Senator COSTIGAN. In your judgment is the responsibility measured by the size of the investment? Mr. KAHN. I beg your pardon, Senator ? Senator COSTIGAN. Read the question, please. (Thereupon the last question was read by the reporter, as above recorded.) Mr. KAHN. The responsibility is measured to a certain extent naturally by the size of the investment, because if we take an issue of $50,000,000 it means that we take a risk of $50,000,000, and we take the responsibility of it ourselves, however many groups may be involved in its final distribution. Senator COSTIGAN. YOU regard the risk as 50 times as great as in the case of a $1,000,000 issue? Mr. KAHN. Mathematically so; yes. Mathematically; yes. Actually we do not regard it. Actually we have by long experience gained complete confidence in that list of distributors with whom we generally do business. It happened that we stood in the breach for syndicates at the time that the Libsitania went down, which was a very unpleasant experience and gave us some sleepless nights—but no worse than we had yesterday with the first touch of the heat, unfortunately. We stood in the breach for a very large issue at the time that the great panic in October 1929 broke upon the country. Again it was not a pleasant experience. But with few exceptions, even in the face of these unforseen calamities, our list of tested and well selected distributors and friends all made good. And, generally speaking, we have complete confidence in them. Therefore I do not consider the risk of a $50,000,000 issue 50 times as large as that of a $1,000,000 issue. I do consider the work greater, I do consider the effort greater, I do consider the responsibility greater. Senator GOLDSBOROUGH. May I ask a question, Mr. Chairman ? The CHAIRMAN. Yes. Senator GOLDSBOROUGH. Mr. Kahn, does not the nature of the security back of the issue have a tendency to increase or lessen the percentage of spread? Mr. KAHN. I should say that the percentage of spread, as I said to Senator Costigan, before, by this time has become so stabilized 964 STOCK EXCHANGE PRACTICES that it is a matter of a relatively trifling difference. There is some difference. The nature of the security has something to do with it. For instance, Senator, if we bring out an issue which we know is the kind of security that our savings banks and the insurance companies will be glad to buy because it is the kind of thing they like to buy Senator GOLDSBOROUGH. What you would call a triple-A security ? Mr. KAHN. Yes. If we bring that out, it is naturally easier to sell than if we bring out a security that has got to be explained, where we know the insurance companies will not under the law be permitted to buy them, savings banks probably will not buy them either, the extra prudent, old-fashioned investor probably will not buy them either, and we have got to go out and make a special effort to find people who are inclined to buy that kind of security. Now, that would have an influence upon the nature of the spread. Mr. PECORA. Mr. Kahn, to go back to the relationship between the banker and his railroad corporation client, as an example. You have said, of course, that the client has the right at any time to transfer his financing to another banker. There is no obligation, contractual or otherwise, which binds the client to the banker. I recognize that. But has there not developed a rule or custom among bankers to keep hands off the client when they know that client has had its financing done by another banker ? Mr. KAHN. I should think, Mr. Pecora, that rule is very much in the spirit of the kind of code which the legislature has now adopted, or is about to adopt, to regulate the business activities of all branches of business in the country. In other words, instead of cutthroat competition, which is not to the interest of the public; instead of the kind of competition which we had between 1926 and 1928, when, to my own knowledge 15 American bankers sat in Belgrade, Yugoslavia, making bids, and a dozen American bankers sat in a half a dozen South and Central American States, or in Balkan States— instead of that kind of competition, cutthroat competition, one outbidding the other foolishly, recklessly, to the detriment of the public, compelling him to force bonds upon the public at a price which is not determined by the value of that security so much as by his eagerness to get it—that kind of competition I hope is ended. As far as we are concerned we have always endeavored to observe the rules of fair competition. And I think some other bankers have. I hope most other bankers have. But it is exactly the same, again, as if an architect had built a house for me; no other decent architect would come to me and say, " I can build a better house for you." The architect relies upon his reputation. He will show by what he has done that he has built a better house. I have seen it, no doubt; I pass it every day on my way to my office. The competition which exists is in my opinion a competition of service and of performance. The competition of attracting clients. Not by chasing after business. Not by trying to get another fellow out of business who is doing business legitimately and well, but by proving to the client that he would do better by coming to me. That has happened. Senator COSTIGAN. Mr. Kahn, will you describe in greater detail the competition of bankers in Europe to which you made reference a few moments ago? STOCK EXCHANGE PRACTICES 965 Mr. KAHN. I am not certain what reference I did make. Mr. PECORA. YOU spoke of a dozen or more bankers competing with one another in Belgrade in some ruinous fashion. Mr. KAHN. Oh, Senator, I beg your pardon. I referred to the competition by American bankers for European and foreign issues in general through the two mad years of 1926 and 1928 when, just as in 1929, nothing counted but pieces of paper, equities; so in the two or three preceding years before that the public had a mania for buying high-interest-bearing bonds. Senator COSTIGAN. Where were these bankers assembled? Mr. KAHN. Oh, in all the capitals of the various nations. Senator COSTIGAN. Were they the leading bankers of the United States? Mr. KAHN. It is a little ungracious of me to graduate them, Senator. They were bankers engaged in the business of buying securities. And I hope you will not $,sk me whether they were leading bankers or less leading bankers. Senator COSTIGAN. Well, among them were there some leading bankers of this country ? Mr. KAHN. I hesitate—I hate to seem evasive to you, and I know I could not if I tried, but would it not be embarrassing and ungracious if I answered that question ? Senator COSTIGAN. Perhaps you will specify who the bankers were. Mr. KAHN. Personally I do not know all of those bankers. Six years have gone by. I have grown 6 years older. My memory is not as keen as it used to be. Senator COSTIGAN. Was your firm represented in this competition? Mr. KAHN. Never, Senator. Not once. Senator COSTIGAN. YOU added a statement to the effect that some compulsion was brought by those bankers on others to market the securities, if I understood you. Is that an accurate observation? Mr. KAHN. I did not mean to imply that, Senator Costigan. I meant to say that the compulsion was rather upon the banker himself. He had the bear by the tail. He had to get rid of him somehow. I will give him credit for believing that he had a bear that was well worth disposing of. But the fact that he had him—the compulsion of getting rid of the bear was upon him. Senator ADAMS. That would be true of most any bear, would it not, if you had him by the tail ? Mr. KAHN. Yes. Senator BARKLEY. AS N a matter of fact he had a bull by the tail when he thought he had a bear. Mr. KAHN. That has happened many times, as we all know to our cost. But the fact of the compulsion, and, as I have tried to bring out, by an unduly competitive system, by a cutthroat competitive system, by endeavoring to break in at whatever cost the public is damaged because the public pays an unduly high price. And the banker who has been triumphant in getting that issue will very soon find himself regretful that he did get it. And in any event he will be under the compulsion for his own solvency, to try and get rid of it. Therefore I say that kind of competition is harmful both to the corporations and to the public and to the government involved, because those governments by this very method have seen their credit spoiled, and have also seen money given to them which it would have been very much better if they had never had. 966 STOCK EXCHANGE PRACTICES Mr. PECORA. NOW, Mr. Kahn, in answering the question that I put to you a few moments ago I tried to follow your answer, which was illuminating, and I am still uncertain as to whether you intended to inform this committee in your answer that a custom had developed among bankers in pursuance of which a banker will not seek to gain a client whom he recognized already to be a client of some other banker. Has such a custom developed in the banking profession. Mr. Kahn? Mr. KAHN. I should not say, Mr. Pecora, in the banking profession peculiarly. I should say it has developed more or less in all professions by a process of enlightenment. Mr. PECORA. Well, we are confining ourselves now to the banking profession. I simply want the committee to know whether or not that custom has developed and exists in the banking profession ? Mr. KAHN. The custom which has developed and which is in the banking profession, and which has long existed among bankers, and not only the top-notch bankers, but among reputable bankers, is that of competing with one another on the basis of their services and their performance. Precisely as the railroads, now that the rates are regulated, can only attract clients by their service and their performance. The corporations concerned are the ones who determine what bankers they want to deal with. It is not the banker who determines what corporation he wants to deal with. He might like to very much. But it is for the corporation to say, " Well, I am very happy where I am; I have picked that banking house and I will stick to it until they make a mistake. After they make a mistake I will quit it and go to another." If a railroad corporation or any other corporation comes to us and says "We have determined to terminate our existing financial sponsorship and advice and we would like to get yours ", I do not believe we would hesitate to act upon that, in decency, fairly, and with proper regard for our neighbors, whether they be bankers or whatever they may be. But that is our whole method of competition, and has been our whole method of competition always, and it is not merely between us and any one particular banker. It is between us and all bankers. I can give you a few instances—that I would rather not give—but I can give you a few instances where business heretofore done by us has gone to other bankers, and where business heretofore done by other bankers has gone to us. I would rather not mention names, but it has occurred. But our effort, and I hope the effort of all bankers, is that this thing shall be done decently, fairly, with a mutual respect for one another, and not a cutthroat competition, and not an undignified scramble for business. Mr. PECORA. Then there is not that spirit or kind of competition among bankers which would cause a banker to seek to do the financing for a railroad corporation, for example, when he knows that that railroad corporation in the past has had its financing or banking done by some other banker? Mr. KAHN. I do not believe, Mr. Pecora, that that is the element which would enter into the conclusion. Mr. PECORA. Well, whether or not it is the element, is it the fact that bankers do not engage in that competitive kind of business one with another? STOCK EXCHANGE PRACTICES 967 Mr. KAHN. I cannot answer yes or no without amplifying my answer by saying there is distinct and keen competition between bankers, but that competition is based not upon one banker trying to undercut the other banker's bid by an eighth or a quarter, but it is based upon services, upon accomplishments, and upon the choice of the corporation in question. We do not go, and I do not believe any banker usually does go, to corporations of our own initiative. We would say, " These people, we hope, know that we have a good reputation. We hope that if there is business they will come to us." Our minds and our activities are wide open to do business with anybody who comes to us. But we will not chase after business. And I can only speak for ourselves. I cannot speak for other bankers, but I can say for ourselves, we will not chase after business. We will not engage in competition which we consider unfair and from which we consider neither the corporations nor the public benefit. But we welcome eagerly any new opportunity to do business. And it has happened to us that business which we heretofore have done with certain railroads has been done by others henceforth, and it has happened that certain issues heretofore done by large concerns that I could mention, but I prefer not to, have been done by us, because the business came legitimately and fairly. Mr. PECORA. Well, those instances are relatively few and far between, are they not? Mr. KAHN. They are relatively few and far between; yes. Mr. PECORA. And do you know of a case where a prominent banking firm which had done the financing, we will say, for a railroad corporation, loses that client where the banking firm has indicated its willingness to continue financing for that road? Mr. KAHN. Yes; Mr. Pecora, I do. Mr. PECORA. Are those instances also relatively very few? Mr. KAHN. They are relatively few; yes. Mr. PECORA. NOW, to be specific, let us assume that A. B. &> Co., a private banking firm of standing and recognized prestige, has done the financing for the X. Y. Z. Railroad, you would not as a banker if you learned that the X. Y. Z. Railroad wanted to borrow, we will say, $50,000,000, offer your banking services without the consent of A. B. & Co., or unless the X. Y. Z. Railroad originally come to you? Mr. KAHN. It does not depend upon anybody's consent, Mr. Pecora. It depends Mr. PECORA. NO ; but what has been the custom ? Mr. KAHN. It depends upon our own sense of what is fit and proper and decent to do. Mr. PECORA. Well, you would not consider such a thing fit and proper and decent to do, would you ? Mr. KAHN. I would not; no. Mr. PECORA. And that rule is observed generally by bankers, is it not? Mr. KAHN. I can only speak as to my own firm. Mr. PECORA. Well, can you not speak also from your knowledge of the banking business generally as to what the rule and custom is? Mr. KAHN. I can say that 1 believe generally amongst houses of standing the ethics of the business is not to indulge in cutthroat competition and steal things away the one from the other, unless 968 STOCK EXCHANGE PRACTICES there is a situation where the corporation concerned of its own volition or by the good offices of somebody comes and says, "We have determined to change our relations. We have come to you. Are you willing to do it? " " Gladly." Mr. PECORA. For instance, if you learned that a railroad corporation wanted to borrow $50,000,000 and you knew that that railroad corporation had had its financing previously done by another banking firm, you would not think of going to that railroad corporation on your own initiative and offering to handle the financing operation, would you ? Mr. KAHN. I think, Mr. Pecora—I hate to take your time and the committee's time any longer than necessary, but I thought I had explained pretty clearly what our attitude in such a case would be. Mr. PECORA. Well, in order to make sure that the answer is clearly in the record will you answer the question that I put to you, the present question? If you can answer it categorically, I think that will dispose of the question. (The pending question was thereupon read by the reporter, as above recorded.) Mr. KAHN. Well, if you want a categorical answer, Mr Pecora, I can only say it is always the other way around; has been with us for 50 years perhaps, or certainly for the last 30 or 40 years. It is not we that go to the corporations and ask them to do business with us. We hope that we have established a reputation which is our show window, which attracts customers. We hope that our trade mark, our sponsorship is recognized of some value to the corporation. We do not go after them. That may be conceited, but we do not. We would rather do less business. We do not go after them. But if a railroad comes to us, or if any corporation comes to us and says: " We waint to place a $50,000,000 issue through you ", and we know they have been doing business with somebody else, we ask them fairly and openly the question, " We know that you have been doing business with so and so; are you not doing business any longer with them? " " No, we have severed our connection ". Then we consider ourselves entirely free to do their business. Senator BARKLEY. But, if you knew that in the preliminary stages of the floating of the $50,000,000 loan they had been under negotiations with some other bank you would not step in voluntarily and seek to take that client away from the other bank? Mr. KAHN. I would not seek to take any client away from anybody. I am seeking to develop in our own business and my associates are seeking to develop in our own business. Senator BARKLEY. IS there not a very well developed code of ethics among bankers that one banker will not try to take business away from another banker? Mr. KAHN. I think it is a well-recognized code of ethics, and it is getting better through the country. Senator BARKLEY. That is undoubtedly a fact, though, is it not? It seems to me that a very simple proposition which a simple answer would clear up. Mr. KAHN. I am not prepared to say that it is a fact, Senator. No.; I am not. Senator BARKLEY. Well then, the conditions are not as ethical as you might hope that they could be ? STOCK EXCHANGE PRACTICES 969 Mr. KAHN. I believe I have already shown that in 1926 to 1928 the conditions were such as I am far from approving. But I believe that especially under the new Recovery Act it will be more and more recognized that that kind of competition is detrimental, and is perhaps slightly unethical. I can speak for ourselves. We do not go after other people's, business. We do not go after business at all. We have our shop window, as I call it. If somebody comes to us and says, " I would like to do business with you. I have heretofore done business with John Smith. I wrould like to do business with you." We would say, " Do you mean to say you have definitely broken with them?" "Yes." "And you tell us you are free, without infringing upon our conscientious scruples, to do business with us? " "Yes." I would not then hesitate to do business. Senator BARKLEY. DO you know instances where other bankers have gone after your business ? Mr. KAHN. I "have some, Senator. I hope you will not press me. Senator BARKLEY. I am not going to press you, but it has occurred ? Mr. KAHN. Yes. Senator BARKLEY. Are they reputable bankers—without giving their names? Mr. KAHN. Yes. Mr. PECORA. Has it succeeded? Has the effort succeeded in those instances ? Mr. KAHN. In some instances, yes. We are poorer for that effort. Senator BARKLEY. DO you still regard them as reputable bankers ? Mr. KAHN. I regard them as reputable bankers. I would not have done what they did,, but who am I to sit in judgment upon others? " Let him who is without sin first cast the stone." I guess I am guilty of other sins, too. But this particular thing I do not believe in. Mr. PECORA. Would you say fairly, Mr. Kahn, that in the banking profession a system or code of ethics exists among the well-recognized bankers, bankers of reputation, in pursuance of which there is no competition among them for the business of a corporation which has had financing previously done for it by some banker ? Mr. KAHN. AS far as we are concerned, that is correct. As far as our firm is concerned, that is correct. Mr. PECORA. Opinions will differ among individuals honestly and fairly, will they not, as to the measure of risk involved in a piece of financing ? Mr. KAHN. Yes. Mr. PECORA. And the measure of risk is an element that enters into the determination of the profit or spread to the banker ? Mr. KAHN. Yes. Mr. PECORA. NOW, in view of the fact that there is that normal and natural difference of opinion among bankers as to the element of risk involved in a financial operation, and hence as to what should be a fair and reasonable profit or spread to the banker in assuming the risk, would not the corporation seeking financing be likely to obtain better terms if there were more competition among bankers for these financial operations? Mr. KAHN. YOU may think I am speaking pro bono in the answer I am going to give. I am too old to have axes to grind. I am trying 175541—33—PT 3 2 970 STOCK EXCHANGE PRACTICES to answer according to my best judgment and through long experience, and if the answers I give can be of any service to your committee I shall be only too happy and too satisfied to have been able to be of that little service. And so I hope you will believe me that I am going to answer the question you have asked me, because it is a slight embarrassment, becaiuse it affects my pocket for the next few years that I still have, but not for very, very long. I hope that you will be convinced that I am answering without considering my personal or my firm's interest. I do not believe, Mr. Pecora, that competition of that nature, either public or confined to a few banking houses, would be to the benefit of the corporations. Perhaps I may be permitted to submit for the record a pamphlet which I wrote on that subject about 10 years ago—and I wrote it myself—and another pamphlet which a distributing house in New York wrote in 1928, quite unknown to me, as I only heard about it a few days ago, that it existed, on the question of competitive bidding. I do not know whether you want to clutter your record with it, but here they are, in case you should wish them. But to sum up, I think if you have bidding for public issues on the part of the public you are leaning on a broken reed. The public does not bid. The public has proved again and again that you cannot entice it to go into competitive bidding. Mr. PECORA. But, Mr. Kahn, my question did not involve the element of competitive bidding on the part of the public; it involved the element of competition among bankers for a financing operation. Mr. KAHN. Well, I was coming to that particular phase of it. If you have competition amongst bankers for a certain issue you create what to my mind is one of the most undesirable conditions which you could create in the investment community, namely, bidding at the expense of the public. If I make a bid, if any reputable house makes a bid, he knows he must consider for his own reputation both the interest of the corporation, to whom it must make a fair bid—if it does not make a fair bid it will lose the business—and the interest of the public to whom it must make a fair offer or it will lose the public clientele. But if you stimulate me by saying, " Now, there are a dozen bidders bidding for that thing ", you screw yourself up, screw yourself up a quarter percent, half percent, 1 percent, you will get rid of it to the public. I am gambling with the back of the public. I am damaging the public for my benefit. In order to enable me to retain that business I am bidding a price which is an unduly high price. That unduly high price does not do the community any good, because ultimately the price will find its own level. I t does not do the corporation any good, because the price will go down and the corporation will lose a part of its public good will. I do not see in what way that kind of competition has more good than harm in it. Mr. PECORA. Has it been tried out so that that effect has been observed ? Mr. KAHN. I beg your pardon? Mr. PECORA. Has that kind of competition been indulged in or tried out? Mr. KAHN. Yes. STOCK EXCHANGE PRACTICES 971 Mr. PECORA. SO that you can point to that effect that you are now referring to ? Mr. KAHN. That effect is set forth in those two pamphlets at some length, but I do not want to impose them upon you by reading them. Senator BARKLEY. I think it would be valuable to have those pamphlets printed in the record, and I ask that they be printed as a part of the hearing. The CHAIRMAN. Without objection, they will be admitted and filed and carried in the record, both of them, and marked as exhibits. (Pamphlet presented by Mr. Kahn entitled " The Marketing of American Railroad Securities, Memorandum for the Interstate Commerce Commission submitted by Kuhn, Loeb & Co.", dated October 25, 1922, was thereupon marked " Committee Exhibit 1, June 27, 1933." See p. 1034. (Pamphlet presented by Mr. Kahn, entitled " Competitive Bidding for Equipment Trusts, A Discussion ", written by Ernest L. Nye, Freeman & Co., New York, in 1928, was thereupon marked " Committee Exhibit 2, June 27, 1933." See p. 1052. Mr. PECORA. We will read those pamphlets, but they are rather voluminous documents, I am afraid. Can you give us your own judgment with regard to the matters that I am questioning you about and not refer us at this time to these two pamphlets ? Mr. KAHN. Gladly. Gladly, Mr. Pecora. I am sorry I interrupted my answer. I say as far as the public is concerned that kind of competition is, and has proved, especially during 1926 and 1928, exceedingly costly to the public, because it is more than human nature to expect that under the stimulus of having a price hung up someone, in order to get that price, is not going to pay a price which is not justified by the circumstances. Mr. PECORA. DO you think a banker would pay a price not justified by the circumstances ? Mr. KAHN. Frequently. Mr. PECORA. And he has remained in the banking business after frequently making those mistakes? Mr. KAHN. He has remained in the banking business not as prosperous as he was before, but the public had paid the price in the meantime. The public had bought those bonds. Moreover, Mr. Pecora, I want to say there is a constant check. The corporations are not dependent upon them for telling them " Your bonds are worth so much." The corporations, and especially the finanical officers of the corporations, have a very definite duty to go around and inform themselves what is a fair price. The railroad corporations have not only a very definite duty, but a legal duty, because the Interstate Commerce Commission Eas to approve what is a fair price and what price they are willing to sanction. It is not because I impress my views on corporations. We have constant competition, the potential competition of every other banking house, and if the particular official in question should lunch with Mr. Brown and say, " Here, we have your bond to sell. What do you think it is worth ? " Mr. Brown says, " I think it is worth 95 ", and I have told him I think it is worth 92, I do not think it is likely to come back to me very frequently. There is a constant competition. 972 STOCK EXCHANGE PRACTICES Mr. PECORA. Your judgment might be the better of the two? Mr. KAHN. Yes; but unfortunately he might not take it, and it might be bad for him not to take it, because T do not believe that it is in the best interest of a corporation always to squeeze out the last dollar at a particular moment that the securities can be sold for, because whom do they squeeze it out of ? They do not squeeze it out of the banker. I get exactly the same commission whether I sell a bond at 95 or sell a bond at 92y2. But the public is paying an unfair price. My capacity to serve industry—and that is really the whole test of a private banker's usefulness Senator ADAMS (interposing). Mr. Kahn, that result only comes about in the event that you are able to definitely force the public to pay the added price to cover the commission, does it not ? That is, that assumes that you can fix the price so as to cover the commission ? Mr. KAHN. I cannot fix the price to cover the commission, but as a matter of fact, in order to enable me to go ahead and do my business I have got to have a certain spread, which is not a commission; but I have to have a certain spread in order to compensate my distributors. Senator ADAMS. Can you fix the spread or fix the price to the public so that you will secure that spread, or are you held back by the occasional unwillingness of the public to take the offer? Mr. KAHN. Sometimes it is held back by an occasional unwillingness of the public, but generally speaking it is a recognized fact that the public will buy bonds that are offered to it by recognized distributors and recognized banking houses at a fair rate and a rate which is attractive to the public. Senator ADAMS. That is, the public as a practice will accept the price which is fixed by the banking house ? Mr. KAHN. Under responsible sponsorship, yes, because that is where your securities bill comes in now, that henceforth the public will know about those facts. Senator ADAMS. May I ask you: This pamphlet which you offer, Mr. Kahn, was written in 1922, I notice. Mr. KAHN. Yes. Senator ADAMS. I S there anything in the experiences of the years since then to change the conclusions which you have expressed in that pamphlet? Mr. KAHN. If I had to write it again I would write it exactly the same way. I would change a few words. Senator ADAMS. YOU were a fortunate man, that you did not have to learn anything like the rest of us. Mr. KAHN. But as to this particular thing, I think my convictions are so deep-seated and so long, and my observation is an observation of 40 years, not only here but in Europe, in various countries in Europe, that I do not believe I am open to reconsideration, even though I may seem obstinate about it. I really do believe I know that subject. I have seen it work in England, in France, in Germany, and I have seen that they have always come back in those countries to the same system; that if I want a plumber's job done I go to the plumber that I think is the best fellow, and as long as he does his job well I stick to him. If he STOCK EXCHANGE PRACTICES 973 overcharges me I go to somebody else. If he tries any crooked business on me I go to somebody else. But generally speaking, I do not gain much by having people compete with one another on what at best can only be a trifling difference. And that is so in England; it is so in France; it is so in Germany; it is so in.Holland and Belgium, that the corporations pick out the men of the firm that they want to do business with, and as long as they are satisfied and the service is good to them and they do not believe, and the experience has been—as far as I have had experience, that is over 40 years—has proven, that they have nothing to gain by inviting competition other than based on performances and services, they will continue with that firm. Mr. PECORA. Mr. Kahn, who fixes the price to the public of these issues that are underwritten by bankers for railroad corporations? Mr. KAHN. That price is fixed between the corporation and the banking house to which they go, and it is fixed by comparison of views, and sometimes those views are very wide apart. Ultimately a conclusion is reached as to what is fair to the corporation, what is fair to the public, and at what price can the issue be sold successfully. It certainly would not be to the corporation's interest to force the issue to be sold at a price where it would be a failure, because then it would be soiled goods and would not be salable any more. Mr. PECORA. Well, let us see: First the banker negotiates with the railroad corporations for an issue, doesn't he ? Mr. KAHN. Yes. Mr. PECORA. And the price to the banker is fixed as a result of such negotiations ? Mr. KAHN. Yes. Mr. PECORA. And that is the price that the railroad corporation receives for its securities? Mr. KAHN. Yes. Mr. PECORA. Thereafter the price at which that security is sold to the public is primarily of concern to the banker, isn't it ? Mr. KAHN. Yes. Mr. PECORA. SO that, if there is a conflict or difference of opinion between the banker and the railroad company as to the price at which the security shall be offered to the public, the banker's judgment would usually control, would it not? Mr. KAHN. It would usually control, except in the case of railroad securities, where the Interstate Commerce Commission's judgment absolutely controls. The Interstate Commerce Commission absolutely says: " If you are putting on a spread more than so-and-so we will disapprove it." In the case of railroad securities that element simply does not exist. It is definitely fixed by the Interstate Commerce Commission. Mr. PECORA. If the Interstate Commerce Commission then fixes the price of the security to the public Mr. KAHN. Yes. Mr. PECORA. And us Mr. KAHN. Yes. I understand that is what you mean to tell 974 STOCK EXCHANGE PEACTICES Mr. PECORA. Then why could not there be a free competition among bankers for the financial operation for the railroad company in fashion calculated to produce a narrowing of the spread and a consequent benefit to the railroad company? Mr. KAHN. For the reasons, Mr. Pecora, which I have endeavored to indicate, that somebody would depress that spread to a point where it would be, instead of being beneficial, damaging, because it would be a cut rate, it would be a cut price, it would drive reputable, responsible concerns more and more out of the business, and the result would be a diminished protection for the public. Mr. PECORA. HOW does the public interest become diminished by those means, if the price to the public is fixed by the Interstate Commerce Commission? Mr. KAHN. The public interest is diminished—and I assume that is why the Interstate Commerce Commission is interested in that spread—the moment that its service rendered to it is not rendered in the best possible way. The moment that the railroad concerned has not got the best advice as to the kind of security which it should issue, as to the mortgage which should be drawn, as to the instruments which should be prepared for the future, as to its clientele, as to its selling, if it could not get that service, and the people who render that service—and it is a year-round service—if it could not get the service of me and my associates, and we did not get a fee, after having given hours and days of time and thought to this matter, another concern would take the business away from us. The service which the investment banker now gives the railroads would be absolutely cut off, if, after having given the service, we haven't got a fair percent to do business from the railroad to which we have rendered great services and have advised. Now, you may say that service is worth nothing. My experience and my belief is that service is a very valuable service. Mr. PECORA. There has been no indication by anybody around this table that the service of the investment banker is worth nothing. But under this method that you have been testifying about, that is, with this absence of competition among investment bankers Mr. KAHN. Yes. Mr. PECORA. IS not the spread to the banker placed largely within the control of the banker, because of that absence of competition ? Mr. KAHN. N O ; it is placed within the control of the Interstate Commerce Commission. Mr. PECORA. DO you know of a single case where the Interstate Commerce Commission has disapproved a price of a security to the public because the spread to the banker was too small ? Mr. KAHN. I do not recall at this moment. I have very good— [After conferring with associates.] No. Mr. PECORA. DO you know of instances where the I.C.C. has disapproved the price to the public because the spread to the banker was too large? Mr. KAHN. Yes, informally. Mr. PECORA. DO you recognize the fact that the presence of a free competition among investment bankers for the financing of a railroad company operation would have a tendency to reduce the spread to the banker? STOCK EXCHANGE PRACTICES 975 Mr. KAHN. For a while, but only for a while. I think there is no guaranty whatsoever that what has now become a recognized norm amongst reputable bankers and what the Interstate Commerce Commission constantly watches, would remain permanently unused. I do not for a moment believe it would. Perhaps I can give an instance which one of my associates has just put before me to show the futility of that kind of competition. On July 14, 1928, the Southern Pacific Co. sent invitations to 60 banks and bankers inviting bids on an issue of $4,815,000 of its equipment trust certificates. Kuhn, Loeb &' Co. were also invited, but in accordance with our usual practice, along with others who were unwilling to make those bids for the certificates, we also wrote that if the company did not receive from others satisfactory service we should be prepared nevertheless to continue to serve the needs of the company. Only three bids were received, the highest of which was 97% percent, which meant an annual percent of cost to the company of about 4.94 percent. Those bids being unsatisfactory, they were rejected. On July 24, when advised by the Southern Pacific Co. as to the result of these bids, we offered to purchase the certificates at 98% instead of 97%, which was the best bid that they received by competition between 60 firms. We offered to pay 98%, and we promptly sold the certificates. Mr. PECORA. IS that an exceptional case, Mr. Kahn? Mr. KAHN. My partner just tells me that happened in other cases. For instance, in the Cincinnati Union Station Co. issue. We are speaking about something as to which naturally I can only put my experience and judgment against the questions which you are asking. My experience and judgment and my absolute conviction is that if you control the spread your corporations in the long run would not gain anything. You would drive out the most responsible and reputable bankers. We would not bid—I beg your pardon for including ourselves among responsible and reputable bankers—but I know we would not bid. We do not do business on those lines. I t is not the kind of business which we believe is compatible with dignity, and with the hard work done and with the services performed all the year round by a banker, and those services cannot be performed from one day to the next; they must be learned. They required the accumulated experience of three generations in our case. We pay for them by steady application to our job. We pay for them by not letting ourselves be distracted from our job. We pay for them by not going into things which would distract us from our job. Just as if you have a suit of clothes to buy, you would have to pay to one tailor much more than you pay to another tailor. I t is the same. The suit keeps you warm if you buy it from a cheap tailor, too. But the other tailor puts the experience and the reputation of making good suits into it, and you go to him. Now, my definite conviction is that by limiting the spread the corporation gains nothing. The reputable bankers are eliminated. The services which are now freely at the disposal of corporations 976 STOCK EXCHANGE PRACTICES without their paying anything for it except an occasional business, but otherwise no fee is charged to them; any of our connections can come to our office and can sit there for days and days and come again and again and they will get our best advice for the corporation and they will pay us nothing for it whatsoever—no fee, no retainer. We rely upon doing business once in a while. If that is taken away from us we would not do it. Mr. PECORA. NOW, Mr. Kahn, is it your judgment and. experience that competition among bankers for the financing, we will say, of a railroad corporation would have a tendency to reduce the spread to the banker? Mr. KAHN. I do not. Mr. PECORA. IS it your judgment and experience that that competition would have a tendency to increase the spread to the banker ? Mr. KAHN. I do not believe it would have any material effect. Mr. PEOORA. It would not have any effect on the spread of any material consequence one way or the other? Mr. KAHN. It might in a few cases. It would not generally, and I believe the price which you would pay for that advantage, if it is an advantage, is much too high. I think the corporations and the public would suffer from it. Mr. PECORA. HOW would they suffer, Mr. Kahn ? Mr. KAHN. They would suffer from it by losing—I beg your pardon. [After conferring with associates.] Mr. Pecora, I think it is conceivable that in a few cases, at the beginning particularly, but in a few cases the spread between what the corporation gets and what the public gets might be diminished. I do not dispute the possibility of that existing. I do not believe it would exist for long, but I believe there is a possibility of its existing. I do not believe that the spread in city bonds, for instance, has been materially modified by public competition or by competition between bidders. Mr. PECORA. Have you any figures which would determine that one way or the other, or any instances? What illustrations of any kind have you that would support the belief you have just expressed, that in the case of competitive biddings on municipal issues the price to the municipality has not been materially affected? Mr. KAHN. I do not say so much as to the price to the municipality, because some one may have paid a very foolish price. I say, the spread to the public. If you get, by a lucky chance, a municipal issue at various prices you are going to offer it to the public, not on the basis of the price you paid; you are going to offer it to the public on the basis of the price which you believe it is worth, and therefore this does not determine it in any way. Mr. PECORA. Would it not in such a case cause a person to make a higher bid for the issue if he thought he could dispose of it at an attractive profit to the public because it was worth that price ? Mr. KAHN. The reverse of that holds good equally. If I have no responsibility, if I am one of a number of bidders, I will try to buy as cheaply as I can, naturally. I have no responsibility; it is not my job to see that the railroads get the best possible price or that clients get the best possible price, as long as they are not my clients, as long as they are outsiders and I am an outsider. I will give you a case in point, Mr. Pecora. STOCK EXCHANGE PRACTICES 977 Not so very long ago some of our clients wanted to sell bonds, wanted to sell them to us at 89. They were 4%-percent bonds or maybe 5-percent bonds—5-percent bonds, at 89. We told them we did not believe they would be wise in doing that, that " I think if you wait a little while you should get a much better price for them. The bond market just at present is not receptive. Take our tip and wait." They waited, and within a relatively short time those bonds which they wanted to sell to us at 89 they received 97 for. If there had been competition I would have been delighted to buy them at 89. I knew they were too cheap. Senator ADAMS. Mr. Kahn, in this pamphlet, not the one lying by you, but the other pamphlet you handed in, there is contained quite a large number of letters on the subject of competitive bidding. I notice the letters are from dealers in securities, and they are all, or practically all, saying that they are opposed to competitive bidding because it results in over-buying securities or in lessening the margin to the dealers so that they cannot afford to deal in them, and thereby, they say, it is going to lessen the market. Mr. KAHN. That is the very thing I was trying to bring out, that unless you pay the laborer what his hire is worth, if you compel people to go the limit in bidding at prices that they can just barely get away with, I do not believe you are serving anybody. Hie corporations, in the long run, will not be benefited. I am sure they will not be. I know that the most responsible bankers will not enter that kind of business, and I know that the railroads will be deprived of the service of the advice of their bankers, which advice is based upon generations of special study, and that they will be deprived of the advise of people whom they can rely upon in telling them what is the best time to sell bonds, for instance, telling them, " In a month or two a lot of other bonds are coming out. Hurry up and sell these bonds." You cannot get all these services unless the people who give you such services have a reasonable assurance that if the railroad has any business it will come to them. Mr. PECORA. In the course of an answer that you made a few moments back you said, among other things, that you tried to get a security or an issue at as low a price as possible. That is quite natural, but Mr. KAHN. My partner suggests that I did not say I tried, but I said I would be delighted if I had an opportunity of getting a bond away below its value unless I have the responsibility for it. But if I have the responsibility for it, I will not let the corporation sell the bonds, if I have the power to prevent it, below their value. I tell them that such and such is my opinion. Mr. PECORA. Let us go back to the answer you made. I think you said that in the course of an answer you were making to the question immediately prior to the question that Senator Adams asked you. Mr. Reporter, will you go back to the answer immediately before Senator Adams' question, and read what the witness said ? (The reporter read as follows:) Mr. KAHN. The reverse of that holds good equally. If I have no responsibility, if I am one of a number of bidders, I will try to buy as cheaply as I can, naturally. Mr. PECORA. In saying that, were you referring to the attitude of the banker in case of competitive bidding for an issue ? "978 STOCK EXCHANGE PRACTICES Mr. KAHN. Yes, sir. Mr. PECORA. IS it also the attitude of the banker where it concerns an issue without competition? Mr. KAHN. N O ; it is not. I t may seem quixotic, but it is good business that it should not be. A banker can only persist before the public and the corporations if they believe they can get a fair deal from it. I am not speaking as an altruist, but I think I know my business sufficiently to know that it rests entirely upon confidence. Since I have nothing else to offer but confidence, if I betray that confidence or, even without betraying it, if I make a mistake once or twice, they will say, " We will stop doing business with you; we will go elsewhere." Mr. PECORA. The judgment, then, which controls as to the matter oi giving a fair deal to the public is the judgment of the banker where there is no competition? Mr. KAHN. NO, Mr. Pecora. I t is the banker's judgment. But the corporation is under a very definite duty to see that the judgment is right, and if it is not right, to decline to accept it. Moreover, the corporation is under a definite duty to submit such judgment to the Interstate Commerce Commission. There are three checks. Mr. PECORA. Mr. Kahn, I understand that you were requested to produce here a copy of the articles of copartnership which bind together the members of your firm. Are you prepared to do that? Mr. KAHN. Yes, sir. Mr. PECORA. Will you kindly produce a copy of those articles? Mr. DE GERSDORFF. Mr. Chairman, I have here the original copartnership agreement. I do not want to take up the time of the committee in making any motion. We have already communicated with Mr. Pecora's office. We hope that this original agreement will be considered by the committee in executive session, and that when it comes to be spread on the record certain things as to the contribution of capital, the division of profit, and other minor matters which we liave submitted in another part of the records which I will also hand up, may be omitted from the record. Mr. PECORA. Mr. de Gersdorff's firm has taken that up with us, Mr. Chairman, and I have expressed the opinion, feeling that I represented also the attitude of the committee, that for the public record we need only take a copy of the articles of copartnership which have deleted the respective rights and interests of the copartners and their respective contributions to the capital of the firm. Mr. DE GERSDORFF. There are certain other minor provisions which we hope will be deleted, which do not concern anybody or anything except the relations between the parties. I would be very glad to take that up with you or with the chairman. I have the original in full. The CHAIRMAN. YOU do not have a copy of the one with the deleted portions ? Mr. DE GERSDORFF. Yes; I have both of them here. The CHAIRMAN. Are you willing that that should go into the record ? Mr. DE GERSDORFF. Yes, sir. The CHAIRMAN. The other copy you will leave with the committee to consider in executive session? Mr. DE GERSDORFF. Yes, sir. STOCK EXCHANGE PRACTICES 979 Mr. PECORA. I suggest that that course be taken. Mr. DE GERSDORFF. DO you want the original or just a copy? The CHAIRMAN. We do not care about the original copy. Mr. PECORA. A complete copy of the original will suffice for the purposes of the committee in executive session, and a copy with the deletions which you have referred to will suffice for the public record, I assumeMr. DE GERSDORFF. The copies that I have here have not the signatures. I suppose you want them ? Mr. PECORA. For the executive session ? Mr. DE GERSDORFF. I can write them in now and will hand them to you. The CHAIRMAN. Let the copy be admitted for the record. Mr. DE GERSDORFF. DO you want the original before you ? Mr. PECORA. I am not going to use it in the examination for the moment. Senator BARKLEY. YOU may present it later. Mr. DE GERSDORFF. We will give it to you at the recess. The CHAIRMAN. It will be admitted later. Mr. DE GERSDORFF. I am perfectly willing to give a deleted copy to the press. Mr. PECORA. I am going to offer it in evidence now and ask that it be spread on the record. The CHAIRMAN. That may be done. (A copy of articles of copartnership dated Dec. 31, 1932, by and between Felix M. Warburg, Otto H. Kahn, George W. Bovenizer, Lewis L. Strauss, William Wiseman, Frederick M. Warburg, Gilbert W. Kahn, John M. Schiff, Benjamin J. Buttenwieser, Hugh Knowlton, and Elisha Walker, was received in evidence, marked " Committee Exhibit No. 3, June 27, 1933. See p. 1080.. Mr. PECORA. Mr. Kahn, you have already testified that your firm, while it does not solicit deposits, nevertheless does accept them from its clients? Mr. KAHN. Yes, sir. Mr. PECORA. Let me ask you now what has been the highest amount of deposit accounts that your firm has carried for its clients? Mr. KAHN. I have the figures here, and I will get them from my partners. Mr. DE GERSDORFF. That only goes back to 1927. Mr. KAHN. Mr. Pecora, I find from the papers which I have here and which I will be glad to submit in detail in reply to your question, that the highest total deposits which we held on December 31 of any one year was $88,549,566. Mr. PECORA. That was for the fiscal year 1929 ? Mr. KAHN. Yes, sir. Mr. PECORA. Have you furnished me upon my request with balance sheets of your firm showing its financial condition as of the end of each fiscal year from the period between 1927 and 1931, both of those years inclusive? Mr. KAHN. I so understand, Mr. Pecora. Mr. PECORA. I show this document to you, consisting of a number of typewritten sheets, and ask you if that is a correct copy of those balance sheets for those years. Mr. KAHN. We are sure they are right. 980 STOCK EXCHANGE PRACTICES Mr. PECORA. I offer that in evidence, Mr. Chairman, and ask that it be spread on the record. The CHAIRMAN. It will be admitted. (Copies of balance sheets of Kuhn, Loeb & Co. for the period between 1927 and 1931, both inclusive, were received in evidence, marked " Committee Exhibit No. 4, June 27, 1933." See p. 1085. The CHAIRMAN. Have you any affiliates? Mr. KAHN. NO, sir; we have not and never had. Mr. PECORA. DO you know a concern called the European • Merchants Banking Co., Ltd., of London? Mr. KAHN. Yes, sir. Mr. PECORA. I S the firm of Kuhn, Loeb & Co. in any way directly or indirectly connected with that concern? Mr. KAHN. Perhaps one of my partners could go into that matter of detail more accurately than I could. May I ask Mr. Buttenweiser to answer that particular question?—because it is more in the line of his knowledge than of mine. The CHAIRMAN. That will be agreeable. Mr. PECORA. All right, if you will answer that question, Mr. Buttenwieser. The CHAIRMAN. Please stand and be sworn. TESTIMONY OF BENJAMIN J. BUTTENWIESEE, A MEMBER OF THE FIRM OF KUHN, LOEB & CO. The CHAIRMAN. YOU solemnly swear that you will tell the truth, the whole truth, and nothing but the truth, regarding the matters now under consideration by the committee, so help you God ? Mr. BUTTENWIESER. I do. Mr. PECORA. Will you give your name and address to the reporter, please ? Mr. BUTTENWIESER. Benjamin J. Buttenwieser. Mr. PEOORA. Are you a member of the firm of Kuhn, Loeb & Co. ? Mr. BUTTENWIESER. Yes, sir. Mr. PECORA. One of the copartners thereof ? Mr. BUTTENWIESER. Yes, sir. Mr. PECORA. HOW long have you been a member of that firm as a copartner? Mr. BUTTENWIESER. Since January 1, 1932. Mr. PECORA. Prior to that time had you been connected with the firm in any other capacity than as a partner ? Mr. BUTTENWIESER. Yes, sir. Mr. PECORA. For what period of time ? Mr. BUTTENWIESER. Since September 1918. Mr. PECORA. In what capacity ? Mr. BUTTENWIESER. In varying capacities, starting pretty far down the line; Mr. PECORA. Will you just briefly enumerate them? Mr. BUTTENWIESER. I think, like Mr. Kahn once said, pretty close to the line of licking postage stamps, through varying capacities; but at the time of your inquiry, head of the foreign department. Mr. PECORA. DO you know a concern called the European Merchants Banking Co., Ltd.? Mr. BUTTENWIESER. Yes, sir. STOCK EXCHANGE PRACTICES 981 Mr. PECORA. IS the firm of Kuhn, Loeb & Co. connected with that concern in any way, shape, or form? Mr. KAHN. The answer is, No. We are in no way connected with that firm. Excuse me for interrupting. We are in no way connected with that firm and have not been since 1930. We were connected with that firm for 3 years. Mr. Buttenwieser will give you the details. Mr. PECORA. That is what I wanted. Mr. BUTTENWIESER. That was a stock corporation of which we owned the shares. It was in existence from March 31, 1927, to December 31, 1930, during which period we owned the shares of that company; the ordinary shares. Mr. PECORA. What was the business of that company? Mr. BUTTENWIESER. I believe that was called " merchant bankers." Mr. PECORA. What was its business? Mr. BUTTENWEISER. That is the current name in England for such bankers, merchant bankers. Mr. PECORA. Was it a private banking concern? Mr. BUTTENWIESER. Yes. Mr. PECORA. Accepting deposits from clients or customers and making loans? Mr. BUTTENWIESER. Relatively small. The CHAIRMAN. YOU owned all the shares? Mr. BUTTENWIESER. We owned all the ordinary shares. There were some few other shares, I believe, which, under the laws of England, had to be owned over there. Mr. PECORA. Qualifying shares? Mr. BUTTENWIESER. I believe that was it. I understand there were 5,000 manager shares which had to be owned in England, by Mr. Godron Leith, who was our resident partner. Mr. PECORA. Has the company been liquidated? Mr. BUTTENWIESER. Yes, sir. Mr. PECORA. When? Mr. BUTTENWIESER. December 31, 1930. Mr. PECORA. In the questionnaire which I caused to be submitted to your firm in behalf of the committee I asked for a copy of the balance sheet of that company, and I was furnished with this document [indicating]. Will you kindly look at it, Mr. Buttenwieser, and tell me if you can identify it as being a true copy of balance sheets of the European Merchants Banking Co. ? Mr. BUTTENWEISER. I have no doubt it is correct. Mr. PECORA. I offer this in evidence. The CHAIRMAN. Let it be admitted and entered on the minutes. (A copy of balance sheets of European Merchants Banking Co., Ltd., was received in evidence marked " Committee Exhibit So. 5, June 27, 1933." See p. 1086. Mr. PECORA. I will now resume the examination of Mr. Kahn on another subject. Senator GORE. Were you going to go to another subject now, Mr. Pecora ? Mr. PECORA. Yes,, Senator Gore. Senator GORE. I wanted to ask this, Mr. Chairman, with your permission. I want it developed in the record somewhere, if not in 982 STOCK EXCHANGE PRACTICES this connection in some other connection, the fact of Mr. Paul Warburg's activities in organizing the International Acceptance Bank. I think it was granted by Congress rediscount privileges with the Federal Eeserve bank. It then formed a connection with some other bank in New York, the name of which has slipped my mind. What was it, Mr. Kahn ? Mr. KAHN. I suppose, Senator, what you are referring to is that later on it was absorbed by the Bank of Manhattan Co. Senator GORE. Yes; that is it. I thought it was the Bank of Manhattan, but I was not sure enough to say so. I think this International Acceptance Bank has gone out of existence now, perhaps. I have had some information about it which seems like an interesting chapter, and I wish, Mr. Pecora, you would develop that sooner or later. One other question, Mr. Chairman. I notice in this morning's paper a portion of Mr. Wilkins' testimony out in Detroit. I believe it was last night. It was in regard to the withdrawal of deposits and the clearing of certain checks after the holiday was declared. I want to ask now if that comes within the purview of your plans to develop that sooner or later. Mr. PECORA. Senator Gore, may I ask you to repeat that? I was conferring with one of my associates. Senator GORE. I noticed in the paper last night some reference to the clearing of checks in Detroit after the holiday had gone into effect. It was in the testimony of Mr. Wilkins. I do not know upon what foundation he bases his testimony. It seems to me that it would be worth looking into, because he alleges—upon what ground I do not know— that certain interests in New York deliberately closed those banks and brought about the crash, in order to embarrass Mr. Ford. I do not know whether that is true or not. It grew out of the investigation or the testimony of Mr. Wilkins before the grand jury. If there is any foundation to it, it ought to be developed, and if there is not, it ought to be developed—in either case, because it creates a terribly bad impression if it is untrue, and if it is true it is a matter of the highest importance. The CHAIRMAN. I do not know whether Mr. Kahn knows anything about that or not. Senator GORE. I am not on this committee, but I just dropped in, and I hope the chairman will pardon me for the interruption. The CHAIRMAN. If Mr. Kahn has any information on that subject, the committee would be glad to hear it. Mr. KAHN. I am afraid that I have no information on the subject. The International Acceptance Bank was formed by Mr. Paul Warburg as his personal venture and the venture of some of his friends, many years after he ceased to be a partner in my firm. That was after he left his official position in Washington. I could not possibly of my own knowledge testify to that. Senator GORE. I knew you could not, Mr. Kahn, but I thought you might put into the record suggestions that would enable Mr. Pecora to develop the history of it. Mr. KAHN. I am afraid that of my own knowledge I know of no way in which I could be helpful in that connection. I would be only too glad to be, if I could. STOCK EXCHANGE PRACTICES 983 The CHAIRMAN. Have you any information regarding the Detroit matter that Senator Gore inquires about ? Mr. KAHN. NO information of that or of any similar character came to my knowledge. TESTIMONY OP OTTO H. KAHN, A MEMBER OF THE FIRM OF KUHtf,. LOEB & CO., NEW YORK CITY—Resumed Mr. PECORA. Mr. Kahn, are there any meetings of the partners of your firm that are held at regular intervals for the transaction of the business of the firm ? Mr. KAHN. NO, sir; we have no regular meeting of that kind. I t varies. Once in a while we meet fairly regularly, twice a week or three times a week, when business happens to be active. Much more frequently we have no such meetings. I should say that the proportion between the years when we have such meetings and when we have no such meetings regularly, would be about one to five. I think, five times when we have no such meetings to one time when we have such a meeting. Mr. PECORA. Are any written records or memoranda maintained of the proceedings at those meetings or conferences of the partners. Mr. Kahn? Mr. KAHN. NO, sir. Mr. PECORA. Have they ever been? Mr. KAHN. Never. Mr. PECORA. Mr. Kahn, has there been any reason, any special reason, for not recording those proceedings by way of any written record ? Mr. KAHN. None whatever. The mere fact that they were held so irregularly proves that they were nothing but exchanges of opinion, that there were no new resolutions of any kind passed.. For instance, if one partner had something in mind which he wanted all of the partners to know he would ask that a meeting be held. But there is no significance to the meetings. They are thoroughly informal and merely informative. Mr. PECORA. Well, because they are informative wouldn't certain, advantages be served by keeping a written record of those proceedings ? Mr. KAHN. I do not believe so, Mr. Pecora. That has not been our experience. We are a family affair. A number of us sit close together all day long, and we know pretty well what goes on. But once in a while, and sometimes more than once in a while, sometimes regularly for 2 or 3 or 4 weeks, there is a tacit understanding that we will have meetings. Then we find out, after having observed those meetings for 3 or 4 weeks, that we are wasting our time, and that too much is said, too much talk is indulged in, that everyone wants to " shoot off his face ", so to speak. Senator BARKLEY. Sometimes what you might say is like the Senate ? Mr. KAHN. Well, Senator Barkley, I would not dare say that. Mr. PECORA. But the Senate's proceedings are duly recorded. Mr. KAHN. And then we drop them again. We find that no useful purpose is served by making any formal record of such, meetings, and we have never done so. 984 STOCK EXCHANGE PRACTICES Mr. PECOEA. Mr. Kahn, is your firm subjected to examination with respect to its banking business by any public officer or authority either of the State of New York where its office is located or of the United States? Mr. KAHN. NO, sir. I know that you are familiar, much more familiar than I, with the laws of the State of New York in respect to private bankers' accepting deposits, and under the definition of that law we have accepted no such deposits and therefore are subject to no such examination. Mr. PECORA. That is, you have conformed to those provisions of the banking laws of the State of New York which do not subject your firm to examination or inspection at the hands of the, State superintendent of banks of New York? Mr. KAHN. Yes. Mr. PECORA. DO you know whether or not counsel for your firm had any part in the drafting of those provisions of the banking law of the State of New York? Mr. KAHN. Not to my knowledge; but it might well be so. I know that one of my partners was consulted about it, and it is quite the reasonable thing that he consulted one of counsel. But I do not really know, of my own knowledge. I do not know, because I was not consulted. Mr. PECORA. Don't you know, or have you heard, rather, that counsel for your firm appeared with or collaborated with counsel for other private banking firms in the city of New York and helped to draft the legislation which is now on the statute books of the State of New York with regard to private bankers? Mr. KAHN. Not to my knowledge, Mr. Pecora, but it may well be so. Mr. PECORA. DO you recognize any disadvantages that would attach to your firm in the conduct of its business if it were subjected to examination by the State superintendent of banks of New York in the same fashion that commercial banks, State banks in New York are subjected to examination by the State superintendent of banks ? Mr. KAHN. Isn't that water over the dam, Mr. Pecora, under the new laws that have been enacted ? Mr. PECORA. Well, I am not so sure that it is, but at any rate I should like to have your answer. Mr. KAHN. Well, my answer is that as far as examination is concerned, I personally—and I haven't conferred with my partners about it—but I personally see no reason why we should not be examined. Mr. PECORA. Has that always been your attitude or state of mind on that subject? Mr. KAHN. I do not really know when I last gave it consideration, but I should think, knowing my slant of mind, that it probably has always been my attitudei Mr. PECORA. Well, whether or not that was always your attitude, the fact is that the actual conduct of your banking business has been such as to avoid examination by the State superintendent of banks in New York, hasn't it? Mr. KA,HN. May I respectfully object to the use of the word " avoid " ? STOCK EXCHANGE PRACTICES 985 Mr. PECORA. Or it has been such as not to subject yourselves legally to such examination, if I may put it that way. Mr. KAHN. Well, there was certainly no conscious avoidance of it. Mr. PECORA. I am willing to let you use your own terminology in describing the fact. Mr. KAHN. The fact is that there was no conscious avoidance. It simply happens that our business, which is not to solicit deposits, and not to take small deposits, and not having deposits subject to check, did not fall within the province of the law which would have implied an examination by the State superintendent of banks. Mr. PECORA. Wasn't that provision put in the law for the benefit of a fewprivate banking firms, to your knowledge? Mr. KAHN. TO my knowledge; no. Moreover, it would not appear to be to their benefit in my humble opinion. I see no benefit in not being examined. Mr. PECORA. YOU could still have placed a limitation, a minimum amount on deposits that you would receive, and be subject to examination if it were not for that provision of the law; isn't that so ? Mr. KAHN. If it had not been for that provision of the law; yes. The CHAIRMAN. Are your deposits time deposits or demand deposits, or what? Mr. KAHN. Our deposits (conferring with associates) my partners tell me, and this is; a little bit beyond my own activities in the firm; but they tell me that they change, sometimes being time deposits and sometimes being demand deposits. There is no definite rule either the one way or the other. Senator BARKLEY. YOU say they are not subject to check? Mr. KAHN. Pardon me, Senator, but I did not hear your question. Senator BARKLEY. Did you say a moment ago that your deposits are not subject to check? Mr. KAHN. They are not subject to check in any ordinary understanding of that term; no. Senator BARKLEY. HOW does a depositor get his money out of your institution? Mr. KAHN. He asks for it. Senator BARKLEY. Sir? Mr. KAHN. He asks for it and we transfer it to him. Senator BARKLEY. Well, there has to be some written order, I suppose, in order to get it ? Mr. KAHN. It is subject to his order, but it is not subject to check as that term is generally understood. That is, as far as anyone except individual partners and relatives of the firm are concerned, no one possesses Kuhn, Loeb & Co. check books. If they want their money they ask for it and they get it. Mr. PECORA. At any time? Mr. KAHN. At any time, unless it is a time deposit. Senator BARKLEY. And in that case you issue a Kuhn, Loeb & Co. dheck to the depositor? Mr. KAHN. Yes, sir. Senator BARKLEY. And he cashes that check somewhere else ? Mr. KAHN. Yes, sir. But it would go, probably, through our bank in the ordinary course of events. Mr. PECORA. NOW, Mr. Kahn, are your depositors corporations? 175541-^-33—PT 3 3 986 STOCK EXCHANGE PRACTICES Mr. KAHN. Yes; and some, quite a number of them, hold European connections, banks that leave certain amounts here on deposit,, but no very great amount at any one time. And yet we have quite a number of European depositors with whom we have had business relations for many years. And we have small amounts with them, and they have small amounts with us. The CHAIRMAN. YOU do not have any savings deposits ? Mr. KAHN. I beg your pardon, Senator Fletcher ? The CHAIRMAN. Have you any savings deposits, Mr. Kahn ? Mr. KAHN. NO, sir. Senator BARKLEY. Does every member of your firm make a financial contribution, or put in a certain amount of money as though he were buying stock in a corporation, when he becomes a partner ? Mr. KAHN. NO, sir. The articles of incorporation make that perfectly plain—or, my attention has been called to a misuse of a term there. I should have said the articles of copartnership make that perfectly plain. But whether he does or does not make a deposit,, his liability so far as the firm is concerned is unlimited. Senator BARKLEY. I understand. But a man is taken into the firm for what he may be worth as an addition to it and not by reason of what he puts into it by way of money; is that it? Mr. KAHN. Yes, sir. Senator BARKLEY. Where he might put in money, or in case he does not, upon what basis does he share in the profits? Mr. KAHN. Upon a basis which is determined by mutual agreement. Senator BARKLEY. IS that basis set out in the articles of copartnership ? Mr. KAHN. Yes, sir. Senator BARKLEY. And those articles are changed every time you take in a new partner or lose one? Mr. KAHN. Yes, sir. Mr. PECORA. NOW, Mr. Kahn, in the questionnaire which I submitted to your firm in behalf of this committee some time ago, I asked for the number of corporations engaged in interstate commerce having bank deposits with your firm, and the total amount of such corporation deposits at the end of each calendar year during the 5-year period from 1927 to 1931, both inclusive. Mr. KAHN. Yes, sir. Mr. PECORA. I show you this typewritten document, and ask you if that constitutes the answer prepared by your firm and the correct answer to that question. Mr. KAHN. Yes, sir. Mr. PECORA. Mr. Chairman, I offer that in evidence and ask that it may be spread on the record of the hearings. The CHAIRMAN. It will be received and will be made a part of the record by the committee reporter. STOCK EXCHANGE PRACTICES 987 COMMITTEE EXHIBIT NO. 6 QUESTION NO. 21 Total amount of deposits of corporations engaged in interstate commerce at the end of each of the calendar years 1927-31, inclusive, and) the number of such corporations Year e n d i n g - Number of corporations 14 17 18 19 15 1927 1928 _ 1929 1930 1931 Total deposits $24,151,503.54 33, 338,974.89 59, 703,040.79 31,245, 767.37 12,891,901.47 Mr. PECORA. NOW, Mr. Kahn, question no. 22 of the questionnaire which I submitted to your firm in behalf of this committee asked for the names of all corporations engaged in interstate commerce having banking deposits with you in excess of $50,000 during that same 5-year period. And I received this document, which I now show you, as an answer to that question. Will you kindly look at it and tell us if that constitutes a correct and complete answer to that question ? Mr. KAHN. Yes, sir. Mr. PECORA. I offer that in evidence and ask that it be spread on the record of the committee's hearings. The CHAIRMAN. Let it be admitted and be made a part of the record. COMMITTEE EXHIBIT NO. 7 QUESTION 22 Names of all corporations engaged in mterstate commerce having banking? deposits with us in excess of $50,0000 durmg period 1927-31, inclusive Balaban & Katz Corporation. Baltimore & Ohio Railroad Go. Chesapeake & Ohio Railway Co. Chicago, Milwaukee, St. Paul & Pacific Railroad Co. Chicago & North Western Railway Co. Delaware & Hudson Co. Denver & Rio Grande Western Railroad Co. Gulf, Mobile & Northern Railroad Co. Hudson Coal Co. Hudson-Manhattan Railroad Co. Illinois Central Railroad Co. Indiana & Illinois Coal Corporation. Inland Steel Co. International-Great Northern Railroad Co. Kansas City Southern Railway Co. Mid Continent Petroleum Corporation. Missouri-Kansas & Texas Railroad Co. Missouri Pacific Railroad Co. National Malleable Steel Castings Co. New Orleans, Texas & Mexico Railway Co. Pacific Oil Co. Paramount Famous Lasky Corporation. 988 STOCK EXCHANGE PRACTICES Paramount Publix Corporation. Pennroad Corporation. Pennsylvania Co. Pennsylvania Railroad Co. Southern Pacific Co. Texas & Pacific Railway Co. Transportation Products Corporation. Union Pacific Railroad Co. Utah Fuel Co. Wabash Railway Co. Western Maryland Railway Co. Western Union Telegraph Co., Inc. Westinghouse Electric & Manufacturing Co. Westinghouse Lamp Co. Youngstown Sheet & Tube Co. Mr. PECORA. NOW, Mr. Kahn, in looking over committee's exhibit no. 7, June 27, 1933, which is an answer to my question no. 22 of the questionnaire submitted to your firm, I notice the names of many railroad companies among corporations engaged in interstate commerce which maintain deposit accounts in excess of $50,000 with your firm. Are these railroad corporations companies for which your firm has done the financing in the past ? Mr. KAHN. May I have a look at it, Mr. Pecora, to see what it is? Mr. PECORA. Yes; certainly. Mr. KAHN. I have a copy here, I am told. I am sorry. Mr. PECORA. All right. Please look at it and answer the question. Mr. KAHN. Generally speaking, the answer to your question is " Yes." There may be one or two minor ones where that is not so, but generally speaking the answer to your question is " Yes." Mr. PECORA. Were these deposits maintained by those railroads with your firm time deposits or were they deposits payable on demand ? Mr. KAHN. Yes; I give the same answer as before, that it depends upon the arrangement and the convenience of our depositors. Sometimes they prefer to keep it on time, when they have no immediate use for the money; and sometimes they are call deposits. There is no definite rule. Mr. PECORA. DO you allow interest to them where the deposits are time deposits? Mr. KAHN. DO we allow interest? Mr. PECORA. Yes. Mr. KAHN. Yes. Mr. PECORA. DO you allow interest where they are time deposits, was my question. Mr. KAHN. Yes, sir. Mr. PECORA. What controls the rate of interest that you allow on such deposits? Mr. KAHN. The best that we can afford, the best that the condition of the market permits. Senator TOWNSEND. About what is the rate of interest paid on deposits ? Mr. KAHN. I t varies, Senator Townsend. At the present time I am sure it is not very much, but we adjust it to the conditions prevailing in the money market at the time. Senator TOWNSEND. DO you know what the rate of interest is at the present time? STOCK EXCHANGE PRACTICES 989 Mr. KAHN. I will have to confer with some of my associates. Senator TOWNSEND. All right. Mr. KAHN. At the present time they tell me—well, I am afraid I am dependent upon information as to that, and do you want me to answer what is given to me ? Senator TOWNSEND. That will be all right. Mr. KAHN. At the present time they tell me the deposits with us; are very small, and that the rate which we allow varies from one half of 1 percent for call deposits to 1 percent for time deposits. Senator TOWNSEND. Those rates were very much higher, I take it9 during the boom period of 1929 ? Mr. KAHN. Oh, yes; much higher. Senator TOWNSEND. What was the highest rate at that time ? Do you recall? Mr. KAHN. I am having it looked up. Senator TOWNSEND. That will be all right, and you can answer when you receive the information. In the meantime, Mr. Pecora may go ahead. Mr. PECORA. NOW, Mr. Kahn, in the questionnaire that we submitted to your firm, question no. 4, we called for the names of all banks and trust companies in which your firm maintained deposits during the 5-year period, 1927 to 1931, both inclusive, and the amounts of those deposits at the present time in any such banks and trust companies; and we also called for the names of all other banks and trust companies in which deposits are now maintained. In answer thereto I received from your firm a typewritten document which I will ask you to kindly look at and tell us if you can identify it. Mr. KAHN. Yes, sir. Mr. PECORA. I S that a correct and complete statement in answer to the question submitted to you? Mr. KAHN. It is. Mr. PECORA. I now offer it in evidence and ask that it may be spread on the record of the hearings. The CHAIRMAN. Let it be admitted and the committee reporter will make it a part of the record of the hearings. COMMITTEE EXHIBIT NO. 8 QUESTION 4 A. Names of banks and trust companies in which this firm maintained during the years 1927 to 1931, inclusive deposits Mechanics & Metals National Bank, New York. National City Bank, New York. Chase National Bank, New York. National Bank of Commerce, New York. Chemical National Bank (title changed), New York. Guaranty Trust Co. of New York. B. Balances as of Mar. 31, 1933 Guaranty Trust Co. of New York National City Bank, New York Chase National Bank, New York Chemical Bank & Trust Co., (title changed) New York Bank of The Manhattan Co., New York $748, 624. 61 161, 792. Oa 60,498. 36 300,392.84 57, 293.26. 990 STOCK EXCHANGE PRACTICES G. Foreign banks and trust companies in which deposits were maintained during the period 1921-31; balance as of March SI, 1933 (dollar equivalent) Bank of Montreal, London, debit $10. 99 National Provincial Bank, Ltd., London Account closed Swiss Bank Corporation, London Do Westminster Bank, Ltd., London $35,188.23 Dresdner Bank (formerly Darmstaedter & National-Bank), Berlin 316. 67 Deutsche Bank & Discounto-Gesellschaft, Berlin 251. 70 Deutsche Effecten- & Wochsel-Bank, Frankfurt a/M 1,078.18 Deutsche Vereinsbank, Frankfurt a/M Account closed Direction der Disconto-Gesellschaft, Berlin Do Oesterrreichtische Creditanstalt, Vienna $64. 00 Banque de Paris at des Pays-Bas, Paris 2, 011. 35 Comptoir National d'Escompte de Paris, Paris Account closed Credit Lyonnais, Paris $957. 00 Chase Bank (formerly Equitable Trust Co.), Paris 504.49 Societe Generate pour favoriser, etc., Paris 480.34 Banque Centrale Anversoise, Antwerp 93. 00 Banque de Bruxelles, Brussels 90.35 Credit Suisso, Zurich 255.71 Banque Federate, Zurich 202. 00 Amsterdamsche Bank, Amsterdam 101,476.50 Nederlandsche Handel-Maatschappij, N.V., Amsterdam 460.00 Centralbanken for Norge, Oslo . 14. 63 The CHAIRMAN. Did your firm make many of what are known as " brokers' loans " prior to October of 1929? Mr. KAHN. Did we ? The CHAIRMAN. Yes. Mr. KAHN. Yes. It is a part of the way in which we employ our money. The CHAIRMAN. Would you give us an idea of the extent of those transactions in a general way ? Mr. KAHN. I am informed that it shows on our balance sheet, of which you have an exhibit. The CHAIRMAN. DO you remember the rate of interest that you received on those loans ? Mr. KAHN. It varied, Senator Fletcher. Yes; it varied. Mr. PECORA. Are those brokers' loans that are referred to in your answer as call loans secured by stock-exchange collateral? Mr. KAHN. Yes, sir. Senator TOWNSEND. Mr. Kahn, have you secured that interest in 1929 that I asked about? Mr. KAHN. Fourteen percent, I am informed, was the highest rate. Mr. PECORA. That is, prior to November of 1929 ? Senator TOWNSEND. That is, on your deposits ? Mr. KAHN. Yes, sir. Senator ADAMS. Inasmuch as two questions came in there at about the same time, I am wondering whether Mr. Kahn answered the one or the other. The CHAIRMAN. Fourteen percent was your highest rate on those loans? Mr. KAHN. That was on deposits, and I am trying to look it up. You realize that the renewal rate of the stock exchange is not fixed by the banker but by the stock exchange. It is a part of a ruling made every day, as to what shall be the rate which stock-exchange brokers are permitted to pay for renewal loans, and we are advised about that. I am trying to find out how high that rate was as a maximum, but we have not received it as yet. STOCK EXCHANGE PRACTICES 991 The CHAIRMAN. Did you say you paid as high as 14 percent on deposits, or did you mean to say that those were the rates you received on call loans? Senator TOWNSEND. I am wondering if we are not confused a little about the questions. My question of a few minutes ago was as to the highest rate you were paid for call loans during 1929. Mr. KAHN. I am informed that in one or two cases we took deposits on the understanding that we would allow whatever the rate was that we might succeed in obtaining, less 1 percent for our services, that in one or two cases, or at least in a few cases, we received as high as 14 percent. Mr. PECORA. What you mean to say is this Mr. KAHN (continuing). And I find I made a mistake in that last answer. My associates tell me that it was one half and one quarter of 1 percent. Mr. PECORA. DO you mean by that answer that in those one or two instances your firm made call loans of moneys of clients, depositors, or customers, whatever you may choose to call them, and agreed to pay to those clients, depositors, or customers, the same rate of interest you got in the call money market for those loans, after deducting 1 percent for your commission ? Mr. KAHN. I am informed, Mr. Pecora, that I was wrong about deducting 1 percent, that it was less, and that I did ourselves an injustice, that we did it much cheaper. Now, what was it? Mr. LANGENBACH. It was one quarter of 1 percent on time, and it was not in just a few instances but in many instances. Mr. KAHN. Mr. Langenbach answered that. Mr. PECORA. I S he a partner ? Mr. KAHN. NO ; he is our chief bookkeeper. Mr. PECORA. Who handled those call loans for your firm in 1929; what members of the firm ? Mr. KAHN. The head of our loan department, whoever he happened to be at that time. I do not really know now who he was at that time. Mr. PECORA. Were they partnership decisions, those decisions that were made with regard to moneys that would be loaned on call, or was that left to an employee ? Mr. KAHN. There were no partnership decisions made. But I presume one of the partners had general supervision over the department business. I know that I did not. Mr. PECORA. Who did have ? Which one of the partners did have that general supervision over the matter of loans? Mr. KAHN. That would be my greatly esteemed former partner, Mr. Jerome J. Hanauer, who is here and in whose province that particular supervision lay. Mr. PECORA. But he is no longer a partner ? Mr. KAHN. NO. Mr. PECORA. HOW did the interest rates that were allowed by your firm to these various corporations who maintained deposit accounts, balances in excess of $50,000 enumerated on committee exhibit no. 7 of this date, compare with the interest rates allowed by commercial banks at that time ? Mr. KAHN. I am sorry to have to consult about that. I t is not within my knowledge. 992 STOCK EXCHANGE PRACTICES Mr. PECORA. Well, give us the benefit of your consultation.. Mr. KAHN. Would you like to have Mr. Hanauer answer that question or shall I tell you what he says to me ? Mr. PECORA. I have no objection to his giving you the information and you can communicate it to us as having been obtained from him. Mr. KAHN (after consulting). Mr. Pecora, I am sorry to have delayed you but it is not within my personal knowledge. But my former partner tells me that he depended upon the arrangements that were being made in each case with the corporations or their financial officers concerned. I t depended on our own determination to a certain extent, about what they could tell us informally, how soon they were likely to use that money. There was no definite assurance given, but they would tell my partner something like this: We are not likely to need the money for 10 days or a fortnight, or possibly 3 weeks, as the case might be. And on the strength of that information, and on the strength of personal negotiations^ the rate was fixed. Usually it was for the same rate as commercial banks were allowing or a trifle better. It was to the best of my knowledge never less than that, never less than they could get elsewhere and sometimes a trifle better. Mr. PECORA. Did the rates vary with depositors ? Mr. KAHN. Yes; the rates varied. Mr. PECORA. What was the range at any one time % Mr. KAHN. Oh, I did not understand your question. Did you ask if the rates varied? Mr. PECORA. Yes. Mr. KAHN. I thought you asked as of the time. The rates did not vary as to depositors. They were as nearly alike as possible considering the circumstances of the case in each instance, as nearly as they could be considered. Mr. PECORA. Where you regarded a deposit as a time deposit did you allow the same rate of interest to all depositors who maintained time deposits with you? Mr. KAHN. For the same length of time ? Mr. PECORA. Yes, Mr. KAHN (after sir. consulting with associates). Yes. They tell me, Mr. Pecora, if he deposited at the same time, for the same period, under the same circumstances, yes. We treat them all alike. But if times were different, if the circumstances were different, if the length for which they left it with us were different, the rate is different. But the answer to your question is generally yes. Mr. PECORA. And your firm, I presume, made a use of these deposit funds profitable to it ? Mr. KAHN. Slightly to us. Not very. We allowed the closest rate that we could afford. Mr. PECORA. YOU employed those funds in the making of loans generally speaking, did you not, for the most part ? Mr. KAHN. In the making of loans immediately available; yes. Mr. PECORA. NOW, were those deposit funds used in connection with the securities or the securities business handled by your firm? Mr. KAHN. Perhaps I can answer that best by saying—and you will correct me if I am not right (addressing his associates) that our STOCK EXCHANGE PKACTICES 993 first purpose and our first policy was always to have ample funds at hand to pay off our deposits. That was the first policy. Beyond that we did not distinguish, discriminate formally between deposits and between our capital, except that we always reserved against our deposits sufficient funds to pay them off at once. Senator TOWSEND. DO you mean in cash? Mr. KAHN. Yes. Senator TOWNSEND.* Mr. KAHN. I mean In cash? to pay them off in cash immediately. For instance, if you would make what we call immediately available assets that would mean that we could sell or dispose of them, liquidate them, within 24 hours, and such assets we always had against our deposits to a more than ample extent. Senator TOWNSEND. YOU mean you were liquid to the point of where you carried a great quantity of Government securities and 1 cash ? Mr. KAHN. Government securities, cash, and other liquid assets. For instance, we would call stock-exchange loans against collateral approved by us liquid funds, because it has never happened that they were not paid off the next day when called for. Senator BARKLEY. Was there any increase in your deposits about the time the call money rate went up to 15 percent or 20 percent in 1929? Mr. KAHN. I believe there was. (After conferring with his associates.) We did get a material increase in deposits in 1929. Yes, Senator. In 1929 our deposits reached their climax. They varied with the times. And our climax was in 1929. Senator TOWNSEND. Did you stipulate any amount that railroads for which you did the financing should leave with you on deposit? Mr. KAHN. We stipulated no amount; no. Senator TOWNSEND. That was left to their own discretion ? Mr. KAHN. And to our acceptance. We would not have accepted a trifling amount. We would have said in such case, " Go to your banks. That is not our business." The CHAIRMAN. DO you have any regular period for settling with the partners? An adjustment time, a date at the end of the year, or what time? Mr. KAHN. Settling with the partners ? The CHAIRMAN. Settling with the partners; yes. Mr. PECORA. That is, distribution of profits among the partners; was there any fixed time for that? Mr. KAHN. Yes. The 31st of December, every year. Mr. PECORA. I believe I understood you to say in answer to a question put to you by one of the Senators a little while ago that not every partner in the firm is required to make a contribution to the capital of the firm upon his being accepted as a partner. Mr. KAHN. That is right. Mr. PECORA. Or admitted as a partner? Mr. KAHN. That is right, Mr. Pecora. Senator GOLDSBOROUGH. May I ask just a question. Mr. Kahn, when you made collateral loans did you require the borrower to maintain a certain percentage of balance with you? 994 STOCK EXCHANGE PRACTICES Mr. KAHN. The borrower? Senator GOLDSBOROUGH. Yes. Mr. KAHN (after consulting with his associates). No; we did not. Senator ADAMS. Your call borrowers are not necessarily depositors? You make those call loans through the stock exchange, do you not? Mr. KAHST. Yes. Senator ADAMS. And you do not know, oftentimes, the individual to whom they go? In most cases you do not know that? Mr. KAHN. Yes; that is true. Mr. PECORA. YOU make them on the responsibility of the broker? Mr. KAHN. Yes. Mr. PECORA. AS well as on the security of the collateral ? Mr. KAHN. Mainly on the security of the collateral. Mr. PECORA. Yes. Mr. KAHN. And we pick good brokers. "We do not make- • Mr. PECORA. YOU mean good brokers pick you. Mr. KAHN. Thank you. Thank you. Senator BARKLEY. There are a lot of people who were neither bankers nor brokers who got picked in 1929. Senator GOLDSBOROUGH. Mr. Kahn, more fully explaining my recent question: If you had certain depositors with your corporation or firm and they wanted to make a collateral loan would you require them to maintain a certain balance against that collateral loan? I am not speaking about the ordinary brokerage loan. Mr. KAHN. NO. The CHAIRMAN. The committee will take a recess now until 2 o'clock. Mr0 KAHN. Senator, may I correct, or rather make plain one thing as to which my partner said I did not express myself very clearly ? When I suggested that I would like to put in the statement by Freeman & Co., I said I did not know about that statement before. My partner understood me to say that I did not know about that firm before. They want me to say that that is incorrect, because it is an old, established and well-known firm. So, I did not wish to say that the firm was unknown to me. I wish to say that the statement was unknown to me until a few days ago. The CHAIRMAN. YOU did not give the name of your partner who was a member of the stock exchange. Mr. KAHN. John M. Schiff. Senator BARKLEY. Shaefer? Mr. KAHN. Schiff. The CHAIRMAN. We will meet then at 2 o'clock. (Thereupon, at 12.35 p.m. a recess was taken until 2 o'clock p.m. the same day, Tuesday, June 27, 1933.) AFTER RECESS The subcommittee reconvened at 2 p.m., Tuesday, June 27, 1933, at the expiration of the noon recess. The CHAIRMAN. The subcommittee will come to order. You may resume the stand, Mr. Kahn. STOCK EXCHANGE PRACTICES 995 TESTIMONY OF OTTO H. KAHN, A PAETNEE OF KTJHN, LOEB & CO., NEW YOEK CITY—Eesumed Mr. PECORA. Mr. Kahn, in the course of your testimony at the forenoon session you read into the record from some typewitten statement that I observed was handed to you by someone in connection with the Southern Pacific Railway Co. financing, Mr. KAHN. Yes, sir. Mr. PECORA. DO you know Mr. KAHN, I presume Mr. who prepared that statement? Percy Stewart, who is sitting by me, prepared it. Mr. STEWART. I prepared it. Mr. PECORA. Was it prepared before you came to this hearing ? Mr. KAHN. Oh, yes. Mr. PECORA. What was the purpose of preparing that statement with regard to that episode? Mr. KAHN. Perhaps the purpose was to pat ourselves gently on our backs. Mr. PECORA. I beg pardon? Mr. KAHN. Perhaps the purpose was to pat ourselves gently on our backs, and show that we of our own volition paid a great deal more than the company was.able to obtain by competition. Mr. PECORA. Was that such an outstanding event in the history of financing by your firm that you considered it important enough to prepare the statement in advance for use at this hearing ? Mr. KAHN. It was an outstanding event to that extent, that, generally speaking, as I mentioned this morning, we do not participate in competitive bidding, and this was a conspicuous instance where the company did much better by dealing with us than they could have done by competitive bidding. Mr. PECORA. Would you say that because of that conspicuous incident, as you have characterized it, it proves the contention you were subscribing to, that competitive bidding is calculated to bring less beneficial results to the corporation seeking to do public financing? Mr. KAHN. I am convinced of that; yes. Mr. PECORA. Just from that one incident? Mr. KAHN. Not from that one incident. From general experience and observation both in this country and many other countries. Mr. PECORA. Does your experience include any other incidents than "this conspicuous one that you have referred to ? Mr. KAHN. I cannot at this moment search my memory sufficiently to give you an answer under oath, but Mr. PECORA. Well, as a matter of fact, you had forgotten this conspicuous incident in the course of your testimony this morning until one of your associates gave you that typewritten statement to which reference was made, had you not ? Mr. KAHN. I do not say that I had forgotten it, but I did not have it in my memory. Mr. PECORA. NOW your firm, as I understood your testimony this morning, specialized—if I may use that term—in railroad 'financing? Mr. KAHN. Largely, yes. Mr. PECORA. Largely. In connection therewith, do you keep abreast or do you seek to keep abreast of the reports and decisions of the Interstate Commerce Commission ? 996 STOCK EXCHANGE PRACTICES Mr. KAHN. We seek to keep abreast; yes. Mr. PECORA. YOU have no difficulty in obtaining them, do you ? Mr. KAHN. NO. Mr. PECORA. The reports and decisions of the Commission are public property and readily available to those who seek them? Mr. KAHN. Yes. Mr. PEOORA. DO you know what has been the history as reflected in the reports of the Interstate Commerce Commission in the past few years of competitive bidding for the equipment obligations of railroads? Equipment Trust certificates? Mr. KAHN. I believe that history is pretty definitely set forth in the pamphlet which I presented this morning, by Freeman & Co. Mr. PECORA. Well, I have not seen that pamphlet yet, and I have not the advantage of examining the authors of that pamphlet here, because they are not here, but I want to ask you as a banker who largely specializes in railroad financing if you know what the history has been as that history has been recorded and reported in the public documents of the Interstate Commerce Commission with regard to Equipment Trust obligations or certificates? Mr. KAHN. My own judgment is that it has narrowed and made more difficult the market for equipment trusts. Mr. PECORA. When you say that it has narrowed and made more difficult the market for equipment trusts, what do you mean by that, so that there may be no misunderstanding of your statement? Mr. KAHN. I mean by that that the distributors, who are a valuable portion of the investment business, have to a considerable extent shown a reluctance to go into the purchase or into the distribution of equipment-trust certificates unless they are sponsored by responsible bankers, and unless an adequate margin was secured to make it worth their while to go to the effort and the responsibility of going out and distributing such equipment trusts. Mr. PECORA. Who has shown that reluctance? Mr. KAHN. The distributors. Mr. PECORA. The distributors? Mr. KAHN. Yes. Mr. PECORA. That Mr. KAHN. Yes. Mr. PECORA. That is, the jobbing agencies? are relied upon by the underwriting bankers; the issuing bankers ? Is that right ? Mr. KAHN. Yes. Mr. PECORA. And the reason for that reluctance is because of the narrowness of the spread or profit to themselves, is it not ? Mr. KAHN. Only in part, Mr. Pecora. I think the distributors, and I venture to say the public, do attach considerable importance to have securities that are offered to them under the sponsorship and bearing the trade mark of responsible bankers, which bankers over a course of many years have shown that they are thorough, that they are experienced, and that they are men of integrity. That is a fact. Mr. PECORA. Are we to understand from that, Mr. Kahn, that the distributors rely in selling an issue to their customers or to the investing public upon the sponsorship of the underwriting banker or the issuing banker ? STOCK EXCHANGE PRACTICES 997 Mr. KAHN. Keliance is perhaps too strong a word, but it is undoubtedly an element which affects their judgment. Mr. PECORA. IS it the most decisive single influence? Mr. KAEONT. That asks me to answer for every distributor, which I cannot do. Mr. PECORA. I merely want your general observation. Mr. KAHN. But my general observation is in this and in other instances that the trade mark and the sponsorship of a responsible banker, which means the examination he has made, the advice he has given, the thoroughness which he has devoted to a thing, the record of integrity which he has made, is an important element in influencing not only the distributors but also influencing the public. Mr. PECORA. The investing public who buy from the distributors ? Mr. KAHN. Yes. Mr. PECORA. Well, I repeat the question: Would you refer to that element as the most important single element which influences the distributor and the retail buyer, so to speak ? Mr. KAHN. It is difficult to say what is the most important single element. Mr. PECORA. Well, do you know any single element more important than that? Mr. KAHN. There ought be no single element more important than the assurance of the investor and of the distributor that he is buying something which has the best kind of sponsorship in the way of reliability and thoroughness. I do not know whether that is always so or not. Mr. PECORA. And that is the sponsorship of the underwriting or issuing banker ? Mr. KAHN. Providing that underwriting and original banking has a reputation for thoroughness and integrity; yes. Mr. PECORA. Yes. Issues such as equipment-trust certificates are now made as the result of competitive bidding, are they not? Mr. KAHN. Yes, sir. Mr. PECORA. And do you know what the effect has been of that competitive bidding for those securities, upon the spread ? Mr. KAHN. I could not answer that offhand. Mr. PECORA. Well, let me read to you from the report of the Interstate Commerce Commission which I have before me, the Fortyfourth Annual Eeport, dated December 1, 1930, page 11: The amounts of equipment-trust obligations in respect of which carriers have fceen authorized by us to assume obligation and liability are shown above. All the equipment obligations, except those issued directly to the builders, were sold at competitive biddings. The table given on page 12 of our Annual Report for 1928 shows certain data with respect to the sale of equipment obligations and bonds in amounts of $100,000' and over to* bankers, and resales by them to the public, in cases where complete sales information is available. The table is here reproduced with additional data for the last 6 months of 1928, the calendar year 1929, and the first 6 months of 1930 included. Then in the table which follows, Mr. Kahn, it appears that for 7" months in 1920 the spread in the price to bankers and to the public per $100 unit was $1.91; that in 1921 it was $2.29%; in 19229 $2.33; in 1923, $2.33; in 1924, $1.86; in 1925, $1.80; in 1926, $1.47; in 1927, $0.66; in 1928, $0.64; in 1929, $0.89; and for the first 6 months of 1930, $0.72. 998 STOCK EXCHANGE PRACTICES And reading from the forty-fifth annual report of the Interstate Commerce Commission dated December 1, 1931, and at page 10 thereof, we find a corresponding table for the first 6 months of 1931, which shows the spread in the sale of equipment obligations of 0.43. And that the average spread for the entire year 1930 in the price to bankers in the sale of equipment obligations was 0.78. Now you would accept these figures as authentic, would you not? Mr. KAHN. Undoubtedly. Mr. PECORA. Embodied as they are in the report of the Interstate Commerce Commission? Mr. KAHN. Undoubtedly. Mr. PECORA. Were you aware of that general trend downward of the spread in securities of this kind before I read it to you from these reports ? Mr. KAHN. I cannot say now that I was aware of it. As I said before, this pamphlet only came to my attention a few days ago. I brought it along because I thought it seemed to me a very eloquent statement corroborative of what I said to you gentlemen before. I have not compared it with this book and with these records. The CHAIRMAN. What would happen, Mr. Kahn, in case there were no competitive bidding? Would the whole business be confined to one or two distributors ? Mr. KAHN. If there were no competitive bidding ? The CHAIRMAN. Yes. Mr. KAHN. I think if there is no competitive bidding, Senator, the result will be that the railroads and other corporations are free to choose whom they want to do business with, and no one can say them nay. There is no one to control them. It has happened in our case more than once that a new financial vice president came into office; we did not know him before; we did not know who he was. We had no possible influence in bringing him in there. We had no possible influence in keeping him in there. But he would gradually acquaint himself with the facts as to the records of our dealings with that particular railroad, and the result was that he went on doing business with us. But it was entirely his doing. He can go to anybody else he chooses. And it is no more competitive or no less competitive than a doctor is competitive or an architect is competitive. Mr. PECORA. Mr. Kahn, you recognize that there is a very sharp difference in principle between the analogy that you have drawn in the relations between a doctor and a patient, and the banker and the common carrier, do you not? There is a public interest in the latter classification that is not present in the relationship between a doctor and a patient, is there not? Mr. KAHN. AS far as the patient is concerned that does not enter. As far as the community is concerned of course it does. Mr. PECORA. Yes. And that public interest and the service of that public interest is something that should be kept in mind. Mr. KAHN. By all means. Mr. PECORA. Yes. Now in the case of the issuance and the sale of equipment trust obligations or certificates by common carriers, I believe it was in 1925 the Interstate Commerce Commission required those to be issued as the result of competitive bidding? STOCK EXCHANGE PRACTICES 999 Mr. KAHN. Yes. Mr. PECORA. And yon have seen that the result has been a very appreciable narrowing of the spread to the banker ? Mr. KAHN. Yes. Mr. PECORA. NOW do you consider that has been harmful to the interests of the carrier or to the public? Mr. KAHN. It may have been very harmful to the interests both of the carrier and of the public. Mr. PECORA. DO you know of any instance that would establish that? Mr. KAHN. I believe that the pamphlet I submitted does prove that it has been harmful; yes. Mr. PECORA. YOU are referring now to the pamphlet of Freeman & Co.? Mr. KAHN. Yes. Mr. PECORA. Well I say again, I have not read that pamphlet and I have not the advantage of examining the authors of the pamphlet to see what their foundation for their conclusions was. But do you know of any instance within your personal knowledge where this rule of the Interstate Commerce Commission requiring competitive bidding in the issuance and sale of equipment trust certificates has worked to the detriment either of the carrier or of the public? Mr. KAHN. I have given you one, Mr. Pecora, which I read to you this morning. I am not prepared without going into the thing more fully and examining the matter, to say whether there have been other instances. It is very difficult from a statement such as the Interstate Commerce Commission has made to know in what cases the offerings of equipment-trust certificates have been wholly unsuccessful. I have given you one instance in which they were wholly unsuccessful. There may be plenty of others. I do not know. Senator ADAMS. Mr. Kahn, are you able to give us an approximate figure as to the prices at which equipment-trust certificates have been marketed during this period? Has there been a decline or an increase in the price of equipment-trust certificates? Mr. KAHN. I see from Mr. Pecora's statement that there has been a decline. But I Senator ADAMS. NO ; his figures were a decline in the spread. Mr. PECORA. A decline in the spread ? Senator ADAMS. Yes. I am talking about the price, which might be an entirely different thing. Mr. KAHN. It might be an entirely different thing, as you rightly say, Senator, and I am not prepared now to say whether there has or has not been, because I do not know. Senator ADAMS. The equipment-trust certificate has been regarded as a rather high-grade type of security, has it not ? Mr. KAHN. Yes; very high grade. And the question is, Mr. Pecora—and that was my whole point this morning—that there enter the interests of the public and the interests of the corporation in the first instance. The whole test of whether the investment banker is of any use or not depends on whether his services are of value to the industrial community, including the railroads, in enabling them to meet their long term requirements. If not, then the 1000 STOCK EXCHANGE PRACTICES investment banker might just as well go out of business. I am convinced, and the history of the other countries has shown, that these services are of real importance and of real usefulness. I cannot offhand tell you what elements in the particular passages you have read to me sustain your point and what elements sustain my point. Mr. PECORA. I am not seeking to make any point. I am seeking: to find out your view. Mr. KAHN. Well, my point is that I am quite sure that you can 6ring some cases to my attention which seem to show that the noncompetitive bidding costs more than competitive bidding. But I am prepared to bring to you a whole raft of cases showing that competitive bidding has been most detrimental to the public, has compelled the public to pay unnecessarily high prices- Has in some eases* destroyed the credit of corporations and of governments. And that if you wsigh the one against the other, the thing to do, in my humble opinion, is to go to the people who have the greatest experience, who are most thorough, who have a good reputation, enlist their services and pay them what is a fair compensation—or not pay them any compensation at all, which is the usual case, but simply tell them, "We are willing to sell you that at such and such a price, and now you go out and resell them to the public at a1 fair increase "; and in selling them to the public at a fair increase we are perfectly willing to bear in mind that the investment banking business requires the services of a great many specialists. I t1 requires the maintenance of a very large overhead. It involves a very great responsibility. It involves, if you want to maintain your reputation, your capacity to say no to a hundred tempting opportunities in order to maintain your reputation. Mr. PECORA. That is true of business generally, isn't it? Mr. KAHN. Not of all businesses as much as it is of the investment: business, which is built upon one thing only, and that is Mr. PECORA. The difference is one of degree rather than of principle, is it not? Mr. KAHN. I think it is to a considerable extent one of principle, because, as I tried to express this morning, we haven't got a show window. We do not advertise. We have no salesmen. We send nobody out to tout our goods. The only thing which keeps us alive is the confidence of the people, and that confidence is subject to being recalled. If we haven't got it any more we can just as well go out of business. And to maintain that confidence requires not only character and judgment, it requires also the capacity to say no to a hundred tempting opportunities. Senator ADAMS. Mr. Kaha, if I might interrupt. Perhaps Mr.. Pecora has grasped your explanation, but it has escaped me. L gather that your view is that it had been detrimental to the public as well as to the carrier to have competitive bidding on these equipment trust certificates. I find from these statistics that there is a smaller spread, so far as that is concerned; and apparently from the pamphlet, which I think has been identified as the Freeman & Co. pamphlet, the investment bankers or brokers say in that ratherone after the other that it has resulted in a higher price of these equipment securities. Now I am not quite clear as to the point you make, as to why under those conditions it is detrimental to the public STOCK EXCHANGE PKACTICES 1001 and to the carrier, the carrier getting more money for his certificates^ and, of course, rates and things of that kind are based upon the actual amount of money that comes in. It is more for the benefit of the public, I should think, if they get a dollar for a dollar obligation than if they get 97 for a dollar obligation. So I am really asking for information. Mr. KAHN. Well, Senator, I am not—beg your pardon. [After conferring with associates.] Senator, I am getting valuable advice from the rear. Senator ADAMS. YOU are fortunate in having it available. Most of us have to travel here without reserves or recruits back of us. Mr. KAHN. What the rear tells me and what I fully approve is this: The statement which you have read me does not show whether on the whole the railroad obtained a better price or not in consequence of elimination of those sources of capital which they used to deal. It does show a lesser commission was paid. But if I am willing to pay, as I was willing to pay to the Southern Pacific, 98%, and others were willing to pay only 97%, I do not see in what way the fact that, if they could have sold them they might have sold them at 97%, which would have been a half a cent spread to the officials of the railroad—I hate to argue with the master of the law Mr. PECOKA (interposing). Please do not embarrass me. Mr. KAHN. And to put my very poor knowledge or my very poor argument against yours. But how did I know that was beneficial to the railroad, or how do I know in your instance what the railroads would have obtained and what they would have obtained if they had come to us? How could anyone prove that? I know we would have to pay the top price that was possible to pay. How do I know that was the result, that either the bondholders or railroad was benefitted ? I have given you one case showing where the railroad benefitted through the fact that they came to us instead of going to competitive bidding. Mr. PECORA. NOW, Mr. Kahn, perhaps this would be of some information or enlightenment to you on that very proposition. You were pleased to refer to the conspicuous instance of the Southern Pacific Railroad Co. this morning. You have made reference to it again this afternoon as illustrating the advantage to the carrier in that particular case of disposing of their bonds on your bid of 98% instead of accepting the best bid of 97 and a fraction which it received through competitive bidding. Mr. KAHN. Yes. Mr. PECORA. At what price did you sell those Mr. KAHN. 98%. Mr. PECORA. 98%. That is, your profit was bonds to the public? only one quarter of 1 percent? Mr. KAHN. Yes. Mr. PECORA. Wasn't that unusually small as compared to the profit in railroad bonds generally? Mr. KAHN. That was an unusually small profit. The circumstances were unusual. Mr. PECORA. Then if that was an unusual circumstance, why do you rely upon it to prove a generalization ? Mr. KAHN. It is merely one of the incidents which I happened to have at hand. I might be able to find others, or probably could 175541—33—PT 3 4 1002 STOCK EXCHANGE PRACTICES find others, which were eloquent of what I tried to prove this morning. That is not the only one. I told Mr. Pecora that the Cincinnati Union Station came to us and wanted to sell bonds to us at 89, and we said, no, don't sell them at that price. You can do much better. And shortly afterwards, a few months afterwards, it obtained 97 for them. I can give you plenty of similar examples where, if bonds had been offered to competitive bidding at the time that the railroads wanted to offer them, they would have done infinitely worse than by waiting for the matured advice of their bankers who could afford to be disinterested—I do not pose as an altruist in business, but who could afford to be disinterested—because they knew that if they gave good service it would be appreciated and the business would come to them. No one would have given them that advice on competitive bidding. The railroads made up their minds they would sell at 89. The CHAIRMAN. Mr. Kahn, since the Interstate Commerce Commission not only recommends but insists upon competitive bidding, would you recommend any legislation on that subject? Mr. KAHN. Senator, the Interstate Commerce Commission, in my_ opinion,, very wisely only insists on competitive bidding in the case of equipment trusts, and they are basing that upon certain premises, with some of which I agree, some of which I am a little doubtful about; but I haven't the slightest, not the slightest, fault with that going on as is. My argument is in response to Senator—pardon me, Mr. Pecora's question. As Mr. Lamont says, perhaps I anticipate. My argument was Senator BARKLEY (interposing). Are there any vacancies in the diplomatic service? [Laughter.] Mr. KAHN. A much broader one, Senator. I say it is a question for a decent investment banker to bear in mind the advantage of the corporation and of the public, and that the present method comes as near as is possible with our imperfect human nature, and has been found so everywhere in the world. But I don't say that this particular rule should be repealed. The CHAIRMAN. Of course, it was this equipment trust matter that they were talking about, where they insist on the competitive bidding. Mr. KAHN. Equipment trusts are a somewhat different class of securities from a bond. They are interested in other securities to a very large extent. The element of experienced banking advice as to what is the best kind of securities to offer The CHAIRMAN (interposing). Well, of course, they do not insist on competitive bidding as to stocks and bonds ? Mr. KAHN. Oh, no; they do not. Only as to equipment trusts. Mr. PECORA. NOW, the Southern Pacific Co. instance you cited related to bonds, not to equipment trust certificates ? Mr. KAHN. N O ; it related to equipment trusts, equipment trust certificates. Mr. PECORA. In 1927 you recall that an application was made by the Southern Pacific Co. to the Interstate Commerce Commission for leave to issue $5,786,000 of' equipment trust certificates. Do you recall that? STOCK EXCHANGE PRACTICES 1003 Mr. KAHN. I do not recall it, but I say the instance which I have given to you relates to equipment trust certificates, and I am not arguing, not attempting to argue now, with the wisdom of competitive bidding, for equipment trust certificates. I doubt very much whether either the railroad or the public gains anything by it, but I am not arguing about it. Mr. PECORA. What was the date of that issue that you speak of? Mr. STEWART. July 14, 1928. Mr. PECORA. Are you familiar with the application that was made to the Interstate Commerce Commission in behalf of the Southern Pacific Co. on July 14,1927, for leave to issue $5,786,000 of equipment trust certificates? Mr. KAHN. I am not. Mr. PECCRA. Well, I am reading now from the report or decision of the Interstate Commerce Commission on that application, entitled " Finance Docket No. 6389, Southern Pacific Equipment Trust, Series J, submitted July 14, 1927, decided July 18,1927." I merely want to read the following paragraph from it: Bids for the proposed issue of equipment trust certificates were solicited from 34 banks and bankers, and 8 bids were received, representing 16 banks and bankers. Subject to our approval the certificates! have been sold to the Mellon National Bank, Pittsburgh, Pa., and Salomon Bros. & Hutzler, New York City, the highest bidders, at 99.52 percent of par and accrued dividends from July 1, 1927. I see that in that instance, a year before this conspicuous example that you put into the record here, 5% million equipment trust certificates were sold to the highest bidder at 99.52. Mr. KAHN. Yes. Mr. PECORA. Which is even better than the 98*4 that you regard as a conspicuous example. Mr. KAHN. Well, Mr. Pecora, times were different. Mr. PECORA. Did you submit any bid on the occasion of this 1927 application ? Mr. KAHN. We did not. Mr. PECORA. The year 1927 was, generally speaking, a good year for business, wasn't it? Mr. KAHN. The year 1927? Mr. PECORA. It was one of the so-called " boom " years? Mr. KAHN. A very good year for business; yes. The CHAIRMAN. Did you have anything to do with the Baltimore & Ohio issue of stocks and bonds ? Mr. KAHN. Very likely, Senator. We act as their bankers usually. The CHAIRMAN. I have a statement showing that the stock of the Baltimore & Ohio Eailroad selling for 150 on the market and they issued $150,000,000 more. Mr. KAHN. Yes. The CHAIRMAN. Giving to their stockholders the right to pur- chase at par, $100. Mr. KAHN. Yes. The CHAIRMAN. The privilege practically Mr. KAHN. Yes. The CHAIRMAN. DO you remember that? ate up the whole issue. 1004 STOCK EXCHANGE PRACTICES Mr. KAHN. I do not recall it, but I haven't any doubt that if such an issue was made it was underwritten by us and our associates. The CHAIRMAN. It is said that the participants in the financing, or rather the bankers who did not participate in the financing probably paid $7,500,000 for them, just as though they had underwritten the issue but they did not. Mr. KAHN. I do not have the instance in my memory, but I am quite sure that no railroad could expose itself to the risk of having that amount of stock offered to the public without being protected by some kind of underwriter. In fact, I have the issue here. (At the close of the session Mr. Kahn submitted the following testimony for the record, bearing on this issue: Mr. Kahn. One of my associates informs me there was to his recollection no such issue of $150,000,000 of stock of the Baltimore & Ohio Eailroad Company and suggests that perhaps the chairman has in mind an issue of 632,425 shares of that company's common stock which was offered by the company to its stockholders at 107% on June 9, 1927, the issue being underwritten by my firm. The stock ranged in the market during the month of June 1927 between 114 and 125.) The CHAIRMAN. If you are familiar with that subject matter, and I presume you are, Mr. Kahn, I am reminded that the total capital debt issued up to the time of the war of the railroads in this country was only 11 billion dollars. Mr. KAHN. Yes. The CHAIRMAN. And after that there was issued 12 billion more? Mr. KAHN. Yes. The CHAIRMAN. Making the total capital debt today something like 23 billion dollars? Mr. KAHN. Yes. Senator GOLDSBOROUGH. Billion? The CHAIRMAN. Doesn't that look like an enormous increase in the capital debt of a railroad, 23 billion dollars issued up to now % Mr. KAHN. It looks like an enormous effort on the part of the railroads to render that additional service to the public which had become probably necessary through the run-down condition that was a necessary matter permitted to exist during the war. When the railroads were returned to private hands after the war they found that their expenditures had to be very large, because during the war other things were more important than maintaining the excellency of the railroads. The railroads made a very great effort to put themselves back on the map and to fight for their existence and to give the best possible service. In fact, they may have gone too far. Nearly every other industry went much too far in increasing its plant capacity and in raising money for the purpose of improving its service. It would have been very much better for the country if there had been generally more moderation and less eagerness for expansion and for perfection of service. But they all did it. I do not know: I have not the figure in mind. I accept it, of course. But whatever the railroads did they did for what was not only the interest of the country, a laudable purpose, but what in their best judgment was the necessary purpose in order to maintain their position as a great branch of the national industry. It gave work to many people. It increased the general activity of the coun- STOCK EXCHANGE PEACTICES 1005 try. I haven't any doubt, in the light of hindsight, that it would have been much better if a little more moderation and restraint had been observed. The CHAIRMAN. Does not such a large capitalization result in an increase of rates and repairs and freights and all that sort of thing, and put more burden on the people ? Mr. KAHN. But these expenditures since the resulting increases, if any, in rates, were subject to the approval of the Interstate Commerce Commission. The CHAIRMAN. Yes. Mr. KAHN. They must have approved it or the expenditures could not have been made. Senator BARKLEY. DO you think that this 12 billion dollars increase in the bonded indebtedness of railroads since the war was reflected in the purchase of equipment or in physical benefits ? Mr. KAHN. Not all of it, I am afraid, Senator. Senator BARKLEY. That would represent at least half of the total value of all the railroads, and it is not my observation that they spent anything like that amount of money on equipment. Mr. KAHN. I am afraid I cannot contradict you. Senator BARKLEY. What were they doing with the rest of the money ? Mr. KAHN. YOU see, there happened from 1926 to 1929, and particularly in 1929, a perfect mania of everybody trying to buy everybody else's property, and the railroads were not excluded from that. New organizations sprung up. Money was so easy to get. The public was so eager to buy equities and pieces of paper that money was—just as it was pressed upon foreign governments, so it was pressed upon domestic corporations. The result was that many of the railroads became fearful, and with good reason, that lest somebody should imperil their just interests in their own territory many of them felt either like being aggressors or like defending themselves against aggressors, very much the European situation all over again, only instead of leading to warfare it led to expenditures. In consequence of that I believe that a good many of the expenditures that were made in those years were made for the purpose either of buying strategically located railroads or for the purpose of railroads defending themselves against the apprehended aggression on the part of other railroads or other corporations. Senator BARKLEY. What sort of defense was necessary on the part of the railroads to keep one from selling itself out to some other road that would require the expenditure of billions of dollars for the issue of bonds ? They did not have to sell. What sort of aggression was it that they had to defend themselves from ? Mr. KAHN. May I give you a case in point in answer to that? Senator BARKLEY. Yes. Mr. KAHN. In 1929 the Pennsylvania Railroad, representing as it did no one large holding or no combined large holding of stock but representing hundreds of thousands of small stockholders, became apprehensive that its legitimate territory, the legitimate assets of its hundreds of thousands of stockholders, most of them small stockholders, was being imperiled by the other railroads coming into that 1006 STOCK EXCHANGE PKACTICES territory and buying up strategically important pieces of railroading; in their territory. They considered very carefully, to our own knowledge, what they ought to do to defend themselves, and they finally reached the conclusion that the only way in which they could defend themselves was to unite their own stockholders in a defensive organization, which had the name of Pennroad Corporation and whichwould be strong enough financially and which would be elastic enough constitutionally to go and buy strategically important pieces of railroad before somebody else snatched it away from them. It was not a question of these newcomers wanting to buy the Pennsylvania Railroad; it was a question of these newcomers purchasing properties that were of strategic value to the Pennsylvania Railroad, which they were perfectly willing to leave independent but if somebody else was going to get them, it would be very damaging to their own property; and their own property represented not the holdings of a few rich men or of a small body of compact holdings but a percentage of holdings of much more than a hundred thousand of small investors. They felt called upon, and in my opinion they felt rightly called upon, even though it was costly, to do what they could to defend the assets entrusted to their care. That is how this particular case arose, and I have mentioned it to you as an answer to your question. Senator BARKLEY. Just one other question. Did that operation necessitate the enormous increase, or an enormous increase, in the bonded indebtedness of the Pennsylvania Railroad or of any of these companies which it was seeking to control through the formation of the holding company known as the " Pennroad Co." ? Mr. KAHN. In this particular case it did not, and if I may continue to indulge in a practice which I have started of saying pleasant things about ourselves, we most urgently warned the Pennsylvania Railroad that nothing should be done which would involve any increase in fixed charges and that the things should be handled in such a way that it would involve nothing but equity, which it was perfectly proper, within the choice of the Pennsylvania stockholders^ to put up for their defense or not put up as they thought best. But there was not a dollar of fixed charge incurred. There was not even a dollar of preferred stock incurred. And I do claim a little of a credit of having most urgently advised that there should be no increase in the fixed charge and there should be no preferred stock. Mr. PECORA. Mr. Kahn, you have already stated that the year 1927 generally speaking was a good business year. Mr. KAHN. Yes. Mr..PECORA. Was 1928 a better year for business generally? Mr. KAHN. I cannot say exactly it was better, but it was a good year, too. Mr. PECORA. Well, insofar as prices of securities were concerned, did securities, generally speaking, bring higher prices in 1928 than they did in 1927? Mr. KAHN. I don't really recall. Mr. PECORA. In 1927, which we have seen from the record that I have read and reports of the Interstate Commerce Commission decision on the application of the Southern Pacific Railway for leave to issue five million and odd hundred thousand dollars of STOCK EXCHANGE PRACTICES 1007 Equipment Trust dividends—we have seen that as a result of competitive bidding Mr. KAHN. Yes. Mr. PECORA. The roads sold those to the Mellon Bank and to Salomon Bros. & Hutzler for 99.52. Mr. KAHN. Yes. Mr. PECORA. YOU said that the following year, the year 1928, this conspicuous example arose where your firm obtained an issue of Equipment Trust certificates from the same road at 9814Mr. KAHN. Yes. Mr. PECORA. Why didn't they bring as high in 1928 as they did in 1927? Mr. KAHN. That depends upon circumstances. Mr. PECORA. DO you know what the circumstances were! Mr. KAHN. I do not, except Mr. PECORA (interposing). Can you tell us at this time? Mr. KAHN. Except unwillingness on the part of the many people who were invited to submit a bid. Senator TOWNSEND. Was the rate of interest the same? Mr. KAHN. The rate of interest in that case was—the basis at which they were sold was 4.7785, and I believe they were &y2 percent bonds, 4^/2 percent equipment trusts. I could not possibly tell you what were the motives which induced the many people who were invited to bid to refuse to do so. But they must have been motives of self-interest. They must have believed they could not sell them. Mr. PECORA. NOW, you said something about what you described as a " perfect mania " on the part of everybody to buy everybody else's property in 1928 and 1929. Mr. KAHN. Yes; particularly 1929. Mr. PECORA. Particularly 1929 prior to October? Mr. KAHN. Yes. Mr. PECORA. Referring to 1929, you found quite a change after October 24 for the balance of that year? Mr. KAHN. Yes. Mr. PECORA. The Senator wants to know why I bring that up. Perhaps it is because of painful memories. Now, like most manias, you found that mania an unhealthy one, didn't you, for the common good—it proved to be so ? Mr. KAHN. It proved to be so, and some of us were in before the event too early, and some of us were in after the event Mr. PECORA. But too late? Mr. KAHN. But too late. And some of us reached the conclusion, let us say March, to give you an arbitrary date, that things could not go on, and then we were persuaded by the course of events that the thing could go on and did go on, and then we were in a position of the twelfth juryman, who said, " I have never seen 11 such obstinate men ", and we thought, well, probably—at least some of us thought—probably we are wrong. Everybody else says, " This thing is going on for a few years longer anyhow. There is no sign of a reaction, and probably we are wrong. We do not want to assume that our judgment is right as against everybody else's." We did do one thing, we did not join in the general scramble to create affiliates and to create securities corporations. Not one of them 1008 STOCK EXCHANGE PRACTICES bears our trade mark. Not one of them was set up by us. But we were not—at least I was not—determined enough when I found that my judgment was in defiance of the almost unanimous sentiment of the community. I for one was not willing to say, " Well, I am right and everybody else is wrong." Mr. PECORA. NOW, Mr. Kahn, when did you first realize that this was a mania? Mr. KAHN. That this was Mr. PECORA. A mania, what you have called a " perfect mania " ? Mr. KAHN. Well, I realized off and on that it was a mania. I believed in 1928 already that it had reached the proportions of a mania, and then it went on and the public seemed determined Mr. PECORA (interposing). The mania became more furious and intense, did it? Mr. KAHN. It was not the bankers, Mr. Pecora, that did that. Just as the bankers are not making the violent bull market in New York now. That is not the banking business. No banker can do that. No one individual or group of individuals can do that. Mr. PECORA. If the bankers do not do it, can you tell us what group of persons can do it and do do it? Mr. KAHN. There is nothing as strong as the determination of vast numbers of public opinion to be in the making of—no, that is not the right word—to be in when a great movement is going on. They want to be in. They do not want to sit outside and have their neighbors guess right and they guess wrong. So they go along, and the combined power of millions of people in doing that is infinitely stronger than anything that a combination of bankers can do, and no combination of bankers can make a market such as exists today in New York. No combination of bankers can make a market such as existed in 1929 in New York. They can participate in it, and some of them did to their cost, but they cannot make it. Mr. PECORA. DO you think that bankers are in a position to apply influence or brakes to such mania? Mr. KAHN. They should be. Mr. PECORA. YOU have been a banker practically all of your adult life? Mr. KAHN. Yes. Mr. PECORA. I want to ask you, in the light of your experience over many years in the banking field, what corrective influence, if any, bankers are in position to apply to such a situation ? Mr. KAHN. Perhaps I can answer that by saying that in England, where they are very old in experience and very wise, because they have to be wise in order to live—it is a poor country and they can only live if they are wise; nature has not given them very much else—in England the governor of the Bank of England, who has no extraordinary executive power outside of the Bank of England, surrounds himself with a number of wise heads whom he selects, and if they reach the conclusion that something ought to go down the line in the way of advice to the community at large, especially the financial community, it does go down the line, and it goes down the line in such a way that it is heeded and obeyed. We have no similar thing in this country. It is true that in 1929 the Federal Reserve Board—late in 1929—tried to stem the tide. It STOCK EXCHANGE PEACTICES 1009 is equally true that they did not do anything of the kind earlier; and the time to prevent something serious happening to the financial community is earlier, and not later. But I know of no one who can exercise that influence in this country except the Federal Reserve Board, or perhaps the Treasury. It is very difficult for the Treasury to do it, because if it gives wrong advice the Secretary of the Treasury is accused. If he gives wrong advice everybody will say, " You prevented me from doing the right thing." It is still more difficult for the President to say anything. I know of no agency in this country that is fitted to exercise that function except the Federal Reserve Board. Mr. PECORA. Did not the Federal Reserve Board attempt to apply corrective influences early in 1929? You say it did not do it until late in 1929. Mr. KAHN. It was too late, in my opinion. Mr. PECORA. Did it not attempt to do it early in 1929, and even in 1928? Mr. KAHN. It did not do it in 1928, to the best of my recollection, and the damage was done—again, to the best of my recollection—in 1927 when mdney was made far too easy, when we tried to help Europe to get back to the gold standard and when, for this purpose and for the purpose of facilitating the transactions of our Treasury, money was made far too easy, at a time when the handwriting on the wall Mr. PECORA. YOU say money was made far too easy. By what agency ? Mr. KAHN. By the Federal Reserve Board. Mr. PECORA. Not by bankers generally? Mr. KAHN. Bankers generally had to follow, because the Federal Reserve Board set the pace. The Bank of Chicago, early in 1929, if I remember rightly, tried to raise its discount rate as a warning, but the Federal Reserve Board forbade it. They would not have it; and they could not do it without the Federal Reserve Board. Mr. PECORA. I recall that in February of this year at hearings held by a corresponding committee to this committee, of the Seventy-second Congress, officers of the National City Co. and the National City Bank were examined here and testimony was adduced to the effect that in March 1929 the Federal Reserve Board sought to apply the brakes to this speculative mania, and its action was nullified by the action of a 'certain bank or its officers in sending $25,000,000 to the New York Stock Exchange. Do you recall the incident? Mr. KAHN. I recall the incident. Mr. PECORA. I S it not a fact that one of the strongest tell-tale signs of the development and existence of a speculative mania is the loans made to brokers? Mr. KAHN. That is one of them; yes. Mr. PECORA. One of the signs; one of the almost incontrovertible signs, is it not? Mr. KAHN. It never happened before. This was the first instance where it happened. We have nothing to judge it by. Mr. PECORA. Did not private banking firms as well as commercial banks help along the development of that mania by freely making brokers' loans in unprecedented amounts? Mr. KAHN. TO put it mildly, Mr. Pecora 1010 STOCK EXCHANGE PRACTICES Mr. PECORA. I want to be conservative. Mr. KAHN. TO put it mildly, they certainly did not do sufficient to prevent it or stop it. And would it have been human nature that they should prevent it or stop it, in view of the fact Mr. PECORA. If we cannot look to bankers to guide us, to what group can we look in periods of that sort, if they are not qualified to do it? Mr. KAHN. I do not say they are not qualified to do it; but it is an exceedingly difficult thing in the face of an utter, complete, and unprecedented determination by the public to take the bit in its teeth. It is an extraordinarily difficult thing. If it were a possible thing for the private banking community or the banking community to stop it, they would be brushed aside and people would not pay any attention to them. I know that one of my partners, Mr. Warburg, made a speech warning against what was coming, and they paid not the slightest attention; and even as late as, I believe, in September 1929 Lehman Bros, made an issue of a securities corporation called the Lehman Corporation. There was nothing that they had to offer except their certificates. Not a single transaction had been consummated; not a single business was planned. The public took that stock which was offered at par and bought it at 135. How could they defend themselves against a public mania like that ? They did not put it to 135; they offered it to the public at par. The public went in and bought it at 135 simply because they were determined to speculate. They were determined that every piece of paper would be worth tomorrow twice what it was today. I do not believe the whole banking community together could have prevented it. While far from excusing some of the things they have done—I greatly deplore some of the things that were done, including the one that you mention—I doubt whether anything but a catastrophe could have stopped that violence unless it had been stopped earlier by the Federal Reserve Board. I think in my own mind—and I may be all wrong—we might have been able to stop it earlier, but when it had taken full sway of the people and there was an absolute runaway feeling throughout the country, I doubt whether anyone could have stopped it before calamity overtook us. Mr. PECORA. Could it not have been stopped or checked or retarded appreciably if the banking profession generally had declined to make these brokers' loans in the amounts in which they did ? Mr. KAHN. Mr. Pecora, you referred to loans for others. That is the very thing which happened. When the bankers tried to pull in their horns, some of them, outsiders;1 came and said, " Oh, there is a chance to loan money at 15 percent. If the banks will not loan enough, we are going to loan, ourselves." And every industrial corporation, or most of them, came in and competed with the bankers for loans for the stock market. Mr. PECORA. Did not many of those corporations invest their surplus funds through private banks in that very market? Mr. KAHN. Not very many, I should think. Most of them, I should think, if my memory serves me rightly, did it through the regular banks. My mentors want me to correct something which perhaps might give rise to international complications. I said England was a poor STOCK EXCHANGE PRACTICES 1011 country. I did not mean " poor " in that sense. I meant England is a country which by nature is not endowed with riches comparable to what we have here. Mr. PECORA. It is poor in natural resources ? Mr. KAHN. Yes; poor in natural resources as compared with what we have. But I wish to make it plain that I did not mean to refer to England as a poor country. The CHAIRMAN. England has an advantage over our system, has it not, in that the Bank of England is, as you express it, able to " go down the line ", very largely because they have £175,000,000 equalization fund? Mr. KAHN. Well, Senator Fletcher, before that fund ever existed England was able to do it. It is a tradition. It is a moral influence, more than anything else; and what I am praying for is that some similar moral influence may come to prevail in this country. I doubt whether it can be done through any legislation. I think it can be done through the force of one or two or three men who gradually acquire a moral force such as the Governor of the Bank of England has, because there is also with the Governor of the Bank of England the power over the purse. He can discount or refuse to discount bills. But his main influence is a moral one, and that is a matter of tradition. I hope very much that we in this country will develop a tradition which will place somewhere that power to control and restrain, and be listened to and heeded, utterly impartially and disinterestedly except for the good of the country. But I do not see how it can be done except through moral influence. Mr. PECORA. I want to ask you about an issue of $20,000,000 of guaranteed sinking fund 6% percent gold bonds, which was made by your firm in conjunction with the Guaranty Co., on about June 25, 1925, on behalf of the Mortgage Bank of Chile. Are you familiar with the transaction? Mr. KAHN. YOU have touched a sore point. Mr. PECORA. I did not know how sore it was. Mr. KAHN. It is the only issue which my firm has made since the war, the only foreign issue which is in default. We made it after what we believed to be a very careful and thorough examination. We had before us the record of a country which for over 70 years had never been in default. We had before us the record of a country whose constitutional history was almost free from revolutions and which for many, many years had had a favorable balance of trade, and had a favorable balance of trade then. We had before us the history of a concern whose business was the making of first mortgages, which was guaranteed by the Government of Chile and which was vouched for by the Department of Commerce in records that we found. The record was not furnished to use, but we found it in the records, which said that they knew of no bank better managed, more carefully managed, than the Mortgage Bank of Chile. Everything that we could find out seemed to prove that this was a bond that we were justified in sponsoring. Mr. PECORA. Prior to this $20,000,000 issue of June 1925 the external financing of Chile had been done in Europe, principally byFrench banks, had it not? Mr. KAHN. Most of it; yes. 1012 STOCK EXCHANGE PRACTICES Mr. PECORA. Who brought this particular proposition relating to this proposed issue of 1925 to the notice of your firm? Mr. KAHN. It was brought to the notice of my firm first by our old friends, a very conservative old banking house which had been the agents of the Mortgage Bank of Chile for many years—Dreyfus & Co. Mr. PECORA. Of Paris? Mr. KAHN. Yes; of Paris. That is how it started. We insisted, after having looked into it, that although the business seemed tempting we would not do it unless the Government of Chile guaranteed it. We would not take merely the first mortgages. We insisted that the Government of Chile guarantee it. The Government of Chile refused to do so; at least, as far as Dreyfus & Co. could handle it, it was not possible, and therefore we declined to do the business. About 6 months later our friends, Lehman Bros., came over and said, " There is some one here from the Mortgage Bank of Chile who wants us to do that business. I t is out of our line. Does it interest you ? " We examined into it and we said to them, " If you can get us the guarantee of the Chilean Government it will interest us in principle." Then a little later, about June, we learned that the Guaranty Trust Co. was also trying to do that business; and from this point on I think my associate had better take up the story, because he is much better posted than I am. The business was done primarily from that spot-on by my late partner, Mortimer Schiff, who died in 1931,, and he was closely associated as to all details with Mr. Buttenwieser and Mr. Stewart; and they can tell you the details much better than I can tell them. If it meets with your approval, I would suggest that he tell the story from that point onfr. PECORA. I will examine them in detail about that. I want to ask you a few questions about it before I examine those two gentlemen. When did you learn that the Guaranty Co. of New York was interested in this financing? Mr. KAHN. I believe in June. Mr. PECORA. Of 1925? Mr. KAHN. Yes. Mr. PECORA. That was some 6 months after the proposal had been brought to your notice by the French firm of Louis Dreyfus & Co.y was it not ? Mr. KAHN. Yes. Mr. PECORA. Eventually your firm, after it learned of the interest of the Guaranty Co., which is the affiliate of the Guaranty Trust Co. in this proposed financing, instead of competing with them, joined forces with them in the financing? Mr. KAHN. Yes. There was no reason why American investors should pay the competitive price and should pay the Chilean Government more money than it was entitled to. Mr. PECORA. And was any fee paid Louis Dreyfus & Co. for finding the business for you? Mr. KAHN. Yes. Mr. PECORA. That is termed " finding." " Finding " is a term that is a familiar one in your business, is it not? STOCK EXCHANGE PKACTICES 1013 Mr. KAHN. I t is; yes. Mr. PECORA. One who finds a financial operation for a bank is rewarded by the payment of a commission? Mr. KAHN. Of a reasonable commission. Mr. PECORA. And Louis Dreyfus & Co. received such a commission iin connection with this Chilean financing? Mr. KAHN. I t did. Mr. PECORA. Did anyone else receive any commission or compensation as a finder or a promoter of the negotiation ? Mr. KAHN. From us ? Mr. PECORA. YOU or the Guaranty Co. Mr. KAHN. From us; nobody else. From the Guaranty Co.; yes. Mr. PECORA. Who? Mr. KAHN. Mr. Norman Davis. Mr. PECORA. HOW much did he receive ? Mr. KAHN. He received, for the first business which we did in the intermediaries' and negotiators' commission, $25,000. Mr. PECORA. Did not your firm contribute $15,000 to that? Mr. KAHN. My firm contributed nothing. The syndicate contributed, as part of the syndicate expenses, $15,000; and the Guaranty Co. contributed $10,000. Afterwards the second business was done and Mr. Davis received another fee of $10,000; so that his total fees received were $35,000. Senator BARKLET. What was the nature of that service ? Mr. KAHN. Here [exhibiting a paper] we have the memorandum for which we asked, from the Guaranty Co. of New York. Inasmuch as they were the originators of the relationship with Mr. Norman Davis, with your permission I will read it; it is very short [reading] : The Guaranty Trust Co. of New York and the Guaranty Co. of New York from time to time had discussions with Mr. Davis regarding certain loan transactions with Latin-American countries because of his knowledge of SpanishAmerican affairs and financial questions in general. At such times and at the time of the Chile Mortgage Bank loan Mr. Davis was a private citizen. In 1925 Mr. Davis informed us that the representative of the Chile Mortgage Bank had consulted with him with regard to the placing of a loan in New York and wished to know if we would be interested in considering it, to which we replied in the affirmative. He- accordingly presented to us Mr. Berisso, who had been sent to this country to negotiate a loan for the bank. As the Chile Mortgage Bank then had a long record of uninterrupted payments on its obligations, and the loan which it proposed to negotiate was guaranteed by the Chilean Government which had a similar financial record, the business proposed seemed sound. Accordingly, Mr. Davis was instrumental in putting us in touch with the Mortgage Bank of Chile business and in helping to conclude the negotiations. Perhaps I might add here, Mr. Pecora, that to the best of my recollection Mr. Davis was present at one or two of the subsequent negotiations after the Guaranty Co. and we had agreed to join issue, and he assisted in the negotiations. The Guaranty Co.'s memorandum goes on [continuing reading] : * There was no agreement with Mr. Davis as to the amount he was to receive for his services, though it was understood that he was to be compensated. Upon conclusion of the deal the bankers without previous consultation with Mr. Davis decided that the fee for his work in connection with the successful conclusion of the negotiations should be fixed at $15,000, to be paid by the banking group— 1014 STOCK EXCHANGE PRACTICES Which means the syndicate— and an additional $10,000 was paid by the Guaranty Co. of New York with which Mr. Davis had originally discussed the matter. The representative of the Mortgage Bank of Chile and the Chilean Ambassador were informed of the bankers' intention to compensate Mr. Davis and were in accord therewith. Subsequently, a second loan was made and in this connection a further fee of $10,000 was paid by the banking group to Mr. Davis. No payment was made to him on any succeeding issues. Mr. PECORA. What is the date of that memorandum ? Mr. KAHN. June 2, 1933. Mr. PECORA. By whom was that memorandum prepared ? Mr. KAHN. I t is initialed "J. R. S. (initialed)." Mr. PECORA. DO you know to whom those initials refer ? Mr. KAHN. J. R. Swan, president of the Guaranty Co. Mr. PECORA. And was this memorandum addressed to Kuhn, Loeb &Co.? Mr. KAHN. Yes. Mr. PECORA. Under date of June 2 of this year ? Mr. KAHN\ Yes. Mr. PECORA. And had your firm requested this memorandum for its information? Mr. KAHN. We understood, Mr. Pecora, that you wished to be informed of the facts, and therefore we asked for the facts, and this is the result. Mr. PECORA. This memoradum was sent you in compliance with your request for such information ? Mr. KAHN. Yes. The CHAIRMAN. YOU say Mr. Davis was at that time a private citizen ? Mr. KAHN. He was at that time a private citizen; yes. Senator BARKLEY. Was he practicing law in New York ? Mr. KAHN. I do not know whether he was practicing law or whether he was engaged in general business. I could not tell you that, Senator. Senator BARKLEY. He is a lawyer, I believe, is he not ? Mr. KAHN. When I first met him he was a banker in Cuba; he was the president of a bank in Cuba, many years ago. Senator BARKLEY. He has had considerable experience in LatinAmerican and European diplomatic and financial matters ? Mr. KAHN. SO I understand. Senator BARKLEY. Was he acting in the capacity of an adviser as to this particular loan; or in what capacity was he compensated ? Mr. KAHN. He brought this particular loan to the attention of his friends, the Guaranty Co., and he brought also to their office a representative of the Mortgage Bank of Chile, and that was his first, and I assume, his controlling service. To the best of my recollection he assisted in one or two of the subsequent negotiations, when the details of the business were being determined; but his controlling service was as here reported. Senator BARKLEY. The parties in interest, then, as I understand it, felt that his services in bringing the business to them should be' compensated for, and they fixed this amount as a reasonable sum? Is that correct? Mr. KAHN. Yes. STOCK EXCHANGE PRACTICES 1015 Mr. PECORA. When did your firm decide to join forces with the Guaranty Co. in the flotation of this twenty-million dollar issue of Mortgage Bank of Chile? Mr. KAHN. Mr. Pecora, I learn, but do not know it from my own knowledge, that it was probably early in June of that year. Mr. PECORA. Are you familiar with the correspondence that passed between Mr. Davis and the Guaranty Co. of New York Mr. KAHN (interposing). I am not Mr. PECORA (continuing). In connection with this flotation? Mr. KAHN. I am not at all familiar with it. Mr. PECORA. Was there any competition at all between your firm and the Guaranty Co. with regard to this issue, Mr. Kahn, before the two institutions joined forces? Mr. KAHN. Mr. Pecora, from the time that I stopped I have no longer any detailed knowledge, because I went away; I believe I went to Europe, and the matter was taken up by my partner, Mr. Mortimer Schiff. But I think Mr. Buttenwieser can tell you all the facts. I could only tell you by asking him, and will be glad to do it if you prefer it done in that way. Mr. PECORA. Who is Mr. Laval? Is he a gentleman connected with Louis Dreyfus & Co. ? Mr. KAHN. Yes, sir. I know that he was the New York representative of Louis Dreyfus & Co. of Paris. Mr. PECORA. Had Louis Dreyfus & Co. been interested previously in any Chilean financing ? Mr. KAHN. They were and had been for a long time the European representatives of the Chilean Mortgage Bank. Whether they did any business with the Government of Chile I do not know. Mr. PECORA. Did you or any member of your firm have any conferences with the Chilean Ambassador in connection with this proposed loan ? Mr. KAHN (after conferring). No. We had no direct conference with the Chilean Ambassador in relation to this loan. But after the contract had been concluded he came there and signed the bonds and affixed to them, by authority of the Chilean Government, the guarantee of the Chilean Government. And to the best of my recollection and knowledge that was all the relation we had with him. He signed the contract. Mr. PECORA. At the time of this issue of $20,000,000 for the Mortgage Bank of Chile, what kind of government existed in Chile? Mr. KAHN. At that particular time—and I am now speaking subject to correction, but at that particular time they had what in Chile they called an election—no; they had what here we call an election; they had a new deal, and a new government came in. They did not come in by the peaceful means which characterizes the situation in this country; they came in with a moderate degree of violence. • Senator BARKLEY. It might have been called a raw deal. Mr. PECORA. It was cold steel. Mr. KAHN. But we were advised by counsel that the acts of that Government were absolutely valid in iaw and in every other way. Mr. PECORA. DO you know what the present market quotations are for those bonds? Mr. KAHN. Unfortunately I do know; yes. 1016 STOCK EXCHANGE PRACTICES Mr. PECORA. Well, will you impart your knowledge to us ? Mr. KAHN. They are quoted at about 13, now, between 13 and 14. Mr. PECORA. NOW, Mr. Kahn, how much, all told, of those mortgage bonds issued by the Mortgage Bank of Chile were underwritten by your firm and the Guaranty Co. of New York and thereafter sold to the American investing public? Mr. KAHN. I believe $90,000,000. Mr. PECORA. Over what period of time? Mr. KAHN. From 1925 to 1929. And after that Mr. PECORA (interposing). There were five different issues, weren't there? Mr. KAHN. Yes. Mr. PECORA. And four of them were for $20,000,000 each and one for $10,000,000. Mr. KAHN. Yes. And after that, Mr. Pecora, we were foolish enough, or right enough, or loyal enough, whatever might be the proper term, to put our own money into an additional loan of $8,000,000, which we did not offer to the public but which was our own money and the money of some of our associates, and which money is still there. We did not offer that issue to the public. Mr. PECORA. That was a short-time advance that you made, wasn't it? Senator GOLDSBOROTJGH. I t has turned out to be pretty long term. Mr. KAHN. I t did not turn out that way, Mr. Pecora. Mr. PECORA. But it was intended as a short-term advance, wasn't it? Mr. KAHN. I t was hoped that in the course of time—and our confidence really had not diminished at that time—and as I say, it was hoped that within a year or so it would be possible to float another issue out of which that loan would be liquidated. But that was never possible, and therefore that money is still there. The CHAIRMAN. Was that loan made after the other issues were floated? Mr. KAHN. Yes, sir. The CHAIRMAN. And all Mr. KAHN. Yes; except guaranteed by the Government of Chile ? this last loan, Senator Fletcher, where we were foolish enough even not to insist upon the guarantee of the Government. Mr. PECORA. This eight-million-dollar short-term loan, which has proven to be not a short-term loan, you say was made by Kuhn, Loeb & Co. Mr. KAHN. By Kuhn, Loeb & Co. and a small group of friends of theirs. Mr. PECORA. HOW much of the funds of Kuhn, Loeb & Co. actually went into that eight-million-dollar advance? Mr. KAHN. Originally, we took, as I take it, the whole responsibility. Mr. PECORA. Together with the other participants? Mr. KAHN. Together with the Guaranty Co. Then we succeeded in getting some other participants, with the result that our ultimate investment is—(turning to Mr. Buttenwieser)—How much is it? (After conferring.) Our original responsibility was $3,600,000, and then other people were not only willing but eager, strange as it may seem in the light of hindsight, to get a part of that loan, which car- STOCK EXCHANGE PEACTICES 1017 ried a very good rate of interest. They felt, and we felt, it was merely a temporary loan at & time when a good rate of interest for short-term loans was very desirable. But ultimately we found that $3,000,000 of our $3,600,000 were snapped up by others. We urged nobody to go in, but they liked it. Mr. PECORA. HOW much of the actual funds of Kuhn, Loeb & Co. went into this eight-million-dollar loan eventually? Mr. KAHN. Originally it was $3,600,000. Mr. PECORA. Eventually, yes; but you passed a part of that to other participants. Mr. KAHN. NOW it is $600,000. Mr. PECORA. Then $600,000 is the extent of your participation in that eight-million-dollar advance? Mr. KAHN. Yes, sir. The CHAIRMAN. What was Mr. KAHN. Originally the the rate of interest? rate was 5% percent. Since then it has vanished into thin air, since no longer is there any rate of interest. Mr. PECORA. NOW, Mr. Kahn, you said with reference to this Mortgage Bank of Chile issue that you insisted on a guaranty by the Chilean Government before you would underwrite that issue. Mr. KAHN. Yes, sir. Mr. PECORA. And you got that guaranty? Mr. KAHN. Yes, sir. Mr. PECORA. And the Government from which you got that guaranty was a government that had instituted itself in power by what you call a moderate show of force or violence. Mr. KAHN. Yes. Mr. PECORA. Did you consider that that was a safe guaranty on which to pass on $90,000,000 of securities to the American investing public ? Mr. KAHN (after conferring). What about these, Mr. de Gersdorff? Mr. DE GERSDORFF. Let me see them. The CHAIRMAN. While Mr. de Gersdorff is looking at those papers, Mr. Kahn, let me ask you: Was it the same government that guaranteed all those issues ? Mr. KAHN. Yes. It remained in power for quite a while. Mr. PECORA. Are you sure of that ? Mr. KAHN. Well, I haven't answered your question, I am afraid. Mr. PECORA. YOU stated before that you preferred to have Mr. Buttenwieser and Mr. Stewart examined with regard to this Mortgage Bank of Chile issue or issues, so I will adopt your suggestion. Mr. KAHN. I think it would save your time, because, as you see, I have to turn to the right and to the left to get information. Mr. PECORA. Well; I will do that. I think with advantage to yourself it should be done. The CHAIRMAN. Where is that bank located, at Santiago ? Mr. KAHN. Yes; Senator Fletcher. Mr. PECORA, I will examine Mr. Buttenwieser, if I may suspend with Mr. Kahn at this point, with the understanding that he is not excused from further attendance. The CHAIRMAN. That will be all right. 175541—33—PT 3 5 1018 STOCK EXCHANGE PRACTICES Mr. DE GORSDORFF. Mr. Pecora, let me show you these letters. Have you any objection to their going on the record? Mr. PECORA. This is the first time these documents have been shown to us. Mr. DE GERSDORFF. It is the first time I have seen them. Mr. PECORA. I will see what they are. Mr. DE GERSDORFF. YOU can hold them over if you so desire. The second one of them I think is the most important. Mr. PECORA. I will read the whole series in chronological order. (After scanning over the letters.) Just leave these letters with us for the present. Mr. DE GERSDORFF. All right. Mr. PECORA. Mr. Buttenwieser, I suggest that you now take the chair that has been vacated by Mr. Kahn. TESTIMONY OP BENJAMIN J. BUTTENWIESER, A PARTNER OF KUHN, LOEB & CO.—Resumed Mr. PECORA. NOW, Mr. Buttenwieser, your name has been suggested by your associate, Mr. Kahn, as the gentleman in the firm of Kuhn, Loeb & Co. most familiar with the issuance of these bonds by the Mortgage Bank of Chile, floated by your firm in conjunction with the Guaranty Co. of New York, in the period between 1925 and 1929. So I am going to examine you with respect to those issues. Now, take the first one in point of time, the one of June 25, 1925, and that consisted of an issue of $20,000,000 of guaranteed sinking fund &y2 percent gold bonds due June 30, 1957, did it not? Mr. BUTTENWIESER. That is correct. Mr. PECORA. NOW, at the risk of traversing some of the ground that Mr. Kahn has covered but in view of the fact that I am going to examine you in detail about those issues, will you tell us how this proposal was first brought to the notice of your firm? Mr. BUTTENWIESER. in a general way Mr. Kahn outlined it to you. That is, that late in 1924 our old friends, Messrs. Louis Dreyfus & Co., of Paris, were in communication with us as to whether or not we would be interested in a Mortgage Bank of Chile issue, with which bank they had had relations before the war and whose securities they had offered before the war. And, as Mr. Kahn told you, after some study of the facts they submitted to us we told them we would be interested only if we could obtain a guaranty of the bonds by the Kepublic of Chile. Mr. PECORA. NOW, which particular gentleman in your firm handled the proposition at its inception ? Mr. BUTTENWIESER. Mr. Mortimer Schiff. Mr. PECORA. Did you assist him? Mr. BUTTENWIESER. Yes. Mr. PFCORA. All right. Had you up to that time, or had your firm up to that time done any Chilean financing? Mr. BUTTENWIESER. AS I recall, we had made one issue of Chilean securities in conjunction with others, which issue has been repaid since then. Mr. PECORA. Were you at that time familiar with political conditions in the Eepublic of Chile? Mr. BUTTENWIESER. Yes, sir. STOCK EXCHANGE PKACTICES 1019 Mr. PECORA. What were they? Mr. BUTTENWIESER. Well, at the particular time of which you speak, which was December of 1924,1 believe the regular government was in effect. I think the provisional government to which you referred subsequently, only came into being in the spring of 1925. Mr. PECORA. When this proposal was first brought to the notice of your firm by Louis Dreyfus & Co. in December of 1924, you indicated your willingness to underwrite the issue provided the Chilean Government guaranteed its payment? Mr. BTJTTENWIESER. That is correct. Mr. PECORA. Was that guarantee to extend to the payment of interest as well as to the payment of the principal at maturity ? Mr. BUTTENWIESER. A full guarantee, of interest, sinking fund? and principal, by endorsement. The CHAIRMAN. Have you got that guarantee here, or a copy of it ? Mr. BTJTTENWIESER. Yes, sir. It is embodied in the loan agreement, which in turn contains a facsimile, or not a facsimile but the text of the bond and the guarantee endorsement. Mr. PECORA. Tell us what kind of bonds they were, these so-called " bonds " of the Mortgage Bank of Chile. Mr. BUTTENWIESER. Do you mean that you want me to outline what is the type of bond of the Mortgage Bank of Chile? Mr. PECORA. Yes. Mr. BUTTENWIESER. It is a bank which makes first-mortgage loans against any bonds which it issues. The CHAIRMAN. YOU mean that it makes first-mortgage loans and issues bonds against those loans, do you not ? Mr. BUTTENWIESER. Yes, sir. The CHAIRMAN. YOU had it the other way Mr. BUTTENWIESER. Pardon me. Mr. PECORA. GO ahead with your answer. Mr. BUTTENWIESER. Perhaps I could do around. better by reading this circular. The CHAIRMAN. DO they make first-mortgage loans on real estate ? Mr. BUTTENWIESER. Perhaps I could serve the purpose better by submitting to you a copy of the prospectus descriptive of the bank and the issue of bonds in question. Mr. PECORA. All right. If you have a set of prospectuses please produce them. Mr. BUTTENWIESER. This is the first issue. I believe you already have a copy of it. The CHAIRMAN. What did you sell those bonds at? Mr. BUTTENWIESER. At 97% percent. The CHAIRMAN. For the whole $90,000,000? Mr. BUTTENWIESER. N"O. We are speaking now of the first issue of $20,000,000. The CHAIRMAN. What was the next? Mr. BUTTENWIESER. The next issue was another issue of $20,000,000, of which we bought only $18,330,000. The CHAIRMAN. At what were they sold ? Mr. BUTTENWIESER. At The CHAIRMAN. What 99%. about the next $10,000,000? 1020 STOCK EXCHANGE PRACTICES Mr. BUTTENWIESER. That second issue, Senator Fletcher, was a 6%-percent issue. The CHAIRMAN. GO ahead with your answer. Mr. BUTTENWIESER. The next $10,000,000 were 6-percent notes due in 5 years, which we sold at 98%. Mr. PECORA. And the fourth issue was one of $20,000,000? Mr. BUTTENWIESER. Yes; 6-percent bonds, for a longer term, which we sold at 95%. And the last issue was an issue of 6-percent bonds, made in 1929 and sold at 92. Mr. PECORA. That was a $20,000,000 issue; that last issue? Mr. BUTTENWIESER. Yes, sir. Mr. PECORA. And do you mean you sold them at 92 ? Mr. BUTTENWIESER. Yes, sir. The CHAIRMAN. And those are Mr. BUTTENWIESER. Yes, sir. Mr. PECORA. NOW, hadn't you now worth 13 or 14? better give me for the record a printed copy of the prospectus issued in connection with the first loan that does not contain lead-pencil notations ? Mr. BUTTENWIESER. I believe you have a copy of that prospectus already, Mr. Pecora. This is the only copy we have here, but we can furnish it. Mr. PECORA. I offer this for the record, that is, the printed portions of it,, and ask that it may be spread on the record. The CHAIRMAN. It will be admitted and the committee report will make it a part of the record. COMMITTEE EXHIBIT NO. 9 TWENTY MILLION DOLLAR MORTGAGE BANK OF CHILE! (CAJA DEI CREDITO HIPOTEICARIO) GUARANTEE;© SINKING FUND 6 % PETRCEINT GOLD BONDS DUE JUNE! 30, 1957, UNCONDITIONALLY GUARANTEED, AS STATED BELOW, AS TO PRINCIPAL, I N TEREST, AND SINKING FUND BY ENDORSEMENT BY THE REPUBLIC OF CHILE Coupon-bearer bonds in denominations of $1,000' and $500 each. Principal and interest to be payable at the option of the holders in the New York City office of Kuhn, Loeb & Co. or of Guaranty Trust Co. of New York, in United States gold coin of or equal to the standard of weight and fineness existing June 30, 1925, or in Santiago, Chile, at the office of the Caja by sight draft on New York City without deduction for any taxes, imposts, levies, or duties of any nature now or at any time hereafter imposed by the Republic of Chile or by any State, Province, municipality, or other taxing authority thereof or therein, and to be payable in time of war as well as in time of peace, and whether be a citizen or a resident of a friendly or a hostile State. INTEREST PAYABLE JUNE 30 AND DECEMBER 31 For further information regarding this issue of bonds reference is made to the accompanying letter received from His Excellency the Honorable Beltran Mathieu, Ambassador Extraordinary and Plenipotentiary of the Republic of Chile, and from which the following is summarized: The bonds are unconditionally guaranted as to principal, interest, and sinking fund, by endorsement, by the Republic of Chile, pursuant to decree law of the Governing Council, dated March 9, 1925, and an Executive decree, dated June 15, 1925 (supplementing said decree law), issued under the authority of President Alessandri and his Cabinet, who are functioning as the Government of Chile, Congress having been dissolved in September 1924 pending the adoption of a new Constitution which is now being drafted. The guaranty thus authorized is valid and binding upon the Republic of Chile. Beginning December 31, 1925, the bonds will be redeemable through a cumulative sinking fund calculated to retire the whole issue by June 30, 1957, to be STOCK EXCHANGE PKACTICES 1021 applied on each semiannual interest date to the redemption by lot of bonds at par. The Caja will have the right to increase the amount of any sinkingfund payment for the redemption of additional bonds on any interest date, and in any such case appropriate reductions will be made in subsequent sinkingfund payments. This right is reserved because repayments on the mortgage loans can be made by the borrowers either in cash or in bonds of the Caja in excess of the fixed premium amortization payments and the Caja is not permitted by law to have its bonds outstanding in excess of the mortgage loans against which they are issued. THE UNDERSIGNED WILL RECEIVE SUBSCRIPTIONS FOR THE ABOVE BONDS SUBJECT TO ALLOTMENT, AT 97% PERCENT AND ACCRUED INTEREST TO DATE: OF DELIVERY, TO YIELD 6.70 PERCENT TO MATURITY The undersigned reserve the right to close the subscription at any time without notice, to reject any application, to allot a smaller amount than applied for, and to make allotments in their uncontrolled discretion. The bonds and the guaranty are, in the opinion of American and Chilean counsel, valid obligations respectively of the Caja de Credito Hipotecario and the Republic of Chile. The above bonds are offered, if, when, and as issued and received by the undersigned, and subject to the approval of counsel. In the first instance, interim certificates of Guaranty Trust Co. of New York will be delivered against payment in New York funds for bonds allotted, which interim certificates will be exchangeable for definitive bonds when prepared. Application will be made in due course to list these bonds on the New York Stock Exchange. KUHN, LOEB & Co. GUARANTY CO. OF NEW YORK. NEW YORK, June 25, 1925. WASHINGTON, D.O., June 25, 1925. Messrs. K U H N , LOEB & Co. and GUARANTY CO. of NEW YORK, N.Y.: DEAR SIRS: Referring to the issue of $20,000,000 guaranteed sinking fund 6%-percent gold bonds due June 30, 1957, of the Mortgage Bank of Chile (Caja de Credito Hipotecario, Chile), I beg to give you the following information: The bonds are unconditionally guaranteed as to principal, interest, and sinking fund, by endorsement, by the Republic of Chile, pursuant to decree law of the governing council, dated March 9, 1925, and an executive decree, dated June 15, 1925 (supplementing said decree law), issued under the authority of President Alessandri and his Cabinet, who are functioning as the Government of Chile, Congress having been dissolved in September 1924, pending the adoption of a new constitution which is now being drafted. The guaranty thus authorized is valid and binding upon the Republic of Chile. The Caja de Credito Hipotecario was created by law of August 29, 1855, for the purpose of making available credit facilities on reasonable terms for the development and improvement of real property in Chile. The board of directors is selected by both legislative chambers of Chile, and the chairman of the board, the chief counsel, the cashier, the controller, and the secretary are appointed by the President of the Republic. During its entire existence of 70 years, the Caja has operated successfully and has never failed to meet its obligations. The record of its loan collections is very satisfactory. The losses incurred by the Caja on property foreclosed under its mortgages have not exceeded $40,000 in the aggregate for the last 10 years. In his report, published February 1, 1924, to the Department of Commerce of the United States, Mr. Charles A. McQueen, special agent of the Bureau of Foreign and Domestic Commerce of the Department, states that in the course of its long existence the Caja has conducted its affairs with uniform safety and success. The Caja has no capital stock and is not operated for profit. It has power to charge a commission to provide for its expenses and for a reserve fund, as additional security for its bonds, but having accumulated a sufiicient reserve, the Caja has now discontinued charging such commission. The Caja issues its bonds only against mortgages registered in its name. It makes only first-mortgage loans. The loans are made on a conservative basis and the risk is greatly diversified. On December 31, 1924, the Caja had out 1022 STOCK EXCHANGE PRACTICES standing various issues of bonds aggregating $84,995,700, at approximate rates of exchange, against which it had made more than 9,800 mortgage loans, being an average of not more than $9,000 per loan. The aggregate appraised improved value of the properties mortgaged as security for these loans amounted to more than four times the amount of the loans. As further security for its bonds, the Caja has accumulated a reserve fund of approximately $5,118,000, at approximate present rates of exchange. The law of September 10, 1892, authorizes the Caja to issue bonds and to make mortgage loans payable in foreign currencies. It is the practice of the Caja to make its mortgage loans, against which bonds payable in a foreign currency are issued, also payable in the same currency, except in cases where it has obtained a guaranty of the Republic of Chile for any loss resulting from exchange fluctuations. This was done in 1912 when Fes. 58,823,500 gold bonds were issued (of which there are still Fes. 28,444,500 gold now outstanding), and is also being done in the case of the present issue against $15,000,000 of which mortgage loans in Chilean currency will be outstanding. The mortgage loans against the balance of $5,000,000 of this issue will be made at the request of the Republic of Chile, for special purposes at lower interest rates than the Caja is paying on the bonds, and the Republic has agreed to pay the difference and to guarantee these mortgage loans. The entire present issue of bonds will also be guaranteed by endorsement by the Republic of Chile. No other issue of bonds of the Caja is endorsed with the guaranty of the Republic. The bonds of the Caja are legal investments for savings banks and trust funds in Chile. Prior to the war, in 1911 and 1912, three issues of 5 percent bonds of the Caja, not endorsed with the guaranty of the Government, were made in Europe, at prices from 96% to 99% percent. The present debt of the Republic of Chile, including the present and all other obligations guaranteed by it, aggregates about $250,000,000, at approximately present rates of exchange. The proceeds of the Government loans have been largely used for the construction or improvement of railways, harbors, and other public works. The Government owns 3,624 miles of railroads, telegraph lines, and other property, of an estimated value of approximately $650,000,000, at approximate present rates of exchange, which is well in excess of the entire amount of the debt. In addition, the Government owns large and very valuable tracts of nitrate lands. Chile is a mining and agricultural country. Its mineral products are largely raw materials for essential industries. Exports consist chiefly of nitrates and byproducts of the nitrate industry, copper, borax, wool, and a limited amount of agricultural products. The nitrate deposits are the only large natural deposits so far discovered in the world. The copper industry has been extensively developed, largely by American capital. The trade balance of Chile is favorable. The total foreign trade for 1923 (the last year for which official figures are available) aggregated $318,000,000 at the approximate present rate of exchange, and the balance of exports over imports amounted to $78,000,000. The unofficial estimates for 1924, both for the total trade and for the favorable balance, exceed the results for 1923. Since 1915 imports have exceeded exports in only 1 year. The present currency circulation of Chile at the present rate of exchange of about liy2 cents per peso, is equivalent to $35,855,645. Part of this currency is covered by gold reserves, part by commodities, and part by mortgage loans and other obligations. The total gold reserve amounts to approximately $41,800,000, which is in excess of the dollar equivalent, as stated above, of the present currency circulation. The $20,000,000 guaranteed sinking fund 6% percent gold bonds of the Caja, constituting the loan designated " Emprestito oro Caja Hipotecaria", 1925, which you have agreed to purchase, will be in coupon-bearer form, in denominations of $1,000 and $500, will be dated June 30, 1925, will mature June 30, 1957, and will bear interest at the rate of 6% percent per annum from June 30, 1925, payable semiannually on June 30 and December 31 of each year. Principal and interest will be payable, at the option o$ the holders, in the borough of Manhattan, in the city of New York, at the office of Kuhn, Loeb & Co., or at the principal office of Guaranty Trust Co., of New York, in gold coin of the United States of America of or equal to the standard of weight and fineness existing June 30, 1925, or in Santiago, Chile, at the office of the Caja, by sight draft on New York City, without deduction for any taxes, imposts, levies, or duties of any nature now or at any time hereafter imposed by the Republic STOCK EXCHANGE PKACTICES 1023 of Chile, or by any State, Province, municipality, or other taxing authority thereof or therein, and will be paid in time of war as well as in time of peace, and whether the holder be a citizen or a resident of a friendly or a hostile state. Beginning December 31, 1925, the bonds will be redeemable through a cumulative sinking fund calculated to retire the whole issue by June 30, 1957, to be applied on each semiannual interest date to the redemption by lot of bonds at par. Notice of redemption is to be given by advertisement, the first advertisement to appear at least 30 days before each redemption date. The Caja will have the right to increase the amount of any sinking fund payment for the redemption/ of additional bonds on any interest date, and in any such case appropriate reductions will be made in subsequent sinking-fund payments. This right is reserved because payments on the mortgage loans can be made by the borrowers either in cash or in bonds of the Caja in excess of the fixed minimum amortization payments, and the Caja is not permitted by law to have its bonds outstanding in excess of the mortgage loans against which they are issued. Application will be made to list the bonds on the New York Stock Exchange. Very truly yours, BEI/TKAN MATHIEU, Ambassador Extraordinary and Plenipotentiary of the Republic of Chile to the United States. The CHAIRMAN. Are all these issues in default, Mr. Buttenwieser? Mr. BUTTENWIESER. Yes, sir. The CHAIRMAN. And have been in default for some time? Mr. BUTTENWIESER. And have been since July of 1931. Mr. PECORA. NOW, Mr. Buttenwieser, your firm would never have underwritten this issue, and I am referring to the first issue, of June of 1925, without a governmental guarantee made by the Chilean Government, would it? Mr. BUTTENWIESER. I cannot answer as to that. I know that we wanted the guarantee. Mr. PECORA. YOU SO notified Louis Dreyfus & Co. when they called the proposal to your attention, didn't you ? Mr. BUTTENWIESER. Yes, sir; in 1924. Mr. PECORA. And that was because you did not consider the security of the issuing bank, that is, the Mortgage Bank of Chile, sufficient in and of itself to justify your underwriting the issue and offering it to the American public ? Mr. BUTTENWIESER. That was partly it, Mr. Pecora; and because the American public might not have appreciated how good or how bad the Mortgage Bank of Chile was. The guarantee of the Government of Chile was what we wanted to rely on; yes, sir. Mr. PECORA. YOU wanted that as a selling argument? Mr. BUTTENWIESER. NO ; as the security. Mr. PECORA. YOU wanted it because you needed it as security for the payment of both principal and interest ? Mr. BUTTENWIESER. Yes, sir. Mr. PECORA. I see. It is a fair inference, then, that you did not consider the security of the Mortgage Bank of Chile, or the responsibility of the Mortgage Bank of Chile itself sufficient* Mr. BUTTENWIESER. That is a fair inference; yes, sir. Mr. PECORA. Well, now, you said that at the time when this proposal was first brought to your notice, in December of 1924, you requested a governmental guaranty. But that Government changed in the spring of 1925, did it not? Mr. BUTTENWIESER. I find from a memorandum which has just .been furnished to me by Mr. McEldowney, that the Government had changed in September of 1924. J.024 STOCK EXCHANGE PRACTICES Mr, PECORA, Oh? it was in September of 1924? Mr.BUTTENWIESER. Yes; and my memory about it was wrong. Mr. PECORA. The Government had come into> power in September of 1924, which was a Government that obtained its power through a show of force. It was a revolutionary Government, wasn't it? Mr. BUTTENWIESER. I believe so. Mr. PECORA. That established itself by means of revolution? Mr. BUTTENWIESER. I think it was what you would call a de facto government. Mr. PECORA. It wasn't a constitutional government, was it? Mr. BUTTENWIESER. That is a legal question, Mr. Pecora. Mr. PECORA. Well, it is considered by your firm, isn't it? Legal questions are considered by your firm, are they not, in making up its decision on the underwriting of issues of foreign governments or of foreign institutions ? Mr. BUTTENWIESER. On a problem like that, of course, we would consult our counsel. Mr. PECORA. And you had advice with regard to the nature of this government risk? Mr. BUTTENWIESER. Yes, sir. Mr. PECORA. And your advices were to the effect that the government was established by a revolutionary force ? Mr. BUTTENWIESER. Our advice was that it was a government whose acts would have to be recognized. Mr. PECORA. By whom? By all succeeding governments? Mr. BUTTENWIESER. I think that was the information. Mr. DE GERSDORFF. I think that was written advice, and if we have it here he could give it to you, Mr. Pecora. Mr. PECORA. This is the gentleman who has been suggested as the one connected with Kuhn, Loeb & Co. who should be examined with regard to these loans. The CHAIRMAN. Did you issue any prospectus with reference to this loan ? Mr. BUTTENWIESER. That was the prospectus, the one that I just submitted. The CHAIRMAN. I thought that was the Chilean bank. Mr. PECORA. It was the prospectus of Kuhn, Loeb & Co. and the Guaranty Co. of New York. Mr. BUTTENWIESER. It embodied what was represented by the bank, and the government by the Chilean Ambassador. The CHAIRMAN. Did you represent anything in that prospectus as to the attitude of this Government, as to this loan ? Mr. BUTTENWIESER. DO you mean the United States Government ? The CHAIRMAN. Yes. Mr. BUTTENWIESER. NO. We are not permitted to do that, as that letter quite clearly states. The CHAIRMAN. YOU made no reference in your prospectus as to the attitude of the Government? Mr. BUTTENWIESER. AS to the attitude of our Government we are not permitted, as that letter clearly sets forth. The CHAIRMAN. But I am not aware whether you observed what the State Department required or not. I do not know. Mr. BUTTENWIESER. We always observe what the State Departmentasks us to do. STOCK EXCHANGE PEACTICES 1025 The CHAIRMAN. The public seemed to have got the impression, is the reason I mention that, that this Government was behind this issue of bonds by the Chilean Government in some way. Mr. BTTTTENWIESER. I do not think there is any ground for it in any circular that we issued. Senator BARKLEY. Are you one of a syndicate that floated the Colombian bond issues ? Mr. BTJTTENWIESER. No, sir. Senator BARKLEY. SO you were not subject to pressure there from the State Department in another direction? Mr. BTTTTENWIESER. We had nothing whatever to do with any of the Colombian issues. Mr. PECORA. NOW, have you produced here a copy of a written communication sent by your firm to Louis Dreyfus & Co. under date of January 9, 1925? Mr. BUTTENWIESER. Yes, sir. Mr. PECORA. Will you let me have it, please ? Mr. BUTTENWIESER. Here it is. It is the only copy I have, Mr. PECORA. I want to offer this in evidence and ask that it may be spread on the record. The CHAIRMAN. That may be done. (The letter dated January 9, 1925, from Kuhn, Loeb & Co. to Louis Dreyfus & Co. is as follows:) Mr. PECORA (reading) : JANUARY 9, 1925. Confidential. Messrs. Louis DREYFUS & Co., Paris. Caja de Credito Hypothecario— I suppose that is the Chilean title of this bank ? Mr. BUTTENWIESER. Mortgage bank; yes. Mr. PECORA. Which we called and continue to call for the purpose of convenience the Mortgage Bank of Chile. Mr. BTTTTENWIESER. Yes. Mr. PECORA (continuing reading) : DEAR SIRS : We beg to acknowledge receipt of your favor of December 27 which we have perused with much interest. In leaving out of consideration that part of the institution's balance sheet which is in francs and sterling, and the meaning of which is not entirely clear to us, we gather from the balance sheet submitted to us that the reserve fund of the institution amounts to just about 5 percent of its circulation of mortgage bonds, and that, inasmuch as the institution has no capital, thus constitutes the sole equity behind the mortgage bonds. This in itself would make it impossible for us to consider offering these bonds for 'public subscription without the bonds being additionally secured by a guaranty of the Government endorsed on the bonds. We also notice from the profit and loss account that the total profit of the year was less than one quarter of 1 percent of the circulation of the mortgage bonds. We cabled you to inform you of our decision. If it should be possible for you to arrange that the Government give its guaranty for an issue of bonds, of the institution in the United States, we would, of course, be prepared to consider this matter further. In this connection, may we not call to your attention that the very fact that the mortgages are expressed and collectible in Chilean money, which is now quoted roughly at about one third of its official gold parity, and which is subject to wide fluctuations, would make it impossible for the institution to assume a debt expressed in gold dollars, without obtaining for its own protection some guaranty on the part of the Government to make good any loss incurred through differences in exchange. If the Government of Chile should deem it desirable that the institution raise a loan in 1026 STOCK EXCHANGE PEACTICES the United States, and if our impression is correct that on account of the exchange situation a certain guaranty would be necessary in any event, it might be possible to convince the Government that it should go one step farther and guarantee the bonds and the interest and sinking-fund payments thereon entirely. If the matter could be reopened again on the basis of a government guaranty we should for our own guidance like to receive from you some additional information with regard to the nature of the repurchase of the bonds of the French loans of 1911 and 1912! at a sum exceeding their par value in francs. Was this done on account of some question having come up as- to the right of holders to collect in some other currency than French francs, and was the repurchase of the bonds at a premium the outcome of a compromise on such question ? Believe us, dear sirs, Very truly yours. Mr. DE GERSDORFF. Who is it signed by ? Mr. PECORA. I do not know. Mr. BTTTTENWIESER. I would have to see the initials to say. Mr. PECORA. The letters are L. K. Mr. BTJTTENWIESER. That is Leonard Keesing. Mr. DE GERSDORFF. Well, in their office. What I was getting at is whose letter was it? Kuhn, Loeb & Co.'s letter? Mr. PECORA. Kuhn, Loeb & Co. letter; yes, sir. This is a letter sent by your firm to Louis Dreyfus & Co. after they had called to your attention this Chilean financing proposal? Mr. BUTTENWIESER. That is correct. Mr. PECORA. NOW, some stress is laid in this letter, or rather, mention is made of the lack of capital of the Mortgage Bank of Chile. And reference in this letter is made to that circumstance as one which would preclude you from taking over this issue and offering it to the public here without a government guaranty. Mr. BTJTTENWIESEN. That is correct. Mr. PECORA. What information did you get from Louis Dreyfus & Co. or from any other source in reply to the request you made in this letter for information respecting the nature of the repurchase of the bonds of the French loans of 1911 and 1912 at a sum exceeding their par value in francs ? Mr. BUTTENWIESER. We have a reply which is in French. Mr. PECORA. Well, what is the contents of it? The substance of it? Mr. BUTTENWIESER. YOU will have to pardon the substance of my translation of it. It says—do you want it read in French or do you want me to try to give a translation of it? Mr. PECORA. N O ; just give us a free translation of it. Mr. BUTTENWIESER. It says: As concerns the question which you have raised on the subject of'the repurchase of the obligations issued in France in 1911 and 1912, it concerns in effect an equitable arrangement arrived at between the mortgage bank and the French holders who wished to cash their coupons in sterling, an arrangement which was concluded at the time under the auspices of the National Association of Holders of Securities in France. A better scholar of French has told me that instead of saying " it concerns," I should said " it constitutes." Mr. DE GERSDORFF. " It constitutes in effect." The CHAIRMAN. They do not make any reference to the smaller amount of profits that they made? The smaller amount of reserve? Mr. BUTTENWIESER. TO clarify that point I might state that I haven't that &y2 percent prospectus before me because it has just STOCK EXCHANGE PEACTICES 1027 been submitted for the record, but my recollection is clear that we pursued the same line in that prospectus as we did in this prospectus, which says: The Caja has no capital stock and is not operated for profit. It has power to charge a commission to provide for its expenses and for a reserve fund, as additional security for its bonds, but having accumulated a sufficient reserve, the Caja has now discontinued charging such commission. Mr. PECORA. What information or advice did your firm have with respect to the value of, the soundness of, the security behind the mortgage loans made by the Chilean Bank? Did you have any advices or information on that at all? Mr. BuTTEisrwiESER* We had an unbroken record of 70 years during which the largest loss in the aggregate of 10 years was $40,000. And, of course, we could have no information as to the mortgages themselves. We only had this long record of the Mortgage Bank whose securities in Chile sold as well or better than the Chilean Government's own securities. And in addition to that we insisted on having the guaranty, the unqualified guaranty, endorsed on the bonds of the Republic of Chile itself. The CHAIRMAN. It seems to have been a kind of public corporation that was not operating for profit? Mr. BUTTENWIESER. It was. The closest analogy I can think of is our Federal land banks, operated very much along the same line, although, of course, there is the technical difference that they had stock and this bank had no stock. It is the usual form of credit foncier. The CHAIRMAN. The Federal land banks all had capital, you know. The Government subscribed to the capital, but they had capital. Mr. BUTTENWIESER. Yes, sir. Mr. PECORA. NOW, at the time your firm, with the Guaranty Co., underwrote this $20,000,000 issue, had not the Chilean Congress been dissolved? Mr. BUTTENWIESER. I think it had, and if I had that circular here, I could read you exactly. Mr. PECORA. Haven't you the circular before you ? Mr. BUTTENWIESER. NO. YOU see the circular of the 6% percent issue went to the stenographer for the record, and that handicaps me. Mr. PECORA. IS not the stenographer that has it here ? Mr. BUTTENWIESER. I think Mr. McEldowney has another copy. Mr. PECORA. Let me read from the copy of that circular which I have before me the following statement: The bonds are unconditionally guaranteed as to principal, interest, and sinking fund, by endorsement, by the Republic of Chile, pursuant to decree law of the governing council, dated March 9, 1925, and an executive decree, dated June 15, 1925 (supplementing said decree law), issued under the authority of President Alessandri and his cabinet, who are functioning as the Government of Chile, Congress having been dissolved in September 1924, pending the adoption of a new constitution which is now being drafted. The guaranty thus authorized is valid and binding upon the Republic of Chile. Did your banking firm think, Mr. Buttenwieser, that a guaranty by a government that was in existence under the circumstances indicated by this prospectus was a proper and sound guaranty? Mr. BUTTENWIESER. Our counsel, the Guaranty Co. counsel, and most eminent counsel in Chile, all agreed that it was a valid and 1023 STOCK EXCHANGE PKACTICES binding guaranty of the Republic of Chile, and it has never been questioned by the Government of Chile, the validity of that guaranty, or any of the proceedings surrounding the guaranty of the issuance of the bonds. Mr. PECOBA. Well, did you not recognize that unstable and unsettled political conditions in Chile would affect the value of that guaranty from a practical standpoint, if not from a legal standpoint ? Mr. BTTTTENWIESEB. The Chilean Government, over a long period of time, had been stable. Chilean politics, as I recall, had been stable for many years. Chile had Mr. PECOEA. But a change took place in 1924. Mr. BUTTENWIESER. That is right. Mr. PECOEA. And this stable Chilean Government that I presume functioned under a constitution adopted by the Chilean people, was replaced in September 1924, by a government which obtained power by the use of power and force ? Mr. BUTTEKWIESEE. Yes, sir. Mr. PECOBA. And dissolved the congress and was about to adopt a new constitution ? Mr. BUTTENWIESER. Yes. Mr. PECOEA. That was the situation presented in the spring of 1925 when these bonds were offered and sold to the American investing public, was it not? Mr. BUTTENWIESEB. Well, I think that question resolves itself into two parts. It is the legal aspect of it and the intrinsic merit of the guaranty. Now as to the legal aspect, we had competent legal advice. Mr. PECORA. I am passing on to the intransic merit, as you call it, and which I call the practical merit of the guaranty. Mr. BUTTENWIESEE. The practical merit of the guaranty, as far as I can see, is not affected by the Government, or the form of government that happens to be in power at the moment. Mr. PECOEA. If the government is an unstable government would you accept the guaranty of such a government as readily as you would that of a stable government? Mr. BUTTENWIESER. If I were advised Mr. PECORA. Away from the legal aspects now, on the practical consideration of the question ? Mr. BUTTENWIESEE. Well, it was the only government that existed, and we were advised that its acts were binding upon the Republic of Chile. Mr. PECOEA. Well, even though it were the only government that existed there, it was nevertheless a government of the nature that has been referred to. Now, would you consider a guaranty of such a government, functioning by decree, under a decree rather than under a constitution, invested in office through the exercise of force and violence, a good practical guaranty upon which to pass on $90,000,000 of securities? Mr. BUTTENWIESEE. I do not want to quibble on this, but it seems to me either the guaranty is binding or it is not binding. The best legal advice that we could get was that it was binding. And the proof of it is that it was always considered a valid and binding thing. Mr. PECORA. NOW you are discussing the legal effect of the guaranty rather than its intrinsic value. Now, address yourself to what you call the intrinsic value of the mortgage, and what would you say? STOCK EXCHANGE PEACTICES 1029" Mr. BUTTENWIESER. I say if it were binding that would not affect its intrinsic value. The CHAIRMAN. HOW about the securities on which these bonds were based ? Did the value of property go down, or what became of the value of the mortgages ? Did that continue under this new government ? Mr. BUTTENWIESER. The value did continue, as far as I know, under the new government; yes. The CHAIRMAN. There must have been depreciation in the value of their securities or their bonds would not have dropped so. Mr. BUTTENWIESER. I did not catch that question, Senator. The CHAIRMAN. I say there must have been a depreciation in the value of the securities held by the bank or their bonds would not have dropped so. Mr. BUTTENWIESER. Well, I think it is more than just the value of the securities back of these bonds that affects the market price of these securities. There are many other problems involved. Mr. PECORA. We all understand that legally one endorsement is as good as another, but practically they are not alike, are they ? They depend on the financial responsibility of the endorser, do they not? Mr. BUTTENWIESER. That is correct. Mr. PECORA. NOW, would you not say the same principle would apply to governments? Mr. BUTTENWIESER. Yes, Mr. PECORA. Well, then, sir. did you consider that the endorsement of a revolutionary government in Chile was a sound and safe endorsement or guarantee? Mr. BUTTENWIESER. Well, first, again, Mr. Pecora, I must say that if it were a valid, binding obligation of that Government the form of that government, as far as I can see, makes no particular difference. Mr. PECORA. Suppose a revolutionary government cannot continue in power, and chaos and disorder prevails, that is reflected in the ability of the government to make good on its guarantee, is it not? Mr. BUTTENWIESER. It does not follow that the form of government has any bearing on the ability of the government to make good under its guaranty. Mr. PECORA. Have you not heard as a banker of governments repudiating the acts of prior governments ? Mr. BUTTENWJESER. Yes, and we had competent advice, I repeat, to state that the Eepublic of Chile could not repudiate the acts of this Government, and have not. Mr. PECORA. Well, here you were given this guaranty at the time when this Government of Chile was functioning without a constitution and without a congress, which had been previously dissolved by the usurping government. Mr. BUTTENWIESER. Mr. Pecora, I can only rely on the previous statement that I have made, that all the counsel that we consulted,, two eminent firms in New York, leading counsel in Chile, said that, as it was the only apparent government there its acts could not be repudiated under international law. And the fact is its acts were not repudiated. The validity of this guaranty has never been questioned. 1030 STOCK EXCHANGE PRACTICES Mr. PECORA. Did that control your judgment as to the intrinsic value of the guaranty ? Mr. BUTTENWIESER. The intrinsic value is predicated on other considerations than the legal question. Mr. PECORA. I agree with you, but did the fact that this guaranty was obtained from a government that existed under the circumstances that then prevailed in Chile have any bearing in your mind upon the sufficiency, from a practical standpoint, of this guaranty? Mr. BUTTENWIESER. NO. I do not see that it has any bearing. Mr. PECORA. And it was in pursuance of such judgment that you accepted the guaranty and underwrote this issue and passed it on to the public here? Is that right? Mr. BUTTENWIESER. Guided, once again, by competent legal advice that this guaranty would be valid and legally binding. And if I may consult counsel as to whether or not I may read into the record a copy of the telegram which we had from the State Department on the subject? But I do not know whether we are permitted to make that public. The CHAIRMAN. From our State Department? Mr. BUTTENWIESER. Yes. Supplementing that letter that you saw, Senator Fletcher. The CHAIRMAN. Well, they simply say that there has been no change in their recognition of the Government there. No objection to reading that in, I do not think. You might read that into the record. Just read the telegram. Have you got it with you ? Mr. PECORA. I have here a copy of a cable addressed to Manuel Foster, Esq., Santiago, Chile. Under date of June 22, 1925. Have you got a copy of that cable before you ? Mr. BUTTENWIESER. Yes, sir. Mr. PECORA. Who sent that cable ? Mr. BUTTENWIESER. Did you say June 22, to Manuel Mr. PECORA. June 22, 1925. File no. 1123-6. Mr. BUTTENWIESER. I have one of June 21 to Manuel Mr. STEWART. HOW does it start, Mr. Pecora? Mr. BUTTENWIESER. What is the first of it? Mr. PECORA. It starts: Foster? Foster. N.Y., June $2, '25. Copy of cable to Manuel Foster, Esq., Santiago, Chile: Answering questions your cable 19th instant. Mr. BUTTENWIESER. Well, that is " from." Mr. STEWART. That is received from. Mr. BUTTENWIESER. That is why I could not place it. Mr. PECORA. I have here " Copy of cable to Manuel Foster." Mr. BUTTENWIESER. It is " from." I think you will find it reads that way. Mr. PECORA. Well, the copy we have says " to." Mr. STEWART. Here is the original. Mr. BUTTENWIESER. I S that the one that says: "Answering questions your cable 19th instant " ? Mr. PECORA. Yes. " Your cable 19th instant." Well, the copy you furnished us reads: " Copy of cable to." "Undoubtedly a typographical error. Mr. BUTTENWIESER. I am sorry. I just wanted to make clear. STOCK EXCHANGE PRACTICES 1031 Mr. PECORA. Well, that was a cable, then, from Manuel Foster? Mr. BUTTENWIESER. Yes; that is right. Mr. PECORA. NOW, Manuel Foster represented your firm, did he? Mr. BUTTENWIESER. Yes, sir. Mr. PECORA. In Chile? Mr. BUTTENWIESER. He was our counsel in this transaction in Chile. Mr. PECORA. Yes. He said as follows in this cable: Answering questions your cable 19th instant: First president was duly elected under constitution, but present cabinet was appointed by former military council and practically confirmed by the president. Constitutionally they have no authority to recognize debts unless by law enacted by Congress. But in this case their decrees as proceeding from a de facto government recognized by the country and respected by all the citizens are valid and binding upoi} the Republic. Second. As I have stated in the preceding point your assumption is right. Third. It depends on decree law 308 dated March 9 up to 50,000,000 pesos Chilean currency but said decree law was complemented by executive decree dated June 15 extending authorization up to $20,000,000 United States currency in order to authorize the negotiation of one single loan. This last decree, although not shaped in the form of the so-called " decree laws ", enforced the same binding upon the Republic. Fourth. The simple fact of using the word '* guaranty " conveys the idea of a collateral obligation and indicates the existence of a principal debtor which in this case is the Caja but decree 8 of June authorizes endorsement of direct guaranty to bondholders on temporary and definitive bonds. Fifth. Both decrees have been signed by President and by minister of finance as it is observed in the promulgation of laws passed by Congress. Sixth. I insist in my opinion that insofar as the legal aspects of this negotiation is concerned there is no danger in the operation. The Caja Hipotecarlo is a state institution or organism created by the state and administered by a director and a board appointed by government and its bonds are signed by a high government official. Therefore, in my opinion the government is ultimately responsible for its operations. In this very sense it was considered by France and Germany when gold bonds were issued in 1911 and 1912. Therefore even without any declaration from the government its guaranty or final responsibility is absolutely clear, as arising from acts of its own organism. I must also add that as you are acting bona fide with the only apparent government of this country you shall be placed under the protection not only of the Chilean but also of even the international law. Now, your firm sent a reply to that cable to Mr. Manuel Foster, did it not, under date of June 23, 1925 ? Mr. BUTTENWIESER. Yes, sir. Mr. PECORA. And in that cable did you say as follows: Is it not correct to refer to council as governing council which we prefer instead of military council? Mr. BUTTENWIESER. Yes, sir. Mr. PECORA. NOW, your legal adviser resident in Chile said that this Government whose guaranty you were seeking, or rather the President of the Government whose guaranty you were seeking, was appointed by a former military council, or rather the Cabinet was appointed by a former military council. You did not like that term " military council " and suggested a modification or change to " governing council ", is that correct ? Mr. BUTTENWIESER. If he felt they were synonymous. Mr. PECORA. Yes. And that is the term that you used in your prospectus to the American public, was it not, " governing council" instead of " military council " ? 1032 STOCK EXCHANGE PRACTICES Mr. BUTTENWIESER. Which it was. Mr. PECORA. Why did you prefer the term " governing council" to " military council " for the purpose of your prospectus ? Mr. BUTTENWIESER. Well, I think " governing council" is a more accurate statement of what a government is than " military council ", which might be misinterpreted. Mr. PECORA. Were you overruling the advice conveyed to you by your counsel resident in Chile when you referred to it as a " military council" and you suggested you preferred the term of " governing council" ? Mr. BTTTTENWIESER. We were not overruling it, Mr. Pecora. We merely wanted to get the most accurate statement in English of what that council was. Mr. PECORA. Well, hadn't he given you a very definite designation or characterization of it when he said it was a military council? Mr. BTTTTENWIESER. It was doubtless a governing council or else he would not have agreed to the word " governing." Mr. PECORA. Had not Mr. Foster accurately designated or described this council as a military council when he cabled your firm under date of June 22, 1925 ? Mr. BTTTTENWIESER. In English he had suggested that it was a military council. Mr. PECORA. He did not suggest it. He stated it. Mr. BTTTTENWIESER. He stated it was a military council. Mr. PECORA. Yes. He stated it " By former military council", and then you cable the following day- and say: " Is 15 not correct to refer to council as governing council which we prefer instead of military council." Now the reason you had that preference was because you thought that it would sound better in the prospectus to the investing public here to say that this Government or the Cabinet of the President had been confirmed by a governing council rather than a military council ? Is not that plainly the reason ? Mr. BTTTTENWIESER. I would say that " governing council " is less susceptible to misinterpretation than " military council ", because, as you see, it takes a long legal explanation to show that military council is that—the guaranty of this Government under this military council was a valid, binding obligation of the Republic of Chile under Chilean law and under international law. Mr. PECORA. DO you know the personnel of that council that you preferred to call a " governing council " ? Mr. BUTTENWIESER. No; I do not know. Mr. PECORA. Was it not all composed of military and naval officers ? Mr. BUTTENWIESER. I do not know that. The CHAIRMAN. Did you ever approach the Government of Chile with the idea of making good their guaranty? Mr. BUTTENWIESER. Yes, sir. We protested to the Chilean Government with reference to making good their guaranty on all these $90,000,000 of bonds, and we sent a very comprehensive protest first to the State Department asking them to forward it, and I have it here, if you desire it, the reply of. the State Department wherein they stated why they could not forward it, and subsequently we forwarded it ourselves to the Republic of Chile and to the Mortgage Bank, both. STOCK EXCHANGE PEACTICES 1033 Mr. PECORA. By the way, had the American Government recognized this de facto government at that time ? Mr. BUTTENWIESER. The State Department advised us in that telegram, of which you have a copy, that they had recognized no change in the Government. I believe that is the exact wording of it. Mr. PECORA. Well, did you interpret that as meaning that our Government had recognized formally this de facto government? Or does it mean that it had not extended such recognition to it ? Mr. BUTTENWIESER. I cannot answer that. Mr. PECORA. Well, who can answer it for your firm? Mr. BUTTENWIESER. I believe the fact that it had recognized no change, that they considered the Government of Chile existed under the same circumstances as it had existed. In other words, they recognized that no change had taken place. Mr. PECORA. In other words, they recognized that the de facto Government was merely a de facto government, did they not? Is that not what that means? Mr. BUTTENWIESER. That is a legal point again on which I am really not qualified to pass. But I believe these legal opinions amply cover that point. Mr. PECORA. Well, I do not know, Mr. Buttenwieser. Your legal adviser in Chile refers to this council as a military council. You asked him to correct it and refer to it as a governing council because you preferred that to a military council. Now whose opinions control your judgment, your own or the advices of your lawyers with regard to these questions? Mr. BUTTENWIESER. On legal subjects of course the advice of our counsel. The CHAIRMAN. What response did the Chilean Government make to your protest? Mr. BUTTENWIESER. They wrote us a letter stating why it was impossible for them to live up to the payments under their guaranties. The whole subject was covered in the text of the Chilean moratorium law of July 1931. The CHAIRMAN. The effect of their reply was that while they did not deny the guaranty they were unable to perform the contract ? Mr. BUTTENWIESER. That is it exactly. They have never denied in any way the validity of their contract. The CHAIRMAN. Did they give any reason why they could not live up to the guaranty? Mr. BUTTENWIESER. Yes. They furnished many statements—they published some statements as to why it was impossible for them to service their foreign obligations. Their own obligations and their guaranteed obligations. The CHAIRMAN. Did they make any promise to do it in the future ? Mr. BUTTENWIESER. Yes. They said they hoped to be able to do it. The CHAIRMAN. I think we had better take a recess. We will now recess until 10 o'clock tomorrow. (Thereupon, at 4:30 o'clock p.m. Tuesday, June 27, 1933, an adjournment was taken until 10 o'clock a.m. the next day, Wednesday, June 28, 1933.) 175541—33—PT 3 6 1034 STOCK EXCHANGE PRACTICES COMMITTEE EXHIBIT 1 (In the matter of terms and conditions to be prescribed by the Commission in connection with the issuance of securities under section 20a of the Interstate Commerce Act, as amended) THE MAEKETING OF AMEEICAN RAILEOAD SECURITIES INTRODUCTION THE PEOBLEM No more important problem today challenges the skill and wisdom of American railroad managements—and the public authorities charged with the function of regulation—than that of how to obtain the capital necessary to provide the facilities required to transport the commerce of our growing country. It has been estimated by several high authorities that in order to meet with any degree of adequacy the requirements for new construction, for additional main tracks, sidings, and yards, for equipment and terminal facilities, for elimination of grade crossings, especially in the larger cities, for block signaling and other safety appliances, and the requisite general strengthening and improvement of existing properties, expenditures are called for, aggregating as much as $1,000,000,000 a year for a series of years to come. There is never-ceasing demand in the United States for more and better railway services. Unless this demand is to remain unsatisfied the railway management must find some way to attract to the railway industry an uninterrupted and steadily augmenting flow of new capital. The problem is no less vital to the public whose prosperity and convenience so largely depend upon the adequacy of its transportation service. At the same time the public, which pays the rates providing the return earned upon capital invested in railroads, has a clear interest in having the railroads sell their securities—and obtain their new capital—upon terms which involve no burden upon rates beyond that actually necessary to attract the required capital. Capital already invested in railroad facilities is irrevocably committed, but any and all new capital must be attracted from the investing public upon terms and under conditions which appeal to that public. It is thus of essential importance that the following purposes be accomplished: 1. Obtain the capital. 2. Attract it upon fair and reasonable terms. 3. Have a broad and stable market for railroad securities and a favorable disposition on the part of investors toward such securities. Generally speaking, the existing method of disposing of railroad securities is by three processes: 1. Offering stocks pro rata to existing shareholders, the issue usually being underwritten by bankers; 2. Selling bonds at a fixed price to bankers, who through the medium of a syndicate and with the cooperation of distributing houses throughout the country, market them to the public; and 3. Selling an issue through a banker to the public, with a commission to the banker for his services. (This method is very rarely employed.) The question is now raised whether it would be well that the existing practice be changed and that railroad securities hereafter be sold by one of the following methods, viz, (1) unrestricted public bidding, or (2) competition among bankers. Such a change would, of course, involve the abandonment of the heretofore prevailing method, under which a railroad company usually selects a banking house of high standing and, so long as the services of that banker are satisfactory, makes its issues of securities customarily through or with the aid of that house. The suggested change contemplates that the relationship between the railroad and the investment market shall be similar to that between American municipalities and the investment market, wherein issues of securities are usually sold by competitive bidding. In considering this problem, the paramount question is, How can it be made certain that the vast amounts of new capital required by the railroacls, year in and year out, shall be forthcoming upon the most advantageous terms? STOCK EXCHANGE PRACTICES 1035 I. T H E EXISTING PRACTICE OF DEALING THROUGH BANKERS A. WITH AMERICAN RAILROADS As a rule, railroad companies of the United States, like those of other countries, market their bonds by selling them either to or through bankers. In cases where securities are offered for pro rata subscription to stockholders it is customary for the corporation to protect itself by arranging with bankers to underwrite, or to form a group to underwrite, their sale, that is, to agree to purchase such of the securities as are not taken .by the stockholders. Most of the important railroad companies, as well as industrial corporations, make a practice of dealing with a particular banking house or a particular group of bankers in marketing securities. This relationship rarely rests on formal contract. As a rule, the relationship is informal and tacit and its duration, as will be developed in detail further on, depends wholly upon the satisfaction of the railroad with the services rendered. A railroad company gradually comes to recognize a particular banking house as its banker. The existence of such a relationship means that the railroad has at its disposal continuously the services, skill, standing, experience, advice, and financial influence and capacity of the banker. Among the banker's functions are to keep track of the financial situation and requirements of the railroad, to assist in the preparation, in advance of the need, of a proper and serviceable system for financing such requirements; to advise as to the class, kind, and denomination of securities to be issued and as to the best time for selling them, so that his clients may not miss an opportune moment for meeting their requirements; to indicate from his survey of the markets of the world his judgment as to the amount of securities which could be absorbed in one or the other market; to scrutinize the mortgages and deeds of trust under which securities are to be issued, with a view to their provisions being, on the one hand, carefully protective of the investor, and, on the other hand, sufficiently broad and elastic not to hamper and restrict the corporation unduly in respect of its future requirements. The terms of a negotiation are by no means imposed by the banker, for it is easily within the means, and is recognized as an important and responsible duty, of those conducting negotiations on behalf of the railroad company, to acquaint themselves with the reasonable market value of the securities which it desires to sell and to insist upon obtaining a fully adequate price. The railroads for whom bankers act nowadays can have no inducement to continue that affiliation except satisfaction with the services rendered. A railroad company generally is, and always ought to be, free to terminate its relationship with its bankers at any time and entirely within its own discretion. That changes in the relationships between railroads and bankers do occur is indicated by the variations which take place in the course of time, in the connections, and the relative influence and position of the prominent banking firms which deal in railroad securities. The relationship between the railroad and its bankers is one which, whilst not limiting the railroad's freedom of action according to its own judgment of its best interest, does involve upon the part of the bankers certain definite and continuous duties and obligations, more fully referred to later on. B. WITH INDUSTRIAL CORPORATIONS Industrial corporations, unlike railway companies subject to public regulation, are entirely free to sell their securities in whatever way they deem most advantageous. Their managers, or presidents, are very frequently among the larger stockholders, and indeed, in numerous cases, are the principal stockholders, of the respective concerns, and therefore have a more direct and important pecuniary stake in their enterprises than can be the case with the chief executives of our large railroad corporations, the ownership of which is scattered in the hands of several hundred thousand shareholders. Yet there are hardly any industrial concerns either here or in Europe which dispose of their securities by competitive bidding among bankers or by direct offering to the public. Practically all such corporations pursue the course of negotiating with one particular bank or group of bankers and entrusting the 1036 STOCK EXCHANGE PEACTICES handling of their security issues to such banker or group of bankers so long as their services prove satisfactory. Their action is conclusive evidence that the system of competitive bidding is found unsuitable and disserviceable by the consensus of opinion of those in charge of industrial affairs, here and in Europe. II. How RAILROAD SECURITIES AEE PLACED WITH THE PUHLIC The great complexity involved in the sale of securities will readily be seen from a brief outline of the method usually adopted in marketing a large issue of bonds. The railroad, in the first instance, sells the issue to a strong banking firm at a price mutually agreed upon through negotiation. That firm then associates with itself a syndicate consisting of many (usually hundreds) of other banking, brokerage, investment, and distributing houses throughout the country, each having its clientele of investment customers. Bankers, of course, do not buy securities for permanent investment by themselves. If bankers or syndicates permanently kept the securities which they bought from the railroads their capacity to undertake such transactions would be exhausted very soon. If securities are to be placed, they must ultimately find lodgment with investors, and, while the amounts of securities taken by large investors, such as the life insurance companies, savings banks, and capitalists, appear large, their aggregate, especially since the advent of the high surtaxes, is small compared with the investments of the rank and file of small investors. Pending the formation of a syndicate, the firm which has contracted with the railroad stands in the breach, and is responsible to the railroad whether or not it succeeds in forming the syndicate. Even after the formation of the syndicate, the practice is that the responsibility of the contracting firm continues and it remains liable to the railroad for the due fulfillment by each syndicate member of the obligation undertaken by him. Then begins the laborious process of selling securities to ultimate investors, through advertising, letters and circulars, and personal presentation, and in this labor are engaged large numbers of dealers in securities, each with his own clientele. In time, if the issue is a success, the securities are absorbed-. If the issue is not a success the participant in the syndicate must either sell the securities at a loss or carry them along until the advent of propitious times enables them to dispose of them. The selling of securities to the public has in recent years undergone a radical change. Formerly, the principal buyers of railroad bonds were wealthy individuals and large corporations, especially insurance companies and savings banks. The former, owing to the surtaxes, have practically been eliminated as absorbers of railroad bonds and confine their investments very largely to taxexempt securities, while the insurance corporations and savings banks do not invest as largely as before the war in railroad securities. It has therefore been found necessary to discover new channels for the absorption of railroad bonds. This has been accomplished within the past few years by a most intensive campaign of education and distribution among the rank and file of investors. The result has been exceedingly gratifying in that a vast army of small investors has been developed. The achievement is of great public consequence from the social and economic point of view. III. T H E PROPOSAL TO< MARKET RAILROAD SECURITIES BY COMPETITIVE BIDDING It is now urged in certain quarters that railroad companies would do better if they should discontinue dealing habitually with particular banking houses, and, whenever they have securities to sell, would offer them for sale by competitive bidding among bankers, regardless of past affiliations. Some even go so far as to advocate that bankers, as such should not be used at all, not even upon a competitive basis, but that the railroad companies should sell their securities directly to their own stockholders or to the public at large, preferably offering them for public tender and accepting the proposals of the highest bidders. If railroads offered bonds direct for public subscription in limited amounts, the result might be fairly satisfactory in good or normal times, although even then, deprived of the facilities, the skill, and the sponsorship of responsible bankers, the prices obtained would probably be lower than those which would have been realized by dealing with a banker, and that consideration takes no STOCK EXCHANGE PRACTICES 1037 account of the uncertainty in which the railroad would necessarily find itself as to what portion of the funds it required would be in fact realized as the result of the public offering. Moreover, the public demand would naturally concentrate itself upon the issues of the best known and most prosperous railroads, making it very difficult for railroads not enjoying high credit to obtain necessary funds—all the more difficult, as the system of competitive bidding would offer no inducement to bankers to take upon themselves the risk and responsibility of acquiring such Issues. Under that plan there would likewise be less assurance of the pursuance by railroads of a sound and consistent financial policy such as a prudent and conservative banker requires as a basis for commending securities to the confidence of the investing public which looks to the banker for advice and leadership. In unfavorable times, of course, the public's response to an offering of securities is small, at times exceedingly small. It occurs frequently that bankers or syndicates have to carry issues of bonds, which they have purchased, for many months or even years, until investment demand revives. If an issue of bonds offered by a railroad for competitive bids on direct public subscription resulted in nonsuccess, the issue, if saleable at all, could only be disposed of at a very heavy sacrifice. The failure of a public offering and the consequent public knowledge that the railroad had been unable to obtain the funds it requires, would cause grave damage to a railroad's credit, if it did not for the time entirely destroy it, would cause alarm amongst investors, and in not a few cases might cause bankruptcy. That is the vital and fundamental difference between the risk incurred by municipalities and that incurred by railroads in the disposal of their bonds by public bidding. If a municipality fails to dispose of its bonds, the situation thereby created, though embarrassing, does not ordinarily involve grave harm, and can be dealt with. If a railroad fails, however, the damage done is exceedingly grave at best—and may be irremediable. THE PUHLIC DOES NOT BID As a matter of fact, unrestricted public competition does not in practice mean what the term implies, because all experience has shown that the public does not care for such bidding and actually refrains from participating therein to any appreciable extent. Even in the case of municipal securities, it is amply demonstrated that the offerings are not taken by the public in the process of competitive bidding, except in a very limited measure. The successful bidders both as to quantity and price are almost invariably bankers or banking syndicates who buy for resale to the investor. The public wisely requires, even in the case of municipal securities, the advice and moral responsibility of bankers. They want to be sure that all legal matters have been properly looked into by somebody, not the seller, and that the soundness and validity of the security is vouched for by a competent and reliable firm. If, as experience has shown, the public cannot be depended on to cover the offering even of municipal bonds by competitive bidding, this would be so in a still more pronounced degree in the case of railroad securities. It follows that public competition would really mean not offering securities to the public, but offering them to the bankers. The banker, if he were—as he would be in this case—entirely free to bid or not to bid, to pick and choose, to take the best and leave the less good alone, would actually leave the less good alone, with the result that many railroads would find themselves faced with the grave consequences of the failure of public offerings. Municipal and State securities possess the immense advantage of being tax free. Yet it has happened, in the past quite often, and even not unfrequently of more recent dates, that such issues were not covered when offered for public bidding, the failure, entire or partial, being due usually to their being unsuited to the market or because of some doubt as to their legality. Can it be doubted that the same result would occur much more frequently in the case of railroad securities if offered for public bidding? 1038 STOCK EXCHANGE PEACTICES THE EXPERIENCE OF CITIES It is true that Government and municipal securities in this country are usually offered for competitive bidding, but Government, State, and municipal financing is not comparable with corporation financing. In the former case the securities based upon the taxing authority are in the simplest form— generally little more than a plain promise to pay—and in recent years, since the advent of high surtaxes, a ready market is usually assured by the taxexemption feature. Nevertheless, public officials usually deem it wise to consult bankers before determining their financial policies and particularly before issuing large loans, and at times have sought and obtained in advance informal guarantees from bankers that offerings will be covered. They can, of course, rely upon bankers rendering assistance as a matter of civic duty. In the case of railroads, with the element of habitual clientage between railroad and banker eliminated, it would naturally be impossible to count upon any such uncompensated advice and assistance. As illustrating the point that the financing of State and even the highest grade municipal bonds has not always been successful in spite of the taxexemption feature, it may be mentioned that in June and August 1907, the city of New York offered two issues of bonds of $29,000,000 and $15,0<00,00O, respectively, for which bids of only $2,100,000 and $2,700,000, respectively, were received. The issues were sold by private sale to bankers a few months later. About the same time a small offering of bonds by the State of New York met with a similar result. In 1914, shortly after the outbreak of the war, the city of New York, finding itself in immediate need of $100,000,000 of gold to pay notes maturing in England and France, turned to J. P. Morgan & Go. and Kuhn, Loeb & Co., who, without compensation, as a matter of public duty, undertook to organize, and in the midst of conditions of unprecedented difficulty, did organize a syndicate to provide the necessary funds. In more than one instance in the years preceding that occurrence, the city was compelled, in order to avoid failure of an issue offered for public tender for the purpose of meeting pressing requirements, to have recourse to one or the other of the leading banking houses. In numerous cases it was only large subscriptions by such banking houses—made often without any expectation of profit and resulting none too rarely in losses—which avoided the, at least partial, failure of public offerings of the bonds of the city of New York. There is no reason to believe that the cities have been better off under the practice of selling bonds at public offering to the highest bidders than they would have been had they been permitted to deal privately with the bankers as do the railroads. But, even if it were otherwise, it is manifest that railroad companies could not possibly expect to fare as well as do the municipalities if they had to depend upon the uncertain and fluctuating public demand when they attempt to sell their securities at public offering to the highest bidder. Especially does this hold true in the case of the less strong railroads, where a careful analysis and study of the condition of the company and sometimes even an auditor's or an expert's report is required before a conservative banker will stand sponsor for the company's securities. The investing public wiH neither take the trouble, nor does it possess the qualifications, to analyze for itself the position of the securities of the less well-known properties and to form a reasoned estimate as to their degree of safety, based, as such estimate must be, upon the compilation and study of statistical and other data, which it is among the functions of the banker to gather and to make available to his investment clients in convenient and easily understood form. In this connection it is significant that the Farm Loan Bureau of the United States Treasury has found it advantageous to issue the bonds of the farm-loan banks not by competitve bidding but through a group of bankers selected by the Bureau whom it may at all times feel free to consult and who watch the markets in the interest of the Bureau. EUROPEAN PRACTICE In not a single European country does the system prevail of competitive sale, either general or limited, of securities on the part of corporations. Moreover, many even of the governments and municipalities, in placing their loans, STOCK EXCHANGE PEACTICES 1039 have recourse not to competitive bidding but to regularly established and continuous connections with a banking house or a group of banking houses. Not one of the foreign governments, belligerent or neutral, which during the European war have found access to the American investment market for the securities of their respective countries, had recourse to competitive bidding amongst bankers or otherwise. In each instance the government concerned has dealt with some one particular banker or group of bankers whom it selected as efficient and worthy of confidence. A cabled inquiry addressed within a week to eight different countries in Europe, and also to Japan, to find out whether, since the war, the practice has been modified in those countries of dealing with selected bankers for the sale of public service and other corporate securities and even, in numerous cases, governmental or municipal bonds, elicits the information that no reason has been found to change that practice and that it continues to prevail. IV. T H E PRESENT METHOD OF UNDERWRITING THE SALE OF STOCKS TO SHAREHOLDERS Under the laws of most States and the charters of most corporations, it is necessary that new issues of stock, or of bonds carrying the privilege of conversion into stock, must first be offered for pro rata subscription to the corporations' stockholders. In such cases the banker's knowledge of markets is valuable to- advise the corporation of the character of securities which its shareholders are likely to accept or for which the subscription rights would command a market value. When an offering of new stock is made to shareholders of a corporation it creates a technically weak market position, inasmuch as both the existing stockholder and the speculator know that there is a mass of new stock about to issue, and the market must absorb it. Consequently the speculator' is apt to incline toward rushing into the market, arguing to himself, " I will sell that stock. I will get it back cheaper. The market must absorb such and such a number of millions of new stock, and it cannot do that without going down. I am quite safe in selling some." Experience has shown that in many cases the stockholder to whom the so-called right to subscribe for new stock is offered, does not exercise that right. He is not always prepared to put up additional cash. He frequently sells his " rights " for whatever may be their market value. Consequently, by the very issue of additional stock, offered to existing stockholders, there is created an unfavorable and somewhat hazardous market condition. Naturally, the tendency invariably is for the offering of stock to depress the existing level of the stock. That may go so far as to remove! any inducements to the stockholder to subscribe for the new stock, and to render " rights " valueless. An unprotected offering, i. e., an offering not protected by underwriters, is a target for selling. Moreover, not to mention the damage to its credit in case of the failure of such an offering, the railroad is uncertain pending the time in which the securities are under offer to the stockholders (usually not less than from 45 to 60 days) whether or not, or to what extent, the stockholders will subscribe, and is, consequently, in doubt whether, a t the end of the subscription period, it will come into possession of the funds it requires. All of this is obviated by the formation of an underwriting syndicate inasmuch as it guarantees to take and pay for any part of the offering which the stockholders may not want to take. The existence of such a syndicate and the resulting guarantee of the success of the offering has a strong moral effect upon the stockholders in encouraging them to subscribe, and an equally strong effect in discouraging speculators from " short selling " while an unprotected offering invites such selling. It follows that a railroad can safely afford to offer securities at a much higher price when underwritten than they would risk fixing when not secured and protected by an underwriting. A characteristic illustration of the foregoing is furnished by the experience of the Pennsylvania Railroad Co., than which there is no stronger railroad corporation in the country, when, in 1903, it, without underwriting, offered $75,000,000 of its stock for subscription by its stockholders at 120 percent. The market price of the stock at the time was, and for some time had been, around 145 percent. Owing to the large difference between the market price and the price of the offering, the officers and directors of the railroad deemed it unnecessary to insure success by an underwriting. 1040 STOCK EXCHANGE PRACTICES As a result of changes in market conditions, sales of rights by stockholders, and selling by speculators, it being known that there was no underwriting syndicate, the market value of the stock rapidly declined. When the price in its descent had reached 125% and the failure of the offering appeared imminent, the railroad finally called upon its bankers to form a syndicate to underwrite the issue, which was promptly done. The reassuring effect of the mere public announcement that a syndicate had guaranteed to take and pay for any part of the offering which was not: subscribed for by the stockholders was such as to arrest immediately the selling on the part of alarmed stockholders as well as by speculators. The decline in the market stopped, and a threatened failure, which might have involved serious consequences and affected railroad credit generally, was turned into a complete success. Even after taking into consideration the expense of an underwriting syndicate, a railroad will usually obtain materially higher net proceeds from an underwritten offering than from one not underwritten, in addition to the advantage of being certain of securing the required funds. Manifestly, it is more advantageous to a railroad's financial position and the maintenance of the price level of its securities to offer a security, even to its stockholders, at, say, 110, and pay a reasonable underwriting commission, rather than to offer it at par without an underwriting. The cases in which railroad companies or other corporations have successfully sold their securities direct to the investor are exceedingly rare, and even then usually at prices below what could have been obtained from bankers. To quote only one example of nonsuccess in the case of direct dealing with the public, the Vermont Valley Railroad in 1914 offered for competition by sealed tenders an issue of $2,300,000 of its 6 percent 1-year notes. Although the Vermont Valley Railroad was a very prosperous concern, having a record at that time of having paid dividends at the rate of 10 percent per annum for 9 years, and the notes had the additional security of being guaranteed by the Connecticut River Railroad Co., the offering resulted in complete failure, practically no bids having been received. On the other hand, the case of the case of the American Telephone & Telegraph Co. which recently sold a large issue of stock at par directly to its stockholders, without the intermediation of bankers, has been cited as significant and indicative of the possibilities of effective results without the cooperation of bankers. The real significance in that case, however, lies in the patent fact that had that issue been underwritten by bankers a considerably higher price for the company could have been obtained. The security sold by the American Telephone & Telegraph Co. was seasoned stock paying 9 percent dividends. It was offered at par. Bankers, in consideration of a reasonable commission, would gladly have underwritten the offering at a considerably higher price. It should be understood that this does not imply any suggestion of criticism as to the course pursued by the company. There were valid considerations of broad policy which guided the decision of those in responsible charge, to give to the vast body of its stockholders the benefit of a stock offering at a particularly attractive price. V. EFFECTIVE COMPETITION PREVAILS UNDER PRESENT METHODS There are ever present elements of actual or potential competition which assure favorable terms to a railroad company dealing habitually with the same bankers. The price and the margin of profit or commission at which a banker concludes a negotiation with a railroad company for its securities is necessarily in competition with the terms upon which other bankers negotiate with other railroad companies for their securities. The prices at which railroads sell their securities are now matters of public record. Moreover, the terms of a contract between the railroad and the bankers are subject to the approval of the Interstate Commerce Commission. No banker expecting to maintain his regular connection with a railroad company can do otherwise than pay full and fair value for the securities which it has to sell. It is a matter of necessity and self-interest for him to do so. Railroad companies, through various means, are well able to. place an accurate estimate upon the market value of securities, which they have for sale, and no board of directors could afford to incur the approbrium and responsibility of selling securities to their regular banking connections otherwise than on the basis of what they are reasonably and fairly worth, considering the time and the conditions. STOCK EXCHANGE PEACTICES 1041 The prevailing market prices of existing issues fix very closely the prices at which new securities can be sold to investors. The banker who would make a practice of marketing the securities of his clients at prices materially below the prevailing prices for issues of similar character and quality would soon lose his clients. In isolated instances, for the purpose of obtaining advertisement or position, or even, in certain instances, for reasons of a less legitimate kind, others than the regular banking connections of particular railroads may conceivably be willing to pay a somewhat higher price for an issue of securities than such regular connections; but there is no reason whatever to think that such " occasional" bidders would be able or willing to do better for the railroads, year in and year out, than the bankers usually acting for those railroads. On the contrary, there is every reason to expect the reverse. Whether through a system either of unrestricted public bidding or of competitive bidding limited to bankers, the railroads year in and year out would obtain higher prices for their securities than have been and are being realized under the existing time-tested system, is a matter of opinion and cannot be any< thing else. Whether that opinion is pro or con, there can be no question that as against gaining a wholly problematical and uncertain benefit the railroads stand to lose the certain, well-established, and weighty advantages which now accrue to them through the responsibility and moral and practical obligations toward them of the bankers with whom they habitually deal. To market railroad securities on a large scale requires a combination of skill, experience, capital, reputation, and connections that, from the nature of the case, can be possessed by only a limited number of concerns at any one time, because only the test of time will produce most of these necessary qualities. That skill, experience, and reputation it is the business of the banker to make available to his clients, together with his financial potency and relationships. A banker of long experience with a record of success, conservatism, and integrity develops a power to place securities that is of great value to his clients, cumulatively so the longer the relationship is maintained. RESULTS MUST BE JUDGED OVER; PERIOD COVERING BOTH RISING AND DECLINING MARKETS The question of the best and most serviceable method of selling railroad securities must be determined not from the wholly exceptional and fortuitous circumstances which have prevailed during the last year, but in the light of the experience of the longer past and the needs of the future. In the marketing of securities, as in other businesses, there are occasional periods of excessive activity, usually of comparatively short duration, occasional periods of acute depression, and longer periods of normal activity. It happens that this year has been a period of unparalleled activity in the marketing of securities of domestic issues, simultaneously with and partly caused by growing reluctance to invest in issues of European countries. There has been a vast and almost insatiable demand for new domestic securities, particularly bonds, an almost uninterrupted decrease in interest rates and a corresponding increase, in the market value of securities. The result has been that bankers and syndicates have been much more than usually successful in marketing the domestic security issues which they have purchased and that as a rule new security issues have advanced in the market and reached prices in excess of the issue price. The upward trend of security values is illustrated by the fact that in the last 10 months the average market price of .10 standard railroad bond issues taken at random has increased about 13 points. It has been a time when it was possible to indulge in improvident bidding or " spite-bidding ", without being deterred by the swift penalty of nonsuccess in marketing, which follows such practices under normal circumstances. Under these conditions, it is easy for critics who consider only recent experience, and whose knowledge does not carry them back to the pre-war years (which, after all. furnish the best standards for judging the future), to jump at the conclusion that the railroads have not been receiving the best possible prices for the securities they have marketed and that higher prices would have been realized if the sale of railroad securities had been opened up for competition. Criticism has been especially easy and abundant on the part of those who have little or no background of experience in the marketing of railroad 1042 STOCK EXCHANGE PRACTICES securities to guide them, who have not had to bear the responsibility of financing the requirements of great railroad properties in normal times and during periods of depression and who do not realize the necessity of looking ahead to the future periods of depression or of more normal demand for securities when the railroads of the country will have the same need for new capital as now. VI. PEESENT PROCEDURE HAS PEOVED OF ADVANTAGE TO THE RAILEOADS To deal through bankers in accordance with present practice, has actually proved itself a source of distinct financial advantage to railroads—even the most prosperous and soundly financed companies. A few conspicuous cases may be cited here to illustrate the point: * 1. In March 1905 the Pennsylvania Railroad arranged with its bankers to form a syndicate to underwrite the offer to its shareholders at par of $100,000,000 Pennsylvania Railroad 3% percent convertible bonds (convertible into stock at 150 percent). The stockholders subscribed for less than 10 percent of the offering and, consequently, the underwriting syndicate had to take and pay for about $90,000,000 of the bonds. The bonds within the year declined to 97% percent and never again reached par, the price at which they were first offered. If it had not been for the underwriting syndicate, the situation, resulting from the failure of the stockholders to subscribe and thus provide the money needed by the railroad, would have been very embarrassing to the railroad and very serious in its effect upon the general financial and investment situation of the country. 2. In 1908 a situation had arisen which had brought the market for railroad bonds in this country to a complete standstill. Railroads for many months were unable to obtain funds except, to a limited extent, by means of the costly and dangerous expedient of selling short-term notes. The effect was cumulative and far-reaching and threatened to bring about serious consequences. As this juncture the bankers of the Pennsylvania Railroad succeeded in inducing the two foremost banking houses in England, Messrs. N. M. Rothschild & Sons, and Messrs. Baring Bros. & Co., Ltd. (the former of whom had not issued an American security for many years), to purchase and bring out jointly with them at 96 percent an issue of $40,000,000 Pennsylvania Railroad 4 percent consolidated bonds. Largely in consequence of the prestige and placing power and investment following of the issuing houses, the public offering was a complete success and its effect, as recognized by many published comments here and abroad, was to break the deadlock which had existed, and to cause capital to flow again freely into the investment market. 3. In August 1913 bankers formed a syndicate to underwrite the offer to Union Pacific stockholders of $88,000,000 Southern Pacific stock trust certificates at 92 percent. The effectuation of that sale was of very great importance as, failing it by a certain very near date, the Southern Pacific stock in question would have been placed, under a court decree, in the hands of a receiver, the sentimental and actual effect of which course would have been grave. In the face of many predictions that a syndicate to guarantee the sale of so vast an amount of stock could not he formed under the then prevailing generally disturbed and unfavorable conditions, the bankers, with the aid of their connections throughout America and Europe, succeeded in the undertaking, the syndicate as finally made up consisting of nearly a thousand participants. It is entirely safe and well within bounds to say that if that mass of stock had been offered without guaranty and protection of an underwriting syndicate, it would not have been sold—if at all, within the time limit set by the court—at a price averaging better than 80 percent. 4. In connection with the first plan for the dissolution of the Union PacificSouthern Pacific combination approved by Attorney General Wickersham (which failed of adoption because of the refusal of the California Railroad Commission to approve certain of its features), he imposed the condition that the sale of the Union Pacific Co.'s holdings of Southern Pacific stock (which would be offered for pro rata purchase to the stockholders in the Southern Pacific Co.) should be underwritten by a syndicate. *A number of additional instances of a similar value to the railroads will be found on pages 33 to 37. STOCK EXCHANGE PKACTICES 1043 He imposed that condition for the manifest reason that the sale of the stock, however attractive the price to the stockholders might be, could be insured only in case definite arrangements were made for a sale of the stock that might not be taken by the stockholders upon the offering. None of the aforementioned transactions, under the circumstances of the cases and the times, could have been effected equally well, if at all, by any method of competitive negotiating or bidding. VII. THE PAYMENT TO THE BANKEIR I S FOB ASSUMING A SUBSTANTIAL RISK AND PERFORMING A VALUABLE SERVICE The risk taken by the banker and the syndicates he may organize is always a real and at times a very great one. There is widespread misapprehension as to the profits made by bankers and syndicates upon the underwriting and purchase of securities of railroad companies. There is also a frequently encountered misconception to the effect that the railroads are in the habit of paying a commission to the banker when selling securities to him. When the banker forms a syndicate to underwrite an offer of securities to shareholders a fixed commission is naturally stipulated, commensurate with the advantage secured by the railroad company in obtaining through the underwriting the certainty of the success of its offering, and with the risk incurred by the banker and the syndicate affiliated with him. On the other hand, in the case of the sale of railroad securities to or through bankers without an offering to stockholders, it is very unusual for the sale to be on a commission basis. As a rule, the procedure is that the banker makes a firm bid to the railroad for such securities at a fixed price, said price with the addition of a reasonable standardized percentage for his own compensation being the figure at which he expects to be able to form a syndicate. That compensation is in return for his preparatory work, his moral and actual responsibility and risk and his services in managing the syndicate. It is a charge made by the banker to the syndicate. The compensation of the banker and the anticipated profit of the syndicate are practically a fixed percentage. The banker's method is not to buy low and sell high. In fixing the selling price to the public, he merely adds to the purchase price a certain percentage to cover his own and his syndicate's compensation and expenses, and that percentage does not vary materially irrespective of whether the purchase price was say 90 or 95 or 100 percent. His aim and inducement are to buy at a price which will enable the securities to be sold to the public after adding to that price the customary compensation. He has no inducement whatever to buy at a lesser price because his compensation would not be increased thereby, but on the other hand the good will and approval of the railroad concerned would be jeopardized. When a syndicate is formed the banker's financial risk is by no means ended, as, in practically all cases, he is himself a large participant in the syndicate—is, in fact, expected to be. Moreover, generally he remains financially responsible to the railroad for the commitment of each individual syndicate participant. The railroad looks to him for the due performance of the contract, and not to the hundreds of syndicate members. Again his moral risk and responsibility toward the syndicate is great, inasmuch as he is relied upon by its members to have examined carefully into the soundness of the security, to have scrutinized the mortgage, to have taken competent legal advice, to have correctly gauged the moment and estimated the price at which the securities can be advantageously placed with the public, to do the principal work in marketing them, and to guide the work done by others. If the banker is found wanting in any of these respects, or his judgment proves to be faulty, he loses the confidence of those who habitually participate in syndicates and with it his capacity to engage in financial transactions on a large scale, as it is only with the cooperation, financial or otherwise, of syndicates that large transactions can be carried through. The spread on which the syndicate figures as between the purchase price and the price of resale to the public is not more than sufficient to cover the expense of " overhead ", the outlay for advertising, circularizing and counsel fees, and reasonable compensation divided over hundreds of syndicate participants and distributing houses for their risk and their work in placing the securities with the public. In view of the change which has taken place, as previously referred to, in the clientele for railroad bonds (owing to the pref 1044 STOCK EXCHANGE PRACTICES erence of large investors for tax-exempt bonds) the selling of railroad securities has become both a more laborious and intensive and a more costly process than formerly. In addition to a highly trained and expensive office staff,, bond houses nowadays must employ an army of traveling salesmen. In order to get issues of railroad securities well placed among, and absorbed by, bona fide investors, it is necessary, under the conditions created by the advent of high surtaxes, to employ retail distributing houses throughout the country to a far greater extent than used to be the case. The margin upon which the calculations of the syndicate and its managers are based must therefore be sufficient to enable reasonable compensation to be afforded to such, retail distributing houses so as to give them a fairly adequate inducement to put forth their efforts in placing the securities. If, through an excessive narrowing of the margin, whether due to vagaries of competitive bidding or to' other causes, such adequate inducement cannot be given to that Nation-wide force of distributing houses in the case of railroad securities, the inevitable result would be that these houses would more and more relinquish that field and devote their principal attention to pushing the distribution of industrial and other securities, of which a constantly growing supply is available. Under the methods now prevailing it is wholly impossible that the originating banker, the syndicate participants and the distributing houses can make an undue profit as between the railroads and the public. The expected compensation for their respective services is expressed in practically standardized percentages, varying somewhat in accordance with the quality of the security and the risk and difficulty of the business. There can be no profit to bankers, syndicates or distributors over and above these percentages, but of course there canbe a loss if the banker's judgment as to the price which a given security is worth or as to the general condition of the investment market is at fault, or if a sudden change occurs in that market owing to unforeseen events. The limit of possible profit is fixed, the limit of possible loss is indeterminate. It is worth mentioning in this connection that the banker in England does not render the same measure of service to the corporations whose securities he sells to: the public, as does the American banker. It is the practice of the London banker, immediately after the public issue has taken place, to dissolve his syndicate, distribute amongst the syndicate participants any bonds remaining unso]d and leave it to them to sell at the best price they can get. He does not usually consider himself responsible to endeavor to protect the stability of the issue price. The practice of the American banker, on the contrary, in cases where a public issue has not resulted in placing with the public the entire amount offered, is to keep his syndicate together for a certain length of time (sometimes for a great length of time), to retain charge of the disposal of the unsold balance and to continue his efforts to place the same with the investing public at the original issue price—a practice fairer and more serviceable both to the railroads and to the public. Even in the case of wholly successful issues, it is the usual practice here to keep the syndicate together for from 2 to 3 months, so as to be ready to " protect" the market, as more fully explained later. SOME INSTANCES. OF SYNDICATE RISKS TURNED INTO LOSSES The following actual cases, which are by no means exhaustive, indicate the risks incurred by banking syndicates, and illustrate the losses and vicissitude to which they are subject: 1. In September 1905 the Erie Railroad arranged with its bankers to form a syndicate to underwrite the offer to its shareholders at 100 percent of $12,000,000 convertible 4 percent bonds, series " B " (convertible into common stock at $60 per share). The result of the offering was that the stockholders subscribed for only 18 percent and, consequently, the syndicate had to take and pay for $9,840,000 of the bonds. The syndicate was dissolved in December 1906, none of the bonds taken by it having been disposed of. The bonds were listed on the stock exchange in February, 1907, when they sold at 85 percent. 2. In January 1906 the Missouri, Kansas & Texas Railway arranged with its bankers to form a syndicate to underwrite the offer to its shareholders at 87% percent of $10,000,000 general mortgage 4% percent bonds. The stockholders subscribed for only 50 percent of the offering and the syndicate had to take $5,000,000 of the bonds. The syndicate was dissolved in December 1907, only a few of the bonds taken by it having been disposed of. STOCK EXCHANGE PEACTICES 1045 3. In May 1907 the Union Pacific arranged with its bankers to form a syndicate to underwrite the offer to its stockholders at 90 percent of $75,000,000 4 percent convertible bonds (convertible into stock at 175 percent). The stockholders subscribed for barely 5 percent of the offering and, consequently, the syndicate had to take and pay for about $70,000,000 of the bonds. The bonds in the course of the following 6 months declined to 78% percent. 4. In January 1913 the Baltimore & Ohio Railroad Co. arranged with its bankers to form a syndicate to underwrite the offer1 to its stockholders at <95% percent of $63,000,000 4% percent convertible bonds (convertible at 110 percent). The stockholders subscribed for barely 30 percent of the offering and, consequently, the syndicate had to take and pay for about $44,000,000 of the bonds. In the course of a few months the bonds declined to 88% percent. 5. In April 1906 the Wisconsin Central Railway arranged with bankers to form a syndicate to underwrite the offer to its shareholders at 89 percent and interest, of $7,000,000 Superior & Duluth Division & Terminal first mortgage 4 percent bonds. The stockholders subscribed for only 1 percent of the offering and the syndicate had to take $6,930,000 of the bonds. The syndicate expired by limitation July 1, 1908, none of the bonds taken by it having been disposed of in the interval. 6. In March 1910 the Atchison, Topeka & Santa Fe Railway Co. arranged with its bankers to form a syndicate to underwrite the offer to its shareholders at 102y2 percent of $43,686,000 convertible 4 percent bonds due 1960. The stockholders subscribed for only about 12% percent of the offering, leaving about $38,000,000 of the bonds to be taken by the syndicate. 7. In February 1906 the Southern Railway sold to its bankers $20,000,000 development and general mortgage 4 percent bonds at 89 percent less commission. The syndicate formed by the bankers to handle this transaction remained in existence for nearly 2% years, i. e., till July 1, 1908, at which time the syndicate members had to take up 68 percent of their participations. The market price of the bonds at that date was 74 percent. 8. In January 1909 the Western Maryland Railroad sold to bankers $8,500,000 first mortgage 4 percent bonds. On January 18, 1909, about 90 percent of the bonds had to be taken up by syndicate participants. No bonds were disposed of by the syndicate until September 1910, and from then on, at various -dates up to February 28, 1911; thus the syndicate lasted more than 2 years. 9. In June 1909 the Seaboard Air Line arranged with bankers for the formation of a syndicate to guarantee the sale of $18,000,000 adjustment bonds at 70 percent. November 1, 1909, syndicate members took up about 90 percent of the bonds, which were disposed of in small lots between February 1910 and November 30, 1910, the syndicate thus lasting about 1% years. 10. In January, 1910, bankers purchased $22,000,000 Chicago City & Connecting Railways collateral trust 5 percent bonds, and formed a syndicate at 91 percent. The syndicate expired in February 1912, leaving syndicate members ivith almost 90 percent of the total amount unsold in their hands. It will be observed that all the above examples, the list of which could be considerably prolonged, relate to the period preceding the war. The selection lias been so made purposely, because ever since the beginning of the war the conditions of the investment market have not been normal. During the greater part of that period they were abnormally adverse, while since the beginning of the present year they have been abnormally favorable. Therefore, the war and post-war periods offer no basis upon which to found permanent conclusions. However, a few examples from these periods, which might be greatly multiplied, may be inserted here: 11. In March 1916, bankers formed a syndicate to underwrite the offer to stockholders of $40,180,000 Chesapeake & Ohio Railway Co. 30-year 5 percent secured convertible gold bonds at 97% percent and accrued interest. The stockholders subscribed for but slightly over 5 percent of the offering and the syndicate had to take and pay for $38,047,500 of the bonds, equal to 94% percent of the issue. At the time when the syndicate was called upon to make good its obligation, the bonds were selling in market at 94% percent. 12. In January 1917, the Chicago, Milwaukee & St. Paul Railway sold to its bankers at 93% percent $25,000,000 general and refunding mortgage 4% percent bonds, series "A", due January 2014. On April 24, the syndicate was dissolved, the members having to take up 43 percent of their participations. The bonds at that time were selling in the market at 88% percent. 13. In June 1919, the Baltimore & Ohio Railroad Co. sold to its bankers at 93% percent $35,000,000 of 10-year 6 percent secured gold bonds. The syndicate 1046 STOCK EXCHANGE PRACTICES remained in force until January 30, 1920, when the members had to take up 23 percent of their participations. The bonds were then selling in the market at 83% percent. 14. In July 1919, the Cleveland, Cincinnati, Chicago & St. Louis Railroad Co. sold to its bankers at 95% percent $15,000,000 6 percent bonds. On December 1, 1919, the syndicate was dissolved, the members having to take up 11 percent of their participations. The bonds were then selling in the market at about 86 percent. VIII. THE NATURE AND VALUE OF AN ESTABLISHED BANKING RELATIONSHIP The considerations which make a system under which railroads would offer their securities direct for public bidding precarious, hazardous, and futile are so patent and so conclusive that it may well be assumed that no reasonably informed person will contend seriously that it would be either advantageous or safe for railroad companies to pursue the course of attempting to market their securities without the trained cooperation of bankers. The question remains to be discussed whether it is in the public interest that a railroad company should habitually deal with a particular banker and give that banker the preference when it has securities to be sold or underwritten as long as—and only so long as—it is satisfied with his services. The following considerations are offered in support of this, the existing practice: 1. The present plan enables a railroad to be certain of its ability to secure the necessary funds for its commitments. It is of the greatest importance for a railroad, when making commitments for expenditures for improvements, new construction, equipment, etc., to be certain that it will be able to sell the requisite securities when such commitments come due and must be met. That is a fundamental principle of sound railroad financing. In dealing regularly with a banking house of ample financial strength and wide connections, the railroad company is assured that it will be able to obtain the requisite funds, even in unfavorable times, because the banking house, in order to insure the continuity of the connection and the solvency of the railroad, cannot do otherwise than use to the utmost the resources and the facilities of connections and credits at its disposal to provide for the requirements of the railroad. If, on the other hand, the railroad had been in the habit of selling its securities on a competitive basis, it would have no such friend in need, and the various bond and banking nouses would naturally buy its securities only as it suited their own purposes. The strongest railroads have found themselves in the situation where large sums of money have been imperatively needed in most unfavorable times and where only their claims upon their regular bankers have enabled them to obtain the necessary funds. It has of late years been a matter of not infrequent occurrence that during the pendency of applications for the approval by a public service commission of proposed bond issues, railroads have found themselves in need of temporary financial accommodation. For such accommodation, if not readily or opportunely obtainable from the railroad's banks and trust company connections, the railroad would turn to its banker. Furthermore, in the case of bonds, the application for the issue of which is pending before a public service commission, it is not unusual for the banker, at the railroad's request, to obligate himself to purchase such bonds, subject to the approval of their issue by such commission, so that the railroad is protected against an unfavorable change in the investment markets while its application is being considered and is certain of obtaining the needed funds as soon as the application is granted. The temporary financial accommodation previously referred to, and the definite sale of bonds in advance of, and subject to action by public-service commissions, have at times been of great service and value to railroads. It is doubtful whether either expedient would be at the service of a railroad if securities were sold by competitive bidding among bankers. There have also been numerous instances when railroads which found themselves confronted with grave financial problems or in need of large sums for refunding purposes have applied to bankers to evolve plans and inaugurate measures for dealing with these problems comprehensively, for strengthening their credit, or for their financial rehabilitation without the expense and detriment of a receivership. The accomplishment of this task on the part of STOCK EXCHANGE PRACTICES 1047 the banker involves much time, thought, and study as well as a degree of financial risk and the assumption of great moral responsibility toward investors who, following the banker's advice, may aid in furnishing the requisite funds and who look to the banker to safeguard such investments. Last April, for example, the New York, New Haven & Hartford Railroad Co. was faced with the maturity of $28,000,000 of debentures of which one half were held in France and one half in this country. The company's credit was not sufficient to make a new issue of securities possible. Failure to meet or extend the debentures at maturity would have meant bankruptcy. With the active aid of banking houses through whom the debentures had been placed originally and with whom the company had been in consultation many months in advance, a voluntary extension of the debentures was secured. The negotiations involved a great deal of time, thought, skill, and effort, and, it is fair to say, could not have been successfully concluded, except through the influence, prestige, skill, and activity of the banking houses concerned. It is a significant fact that most of the railroads which have gone into receivers' hands in recent years had followed the practice of selling their securities to different bankers at different times, and for the financing and support of, and advice to, such railroads, and the preservation of their solvency, accordingly, no single banking house felt itself responsible.1 2. A railroad's financial requirements must be foreseen and assured long in advance of the actual need, and the present practice makes that possible. In July 1921, when investment conditions had not yet become propitious, an issue of the combined bonds of the Northern Pacific and Great Northern Co.s aggregating $200,000,000 fell due. The refunding of this vast amount of bonds was successfully accomplished with the aid of the bankers who had been concerned in their issue originally. The preparations for this refunding operation had been in progress for the best part of a year and were necessarily of the most elaborate character. Manifestly, this immense operation could have been successfully carried through on an acceptable basis only by experienced bankers of high standing and Nation-wide connections, who were familiar with the history of the transaction and the manner in which the securities to be refunded were held, and who had adequate inducement to give to this complex and difficult negotiation the time and thought and the painstaking effort which its preparation required. In June 1906, when the investment market in this, country was practically at a standstill, American bankers placed an issue of 250,000,000 francs Pennsylvania Co. 3% percent bonds in France; in February 1907 an issue of 145,000,000 francs New York, New Haven & Hartford Railroad Co. 4 percent bonds in France and- Germany; in March 1910 an issue of 150,000,000 francs Chicago, Milwaukee & St. Paul 4 percent bonds in France and England; and in February 1911 an issue of 250,000,000 francs Central Pacific Railway Co. 4 percent bonds in France and England. All of these loans were-negotiated at times when it was of great advantage to the railroads as well as to the general financial situation to obtain money abroad. They took many weeks of preliminary negotiation and complex arrangements and could not possibly have been negotiated on a competitive basis. One railroad company alone must provide for $130,000,000 of maturities in 1925 and another for $50,000,000 the same year. It will inevitably be necessary for these companies to consult with bankers a long time before the maturity date, and devise plans for refunding, and obtain competent advice as to the best moment and method for carrying out these large transactions. No banker could reasonably be expected to undertake the task and assume the responsibility of building up a railroad's credit, of studying and advising upon financial policies and methods, and putting his skill and placing power and sponsorship at its disposal if he had to expect that after having devoted his time, effort, and reputation to the work, the security-issues of the railroad would be thrown open to competitive bidding, whether general or confined to bankers, regardless of whether or not his own services were faithful and efficient and satisfactory to the board of directors and management. 3. The technical advice and the assistance growing out of the practical experience of the banker are of great value to the railroad. 1 EXAMPLES: Wabash, Western Maryland, Wheeling & Lake Erie, Kansas City, Mexico & Orient, St. Louis & San Francisco, Norfolk & Southern, Chicago Great Western, Chicago. Rock Island & Pacific, etc. 1048 STOCK EXCHANGE PEACTICES A. IMPORTANCE OF ADVICE! AS TO THE! BEST TIME TO ISSUE SECURITIES In dealing regularly with one banking house, a railroad obtains the benefit of expert advice (and that from someone thoroughly familiar with, and interested in, its affairs) as to financial policy, as to the best and most opportune time for selling securities, and for providing for its financial requirements, as to the class and kind of securities best suited to conditions prevailing and to be anticipated, and as to the best method of offering them to* the public. The element of the selection of time is of much importance in itself, for it happens not infrequently that the lapse of a single week or less measures the difference between reasonably favorable and unfavorable or even totally forbidding conditions. The ebb and flow of the currents in the investment markets depend on many and complex conditions and considerations, and it is one of the functions of the competent banker to keep himself posted as to affairs, aspects, and prospects in America, Europe, and elsewhere, and to anticipate in his judgment and advice their results and their effects upon the money and investment markets. The advice and cooperation of the banker are especially important to railroad companies during periods of declining security values, with which the Interstate Commerce Commission has not yet had occasion to deal, inasmuch as during the more recent past there has been an almost continuous upward trend of prices. In times of declining markets for securities quick action and sound advice are particularly essential. Premature publication of a company's intention to issue new securities must be guarded against. Apart from other considerations, holders of its securities already outstanding might hasten to sell their holdings without waiting for full information. Such premature selling might so affect the market as to make the new transaction more costly or perhaps impossible. Furthermore, public knowledge that one or more issues of railroad securities are contemplated might cause industrial concerns or foreign govenments or municipalities to hasten offerings of their own securities, as indeed has occurred in the past, so as to anticipate the railroads' offerings and get prior access to the investment market. The supply of available investment capital has, of course, its limitations, and in normal times the rule " first come, first served" does apply to a certain degree. If a sale by public tender or by competitive negotiating or bidding among bankers were required, no one would be interested in supporting the market for a company's outstanding securities; in fact, prospective bidders would be benefited by a decline. On the other hand, with bankers having a continued interest in its welfare and a publicly recognized moral responsibility for its securities, the situation is quite different. In this connection the question may be pertinent as to the relative desirability of the practice of selling securities before (or simultaneously with) the application to the Interstate Commerce Commission for approval, the transaction being made subject to the Commission's subsequent• approval, or of delaying the offering until the Commission's approval has actually been obtained. On the whole, the first method, although not free from objection, would seem to be the safer and more desirable from the point of view of the railroads. It is quite impossible for any banker to definitely advise a corporation, with any degree of positiveness, as to the price its securities will command several weeks later. Too many elements of uncertainty are involved. The publication, weeks in advance of the actual consummation of the transaction, of the intention of railroad companies to make issues of securities might prove seriously detrimental as indicated in the preceding paragraph. Everything considered, it would seem best that the companies should be accorded discretion to exercise their own best judgment in each instance whether they should sell subject to subsequent approval by the Commission, or should first obtain the Commission's leave for selling, at a price not below a stated minimum. B. IMPORTANCE OF ADVICE AS TO TECHNICAL DETAILS SURROUNDING ISSUANCE OF SECURITIES It is of great importance that care should be taken that new issues of bonds should comply with the statutory requirements of various States respecting legal investments of insurance companies, savings banks, and other fiduciary STOCK EXCHANGE PKACTICES 1049 institutions. Whether or not a given issue of bonds meets these requirements will often make a difference of several points in their value. , Investors attach considerable importance to knowing that the mortgages, trust deeds, etc., and all legal steps relating to the issue of securities' which they are asked to buy have been carefully examined by bankers of repute and experience and their counsel, with a view to safeguarding the interest of the holders of the bonds as distinguished from those of the railroads, the makers of the bonds. The mortgages and trust deeds under which the securities are to be issued, before being put in final shape, are carefully gone over by the banker, and his advice is given with the view to creating the best and most salable instrument satisfactory both to the public and to the railroad company, and having due regard both for the protection of the investor and for the future financial requirements of the railroad. Such advice is frequently, especially in the case of large refunding mortgages which are meant to be the principal means of raising money for the railroads for years to come, of very great utility. It is likewise greatly valued by the investor who has come to rely upon the tried and tested thoroughness and competence of experienced and highly reputed bankers to protect the interests of the investing public in respect of not only the intrinsic goodness of a security for which they become sponsors, but also in respect of the provision of the mortgage or trust deed appertaining to such security. 4. The bankers' dual obligation to the investing public, on the one hand, and, on the other, to the corporation whom he serves constitutes a protection to both. The leading bankers could not maintain their position as such if they did not have the confidence of the investing public and a large following amongst investors, large and small, both here and abroad. Careful analysis, continuous and watchful scrutiny, in respect of securities issued by him and of the companies concerned, are essential functions of the banker. In buying securities and offering them for sale, he gives public notice, so to speak, that he has examined into and satisfied himself as to their safety and merit. The banker does not safeguard merely the technical and, to the best of his ability, the intrinsic soundness of the securities he issues; it is alike his duty and to his own self-interest to protect and stand behind the securities for which he is recognized as sponsor, just as it is his duty and to his own self-interest to satisfy himself by careful investigation as to the soundness of such securities, because the banker whose clients suffer loss through following his advice will very soon lose his reputation and the confidence and patronage of his clients. The banker knows well that such reputation and confidence are the mainstays of the prosperity and success of his own business and, once forfeited, are exceedingly difficult to regain. " PKOTECTING " THE MARKET The function of the banker in " protecting " the market for services issued through his house is of peculiar importance. Reference has been made to the altered character of the investment market, in which a great army of small investors has come into existence to take the place of the larger investors who because of preference for tax-exempt securities can no longer be counted upon to be a considerable factor in absorbing railroad securities. If that army, so important and desirable from the social and economic viewpoint, and created at such great cost and effort, is not to disintegrate again, it is absolutely indispensable that the market for the securities which they have bought be " protected " at least for a reasonable length of time after the offering (barring exceptional economic or financial changes)—which protection is one of the useful and legitimate functions of leading issuing houses and has no relationship whatever to what is usually termed manipulating or " rigging " the market. It must be made somebody's business to see to it that if the investor wishes to sell within a reasonable time after having bought, he can, under normal conditions, find a market at or near the price at which he bought. To provide such a market by being able and willing to a reasonable extent to repurchase bonds sold by him is part of the business of the banker who made the public offering—provided that he has a definite and acknowledged relationship toward the company whose bonds he has offered. If he has no such relationship, if the public offering is simply the result of competitive 175541—33—PT 3 7 1050 STOCK EXCHANGE PRACTICES bidding, either general or limited, the banker may be expected to be apt to feel that his functions are completed when he has marketed the securities. The result would be that the immensely valuable work which had been done lately of popularizing railroad bonds might be largely undone, the vast clientele which had been created for railroad bonds might be materially curtailed, and the resulting diminished demand for railroad bonds could not fail to be reflected in the price level which they would command. The continuing responsibility of the banker for bonds which he has offered and sold under the existing system of dealing between bankers and railroads is an exceedingly valuable element from the point of view of the small investor and a strongly steadying factor in the market for railroad securities. That responsibility would be jeopardized by competitive bidding, whether general or limited. It is interesting to note in this connection that even so eminently successful a public offering as that of the recently issued United States Government 4*4 percent bonds, was followed by a substantial decline in the market price of those bonds below the price of issue. There being no one responsible for the " protection " of the market for those bonds, the price declined quickly from the issuing price of 100 to 98.90 percent, which in the case of the world's premier government security has considerably greater significance than a like decline would have in the case of a corporate issue. It is to the interest of a railroad company that its securities should be absorbed by the investing public and that their market value should be maintained, under normal conditions. It is more important to the railroad industry at large that a favorable reputation, the good will of the investing public, and a broad, steady demand for its securities should be preserved than that in every instance the very top-notch price should be obtained to which, through taking advantage of fortuitous circumstances, the purchasing banker may be driven. To disappoint and disgruntle the investor by selling him securities at unduly high prices, which will not stand the test of the workings of ordinary supply and demand, is in its ultimate consequences to be "pennywise and poundfoolish", especially since railroad securities are more and more coming into competition for public favor with industrial securities. The end the railroad company should always have in mind is to maintain a broad and stable market for its securities, and to that end wise discretion in the interest of railroad credit generally and of the particular borrower may even make it desirable in given instances, under all the surrounding circumstaces of the case, to accept an offer which would enable resale to the public under tested and responsible auspices at a fair and reasonable price, rather than an offer of an extreme price with the resulting consequence of the resale to the public being attempted necessarily at an unduly high level. It may safely be said that such railroad issues as are known to be under the habitual sponsorship and consequent moral responsibility of well known and strong bankers have a wider and steadier market and command better prices among investors than those which are not under such auspices and responsibility. If the sale of securities were thrown open to competitive negotiating or bidding, either general or limited, the possession of large capital would tend to become prime requisite for dealing in securities, and the financier or combination of financiers controlling the largest amount of capital would have a much more potent advantage over others than under now existing conditions. The exercise of care, skill, industry, scrutiny, and the sense of moral responsibility toward clients, which now are and always have been the prerequisite for acquiring the reputation and the public confidence upon which an investment banker's position depends, and without which it cannot be maintained for any length of time, would no longer be essential. IX. SUMMARY AND CONCLUSION A. The vital necessity is to obtain for the railroads the assurance of adequate capital upon favorable terms. B. The existing practice of selecting, and dealing with, a particular banking house as long as its services give satisfaction, is an outgrowth of actual experience in the effective marketing of securities. C. In dealing with so delicate a matter as security markets it is of primary consequence that any plan adopted for the sale of securities shall command the utmost confidence on the part' of investors. STOCK EXCHANGE PEACTICES 1051 D. The existing practice has proven itself, in numerous instances, of the greatest utility to railroad corporations, and actual experience demonstrates that the remuneration to bankers and syndicates is but a fair equivalent for very real services actually performed and risks assumed, and that the average of such remuneration, over a term of years, has afforded no more than a reasonable return upon the capital involved, and due compensation for the work rendered. E. The existing practice has been found effective by industrial corporations not subject to public regulation, and it is the method employed by many foreign governments and municipalities in the issuing of securities. F. Some of the advantageous characteristics of the present practice a r e : 1. The relationship between railroad and banker is wholly informal and continues only as long as it is deemed advantageous to the railroad by its officers and directors. 2. The relationship, while in no way limiting the railroad's freedom of action, does impose upon the banker definite and continuous duties and obligations. 3. The bankers have no power to determine the decision of railroads in such matters. 4. The banker is not only the distributor of and propagandist for railroad securities, but he fulfills, at his own risk and cost, the important and valuable function of steadying and protecting the market for such securities. 5. The railroad receives continuously the knowledge, services, skill, standing, financial advice, and financial potency of the banker in both good and evil times. 6. The banker advises as to the financial situation and policy of the railroad, prepares plans for meeting requirements, recommends the kind and character of the security to be created, scrutinizes mortgages and trust deeds, and indicates the best moment at which to sell. 7. The bonds of the corporation represent a promise to pay. The value of that promise depends not merely upon the tangible security offered, but also upon excellence and fidelity of management. While strictly refraining from any attempt to influence the operating and tariff policies of the railroad, it is the banker's duty and self-interest, to the best of his ability, to promote wise and sound management and safe financial policies on the part of the corporation, the securities of which he has issued and for which he has consequently assumed moral sponsorship before the investing public. 8. Even where affiliations between particular bankers and railroads avoid nominal competition, there is a potential competition which operates powerfully in the following particulars: (a) The fact that complete publicity is by law enforced as to the terms upon which security issues are obtained by bankers naturally causes both the banker and the railroad to seek to give, on the one hand, and to obtain on the other, the best terms which conditions and circumstances warrant. (&) The fact that the terms involved in a contract between the railroad and the banker must be approved by public authority is a moral guaranty that such terms will be proposed as will stand well-informed scrutiny. (c) If railroads find that other companies are securing better terms through other bankers, it is inevitable that other bankers will ultimately obtain the business. (d) If railroads cannot obtain what they consider satisfactory terms from their regular bankers, they are entirely free to terminate the negotiations and do business with others. (g) There is no reason to think that, year in and year out, railroads would obtain higher prices for their securities under any form of competitive negotiating or bidding than under the present practice. There is every reason to think that the stability and broad receptiveness of the market for railroad securities would be lessened and the interests of the investors less carefully and responsibly safeguarded. (h) Many, if not all, of the effective values of the advantages (both to the railroads and to the investing public) inherent in the present practice, would be eliminated by competitive negotiating or bidding, whether unrestricted or confined to bankers. No banker could be expected to give his time, effort, reputation and responsibility, material and moral, to the financial affairs of a corporation if he is wholly uncertain whether he will reap any return for his services, as must necessarily be the case in the event of competitive negotiating or bidding. 1052 STOCK EXCHANGE PKACTICES I. To change the prevailing practice would mean to give up definite and tested benefits, alike to the railroads and to the public, for the sake of one wholly problematical advantage, J. Practical experience shows that the operation of the present method under public supervision and with full publicity attending it, assures more success than any other plan yet proposed or practiced in obtaining the necessary capital for the railroads upon favorable terms. K. To the extent that the terms upon which securities are sold have a bearing upon the rates paid by the public for railroad service, the present method secures to the public, insofar as that item is concerned, the lowest burden upon the rates and the greatest assurance of the railroads being able to obtain the capital to provide necessary facilities. CONCLUSION To compel railroads to have recourse for the sale of their securities to competitive negotiating with or bidding on the part of bankers and brokers, or to direct offerings to the public, would be to run counter to the practice and experience of every country in the world. It would confuse and trouble the investing public and destroy elements and features of evident and proved value for public protection. It would tend to make the possession of capital the sole requisite for dealing in securities, irrespective of skill, care, reputation, and the confidence of investors. It would limit, hamper, and restrain the flow of capital into American railroad securities and cause delay, uncertainty, risk, and damage to railroad corporations. Railroads and other corporations should be left free, under the responsibility of their board of directors, and subject to such authority over the issue of their securities as is now exercised by the Interstate Commerce Commission, to deal with whatever banking houses they deem it in their best interest to employ. They should neither be bound by contract or control to deal with any one banking house exclusively, nor forced by statute or regulation to take the chances involved in competitive negotiating or bidding among bankers or of direct dealing with the public. Respectfully submitted. KTJHN, LOEB & Co. OCTOBER 25, 1922. COMMITTEE EXHIBIT (NO. 2) COMPETITIVE BIDDING FOB EQUIPMENT TEUSTS FOEEWOED An article on the subject of competitive bidding for equipment trusts appeared at some length in the New York Times of January 30, 1928, and therein tne writer of this booklet was quoted as follows: " Due to extraordinarily easy conditions in the money market, banking firms have been basing bids in competition for equipment trust securities on a narrow margin of profit not at all commensurate with the services performed or the banking risk entailed through a possible reaction in bond prices. "As a result, equipment trusts have been offered at prices which many of the former large buyers of car trusts, such as insurance companies, have not hesitated to call excessive and out of line with the market. The small investor and less experienced buyer has been invited to pay prices for equipment trusts which the larger and better versed buyers consider to be above the market and in fact the larger buyer, by avoiding the original offering, has been able to wait out a situation and make a ' close-out' bid at a lower price for an unsold balance, which more than once has remained on the shelves. " The actual sufferer, therefore, is the small investor, or the very individual the protection of whose interests has appealed most strongly to the governmental authorities. If the protection*of the investor has not been accomplished during a rising and very favorable bond market, there is much less likelihood that he will benefit during a period of declining prices, for at such times not only is the larger institutional buyer unwilling to purchase offerings unless they are priced exactly on the current market conditions, but his experience STOCK EXCHANGE PKACTICES 1053 even then causes him to hold back because of his expectation of lower prices for all investment securities." Shortly after this quotation appeared a distinct tightening of conditions in the money market became evident, and with it a drop in the price for equipment trusts which was not only severe but also more drastic than it should have been, owing to the artificial price level created through competitive bidding. Railroads which contemplated the placing of equipment trusts quickly found that houses which enthusiastically pursued every opportunity to bid for such offerings under easy-money conditions were reluctant to bid at all in the face of tightening money. Equipment trusts as money continued to tighten became an unpopular security with bankers who had been " stung" at top prices, and when at a later date one of the leading railroads of the country came into the market to dispose of a substantial issue of car-trust certificates it found that instead of 30 or 40 bidders being anxious to submit bids for its car-trust obligations only a few laggard bidders were in evidence, these being actuated, perhaps, by a desire for publicity, and whose bids were then found to be even lower than conditions warranted. Finally, with the approval of the Commission, this road, the Southern Pacific, was allowed to dispose of its car-trust certificates to its own bankers. In selling this issue to its bankers the carrier received a better price than the highest bid offered in competition, and the issue was sold in a prompt manner calculated to strengthen the entire equipment-trust market. As this news became public it was rumored that the Interstate Commerce Commission, because of the recent criticism leveled at competitive bidding, was willing to give the original order of doing business a new trial. Unfortunately, such rumors may have been regarded as a reflection on the judgment of those responsible in the first place for the inauguration of competitive bidding. There are officials in Washington who at one time sincerely believed that all railroad securities should be sold under terms of competitive bidding. Insome channels the 1926 ruling on equipment trusts was reported to be an entering wedge which would lead to competitive bidding for all forms of railroad securities. It has been shown that such a system would have been a great detriment to the credit of the carriers. Competitive bidding for equipment trusts was an experiment and as such developed unfavorable factors which were not originally apparent. However, the Commission still firmly maintains its position and in its approval of the Chicago, St. Paul, Minneapolis & Omaha issue dated August 31, 1928, restates its attitude as follows: " During the early part of the current year equipment obligations sold in some instances on such bases that the cost to the carriers was as low as 4.23 percent. Certain developments in the financial situation during the past few months have narrowed the investment market, with a resulting increase in rates on long-term securities, including equipment obligations. We feel, however, that this condition does not warrant a change in our policy with respect to the disposition of equipment obligations. Moreover, we are of the opinion that we should do nothing that would tend to discredit the method of disposing of equipment obligations that has been employed with success for the last 2 years or that would result in the withdrawal of the support of the investment houses that have participated in the sale of such securities. We can hardly expect bankers to continue to submit tenders for equipment obligations on invitation from carriers if the carriers may reject all bids and after thus testing the investment market place the obligations privately. We are of the opinion that if the offers received for the equipment obligations are not satisfactory the carriers should again call for tenders and accept the most favorable bid or should reject all bids and resort to temporary financing until there is such an improvement in the investment market as will enable a sale to be made on satisfactory terms. In accordance with these views, authority to assume obligation and liability in respect of the certificates under consideration will be granted upon condition that the certificates again be offered for sale at competitive bidding and sold to the highest bidder." The recommendation which forms the basis of this most recent report, namely, that equipment trusts under conditions where acceptable bids are not forthcoming should be readvertised or that the equipment should be temporarily financed is make-shift advice, in the opinion of the writer. The obligation of a recognized municipality may be so handled but it is on an entirely different basis. Whether a municipal obligation is sold to one investment house or to another is. of little consequence, and if an issue is not disposed of under 1054 STOCK EXCHANGE PRACTICES terms of the original sale, it can be readvertised at a later date and sold with no adverse consequence to the obligor. The issuance of equipment trusts is predicated upon orders placed with car and locomotive builders for the purchase of new equipment to be delivered at a very definite time, and which must be paid for as this equipment is delivered. Under the time-honored practice of doing business with its own bankers, the officials of a railroad, even in an unfavorable market, felt in position to arrange if necessary for a temporary loan with such bankers, rather than be forced to offer its equipment trust certificates under unfavorable market conditions. Generally speaking, it is impossible for a carrier to provide for temporary financing of equipment purchases without the assistance of bankers closely associated with the carrier. The validity and security of equipment trusts is based entirely on the theory of a conditional sale, that is, a purchase of the equipment by the carrier from the trustee on such terms that title to the equipment is retained by the trustee as security for the payment of the equipment obligations. Obviously, when a carrier has once acquired title to equipment by the use of treasury funds or as a result of temporary financing, a conditional sale of such equipment to the carrier can no longer be made and the whole basis for the equipment trust is destroyed. Moreover, most carriers have outstanding mortgages which contain either a general clause subjecting after-acquired property to the mortgage, or, even in the absence of a general after-acquired property clause, a clause providing that any equipment or interests therein which the carrier acquires after the date of the mortgage shall become subject to the mortgage. Whenever there is such a mortgage, the carrier's interest in any equipment acquired through temporary financing would become subject to the mortgage, and it would not thereafter be possible to place an equipment trust on such equipment except subject to the lien of the mortgage. If, however, the carrier proposes to sell equipment trust certificates to bankers closely associated with it, it may procure the use of the necessary equipment when it is needed and still await a favorable market for the issue of its equipment obligations by having its bankers arrange to purchase the equipment and to lease it to the carrier. Thus no title to the equipment vests in the carrier and, when the equipment trust is to be issued, the bankers can transfer title to the equipment to the trustee, free from incumbrances. However, such an arrangement necessarily involves close contact between them and the carrier, since bankers would not be interested in acquiring equipment for a carrier except as part of the service rendered by them to their regular clients in anticipation of permanent financing. Competitive bidding, however, has impaired the relationship between the railroad and its bankers, and has actually relieved the bankers of responsibility for arranging any emergency accommodations. Moreover, the readvertisement of an issue unless the market itself has given strong evidence of a more favorable trend will not result in any improvement of the bids received by the carrier and if a readvertisement produces a lower bid this is a decidedly unfavorable reflection on the credit of the carrier—or will the Commission recommend a third, fourth, or fifth readvertisement? The opinion is therefore widespread that the relationship between the carrier and its accepted bankers is not only a valuable one but one to be protected and encouraged, as evidenced through quotations which are attached at the end of this discussion, and which were received from investment dealers through the country in answer to a brief inquiry sent out by Freeman & Co. in January 1928. COMPETITIVE BIDDING FOR EQUIPMENT TRUSTS It is undoubtedly very hard for the members of any governmental regulatory body to accept facts which cannot actually be substantiated with tabulations of figures. The writer feels that it is fair, however, for the Interstate Commerce Commission to admit as evidence hundreds of adverse opinions received from investment dealers throughout the country in connection with the question of competitive bidding for equipment trusts. A serious impairment of the popularity of equipment trusts with the public has occurred. This situation, unless corrected, may eventually deny to the carriers the cheapest and soundest method of financing the purchase of rolling stock. The regulation of the issuance of railroad securities, as is well known, was vested originally in the Interstate Commerce Commission under the Esch STOCK EXCHANGE PKACTICES 1055 Cummins bill. A portion of this bill, namely, section 20a, outlines the powers of the Commission in relation to the approval of securities issued and gives the processes through which railroad securities are to be sold. It is set forth that the Commission not only may supervise the price received for an issue of securities but that it may also, to a certain extent, supervise the disposition of the cash received for such securities. This, in effect, gives to the Commission a privilege formerly entirely controlled by the board of directors of a railroad. It is claimed that the original intent of section 20a of the Transportation Act of 1920 was only to regulate the issuance of securities in the public interest, and that when the Commission arbitrarily takes upon itself what at times amounts to the function of management, it acts in excess of its authorized powers. This contention has been prominently brought to the foreground through the recommendation issued in 1926 to the effect that issues of equipment trust certificates should thereafter be sold under terms of competitive bidding. It is perhaps in order at this point to outline most briefly the usual method employed by the Commission in supervising the financial arrangements of the carriers. Division 4 of the Interstate Commerce Commission has been entrusted with this work and under section 20a of the Transportation Act of 1920 any railroad wishing to sell its obligation must make application through this division for authority to issue such obligation according to the rules and regulations as embodied in the act. Division 4 is under the supervision of a director of finance, who is in close touch with security market conditions from day to day, and while the judgment exercised is tremendous, in order that an unbiased survey of the situation be presented, it is proper to state that the viewpoint taken by the director of finance usually has been a broad and reasonable one. It is not with the personnel of division 4 nor with that of the Commission that the writer has predicated his argument. During 1922 a public hearing was held on the subject of competitive bidding and it was evident then that the trend of the opinion of certain Government officials was toward competitive bidding, not only for equipment trust certificates but also for all forms of railroad securities. It was not until 1926 that a definite recommendation was issued to the effect that competitive bidding must be employed by the carriers in disposing of equipment trust certificates. At the time of the issuance of the 1926 recommendation covering competitive bidding the Commission stated its opinion more or less as follows: In the first place it took the position that equipment trust certificates were so standardized and were of such similarity, both as to> the legal procedure governing the issuance of such securities and as to the collateral underlying the same, that their issuance became more or less a matter of form. It also set forth that it believed that such substantial savings could be made in discounts through competitive bidding that the public interest would be greatly served through the natural broadening of the market for equipment trust securities. A paragraph from the opinion issued by the Commission dealing with the issuance of equipment trusts during 1926 follows: " It is our opinion, however, that the sale of equipment trust certificates by public competitive bidding will be effective in so widening the market for these securities as to assist in the effective and economical financing of railroads by means1 of other securities, such as may from time to time become necessary." In other words, the Commission at that time felt that a broadening of the market for equipment trusts would come about as a result of competitive bidding and that, therefore, his broadening would tend to improve the entire credit structures of the various carriers. The Commission then summed up its attitude more or less as follows: "Equipment trust certificates are of a uniform character, and the relative financial strength of the issuing carriers is not a very important factor in determining the price at which these securities are to be sold. Equipment trust securities, which at one time were sold largely to purchasers such as insurance companies and large banks, have become popular with the smaller investors, and it seems to us that the sale under competitive bidding will tend to widen the market for these securities and produce capital for the railroads under cheaper terms." The writer does not hesitate to state his belief that these two major contentions of the Commission have been proved to be wrong and that not only has the public interest. been damaged through competitive bidding, but also that competitive bidding, far from broadening the market for equipment 1056 STOCK EXCHANGE PRACTICES trusts, lias resulted in creating a feeling of distrust regarding the marketability of equipment trust securities which has narrowed the market for car trusts in all parts of the country. This contention is backed by letters on file received from dealers throughout the Nation whose contact with investors bears a relationship similar to that existing between lawyer and client and physician and patient. The writer, therefore, is not at all concerned with the much-mooted question as to whether or not the Commission in prescribing competitive bidding for equipment trusts has usurped the functions of management of the carriers in what may be an unwarranted manner. He believes that the action of the Commission has not been a sound one and that a reversal of its recommendations should be forthcoming to correct a condition which in the long run will spell economic loss for the carriers. He believes that the Commission's position that equipment trust securities are uniform as regards methods of issuance and types of collateral is not a correct one. In a very ample textbook on equipment obligations issued by Kenneth Duncan, Ph.D., after a study made at the University of Michigan, the reader may quickly find that history shows that the legal procedure attendant upon issues of equipment trust securities is most important and that a very critical attitude has been evidenced in past years by courts throughout the country in the adjudication of contentions arising through foreclosure under equipment trust liens. Professor Duncan states that quite a number of years ago the confidence of investors was badly shaken through neglect by those creating equipment trust obligations to see that there were no irregularities and in very recent years the Investment Bankers Association found it necessary to recommend that laxity on the part of corporate trustees of equipment trusts be corrected before serious damage resulted to the holders of such notes, certificates, or bonds. Professor Duncan states that while the judicial status of railroad equipment obligations has been greatly strengthened during the past years by court decisions, there exist divergent attitudes under different jurisdictions throughout the United States, which have not been uniformly determined at common law. To understand that this may be true it is only necessary for the reader to realize that equipment trusts, for example, may be issued under various procedures, the three most important of which are absolute sale, conditional sale, or lease with option to purchase. It is therefore evident that the issuance of equipment trust securities should be supervised by banking institutions and lawyers familiar with such matters. It is not fair to investors to permit the drawning of the governing indenture to be handled exclusively by the lawyers for the carriers. The correct marking of the units of equipment, for example, may be of the greatest importance in certain States of the Union which even prescribe the exact size of the letters which the name of the trustee-owner must take to effectively establish its position in foreclosure proceedings. The Commission itself, through its regulation issued regarding equipment trusts secured on rebuilt equipment, entering into lengthy requirements concerning the question of the actual cash percent of the original equipment, the depreciated value of the same at the contemplated time of rebuilding, and other technical matters, admits that equipment trust certificates are by no means uniform in issuance. To the mind of the equipment trust specialist, many conditions affecting the solidity of an equipment trust obligation exist which on the surface are not apparent to the small investor who may be the purchaser of the given equipment trust certificate. Fluctuations in the cost of units of equipment make it evident that an issue secured on equipment purchased under very favorable terms, even though the cash payment be smaller, may be preferred over one secured on equipment purchased at temporary peak prices of any one year though the actual down payment in cash be larger on the latter issue. Moreover, certain kinds of equipment, such as standard types of box cars, have a readier resale and are to be preferred as collateral over such types of equipment as gasoline motor cars, ditching machines, lifting cranes, and wrecking machinery, all of which types have been included in latter-day equipment trusts. A very recent application filed by a well-known carrier with the Commission included second-hand dining cars in the equipment. The question of the inclusion of rebuilt equipment is also an important factor, as is the setting up of the maturities with regard to the actual ratio of depreciation on the collateralIn recent years it has become somewhat of a practice to defer the earlier STOCK EXCHANGE PKACTICES 1057 maturities under an equipment trust, which to the equipment specialist is simply a method of diluting the security and also of modifying the rather stringent procedure which heretofore surrounded the methods employed in setting up an equipment trust unless the original amount of cash equity has been commensurately increased. Because of such situations the position of the Commission that all equipment trusts are alike and that the question of the credit of the carrier is more or less a minor one, in the opinion of the writer, is not acceptable. At the original hearing in 1922 regarding the proposition of competitive bidding, it was strongly argued that the marketing of such securities should be made not only through investment houses entirely familiar with equipment trust procedure but through the actual bankers for the railroads expecting to issue such securities. The writer heartily subscribes to this opinion and believes that no investment house is so well able to dispose of an equipment trust as is the banking house which through long association with the problems of the carrier is able to give it not only a fair price but expert advice in marketing its securities. He believes that the present unpopularity of the equipment trusts can be directly traced to the handling of such issues by houses who felt no responsibility whatsoever with regard to supporting the market for such securities after the original sale. The writer feels whole-heartedly that the supervision of the Interstate Commerce Commission regulating the issuance of railroad securities has been of benefit. However, it seems that " a penny wise and a pound foolish " policy has developed with regard to equipment-trust securities. It is certainly impossible to obtain the proper national distribution for equipment-trust securities without giving to the small investment broker throughout the country a fair commission for his services in placing equipment trusts with investors. There is no doubt but that equipment-trust certificates are easier to sell than are many other forms of securities, and it is not the contention of the writer that this commission should be a large one. He believes that enough leeway should be given to the purchasing house, which in his opinion should be the accepted banker for the carrier, to enable this banking house to redistribute a portion of its limited profit in order to obtain permanent distribution and to be in position to protect the secondary market of the securities so sold. Certainly to the mind of a specialist in equipment-trust securities who has watched the marketing of this form of security for a good many years, the prices paid by inexperienced bidders under the recent money conditions prevailing were nothing short of amusing. This is an advertising age and an extreme premium has been placed in business channels upon publicity of every sort so that investment houses are now using every available method to keep their names before the public, even including the use of radio circuits. It is therefore easy to see that a house which has not been successful in obtaining business through its regular channels may be persuaded to enter a bid for an equipment-trust issue, feeling that no profit or even a small loss will be a worth-while procedure from the standpoint of publicity. A house specializing in inactive or high yield industrial issues may decide that a conservative railroad equipment-trust offering helps, as the saying goes, to " dress up the list." Of course, in such an instance the sufferer is the general public, which may be invited to purchase such securities at too high levels. Thirty-five or forty houses bidding on practically no margin of profit for equipment-trust issues during 1 month and a few weeks later under tightening money conditions less than five very weak bids available for a better issue, is a situation for the Commission to ponder over at some length. What has actually happened during 1928 was foretold in 1926 by a committee of the Investment Bankers Association when it was predicted then that while in good times high prices would be realized, in a tight money situation the railroads would not only fail to receive proper prices for their securities under competitive bidding but that they would lose the contact with their regular bankers, which despite many attacks on the part of radical politicians may be conceded as a most valuable connection for any corporation, whether it be railroad or industrial. It is certainly the feeling among investment houses throughout the country that securities brought out by the regular bankers for railroads are more fairly priced than those offered to the public by investment houses which have purchased such securities under terms of competitive bidding and as a matter of opportunity to do business. It is therefore to be hoped that the members of the Interstate Commerce Commission will be ready to recognize that an actual error occurred in the inaugu 1058 STOCK EXCHANGE PRACTICES ration of competitive bidding for equipment-trust securities. Proof is contained in the following comments received from all parts of the country. An overwhelming preponderance of opinion, not only to the effect that competitive bidding for equipment trusts has been a failure but that the market for these bonds has been greatly narrowed through the regulatory action on the part of the Commission, cannot be lightly dismissed. EXTBACTS FROM LETTERS RECEIVED BY US, CONCERNING COMPETITIVE BIDDING FOR EQUIPMENT TRUSTS POPULAR POSITION CAN BE LOST To not practice competitive bidding in the selling of securities, appears on first thought, to be derogatory to economic law. Looking at the matter from all angles we can see lurking dangers in this method used by the railroads to sell their equipment trust securities. While it is undoubtedly true that the railroad companies will receive slightly higher prices for their securities now, the narrow margn of profit made by dealers in distributing these securities, and the high price the public is obliged to pay in buying them, will most certainly ultimately act to the disadvantage of the railroads. The popular position now occupied by this class of securities with the investing public can certainly be lost through a process of overpricing. Even the handling of the securities can lose favor with the investment dealers if the profits are not permitted to remain reasonable, and their customers be well served by a security which is not overpriced. To save the popularity of equipment trust securities with the public and thereby help the railroads ultimately, we recommend the discontinuance of the practice of competitive bidding in the sale of equipment-trust securities by the railroads. This is an expression of our feelings as well as that of our constituency. THE CITIZENS NATIONAL BANK OF EVANSVILLE, By CHARLES E. HOWARD, Evansville, JM,, Manager Bond Department. MORE HARM THAN GOOD However it has been our thought that competitive bidding in the buying of securities has perhaps done more harm than good, and has resulted in unduly high prices to the public. Too often, therefore, after the closing of the syndicate, prices have not been maintained. WM. CAVALIER & Co., San Francisco, Calif. LIABLE TO OVERPRICE In addition I do not believe that competitive bidding on equipment trusts will make the strongest issues still more prominent. The various types of houses who may become interested are liable to overprice some issues just because of their desire to get equipment trusts to sell—the answer is obvious, that the general regard for equipment trusts must suffer. ROBERT GENNERT MACKS, Denver, Colo. CHARACTER OF PAST PERFORMANCES MATERIAL FACTORS In the second paragraph of your letter you have brought out certain points which we believe to be correct, and which need not be recited. While the idea of awarding to the highest bidder on first blush appears to be the correct attitude, yet where a party has a piece of work to be done, and asks for competitive bids, and where it would seem that the lowest bidder for the performance of a certain job would be the one to select, yet we all know that other circumstances enter into the situation, the responsibility of the bidder, and the character of his past performances are very material factors, and frequently a higher bidder will get a certain job for such reasons. Coming back to the STOCK EXCHANGE PRACTICES 1059 question of competitive bidding for equipment issues, a certain firm of bankers with small distributive capacity, in a market such as we are having now, might overtop a bid- made by another firm with good distributive capacity and the result would be that the equipment trust issues would lie on the first dealer's shelf a long time, thereby hurting the market for subsequent issues of bonds of the same railroad, when next in the market. WURTS, DULLES & Co., Philadelphia, Pa. SO HIGH PRICED Among the principal reasons that we are not interested in equipment trusts today is the fact that they are so high priced and that the margin of profit is not sufficient to warrant our taking a chance on being able to distribute them successfully. FREEMAN, SMITH & CAMP CO., Portland, Oreff. FAVOR THE OLD METHOD From the standpoint of the dealer, we are inclined to favor the old method of sale and this attitude, we feel, is not entirely selfish. As you say, over-pricing has resulted from competitive bidding, which together with the small margin of profit now available to the retail distributor, makes participation in the sale of equipment trust securities less desirable than it formerly was. This latter condition also tends to produce sales in large rather than small blocks which makes for a less satisfactory secondary market, besides, as you say, contributing to the possibility of " a situation which may prove costly when less favorable conditions govern the money markets." The discussion, as we see it, really boils down to the question as to whether the public will benefit most by having the railroads receive a somewhat higher price for these securities temporarily, or whether more profit would accrue from having securities brought out on a strictly conservative basis, and with a satisfactory market after the original offering. The latter, we think, would be the more desirable of the two. THE HUFFMAN CO., Dayton, Ohio. DISTRIBUTORS ENTITLE© TO REASONABLE PROFIT It seems to me, with reference to equipment-trust issues, that a more sound and advantageous policy for all concerned would be for the Interstate Commerce Commission to allow customary bankers for railroads to buy equipments in the former way, the Commission reserving the right to order competitive bidding if the price was not, in its judgment, fair and satisfactory. The difference of % or y2 percent in the amount received by the railroad would hardly justify its putting its securities in a position of disfavor and uncertainty with the public. It is also to be considered that there are certain necessary costs of distribution and that distributors are entitled to this cost plus a reasonable profit. With the Commission exercising the control and authority it has in the manner suggested above the interests of the public, railroads, distributor, and investor—all of whom have rights in the matter—could be properly protected. WM. MARRIOTT CANBIY, Philadelphia, Pa. PRICED TOO HIGH Have always felt in offering an equipment-trust security was offering my clientele one of the safest type of investments. No doubt you have noticed that my business with you on this particular class of issues has not been as large as in days gone by, due to the fact that my clientele feel that this type 1060 STOCK EXCHANGE PEACTICES of security is priced too high, which have understood has been caused by competitive bidding by the brokers for this business. WARREN C. M. BINCKLEY, Reading, Pa. DISTRUSTFUL OF PRACTICE We have your letter of February 2 regarding sale of equipment-trust securities, and while our experience with these has been simply that of the small distributor and not at all from the angle of the original purchaser, we are distrustful of the practice of competitive bidding for railroad securities of all kinds. In our opinion the point that you make as to the deviation of car trust indenture provisions under stress of competitive bidding from the standard safeguards which have given equipments their remarkable record for security is one of the strongest arguments against competitive bidding for this particular type of security. WILLIAM O. KIMBALL & Co., Boston, Mass. SECURITY NEGLECTED While, of course, it is true that the railroads have been receiving more for these securities under this practice, it just seems to us that perhaps the restrictions surrounding their issuance are not quite as well regarded; as they were before the sales were made to some one particular house. The competition by banks and bond houses for good loans has been so strong, that many times thes good old-time customs of seeing that plenty of security is obtained are being neglected to a great extent, and we notice it more and more every day. We are so far away from the source of the issuance of bonds and securities of the type mentioned, that we want to know we are doing business with a reliable house, and one that is going to take everything into consideration, before buying an issue. This might not be watched so closely if the securities are sold under terms of competitive bidding. CEDAR RAPIDS SAVINGS & BANK TRUST CO., Cedar Rapids, Iowa, By L. J. DERFLINGER, Cashier. PROFIT MATERIALLY REDUCED Since the profit has been materially reduced through competitive bidding methods we have been forced to discontinue what little effort we had put forth in the distribution of this type of security, on account of the small volume which we would be able to handle not offering us sufficient profit to bother with. We can readily see that competitive methods might work out advantageously for the railroads themselves under existing conditions, but feel that in the long run the practice formerly followed would have a more beneficial effect from the standpoint of the investor, the distributor, and the railroads. It would be our opinion that we would welcome a return to the old practice. M. E. TRAYLOR & Co., INC., Denver, Colo., By WALTER E. OLIN, Vioe President. REGRET SUCH CLOSE TRADING PHILOSOPHY We regret that such intense, competitive, dollar-and-cents. close trading philosophy has crept into a business as personal as the retail distribution of investment securities. After all, if a house of retail distribution has any economic justification, it is that it renders a personal service to an individual STOCK EXCHANGE PEACTICES 1061 who has funds to invest and to a corporation which needs funds for the conduct of its business. BANKS, HUNTLEY & Co., Los Angeles, Calif. RETURNS TO CUSTOMER LOW Reading the orders of the Interstate Commerce Commission, permitting the sale of these bonds as the same appear in the United States Daily, it has been obvious to me that the underwriting houses were not making enough money to continue in business if they were forced to handle this kind of securities alone, and I know from the offerings which we have received, including yours, that the selling commission you were able to pass along to the retail distributor has been so small that the handling of these securities has been unprofitable. Incidentally, the returns to the customer have been ordinarily so low that the customers to whom one is able to distribute the securities have been greatly reduced. Probably to date in a bull market the result has been at least temporarily advantageous for the borrower, but that this condition can continue indefinitely is at least doubtful. CANTON O'DONNELL, Vice President, THE UNITED STATES NATIONAL CO., Denver, Colo. INVARIABLY TAKE A LOSS ON LIQUIDATION Please be advised that within the last year we have refrained from taking on any equipment issues, only in such cases where an urgent demand compels us to do so, for the reason that our experience has been that the prices are so extremely high when the offering is made, that if any of our loyal clients wish to liquidate, invariably it means that they must take a loss. ZIMMERMAN & Co., Pittsburgh, Pa. DOUBT RAILROADS WOULD BENEFIT It is our opinion that if money conditions get bad, the railroads would naturally receive a lower price for their equipment trust obligations, and in the long run it is doubtful to us if the railroads would benefit from competitive bidding. COURTS & Co., Atlanta, Ga. MARGIN OF PROFIT SO LIMITED We have always specialized in equipment trust securities as you know, but the margin of profit has been so limited in the last few years that our business has fallen off 50 percent and it pays us to devote our efforts to other classes of securities. Even in very high class railroad bonds, we receive three fourths to a point profit for handling bonds of this character. NEWBO'LD & Co., INC., By THOMAS It. NEWROLD, President, , Colorado Springs, Colo. RAILROADS BETTER SERVED BY NONCOMPEfTITIVB SALE Generally speaking, it is our feeling that the railroads in the long run will be better served by the noncompetitive sale of equipment trust securities. We feel that such a method gives to the railroad companies greater continuity of banking service, and therefore more interested and helpful financial advice. It is very distinctly our feeling that equipment trusts during the last few years have not received the excellent distribution that they formerly enjoyed. 1062 STOCK EXCHANGE PEACTICES Whether this is the fault of public competitive bidding or not is another question. We are inclined to think the competitive bidding is largely responsible. It is our feeling that financial service and proper financial interest are of such paramount importance to our railroads that the mere question of cheapness should be accepted with a great deal of caution. STANLEY & BISSELL, INC., Cleveland, Ohio, By EDWARD S. LITTLE, Vice President. COMPETITIVE BIDDING HAS CAUSED LOSS OF DISTRIBUTION In answer to your letter of January 30, with reference to the present method of selling railroad equipment trust obligations, we feel that competitive bidding has caused the price of these obligations to become so high that the distribution in this section has been materially cut down. It has been our intention in this department to place some railroad equipment obligations on our list, but in view of their present yield we do not think that it would be advisable for us to materialize this plan at this writing. DALLAS TRTJST & SAVINGS BANK, Dallas, Tea). By J. LEWELL LAFFERTY, Manager Bond Department. NO BENEFIT IN OVER! PRICED OFFERINGS It is our experience that a company does not benefit by having an issue of securities over priced on original offering. The inevitable result is an unsatisfactory secondary market which affects unfavorably the opinion not only of the original purchaser, but also of prospective buyers. The net result is that any subsequent issue has to be priced so as to overcome unfavorable market conditions. This is, of course, likely to be intensified when the margin of profit to the distributors is too narrow to permit really good distribution. CHARLES W. SCRANTON & Co., New Haven, Gown. FORCES HIGHER PRICE THAN MARKET WARRANTS Competitive bidding, however, frequently results in forcing the successful bidder, in order to realize a profit, to put a higher price on the securities than market conditions actually warrant, wThich in turn leads to an unsatisfactory secondary market for the securities and a consequent adverse effect on the credit of the issuing company. This is an age of expert advice, and if a railroad executive feels that he can dispense with the advice and cooperation of some specialist in the banking field, he is at perfect liberty to make his own set-up and shop his bonds to the highest bidder; but in this case the margin of profit to the banker is apt to be so small and his grip on future business so insecure that it does not paly him to consider more than his own immediate problem of marketing the bonds, so as to quickly realize his profits or losses. STONE & WEBSTER AND BLODGET, INC., New York City., By R. H. CARLETON, Vice President. GREAT DEAL AGAINST PRESENT METHOD We have your letter of February 2 in regard to our opinion on the present policy of competitive bidding for car-trust securities. While we do not claim to be at all expert in this line of financing, we are rather of the opinion that In the long run the present method of competitive bids will not prove as satisfactory as the former method of each road dealing with their own particular banking house. While the railroads are probably getting a slightly higher STOCK EXCHANGE PEACTICES 1063 price for their car-trust securities with the present bond and money situation, when this situation changes and the price of money goes up and the sale of securities is made more difficult, it is quite probable the railroads, not having any particular banking house under obligations to them, will not get as high a price for securities as they have in the past. There is certainly a great deal to be said against the present method. WOOLFOLK, WATERS & Co., New Orleans, La. RAILROADS AND INVESTING PUBLIC BETTER OFF Our feeling has been that the bankers commonly associated with the railroads should be permitted to continue to finance the railroads with which they have been associated. This feeling is based on the belief that over a long period of time the railroads and the investing public are better off under such a policy. This is without reference to what might be considered fair play in allowing the banking houses to profit by years of association and building up of railway credit. METROPOLITAN NATIONAL CO., Minneapolis, Mimi., By CHARLES A. FULLER, Jr., Manager Bond Department. FICTITIOUS MARKET CONDITIONS CREATED Competitive bidding for bond issues has created a speculative state of mind within many underwriting circles, and fictitious market conditions have been created which have been detrimental to participating dealers and to their clients. DAVIS, SKAGGS & Co., San Francisco, Calif. FAVOR OWN BANKING CONNECTIONS In reply to your letter of February 2, we are very much in favor of the policy of railroad companies selling their bonds and car-trust securities through their own banking connections rather than by competitive bidding. We believe that competitive bidding is likely to cause too many issues to be overpriced and as a result cause dissatisfaction among the ultimate consumers. RUFUS E. LEE & Co., Omaha, Nedr., By F. W. PORTER, Vice President. COMPETITIVE BIDDING UNSATISFACTORY It has been our observation in municipal bond issues and also in the farm loan business that competitive bidding for business proves very unsatisfactory. The bond houses and trust companies who take part in such competition are usually led to take more chances in order to get the business which in a good many eases afterward proves unsatisfactory. THE FIRST NATIONAL BANK, Friend, Nebr., By H. J. SOUTHWIOK, President. WOULD PROVE COSTLY IN THE LONG RUN In reply Commerce might say run would to your letter of January 31 in regard to the policy of the Interstate Commission asking for competitive bids on equipment trusts, we that we feel this system does lead to overpricing and in the long make the cost of financing high to railroads. 1064 STOCK EXCHANGE PRACTICES We feel that the investment bankers for this type of security can adequately price the issues, and in a great majority of cases they are priced more favorably than as a result of competitive bidding. HUGH B. MCGUIRE & Co., Portland, Oreg., By HUGH B. MCGUIRE. F E W INVESTORS INTERESTED It would seem to us that this has resulted in paying the railroads a slightly higher price for equipment-trust certificates, but we feel it is a debatable point as to whether this is of real benefit to the roads themselves. As the result the interest basis on equipment-trust certificates has declined to a point where very few of our western investors are interested in this paper, and the margin of profit which can be offered to houses who retail equipment-trust certificates has declined so very much that we do not feel that we can afford to handle them. We presume that other houses in the West have had the same experience. Some time ago we handled quite a number of equipment-trust certificates. During the past 12 months our volume in this class of paper has been negligible. Therefore it would seem that the market is being restricted, and in our opinion a greater proportion now than formerly is being absorbed by insurance companies and large financial institutions. In a period of tight money this may react on the roads to their disadvantage. BOSWORTH, CHANUTB, LOUGHRIDGE & CO., Denver, Colo. By ARTHUR H. BOSWORTH. WILL REMOVE! A TREMENDOUS DISTRIBUTION ORGANIZATION As it is generally recognized, the volume of bond distribution in United States is done to a very large extent by the smaller dealer whose channels, if closed to equipment-trust certificates through lack of adequate profit in the business, will remove eventually a tremendous distributing organization from equipment-trust certificates. C. T. WILLIAMS & Co., INC., Baltimore, Md., By JOHN ROBERTSON, Vice President. SHOULD PICK BANKER, WITH CARE On the other hand, it has led to very.high prices being paid by underwriting houses, and in some cases not enough profit left to pay for the trouble of marketing the securities in a comprehensive manner, thus making the market for the security narrow and in a very vulnerable position in the case of a declining market. The writer feels strongly that large companies borrowing large amounts of money from time to time should pick their investment banker with care and then use him as their agent in all offerings of their securities. By doing this the company insures itself against poor treatment in bad financial times. This was certainly demonstrated by the railroads and public utilities during and immediately after the war. NORTHERN TRUST CO., Dulwth, Minn., STANLEY L. YONCE, Vice President. MUST LOOK TO FUTURE1 REQUIREMENTS Looking at the matter through the eyes of the railroad president, there is little doubt that the open and competitive bidding system brings1 somewhat higher prices for the securities. Or rather, such is the case just now, in this period of STOCK EXCHANGE PRACTICES 1065 widespread demand for investments. Yet railroads must look to their financial requirements for years to come, and if this country should once again run into the financial storms of 1920-21, most of the houses which are so active in their competitive bidding today would completely withdraw from the market. The inevitable result, of course, would probably be inadequate prices received by the railroads for their securities. DUNN & CARR, Houston, Tecs. TENDENCY TO RESTRICT MARKET Due to the low yields which new equipment offers have afforded, except in isolated cases, we have been compelled to be nonparticipants. Undoubtedly these prices are the results of competitive bidding, and it is my opinion that while the railroads have been receiving the benefits of higher prices received for their equipments, I think the effect on dealers has had a tendency to restrict the market, and should money conditions change it might be difficult to get the cooperation of the dealer in distribution. Take, for instance, our own case; many channels in which we have placed equipment obligations we have since diverted into other more profitable securities, more profitable not only to ourselves but to our clients, and I think you can multiply this situation many times. K. E. PROCHNOW & Co., INC., Chicago', III., By R. E. PROCHNOW, President. SHOULD PROVIDE FOR ELECTIVE DISTRIBUTION If the distribution of equipment trusts among the general investment public is of interest, it is impossible to get such distribution with the margins now prevailing on that line of securities. For ourselves we sell a few but only when we have to. This* business cannot be handled except at a loss on the present margins prevailing. If it is in the interests of the railroad corporation to get the most on a dollar for their securities, then competitive bidding in equipment trusts will probably accomplish that result. If, on the other hand, it is desirable for the railroad corporation itself to have a wider public interest in their securities, particularly in the territory in which they operate, and we believe it is, there should be a sufficient margin provided in the difference between the issue price and the price to the railroads to provide for effective distribution. ANDERSON, PLOTZ & STEWART, INC., By J. A. ANDERSON, Vice Chicago, III., President. WOULD SEOUL ONLY TO SPECIALISTS If the writer had equipment-trust certificates; to dispose of, he would see to it that they were sold to underwriting houses who were specialists in such distribution. On the other hand, he would not sell an issue of oil bonds to an equipment specialist. We have in mind one particular instance where a substantial issue of oil bonds were sold to a New York underwriter who had no particular ability to retail or wholesale them. The bonds are without question sound, but the offering was not favorably received because of the underwriter's unfitness to distribute it, and as a result the bonds declined 8 percent in price and are now out of line with equally desirable securities of the same class, and when this company again comes into the public market it will find it will have to pay for its failure to recognize the necessity of accepting not only a fair price for its bonds but moreover of selecting some distributor who has the ability to successfully accomplish this work. COMMERCE! TRUST CO., Kansas City, Mo., By GERALD PARKER, 175541—33—PT 3 8 Vice President. 1066 STOCK EXCHANGE PEACTICES INSURANCE IN FINANCE IMPORTANT We are told that a new era of finance has, arrived and that precedents have no value, but from my point of view, if I were president of a railroad, I would think it an advantage to the railroad in the long run, and also to the public, that I should deal in the sale of new securities with some established house or houses with whom I had long associations, knowing that I would be fairly treated and that I could rely on them that the securities would be well placed. If I sold my securities at auction I might temporarily get a slightly better price but I would feel that in time of stress I would have very few friends, and I think that insurance in matters of finance is as important as insurance against fire or other casualties. WALKER BROTHERS, New York City, N. S. WALKER, Esq. ARGUMENTS VERY SOUND The arguments advanced by you are very sound and I believe most private corporations, where not subject to public supervision, adopt this method of selling their securities; however, in view of the fact that railroads are under the supervision of the Interstate Commerce Commission, doubt very much if they could be convinced of the wisdom of doing otherwise than by asking for public bids on these securities. WHITNEY-CENTRAL TRUST & SAVINGS BANK, New Orleans, La., C. G. RIVES, JR., Vice President. POSITION OF INDEPENDENT DEALER UNSATISFACTORY Formerly I have sold a good many equipment bonds to corporations and investors when there was a fair profit to the distributing house. Now, as an independent dealer, it is not profitable for me to handle any of this type of security. Furthermore, the low yield which equipment bonds now offer does not tempt me to offer them to my customers. If that is the general attitude, would the result not be that the railroads might lose any advanage they may gain through competitive bidding? ALANSON G. FOX, New York City. GREATEST SERVICE THROUGH STRONG BANKING HOUSES As you know, we are not bidders for this special type of security. We are thus enabled to disclaim any direct concern in the matter. A long experience in the securities business, however, confirms us in the opinion that the greatest ultimate service is obtained both for the obligor corporation and the investing public, if strong banking houses are permanently allied in financing the recurring requirements of growing railroads. It thus becomes for them a matter of enlightened self-interest to render the best possible professional services. F. S. SMITHERS & Co., New York City. RESULTS IN FALSE VALUES Competitive bidding for railroad car trust issues: These reasons impel us to register a " negative " on the present method in vogue through the interposition of the I.C.C. with reference to the sale of railroad-car trust issues: (a) It deprives the railroad of a serious, tangible, dependable financial connection. (b) It frequently involves hasty and ill-advised buying judgment on the part of too-eager executives of buying departments of security houses. STOCK EXCHANGE PRACTICES 1067 (c) It results in a false level of values, i.e., bottomed on temporary, fluid commercial credits, whereas due consideration should be accorded the longterm capital lock-up and the intervening economic (and other) possibilities. (d) Finally, it robs the distributing dealer of any real incentive to effect a worthy lodgment of the securities, due to the prohibitively small profit involved, in a time of almost terrifying overhead expenses. BOWMAN & Co., St. Louis, Mo. By D. AETHUE BOWMAN. MANY FORMER BUYERS NO LONGER INTERESTED Replying to your letter of the 30th instant, will say that it has been our experience that many who formerly bought equipment trusts no longer are interested in them because of the high prices at which they must be purchased. We have certain clientele that will buy them, but I think that the market could be greatly broadened if the price were more consistent with the character of the security. PARTRIDGE-PATMYTHES CO., INC., Milwaukee, Wis., By JOHN C. PARTRIDGE, President. INSTITUTIONS NOT INTERESTED Your letter of February 1 was received several days ago, since which time the writer has given considerable thought to the matter contained therein. In the first place, we have not been particularly active in equipment trust oblir gations the past few years, due principally to the fact that the yield has, generally speaking, become so low that our institutions have not been interested. Relative to your inquiry regarding competitive bidding, we are somewhat at a loss as to what to say. We do feel that this undoubtedly has been, the cause of severe overpricing, not only in the case of equipment trust securities, but other issues as, well, with the result that underwriting houses and those participating with them, have lost money and the credit of the issuing corporation has by no means been enhanced. On the whole it seems to us that competitive bidding might be eliminated to advantage. We feel that railroads and other corporations would receive practically as good prices, and that distributing houses and the public would probably fare better. PUTNAM & Co., Hartford, Conn. APT TO WORK A HARDSHIP In other words, we believe that competitive bidding, particularly in the equipment trust business, is apt to work a hardship in the long run on the borrower. We also feel that any fair-minded borrower should take into consideration the assistance which has been given him in past years by a banking house, before breaking off relations for some slight concession in price made by another banking house. The writer has a very strong feeling on this point as he has seen competitive bidding in commercial paper transactions work very decidedly to the detriment of the borrower in the long run. It goes without saying that any high grade, reputable banking house would certainly not take unfair advantage of a client in making him a price on his financing, simply because the banking house knew they were bidding without competition, SIDLO, SIMONS, DAY & Co., Denver, Colo., By RICHARD M. DAY. 1068 STOCK EXCHANGE PRACTICES DISTEIBUTTON BEING CURTAILED We realize that the railroads are securing good prices at the present time but feel that distribution of the securities through a number of small dealers is being curtailed through lack of adequate profit. This curtailment may in time react to the disadvantage of the distribution of equipment trusts at a time when money is not so plentiful for investment. MAKSHALL & Co., Pittsburgh, Pa., By It. B. MARSHALL, President. SUCH ISSUES LOSING FAVOR We aline ourselves on the side of the critics of this method and agree that severe overpricing has been one of the results. This may have benefited the roads temporarily but is causing such issues to lose favor in the investment markets. We cannot see the advantage to the roads in dealing now with one group of bankers, again with another group, and so on ad infinitum and are thorough believers in the theory that a corporation's finances may be most successfully handled through the consistent and sustained cooperation of one banking house. BANK OF NORTH AMERICA & TRUST CO., Philadelphia, Pa. By J. H. MASON, Jr., Vice President. HIGH PRICES WOULD BE OFFSET The increased demand for credit for commercial and industrial purposes from customers of the banks could very easily result in a congestion of equipment trust notes that would affect their market unfavorably and in the long run result in the railroad companies finding it necessary to sell such securities at such a disadvantage that the high prices obtained through competitive bidding during easy money times would be more than offset. We feel that the firms of high standing who have specialized in certain classes of bonds over a long period are in better position to know the real value of such securities and handle them to better advantage both for the borrower and the investor than the firms interested only in the commission on a specific issue and not in the general and lasting good market for that class of bond. THE NATIONAL STOCK YARDS NATIONAL BANK, National By OWEN J. SULLIVAN, Stock Yards, III., President. FAVOR RECIPROCITY The writer's experiences as a director in the United Light & Railways Co. and the General Gas & Electric Co. showed him most impressively that it was most important and beneficial for those companies to have friends during the troublous times of the World War. A corporation which merely puts out its securities on a competitive basis and does nothing to warrant receiving help in bad times in our opinion is not in such a strong position as if it took the opposite course of having friends and working under a reciprocity arrangement. MOORS & CABOT, Boston, Mass. FINAL RESULTS NOT BENEFICIAL In reply to your letter of January 31, we beg to say that we believe the final results of the new practice in the sale of equipment trust securities will not be beneficial, with the two main thoughts in mind, that the distributor will not STOCK EXCHANGE PKACTICES 1069 receive a profit commensurate with his efforts and that the former wide distribution of these securities will be cut down with the higher prices, and the investor will probably put his funds in inferior securities as a substitute. In other words, regarding the two main objects of the investment business being the welfare of the investor and a profit to ourselves (two points so closely related that it is hard to consider one over a period of time except in the light of the other), we feel that both the investor and the dealer are better served in the long run under the old system. Also, as we see it, the credit of the railroads is not helped in the long run by the sale of securities, bearing their name to the public, which are over-priced as some have been under the new plan. SMITH, STROUT & EDDY., INC., Seattle, Wash. By E. A. STROUT, Jr., Secretary and Treasurer. PUBLIC SHOULD BE ENCOUEAGED TO BUY In a favorable market such as this one it is true that competitive bidding may get slightly higher prices for the railroads. On the other hand, over a period of time we do not believe this balances the good to be derived from the old-fashioned relationships between corporation and banker. The railroad should make its money out of operating a railroad and not out of banking. Furthermore, the public should be encouraged to buy railroad securities, and the way to do this is not to see at how high a price they can be unloaded on the public. BACON, WHIPPLE & Co., INC., Chicago, III., By W. T. BACON, President. FANCY PRICES PAID No doubt, in some instances, the originating house has paid a very fancy price for the issue with the idea that the advertisement of the origination by them would be advantageous to them otherwise and also with the idea that their dealer clientele would help them bear their loss, if any, in distributing the issues. This same originating house will, of course, be the unsuccessful bidder for the same road's issues when the bond market is in a bad way and naturally the banking house sponsoring the railroad will then have to buy them and take their chances, and my argument would be that they should be allowed to purchase equipments through good and bad times by negotiations only. SECURITY TRUST CO., Lexington, Ky., By J. D. VAN HOOSER, Vice President. ADVANTAGE OF WIDE DISTRIBUTION DEFEATED1 We feel that the increase in price of Equipment Trust securities has made it almost impossible for the dealers in the smaller communities to distribute them. This has undoubtedly led to a greater concentration of securities in this class in the financial centers, and particularly New York, While there would seem to be an advantage to the railroads in selling their securities at a high price, we feel that it is quite possible that in the long run this advantage may be lost by the decrease in the railroad security holders. If there is an advantage in wide distribution of securities of any corporation, we feel that this advantage is defeated in the case of competitive bidding for investment trusts. NORTHERN BOND & MORTGAGE CO., Green Bay, Wis. OPPOSED TO PRESENT METHODS We have your favor of February 1 regarding present methods of selling equipment trust securities by the railroads. From a purely selfish standpoint we are opposed to the present methods as we find that the margin of profits is 1070 STOCK EXCHANGE PRACTICES so small that we could only afford to handle them if we knew we had an imme diate turnover. As it is, the price is usually so full that the offering is not attractive and the interest in the offering on the part of institutions is decidedly lessened. In other words, there is too much sales resistance on account of price and the profit to the dealer is so small that there is no incentive to overcome this. We agree with you that this will limit the distributoin of such securities and when we again get into a lender's rather than a borrower's market, considerable missionary work will have to be done to re-establish equipment trust securities with a broad list of investors. HILL, JOINER & Co., INC., Chicago, III., By C. C. ADAMS, Vice President. MAEKET ACTION UNSATISFACTORY We feel that your position on this subject, as outlined in your letter, is absolutely correct. So far as we are concerned, we have practically discontinued over the past year or so the handling of equipment trust securities because of the close margin of profit. Consequently we are gradually losing contact with any market for this class of obligation, and as we build up other lines of distribution, we doubt if our interest could be revived in equipment trust securities in a less favorable money market when there might be more profit in the distribution of equipments. It has always been our experience that when securities are offered to us by originating houses who have been forced into competitive bidding to secure the business, the market action of the securities after the expiration of the syndicate has not been satisfactory as a general proposition. This is usually true because the securities are over priced. On the other side of the picture we have always felt that any corporation, be it railroad, public utility or otherwise, is in a much more satisfactory position so far as its public financing is concerned during the period of stress, if it has had satisfactory and continued relations with a banking or originating house who feels under obligations to take care of its wants. Certainly such an obligation does not exist if, for every piece of financing that the corporation desires to put out, the bankers have to enter into competitive bidding. We feel very strongly that your position as outlined is entirely correct. ROBINSON-JENKINS-TAYLOR CO., Minneapolis, Minn., ByH. R. TAYLOR, Vice President. SHORT-SIGHTED VIEWPOINT The writer's views on this subject are very much in accordance with your ideas as outlined in your letter. It has always been our opinion here that competitive bidding, although it unquestionably is very advantageous to the issuing company in a favorable market, has a tendency to undermine banking, relationships of a character very necessary to the company whose securities are being sold. We have always felt that for a railroad, utility, or industrial company to form a powerful banking connection of a semipermanent nature might be of great benefit to the company in future years when the security markets might not be anywhere near as good as at this time. It is quite possible that the practice inaugurated by the Interstate Commerce Commission may be successful and may operate to the advantage of the issuing company in the next few years over the period of cheap money which can be expected for some time, but when the reaction sets in we believe the loss of permanent connections will operate to the disadvantage of these same companies. Summing up the above, we take the position that the Interstate Commerce Commission is looking at the practice from a rather short-sighted viewpoint, and also that time alone will prove which theory is correct. CHICAGO TRUST CO., Chicago, III., By J. W. MARSHALL, Vice President. STOCK EXCHANGE PEACTICES 1071 DO NOT FAVOR ORDER We do not favor the order of the Interstate Commerce Commission that equipment trust certificates or other railroad securities should be sold as the result of competitive bidding. Our opinion is that over a period of years the interests of the weaker railroads, and in fact of practically nearly all of such corporations, except the very strongest, would be better served by having their securities marketed through bankers who would feel a responsibility for the properties. W M . E. BUSH & Co., Augusta, Ga. COMPETITIVE BUSINESS NOT FAVORED It has always been our opinion that railroad business of all kinds, including both the majority finance and equipments, should be done by the banking houses sponsoring the railroads concerned, not by any system of competitive business by investment bankers. We are therefore very much in sympathy with this movement in regard to bringing this matter to the attention of the Interstate Commerce Commission, and I hope that your efforts will meet with success. FOURTH & FIRST NATIONAL CO., Nashville, Tenn., By B. O. CURREY, Bales Manager. WOULD N'OT PURCHASE FROM INEXPERIENCED BANKERS Replying to your favor of the 31st ultimo; we have been large buyers of equipment certificates during the last 20 years and have always regarded them prime investments. This type of investment security has increased in favor among certain classes of investors upon recommendation of investment houses. This has primarily been the reason for the success in financing this requirement of our railroad systems. The high standing of the investment house specializing in this type of security brings a corresponding investment standing and credit to the railroad which desires to sell such instruments of indebtedness. We would not purchase this form of investment if brought out and handled by inexperienced bankers or investment houses who have no particular interest in the security except to handle it at a profit. Convertibility, rating, and character of the investment banker bringing out the certificates all enter into the value. If competitive bidding is adopted or forced upon the railroads, cartrust securities will be changed from high grade ultra conservative investments to speculative investments and they would therefore be unacceptable to our clients. AMBROSE R. CLARK CO., New York City. SHOULD RECEIVE SERIOUS CONSIDERATION Of course, we agree that the purchase of issues of the equipment trust by competitive syndicate houses has had a tendency to raise the price which the railroads have received for these securities, and reduced the return basis to the holding public. We believe that the equipment trust securities should be sold with the market as it is when the securities are brought out, and we do not feel that this should be influenced as it is by the competition of syndicate houses in the purchase of these securities. We feel as you do that this should receive very serious consideration. WILKES-BARRE DEPOSIT & SAVINGS BANK, Wilkes-Barre, Pa., By BENJAMIN F. WILLIAMS, Cashier. COMPANY'S CREDIT WOULD SUFFER. If bonds are offered at a higher price than they are really worth and the secondary market is unable to hold the price, it would seem to us that the 1072 STOCK EXCHANGE PEACTICES credit of the company would suffer and that on future. issues they might not obtain as good a price as would have been possible under the old system. COENING TRUST CO., Corning, N.Y., By G. A. HEEEMANS, Secretary. DEFINITE BANKING CONNECTIONS OUTWEIGH HIGHER PRICES We have your letter of January 31, and it is our opinion that the benefits to the railroads of definite banking connections upon whom they can depend in bad times as well as jgood, considerably outweigh the possibly somewhat higher prices which they may obtain for their securities through competitive bidding under favorable market conditions. HUNTINGTON JACKSON & C o . , New York City. PEOFITED DUEING EASY MONEY In other words, the railroads no doubt have profited by selling their securities to the highest bidder during this time of very easy money, but if and when the conditions change materially we feel that they may regret not having tied up to dealers who can always take care of their requirements. SECURITY SAVINGS & TRUST CO., Portland, Oreg., By EDW. H. GEARY, Vice President. BETTER TO SELL TO OWN BANKEE In reply to your letter of February 2, 1928, in regard to railroads selling their equipment-trust securities by competitive bidding, we have always been of the opinion that over a term of years it is better for the railroad company to sell all their securities to their own banker. It is true that under the present conditions the railroads are getting a better price for their equipment-trust securities by competitive bidding, but we are not so sure that this practice will prove profitable to them during the time of stringent money. HOWZE, SPENCER & Co., Duluth, Minn., By GERALD HOWZE, President. CARE OF THE AFTERMARKET Generally speaking, we are not interested in participating in any syndicate if there is a possibility that no one is going to take care of the aftermarket. The danger to the small house from lack of a proper aftermarket is accentuated in the equipment-trust field due to the small amount of the various maturities outstanding. In the past we have seen many cases where a banking house has taken an issue and distributed it and supported it until the issues of the corporation in question had a market standing far superior to any previously experienced. We have seen such corporations sell succeeding issues of securities to other banking groups at higher prices, such higher prices being made possible in many cases because of the good work of their first banking connection. Such action is morally improper and we believe economically unsound. The Interstate Commerce Commission has done great things for the American railroads, but not all its action has been sound. It can certainly reverse itself from time to time and thereby gain a greater respect from the general public. S. C. PARKER & Co., INC., Buffalo, N.Y., By SELBY C. PARKER, President. STOCK EXCHANGE PEACTICES 1073 THOUGHT COMMISSION MAKING A MISTAKE Replying to your letter of February 1, we have to say, at the time the I.C.C. insisted on competitive bidding for the sale of equipment-trust securities of some prominent railroad company, whose petition to sell the equipments was then under consideration, I thought the Commission was making quite a mistake, and I have found no reason since, in further considering the subject, to change my mind. I still believe the best results can be obtained by the railroads in negotiating direct with their bankers. T H E INDIANA TEUST CO., Indianapolis, J. P. FEENZEL, Chairman of the Board. Ind. SUCH A POLICY UNWISE Responding to your request for an expression of my opinion as to the desirability of competitive bidding as a policy in the sale by railroads of their car-trust obligations, I think such a policy is unwise because its tendency is to create an artificial primary market for such securities, leaving the secondary market stale when owners desire to sell them, which must eventually be detrimental to car-trust obligations as a class. HENRY T. KEETLEB. NOT PEONE TO PUSH THIS CLASS OF SECURITY We are in touch with quite a few buyers of equipment trust securities and when brought to their attention at the present prices, they are very loath to purchase. In addition, we are not as prone to push this class of security as we would if the margin of profit were greater, because at the present margin, after taking into consideration the expense of obtaining the business, handling, etc., we are actually handling equipment-trust securities at a loss and no house wishes to handle anything at a loss. Summarizing our opinion, therefore, we are pleased to advise you that we feel that were the bankers given more consideration in the handling of equipment-trust securities as regards profit and in addition, by means of this profit, distribution, that while the railroads would probably not get as good prices as they have at the present time, their securities would actually be in better shape, marketwise and from a point of investment to the actual holder. KUECHLB & Co., Milwaukee, Wis., By C. E. REIDEKER, Vice President. CEASE TO FEEL ANY OBLIGATION It seems to us, while we are not particularly active in equipment trusts, we nevertheless participate in some of the syndicates and selling groups, that an occasional issue will sell entirely too high, others issues perhaps too low. We have experienced in the Iowa municipal market that when a dealer pays too much for an issue of bonds, in order to keep other dealers from purchasing a similar issue in the near future, he buys it for more than it is worth in order to keep the price up, thereby protecting his original purchase. This is of course a very vicious procedure, but I presume it could possibly happen with equipment trusts. I think the most unfortunate part of the competitive bidding is that certain dealers who have understood that they would be required to handle the equipment trusts of certain railroads will now cease to feel any sense of obligation and will buy the bonds as cheaply as possible; in other words, the roads will not have a sort of understood financial arrangement, which has worked out so satisfactorily in the past. PRIESTER-QUAIL & CUNDY, INC., Davenport, Iowa, By JOHN J. QUAIL, Vice President. 1074 STOCK EXCHANGE PEACTICES DISTRIBUTION WILL BE SERIOUSLY AFFECTED Naturally, we have been forced to begin operations in this highly competitive market at small profit on large turnover. If the competitive bidding results in continued buying of new issues by larger banking houses at prices which show them practically no profit, we are convinced that our operations will be narrowed to such an extent that distribution will be seriously affected. As distribution narrows the popular criticism of poor market becomes true and outweighs the advantage of security. HATHAWAY & Co., Chicago, III., By CHARLES D. MARSH, Manager Bon$ Department. COMPETITIVE BIDDING RESPONSIBLE FOR NARROW DISTRIBUTION Our experience has been that equipment trust securities have been so overpriced that it has been next to impossible for us to move any in our territory. During the summer season we have a very heavy demand for high-grade, shortterm paper, and equipment trusts, if reasonably priced, would: allow us to place a considerable block of these short-term securities. We feel that competitive bidding is responsible for the narrow distribution and overpricing of these securities and it would seem more satisfactory if the railroads would sell these securities as they previously did. DAVIS & WEST, Norfolk, Va. EQUIPMENT ISSUES IN DANGER In connection with the subject of equipment trust securities and the advisability of having competitive bidding therefor, we are strongly of the opinion that for the good of the purchasers of the bonds the first consideration is to have the financing handled by houses that are thoroughly acquainted, through experience, with the necessary legal requirements to guarantee protection to such issues. We believe that this is vital because in the long run the record of the equipment trust issues with respect to security and final payment has a very definite relation to the selling price. In other words, if equipment trust issues are continued to be carried through a house such as your own—which has demonstrated its ability to see that issues are properly protected—there is little likelihood that the good record that these issues enjoy will be marred. On the other hand, if we get into wholesale competitive bidding without consideration to the requirements above enumerated, we are apt to have occasions arise that would mar not only the record of the specific road putting out the issue, but the equipment issues as a class. MERCHANTS SECURITIES CORPORATION, Worcester, Mass. By HARRY R. MCINTOSH, Treasurer. NOT INTERESTED I N NEW ISSUES The very low yield on these securities of late has forced us to strike them even from considering their purchase, and until the yield becomes very much more attractive and we can be sure that there will be a constant substantial market for the certificates in the event a sale is necessary, we do not see how we can be interested in new issues. I t seems to us that this grade of securities should be treated in a somewhat different manner than the sale of ordinary securities, and we should be pleased to see the equipment trust handled as of old. COMMERCE TRUST CO., Lincoln, Nebr. ByM. L. SPRINGER,, Secretary-Treasurer. STOCK EXCHANGE PKACTICES 1075 PUBLIC CARRYING THE BAG Claims have been made by several of our customers that severe overpricing has been the result, which has caused an attitude of disfavor on the part of these purchasers. The customers, as well as ourselves, agree that the protection of public interests should be the first consideration. However, they seem to feel, because of this overpricing, that the public is carrying the bag and that the railroads are receiving all the benefit of this practice. SULLIVAN & SMITH, WelWboro, Pa., ByM. J. SULLIVAN. COMPETITIVE BIDDING UNSOUND IN POOR MARKET Competitive bidding brings into the market anyone who is able to pay for the securities, and of course those people are very numerous on a good market. However, on a poor market it is only those who have established clienteles and who have dealt with concerns regularly who will then, even at their own disadvantage, take care of borrowing corporations. As mentioned above, it is true in all kinds of negotiations. WHELLOCK & Co., _ Des Moines, Iowa, By L. F. WHEELOCK. OLD SYSTEM THE BElTTER In reference to your letter in regard to competitive bidding for equipment trust securities, we feel that in the long run the old system of having one of several houses identified with the securities of each road is perhaps the better system, as their handling of the securities tends to stabilize the market, and they are more inclined to lend their support to the road when conditions are unfavorable. These facts, we think, offset the immediate advantage of somewhat better terms resulting from competitive bidding. J. W M . MIDDENDORF & SONS, Baltimore, Mel). BECOME INDIFFERENT TO THIS CCLASS OF SECURITY We think you are doing a good work in securing a crossrsection of the opinions of houses which have in the past offered equipment trust certificates. Since the Interstate Commerce Commission has ruled that equipment trust securities offered by the railroads should be sold to the highest bidder, we have found it impractical and unwise to be actively interested in the distribution of them. We have felt in nearly every case that the bonds were being offered at the very highest price at which they could hope to be sold. Disregarding for the moment the selling price of such offerings, we have also become indifferent to this class of security, inasmuch as we felt we could not afford to purchase them, put them on our list, and offer them to the people to whom we used to sell them, due to the fact that there would be a great sales resistance in moving them off, and we might have them on our list for some little time with little or no profit to ourselves. We feel, too, that our banking institutions, which at one time bought great amounts of equipment trusts, also believe that they are being brought out at the very highest price, and that once they are purchased it is difficult to secure a market at anywhere near the price which they paid for them, in case they found it necessary to resell them. As we look at it, the only benefit derived from the distribution of the equipment trusts under the present arrangements is the publicity which certain originating houses feel they are receiving when they are the successful bidders. After an investor or banking institution has been urged into the purchase of such securities under this plan and then has occasion to resell them and learns 1076 STOCK EXCHANGE PRACTICES of the unsatisfactory market, we think they too must become prejudiced; and a continuance of this policy is unquestionably going to spoil in time what has been a very fine market for this form of investment. MERRILL, HAWLEY & Co., Cleveland, Ohio. NOT WORKING I N PRACTICE We believe that in theory this is all right, but in practice that it is not working out to the real advantage of the railroads or the investing public, not to mention the banker. Apparently in good bond markets such as the present one many houses will buy equipment at exceedingly high prices to be offered as " window dressing " and feel that they have done a good piece of advertising even though they only break even on the deal. In a declining bond market such houses would not be willing to bid and the railroads would have to go to their regular bankers and probably take a price lower than they would have received if these bankers had had all their business. HILL BROS. & Co., 8t. Louis, Mo. NOT IN THE PUBLIC INTEREST During a period when bond prices have been steadily rising it is difficult to present convincing arguments against the sale by railroads or car trust securities by competitive bidding. Although during the period that it has been in operation this practice has undoubtedly resulted in the railroads securing higher prices, we believe, that it is not in the public interest for the following reasons: It is a specialized business and great care should be exercised in drawing up the various indenture and trust provisions. Poor distribution results from overpricing and an insufficient margin of profit. There is no incentive for bankers to help out roads in times of stress. In the past where a railroad's entire financing has been handled by one banker there may have been cases where this relationship has been abused. However, we feel that at the present time the possibility of such abuse is negligible in comparison with advantages to be gained, both by the railroads and the public through more intelligent handling and better distribution. MAYNARD, OAKLEY & LAWRENCE, New York City. WILL RESULT IN OVERPRICING It occurs to me, although I have no experience in original purchases along this line, that open competitive bidding for these securities will result in, overpricing, which will ultimately result in a reluctance on the part of the individual distributing dealers to handle equipment certificates and will therefore have a tendency to concentrate holdings so that if any unforeseen break takes place in the market this type of security is apt to be offered in such volume that the market effect will be decidedly disturbing. I believe it to the interest of those who wish to borrow money in this form to keep the market position of securities in such shape as to inspire the public's confidence in that particular type of security. W. E. HUTTON & Co., Cincinnati, OMo, By CAMPBELL S. JOHNSTON, Manager Bond Department. NECESSARY THAT DEALER MAKE PROFIT Equipment trust securities are not at present, as a class, on an equal rank with Liberty bonds and municipal bonds. To a certain extent, a secondary market must be maintained. Therefore, we believe it is necessary that the dealer be given a certain amount of profit in order to make it worth his while STOCK EXCHANGE PEACTICES 1077 to handle such a market. Otherwise, it is possible that the securities might decline in price very shortly after the offering. E. G. CHILDS & Co., INC., Syracuse, N. Y. NOT FOB THE BETTER INTERESTS OF THE RAILROADS OR THE PUBLIC It is therefore our opinion that the policy of competitive bidding is not for the better interest of the railroads or the public from the broader viewpoint. The railroads of the United States are directed by men of sufficient intelligence, well enough acquainted with economic conditions, not to be milked by any unscrupulous bond companies in underwriting their equipment trust issues. Furthermore, a close, permanent connection with a reputable banking firm will result in greater economy in marketing equipment issues, due to the fact that such banking connection could adequately educate its clientele in the character of the roads, and in such fashion elminate much of the sales resistance that must be overcome by strange houses who competitively bid and secure car trust issues. MORTGAGE & SECURITIES CO., New Orleans, La. By FRED, N. OGDEN, Manager Bond Department. OFFERINGS DECLINED Of course, we are small dealers in a far-away section, but if our experience is any indication of the general experience, we would certainly feel that the public interest is better protected by not enforcing competitive bidding. We know that several of our large bank customers constantly decline any offerings of equipment trust certificates since the inauguration of competitive bidding, on account of the feeling that under competitive methods there is naturally a tendency for investment bankers to pay too much for the issues offered. GUARDIAN TRUST CO., Houston, Tex. ByL. B. DUQUETTE, Vice President. CANNOT FAIL TO DETRACT From the prices asked for various issues of car trust securities recently offered to us, we are inclined to agree with your contention that competitive bidding frequently results in over-prices, with the attendant weakness in aftermarkets which cannot fail to detract somewhat from the favor in which this type of securities is normally held. We agree also that less favorable conditions in the future may serve to emphasize still further the value of a permanent connection as above. THE COMMERCIAL NATIONAL BANK, Peoria, III. By A. B. LLOYD, Manager Bond Department. CARE OF REQUIREMENTS IN BAD TIMES In response to your letter of February 2, regarding the sale of equipment trust securities by the railroads at private or public sale, I do not see where the railroads or any other corporation particularly profit in this manner, as I am firmly convinced that the average corporation of that class has enough able-bodied men who know the value of securities and who are in close touch with the market in general, they can demand from their bankers the price they should receive for this class of securities, thereby favoring the bank and bond house who in turn will favor them in a depreciated period. This may not be true, however, when it comes to the sale of municipal bonds, as the average small town citizenship is not made up of that class of director 1078 STOCK EXCHANGE PRACTICES ship. I still favor, and always will, new business with the party who will be able to take care of the requirements, in bad times as well as in good times. HOME TRUST CO., Kansas City, Mo., JOSEPH DUNES,, Manager Bond Department. SLIGHT SAVING I N TIMES OF LARGE DEMAND As long as the demand for equipment obligations is greatly in excess of the supply, and the credit of all railroads is improving, there is probably a slight saving to the roads through the method of competitive bidding, but we believe that in the long run it is more advantageous to have all the financing of a railroad, equipment and otherwise,, handled by one house. It is our belief that in recent years the great power held by the large financial interests in New York has been more wisely and more justly used than ever before, and that they can be safely trusted to deal justly with all borrowers. LLOYD & PALMER, Philadelphia, Pa. LESS DISTRIBUTION TO INVESTORS Referring to your letter of February 1, relative to equipment trusts, it is our opinion that due to overpricing as a result of competitive bidding, the distribution of equipment trusts to investors has acted adversely. We formerly could distribute many more equipment trusts than we can under the present competitive bidding arrangement. YOUNG & BLAIR, INC., Buffalo, N.Y., By 0. D. BLAIR. BENEFITS NOT GREAT The policy of competitive bidding has undoubtedly resulted in higher prices to the railroads for their securities, but we do not think that the benefits have been as great as at first seemed probable because of the uncertainty of the after-market and the discouragement that many investors felt in buying issues that were priced too high. BAINBRIDGE & RYAN, New York City. TREAT SAME AS MORTGAGE-BOND ISSUE, OR STOCK We believe equipment issues should be part of the general financing program of a railroad and be handled by that road's bankers. We can see no reason why a railroad about to sell an equipment-trust issue should not consult its bankers as it would if it were about to sell a mortgage-bond issue, or stock. MACCALL, FRASER & WHEELERi, Providence, R.I. SOUND BASIS FOR CEITICISM The situations are, in any event, not entirely analogous as there can be no control of the set-up of municipal issues nor often any vital need to borrow in an emergency, and these two elements provide, in my opinion, the soundest basis for1 the criticism of competitive bidding for other types of corporate financing. DEAN WITTER & Co., 8 an Francisco, Calif., DEAN WITTER, President. STOCK EXCHANGE PRACTICES 1079 DEALERS BEQUIRE A FAIR MARGIN OF PROFIT Usually we like equipment-trust securities. We have sold very few of them recently, because of the fact that the margin of profit has been so small, that it has not been worth the effort to go out and push them. We believe something ought to be done to give dealers a fair margin of profit on which to work, and we also believe something should be done to stop the overpricing of these bonds. If competitive bidding has caused this condition, it seems as if steps to change the situation should be taken. Goss & Co., South Bend, Ind.r By HAROLD K. FORSYTHE, President. WOULD NOT BENEFIT RAILROADS OR PUBLIC In regard to the question contained in your communication, we are of the opinion that competitive bidding for equipment trust certificates, as suggested by the Interstate Commerce Commission, would not to any degree benefit the railroads, and indirectly, of course, the general public. We are of the opinion that the business judgment and sound management and fiscal policies of the majority of railroads provide automatically the safeguard of realizing the actual worth of equipment-trust certificates sold to underwriters. It is our belief further that competitive bidding would make necessary the acceptance on the part of railroad management the proposals of institutions which were not properly qualified to set up, distribute originally, or maintain subsequent markets for the securities so awarded them. We feel that the possibility of obtaining slightly higher prices for their securities on the part of the railroads would only be temporary, and would be more than offset by the ultimate weakening off due to improper handling of distributions and markets. BLANKENHORN & Co., INC., LOS Angeles, Calif., By EDWARD V. CARTER, Vice President. COMPETITIVE BIDDING NOT TO BEST INTEREST OF PUBLIC We have your letter of February 1 in relation to equipment-trust securities issued by the railroads under terms of competitive bidding. Due to the high standing of the banking houses who have specialized in equipment financing, we are firmly of the opinion that the public interest has been in the past, is now, and will be in the future, well served by the_ continuance of this general practice. We have seen in the municipal bond business, situations arise whereby municipalities have received far less money for their bonds under competitive bidding than would have been the case had they been privileged to sell direct to some reputable banking house who1 were really interested in their financing. PORTER, ERSWELL & Co., Portland, Me., By W. H. PORTER, President. FAVOR RESPONSIBLE BANKERS We feel that in most cases corporation borrowers can secure better service, greater protection, and, on the whole, as low rates and favorable terms by dealing privately with responsible bankers rather than asking for competitive bids on their special financing. FERRIS & HARDGROVE, Spokane, Wash., By J. E. FERRIS, President. 1080 STOCK EXCHANGE PRACTICES SHORTSIGHTED^ POLICY It seems to us that railroads are following a rather shortsighted policy in severing valuable connections which have extended over a long period of years with banking houses which have represented them in the distribution of their securities. They are taking this action to avail themselves of more favorable bases of issuing securities, which we believe result purely from the competitive situation at the present time. In the future, if there should be another period of stringent money, as there may very well be, these corporations would probably receive a cold reception upon returning to the houses which have represented them so long, and they would scarcely be in a position to criticize the reception received in view of the action they are taking. JAMES H. CAUSET & Co., Denver, Colo., By JOHN C. ROBERTS, Treasurer. FUTURE INTEREST OF INESTIMABLE VALUE We have never felt that the public sale of this type of security, that is, railroad or utility securities, works to the ultimate interest of the company. The future interest that an underlying house has in the welfare of the companies whose securities it underwrites is of inestimable value. Wherever competitive bidding enters, this is destroyed. MILLER, VOSBURG & Co., Los Angeles, Calif., By L. REVEL MILLER, President. EXCESSIVE PRICES While undoubtedly under present money market conditions the railroads have been receiving a somewhat higher price for this class of securities, we know that as far as our own actual working under the new plan, that we have distributed practically no equipment trust securities on the basis that it has been our own feeling that practically all new issues have been brought out at excessive prices and without any possible margin of profit to reimburse us for the cost of effecting distribution. THE NATIONAL BANK OF COMMERCE, Seattle, Wash., By DIETRICH SCHMITZ, Vice President. COMMITTEE EXHIBIT 3 Articles of copartnership, dated December 31, 1932, by and between Felix M. Warburg, Otto H. Kahn, George W. Bovenizer, Lewis L. Strauss, William Wiseman, Frederick M. Warburg, Gilbert W. Kahn, John M. Schiff, Benjamin J. Buttenwieser, Hugh Knowlton, and Elisha Walker A majority of the parties hereto are transacting business in the city of New York as partners, under the firm name of Kuhn, Loeb & Co. Said firm succeeded other partnerships transacting business under the same firm name, and it and its predecessors have transacted business in the city of New York under the same firm name for more than 60 years, during which time they have also had business relations in and with foreign countries'. The parties hereto desire to continue such business from and after January 1, 1933, as a general partnership under the same partnership name. The parties hereto accordingly agree as follows: I. The parties hereto hereby continue in general partnership under and pursuant to the laws of the State of New York for the purpose of carrying on the business transacted by them, and such partnership shall be conducted under the firm name of Kuhn, Loeb & Co. II. The partnership shall continue from year to year unless and until terminated in the manner provided in article IX hereof. STOCK EXCHANGE PEACTICES 1081 III. The capital of the partnership shall be , which shall be contributed by the partners as follows: Each partner, as an expense of the business, shall be entitled to receive interest at the rate of percent per annum from December 31, 1932, payable semiannually on June 30 and December 31 of each year, upon the capital contributed by him as aforesaid, and shall not be entitled to any profits of the business on account of the capital so contributed by him. No part of the capital so contributed by any partner shall be withdrawn without the consent of all the partners so long as he shall remain a member of the partnership. John M. Schiff, as an expense of the business, shall be entitled to receive interest at the rate of percent per annum from December 31, 1932, payable semiannually on June 30 and December 31 in each year, upon the value of his New York Stock Exchange seat, which value shall be taken at the last price paid for a New York Stock Exchange seat in the year preceding the year for which interest is computed. By contributing the use of his membership in the New York Stock Exchange, John M. Schiff: agrees that insofar as it may be necessary for the protection of the creditors of the partnership said membership may be treated as an asset of the partnership. IV. The partnership shall take over all the assets and assume all the liabilities and commitments of the predecessor firm as of the close of business December 31, 1932. V. The net profits of the partnership shall be shared by and between the partners in the following proportions: If, instead of net profits, there shall be a net loss in any year, such net loss shall be borne by the partners in the same proportion in which they are entitled to share in the net profits, except that neither nor , shall be liable for any share of such net loss, and what would otherwise be their respective shares of such net loss, shall be borne by and , who shall be jointly and severally liable therefor, but who as between themselves shall bear such net loss in the proportion that their respective interests in the net profits of the partnership for such year bear to their aggregate interest in such net profits: And provided further, That as between themselves, and • shall be jointly and severally liable for the aggregate amount of such net loss which the two of them shall be obligated to bear as above, and — and shall be obligated to bear as above, and and shall be jointly and severally liable for the aggregate amount of such net loss which the two of them shall be obligated to bear as above. The above-named partners who are liable for net losses further guarantee to each of the followingnamed partners that his interest in the net profits, as specified in this article V, shall be not less than the following-named amounts in each year, that is to say, , which amounts each of said partners shall be entitled to draw in equal monthly installments in each year. Such guaranty shall be joint and several, but as between the partners making the same shall be borne in the same proportion in which they shall bear net losses as hereinabove set forth. VI. All questions concerning the course of business of the partnership and the transactions which it shall undertake shall be determined, if possible, by unanimous action of the partners, but in case of disagreement such questions shall be determined by a vote of a majority of , , and . No partner shall, without the written consent thereto of the other partners, directly or indirectly speculate or be interested in speculation in stocks or any other article whatsoever. No partner shall directly or indirectly make investments in any securities of which a majority of said , , and shall disapprove, and in case of such disapproval, such investments shall be promptly disposed of by such partner. No partner shall, without the written consent thereto of the other partners, use the name of the partnership, except in the business of the partnership, or become surety, or, for the accommodation of another, incur any liability either in the name of the partnership or in his individual name. No partner shall borrow or take to his own use any securities or property of the partnership. VII. In the event of the death or withdrawal or termination of the interest of any partner or partners, the partnership shall be continued by the remaining partners without further action on their part, unless and until terminated as in article IX hereof provided. The interest of any deceased partner shall remain until the December 31, next succeeding his death, up to which time his executors or administrators or other legal representatives (hereinafter referred 175541—33—PT 3 9 1082 STOCK EXCHANGE PEACTICES to as personal representatives) shall be entitled to the same share of profits, and shall bear the same share of losses, as would have been received or borne by him had he survived; Provided, That if such partner shall die on December 31 of any year his interest shall terminate on that date. Upon the termination of the interest of any partner, his interest in the profits and his responsibility, if any, for losses shall be allocated by the unanimous action, if possible, of the surviving or remaining partners, but in case of disagreement, such allocation shall be made by the vote of a majority of , , •, and • —. The same procedure shall be followed in case any interest in profits or responsibility for losses arising from the reduction of the interest of any partner or otherwise, is to be allocated. VIII. In the event of the death of any partner, the survivors shall value the assets of the partnership as of the December 31 next succeeding his death, or if he shall die on a December 31, as of such December 31, at the fair market value thereof at that time according to their judgment. Pursuant to the practice that has prevailed since the beginning of the business, no value shall be included for good will, nor for the right to use the name of the partnership. The parties have entire confidence that a valuation by the survivors, in case of the decease of a partner, will be fairly made, and for reasons which are satisfactory to the parties they regard it as to their interest that the survivors shall make such valuation. The survivors shall make such valuation notwithstanding their interest and notwithstanding that one or more of them may be executor or administrators of the deceased partner. On the basis of such valuation, the interest of the deceased partner shall be ascertained and settled. In case at the time of his death any partner shall be indebted to the firm, the amount of such indebtendness, with interest, shall be taken into account as a set-off and deducted in ascertaining and settling the interest of such deceased partner. In case of the death of a partner, the survivors shall furnish to his personal representatives a statement of the amount of the interest of his estate in the partnership on the basis of such valuation, and the same shall be accepted by the personal representatives of the deceased partner, and without examination of the books of account of the partnership except by such of the personal representatives of the deceased partner, if any, as may happen to be partners. The parties enjoin upon their personal representatives the observance of this provision, which is made for mutual benefit. In case of the death of a partner the survivors shall (except as herein otherwise provided) have 6 months succeeding such December 31 in which to pay his interest in the capital and profits of the partnership as the same shall have been ascertained. The survivors may at their option pay the whole or any part of the amount due from time to time during such 6 months. Interest upon all unpaid amounts shall run at the rate of percent per annum from such December 31. The survivors may at their option, to be exercised by 30 days* written notice given not later than such December 31, or if such partner shall have died between December 1 and December 31, inclusive, of any year, not later than 30 days after such death, turn over to the personal representatives of a deceased partner; and the personal representatives of a deceased partner may at their option, to be exercised by like notice, require delivery of (in each case at valuations to be fixed as hereinbefore provided) an amount of any or all securities or loans belonging to the partnership (certificates of interest therein in cases where suitable subdivision cannot be made), not, however, greater in the case of any security or loan than the proportion of his obligation for losses, if any, of the business, even though the same may exceed the amount due him on capital and profit accounts: And provided' further, That so long as the firm or any successor which has assumed its obligations shall exist the surviving partners shall, and they hereby agree that they will, in disposing of such securities and loans as shall remain to them, make a similar disposition of those which shall come to the representatives of the deceased partner, if such personal representatives so desire; that is to say, they shall treat all alike. If such securities and loans, either or both, shall be subject to any syndicate agreement or other agreement to which the partnership with other persons shall be a party, which affect such securities or loans, the proportion therein of such deceased partner so to be turned over to his personal representatives, shall remain subject to such agreement. The surviving partners shall have said period of 6 months, however, in which to turn over the securities and lpans to be received by the personal representatives of a deceased partner and may turn over the same from time to time during that period. If the STOCK EXCHANGE PEACTICES 1083 amount of securities and loans which shall come to the personal representatives of the deceased partner as hereinbefore provided shall exceed the amount due him on partnership account, such personal representatives shall pay such surviving partners the amount of such excess, and they shall have 6 months from such December 31 within which to do so, and during that 6 months they may at any time and from time to time make payments on account. Interest on all unpaid amounts at the expiration of such 6 months shall run at the rate of percent per annum. The right to deliver securities shall not apply to any partner not contributing capital to the firm, nor shall the right to require such delivery apply to any such partner unless there shall have been a net profit for the year. All of the foregoing provisions of this article VIII shall be applicable to a case of a partner whose interest in the partnership is terminated by withdrawal, dissolution, or in any other manner. The term " survivors" as used herein shall mean surviving or remaining partners, as the case may be. It is expected that all action required on the part of the survivors hereunder will be taken by unanimous vote but in case of disagreement, such action shall be taken by the vote of a majority of • ., _ ~_} and , or the survivors of such four partners. 1 IX. The right to use the name Kuhn, Loeb & Co., and to use the books and records and the place of business of the partnership shall be confined to -, , , , , and . Such right shall continue in said five partners so long as they are partners in the partnership, or ia any partnership succeeding it, and shall cease as to any one of said five partners who shall for any reason cease to be a partner in the partnership or in any partnership succeeding it. It is hoped and expected that any action involving the exercise of the rights and privileges reserved to the partners named in this article as having the right to use the name Kuhn, Loeb & Co., will be by unanimous agreement of said partners, but in case there should be disagreement, such action shall be determined by a majority vote of , , , as long as they are partners in the partnership. If in the case of death or of other incapacity of any of the partners named in this article, there shall not at any time any action is proposed to be taken under this article be a partner living who shall be entitled to cast the vote as stated above of such — the personal representatives of the partner who shall have last represented such shall be entitled to designate any partner of the partnership to cast the vote to which would otherwise be entitled under this article. Any action so taken by a majority vote shall for all purposes be deemed to be the unanimous action of said partners. On December 31 of any year, having given, on or before November 1 of such year, notice in writing to the other partners, such of said partners named in this article as shall then have the right to use the name Kuhn, Loeb & Co., or a majority of them voting as hereinbefore provided, shall have the right to dissolve the partnership and after such dissolution, with the consent of such of said partners named in this article as shall then have the right to use the name Kuhn, Loeb & Co., or a majority of them voting as hereinbefore provided, one or more of the partners of the dissolved partnership shall have the right to form a new partnership, corporation, ©r association under the name Kuhn, Loeb & Co., with or without other partners or stockholders, subject, however, to the conditions hereinabove provided. On December 31 in any year, having given, on or before November 30 of such year, notice in writing to the other partners, such of said partners named in this article as shall then have the right to use the name Kuhn, Loeb & Co., or a majority of them voting as hereinbefore provided, shall have the right to admit an additional partner or partners into the partnership and to determine the proportions in which the net profits of the partnership shall thereafter be shared and the net losses borne by and between the partners: Provided, That if any such notice is given, any partner not wishing to remain in the partnership may withdraw from the partnership on December 31 of such year by giving at least 2 weeks' notice in writing to all the other partners. Notwithstanding any other provisions of this agreement, on December 31 of any year, the interest of any partner in the partnership may be terminated by notice in writing given to him on or before November 1 of such year by such of said partners named in this article as shall then have the right to use the name Kuhn, Loeb & Co., or a majority of tliem voting as hereinbefore provided. 1084 STOCK EXCHANGE PRACTICES X. On December 31 of any year, having given on or before October 1 of such year, notice in writing to the other partners (except in the particular case hereinabove in the fourth paragraph of article IX referred to providing for two weeks' notice of withdrawal), any partner may withdraw from the partnership. XI. If any partner shall withdraw from the partnership, or if the interest of any partner is terminated, or if the partnership shall be dissolved, and after such, dissolution and with the consent aforesaid, a new partnership, corporation, or association shall be formed as hereinbefore provided, each partner so withdrawing or whose interest is terminated, and each partner who shall not be a member of the new partnership or a stockholder of the corporation or association so to be formed, covenants and agrees that he will not, for a period of 3 years thereafter, conduct, or in any way become interested directly or indirectly (either individually, as a member of a partnership, or as an officer of, or through an active interest in, a corporation or association), in, or in the vicinity of, the city of New York, in a business similar to that which has been conducted, or similar to that which under these articles of copartnership shall be conducted, by the partnership of Kuhn, Loeb & Co.; but this provision may be waived in writing at any time, as to any partner, wholly or in part, by the partners named in article IX hereof who shall at the time of such waiver have the right to use the name Kuhn, Loeb & Co., or a majority of them voting as in said article IX provided. In case of the dissolution of the partnership and the continuation of the business thereof by a new partnership, corporation, or association in accordance with the provisions of this article XI, the liquidation of the interest of the partner or partners of the dissolved partnership who do not become members of the new partnership, or stockholders of the corporation or association so to be formed, shall be conducted by the remaining partners in accordance with the provisions of the article VIII hereof. XII. In case the partnership is dissolved and its business is not continued by a new partnership, corporation, or association, the business shall be liquidated by such partner or partners as shall be selected by a majority or , , , and , any of whom may themselves be selected, and upon such terms and conditions not inconsistent with this agreement ana for such compensation to said liquidating partner or partners as such majority may determine. Interest at the rate of — percent per annum shall continue upon capital and other moneys of partners until the same shall be actually paia. The distribution among the partners or the personal representatives of a deceased partner shall be in proportionate shares and in monthly installments as the business shall be liquidated. In case any vote or other action on the part of , -, , and • shall be required by the provisions of articles VI, VIII, or this article XII of this agreement, and and/or shall have died or for any reason be incapacitated from voting or acting, may vote or act in the place of — and may vote or act in the place of and the then executors or personal representatives of — or , respectively, may designate any partner to so vote or act in his place. XIII. Should differences arise among the partners or with a partner withdrawing from the partnership or with a partner whose interest is terminated or with the personal representatives of a deceased partner with respect to the dissolution of the partnership, or the payment of the interest of a deceased or withdrawing partner or of a partner whose interest is terminated or the delivery of securities or loans, or other matters growing out of the partnership, the same shall be settled by arbitration as follows: Either party to such differences may select an arbitrator, and in writing notify the other party of such selection. Within 5 days after receipt thereof, the other party may select an arbitrator and give written notice thereof to the first party. The determination of the arbitrator first chosen, unless another shall be so selected, and, in such case, the determination of the two thus chosen or, in the event of their disagreement, of two out of three consisting of such two and a third to be agreed upon in writing by them, shall be final and conclusive. If such two first chosen arbitrators cannot in such event of disagreement agree upon a third arbitrator within 10 days after such disagreement, the third arbitrator shall be appointed at the request of either of such two arbitrators by the senior judge of the United States Circuit Court of Appeals for the Second Circuit. ' For the purposes of this agreement any notice to be given to any of the partners shall be sufficiently given if delivered to him personally in writing or STOCK EXCHANGE PEACTICES 1085 sent by registered mail addressed to him in care of Kuhn, Loeb & Co., 52 William Street, New York City. XIV. Every position of trustee or director of a financial or business corporation or association or of membership in a reorganization committee, and every other position having relations to financial or other business enterprises, which may be held by any of the partners, shall be held by him, as between the partners, on behalf of the partnership. Each partner hereby severally agrees that he will relinquish any such position at any time upon a demand of a majority of , , , and . COMMITTEE EXHIBIT NO. 4 QUESTION NO. 14 Kuhn, Loeb & Co. balance sheet, Bee. 31, 1921 Cash on hand and in banks Call loans secured by stock-exchange collateral Time loans secured by stock-exchange collateral All other loans Accounts receivable State and municipal bonds Other bonds and stocks New York Stock Exchange membership Total $1, 904r 952.28 60, 825, 000.00 1,150,000.00 6, 478,136. 67 16, 457, 667. 76 2, 931, 668.91 7,427,202.40 70,000.00 97, 244, 628. 02 Capital Deposits Accounts .payable ± Total 20, 000, 000. 00 69, 449, 016. 08 7, 795, 611. 94 97, 244, 628. 02 Kuhn, Loeb & Co. balance sheet Dec. 31, 1928 Cash on hand and in banks Call loans secured by stock-exchange collateral All other loans Accounts receivable State and municipal bonds Other bonds and stocks $747,157. 81 46,180, 000.00 2, 07?, 670. 01 6, 455, 582. 74 15, 859, 779. 25 15, 043, 781.10 Total 86, 363, 970. 91 Capital Deposits Accounts payable 20, 000', 000. 00 58, 821,113. 02 7, 542, 857. 89 Total 86, 363, 970. 91 Kuhn, Loeb & Co. balance sheet, Dec. 31, 1929 Cash on hand and in banks Call loans secured by stock-exchange collateral Time loans secured by stock-exchange collateral All other loans Accounts receivable State and municipal bonds Other bonds and stocks Total Capital Deposits Accounts payable Total $1, 999, 739. 30 39, 350, 000. 00 10,000, 000. 00 8, 634, 640.82 10, 796, 770. 75 27, 080, 026. 22 22, 540, 926.69 120, 402,103. 78 25, 000, 000.00 88, 549, 766.13 6,852, 337. 65 120, 402,103. 78 1086 STOCK EXCHANGE PRACTICES KuJm, Loeb & Co. balance sheet, Dec. SI, 1930 Cash on hand and in banks Call loans secured by stock-exchange collateral All other loans Accounts receivable U.S. Government certificates of indebtedness State and municipal bonds Other bonds and stocks Total $3, 435,565. 80 8, 725, 000.00 9, 339, 298. 61 . 9,012,002.35 9,146,956.00 24, 403, 922.07 21, 093,007. 69 , 85,155, 752.52 Capital Deposits Accounts payable Total 25, 000, 000. 00 57, 032, 847. 08 3,122, 905.44 , 85,155, 752. 52 Kuhn, Loeb & Co. balance sheet, Dec. SI, 1931 Cash on hand and in banks1 Call loans secured by stock-exchange collateral All other loans Accounts receivable U.S. Government Treasury bills and certificates State and municipal bonds Other bonds and stocks Total '. 66, 974,845.46 Capital Deposits Accounts payable Total $16,295,242.63 300,000. 00 8, 378, 314.21 777, 409.31 24,919,859. 72 9, 953, 051.25 6,350,968.34 21, 250, 000. 00 29,118, 918.20 16, 605, 927.26 66, 974, 845.46 : COMMITTEE EXHIBIT 5 QUESTION 1 4 Ewropean Merchant Banking Co., Ltd., London, balance sheet as at December 31, 192T! ASSISTS s. d. Cash in hand 89 14 Investments (quoted stocks at market prices ruling at Dec. 31, 1927. Unquoted stocks as valued by the managing directors) 111, 826 8 £ 5 Sundry debtors and debit balances: Foreign currency credit balances 316 12 Stockbrokers' accounts (in respect of securities sold for future settlement) 42,573 3 Loans, advances, and amounts due from clients 2, 882 3 Syndicate participations at cost 61,917 19 Sundry debit balances 1, 534 18 6 7 0 7 8 1 Total 109,224 16 11 Preliminary expenses 3,667 19 8 Profit and loss account (loss for the 9 months ended Dec. 31, 1927 7,501 10 11 Total 232, 310 10 5 STOCK EXCHANGE PEACTICES 1087 LIABILITIES Capital: £ Authorized: * d5,000 management shares of £1 each 5, 000 0 0 300,000 ordinary shares of £1 each 300, 000 0 0 Issued: 5,000 management shares of £1 each, fully paid 5,000 0 0 300,000 ordinary shares of £1 each, 5 shillings paid— 75, 000 0 0 Total 80,000 0 0 Sundry creditors and credit balances: Westminister Bank, Ltd., overdraft 8,073 19 0 Stockbrokers' accounts (in respect of securities purchased for future settlement) 5,504 5 1 Sundry accounts 138, 732 6 4 Total 152,310 10 5 Grand total 232, 310 10 5 NOTE.—Contingent liabilities at December 31, 1927, in respect of: (1) Partly paid investments held, £437 10s. 0d., (2) Options outstanding, £10,500. European Merchant Banking Co., Ltd., London, balance sheet as at Deo. 81,1928 ASSETS £ s. d. Cash at bankers 8, 088 7 9 Loans at call 125,000 0 0 Investments 77,680 6 1 Participations, 6,418 8 3 Profit and loss account* 1,953 2 11 Debtors 4,470 2 9 Stockbrokers 16,808 13 1 Sundry suspense accounts, income tax, etc. (mostly recoverable) 1,501 7 7 Formation expense account Z, 667 19 8 Office decoration account 5,041 3 10 Total 250,629 11 11 LIABILITIES Capital account Creditors Sundry suspense accounts 80,000 0 0 109, 850 12 8 778 19 3 Total 250,629 11 11 European Merchant Banking Co., Ltd., London, balance sheet as at December 81, 1929 ASSETS £ Cash at bankers Loans at call Investments Participations Stockbrokers' account Debtors Sundry suspense accounts, income tax, etc Formation expense account 1 9,519 90,000 65,207 8,966 12,617 6,992 413 3, 667 After allowing for the loss of £7,501 10s. l i d . carried forward from 1927. s. d. 15 3 0 0 3 2 2 3 8 8 18 3 17 11 19 8 1088 STOCK EXCHANGE PRACTICES £ Office decorations account Profit and loss account Total 8. d. 4,850 9 4 32,360 10 2 234, 596 4 8 LIABILITIES Capital account Creditors Sundry suspense accounts , ^ Total 80,000 152, 364 2,231 234,596 0 0 4 11 19 9 4 8 European Merchant Banking Co., Ltd., London, balance sheet as at Dec. 31, 1930 ASSETS £ Cash at bank Money on short notice , Sundry debtors and outstandings: Foreign currency balances Stockbrokers' accounts in respect of securities sold for future settlement Loans, advances and amounts due from clients Sundry debtors and outstandings Total 7,477 40,000 126 S. d. 15 11 0 0 9 6 2,562 16 6 5, 221 16 9 1, 232 7 11 9,143 10 8 Office decorations, furniture, and fittings at cost, less depreciaciation Per last balance sheet Less : Amount written off 4,850 4, 850 9 9 4 4 Preliminary expenses at cost, less amount written off: Per last balance sheet Less: Amount written off 3,667 3,667 19 19 8 8 32, 360 10 2 24,159 19 5 4,850 3, 667 9 19 4 8 65,038 18 7 121. 660 5 2 5,000 300,000 0 0 0 0 305, 000 0 0 5, 000 105, 000 0 0 0 0 110,000 0 0 Profit and loss account: Balance at debit, Dec. 31, 1929 Add: Loss for the year ended Dec. 31, 1929 Office decorations, furniture and fittings, amount written off—Preliminary expenses written off Total Grand total LIABILITIES Capital: Authorized: 5,000 management shares of £1 300,000 ordinary shares of £ 1 each Total Issued: 5,000 management shares of £1 each, fully paid 300,000 ordinary shares of £1 each, 7s. paid Total STOCK EXCHANGE PKACTICES 1089 Sundry creditors: £ Stockholders' accounts in respect of securities purchased for future settlement Deposit and current accounts Sundry creditors Total s. a. 207 1 9,941 13 1, 511 10 1 5 8 11,600 5 2 Total 121, 660 5 2 NOTE.—The unpaid accrued cumulative preferential dividend on the management shares at December 31, 1930, amounted to £750. European Merchant Banking Co., Ltd., London, liquidator's statement of account from Jan. 1 to Dec. 30, 1931 To assets realized: £ Cash at bankers Gash at call Foreign currency balances Stockbrokers' accounts Loans, advances, and amounts due from clients Sundry debtors Total To To To To To net amount realized, brought down directors' fees received interest received sundry receipts dividends and other amounts collected on behalf of clients Total By liabilities discharged: Stockbrokers Deposit and current accounts Sundry creditors Sundry net amount realized carried down Total By legal charges By postage, telephone calls, lighting and sundry expensesBy income tax By liquidator's remuneration By amounts paid to, or on behalf of, clients By payments authorized by extraordinary general meeting on 2d April, 1931: Gordon Leith 34, 000 Harold Wooding 4, 500 ~ By balance, available for distribution among members, carried down Total 8. d. 7,477 15 11 40, 000 0 0 126 9 6 2,562 16 6 5, 221 16 9 1,232 7 11 56, 621 6 7 44,961 1 5 193 16 6 197 18 2 9 15 1 1, 841 9 11 47,204 1 1 207 1 1 99,941 13 5 1, 511 10 8 44,961 1 5 56,621 6 7 252 0 1 33 13 5 50 4 0 525 0 0 1, 841 9 11 38, 500 6,001 47,204 13 1 8 1 STOCK EXCHANGE PEACTICES WEDNESDAY, JUNE 28, 1933 UNITED STATES SENATE, SUBCOMMITTEE OF THE COMMITTEE ON BANKING AND CURRENCY, Washington, D.C. The subcommittee met, pursuant to adjournment on yesterday, at 10 a.m. in the caucus room of the Senate Office Building, Senator Duncan U. Fletcher presiding. Present: Senators Fletcher (chairman), Barkley, Goldsborough, Townsend, and Steiwer. Present also: Ferdinand Pecora, counsel to the committee; Julius Silver and David Saperstein, associate counsel to the committee; and Frank J. Meehan, chief statistician to the committee; Carl A, de Gersdorff, Eober T. Swaine, and M. T. Moore, counsel for Kuhn, Loeb & Co. The CHAIRMAN. The subcommittee will come to order. We will proceed with our hearings. Mr. Pecora, you may go ahead. TESTIMONY OF BENJAMIN J. BTJTTENWIESER, A MEMBER OF THE FIRM OF KUHN, LOEB & CO.—Resumed Mr. PECORA. Mr. Buttenwieser, in the course of your testimony yesterday afternoon you stated in answer to a question that was addressed to you by the chairman of this committee that— They— Meaning the representatives of the Chilean Government— wrote us a letter stating that it was impossible for them to live up to the payments under their guarantees. The whole subject was covered in the text of the Chilean moratorium law of July 1931. That answer of yours appears at page 188 of the stenographic minutes of the hearing of yesterday. Have you that letter with you, or a copy thereof? Mr. BUTTENWIESER. Mr. Pecora, it wasn't a letter. They were telegrams and letters. Yes, sir; I have those. Mr. PECORA. Can you produce them readily? Mr. BUTTENWIESER. Yes, sir. And, Mr. Pecora, I should like to point out that this was in July of 1931. Mr. PECORA. Yes. Mr. BUTTENWIESER. And the default only occurred, as you appreciate, 6 years after ;the issue which we have been discussing. Mr. PECORA. That is, the first issue? Mr. BUTTENWIESER. After the first issue; yes. 1091 1092 STOCK EXCHANGE PRACTICES Mr. PECORA. And some. 2 years after the last one ? Mr. BUTTENWIESER. Correct, sir. Mr. PECORA. Which was in 1929? Mr. BUTTENWIESER. Right. Do you want me to read that letter? Mr. PECORA. If you will. Mr. BUTTENWIESER. Would you like to see one of them first, to see if it is the one? Mr. PECORA. Let me see the file of correspondence. Mr. BUTTENWIESER. All right. Mr. DE GERSDORFF. I think you have those, Mr. Pecora. Your examiners have seen all those. Mr. PECORA. All right. Now, one of the letters submitted to me by the witness reads as follows—and, Mr. Chairman, if there is no objection I will read it into the record. The CHAIRMAN. All right. Mr. PECORA. It is on the letterhead of the Republic of Chile, Minister of Finances, Santiago, December 2, 1922, and is addressed to Messrs. Kuhn, Loeb & Co., New York: I beg to acknowledge receipt of your letter dated October 19, 1932, in which certain protests are expressed against the failure of the services on the loans issued through the mediation of your bank. In this regard I write to declare that in view of the enormous decline of the exportation of Chilean products of every kind has deprived the nation of the possibility to dispose of foreign exchange in order to attend to the services on the foreign obligations with you. The undersigned hopes as soon as the decline in world prices permits of an improvement of the foreign commerce of Chile the creditor will be in a position to resume service on its foreign obligations. Then he says " I remain ", and so forth,, and signs his name as Minister of Finances. Now, Mr. Buttenwieser, let me ask you what study was made, if any, of the financial condition or status of the Mortgage Bank of Chile prior to the time when your firm agreed, with the Guaranty Co., to underwrite the first issue of $20,000,000 of these bonds ? Mr. BUTTENWIESER. We made a careful study of its past record. Mr. PECORA. That is a characterization. Tell us what you really did. Mr. BUTTENWIESER. We noted that it had a 70-year record of performance where the maximum losses over a period of 10 years preceding this issue had been $40,000; that their securities in the home market sold as well or better than government securities. And in addition to that, as I stated on yesterday, we insisted upon having and placed great reliance on the guarantee of the Republic of Chile endorsed on the bonds. Mr. PECORA. What study, if any, did you make of the appraisal basis upon which this Mortgage Bank of Chile made its mortgage loans ? Mr. BUTTENWIESER. We could not make any study of the appraisal value. We could, of course, rely on the statements contained in that prospectus and confirmed in the report of the Department of Commerce that the bank had handled its affairs—well, I should rather quote the exact text than to rely on my memory, but I think the words were—I have them right here and will refer to them— Had conducted its affairs with uniform safety and success. STOCK EXCHANGE PRACTICES 1093 Mr. PECORA. Well, that is the statement embodied in the letter by the Chilean Ambassador, isn't it ? Mr. BTTTTENWIESER. It is taken from a report of a special agent of the Bureau of Foreign and Domestic Commerce of the Department of Commerce of the United States. Mr. PECORA. Well, is there anything in that letter or in that report which informed you of the appraisal basis of the mortgage loans made by this mortgage bank of Chile? Mr. BUTTENWIESER. I t states that— It makes only first-mortgage loans. The loans are made on a conservative basis, and the risk is greatly diversified. Mr. PECORA. I S that included in that report ? Mr. BUTTENWEISER. I think substantially that sense is embodied in that report. But I am quoting now from the letter again, and it says Mr. PECORA (interposing). Have you got the report itself? Mr. BUTTENWEISER. Yes, sir. I am continuing from this prospectus— The aggregate appraised improved value of the properties mortgaged as security for these loans amounted to more than four times the amount of the loans. Which is just what they had always told us, that the loans were made approximately up to 25 percent of the appraised improved value of the property. But I want to stress again that we placed the greatest reliance, of course, on the unconditional guaranty of the Republic of Chile endorsed on the bonds. Mr. PECORA. Did you place a greater degree of reliance upon that guaranty than you did upon the security of the mortgage loans made by the bank? Mr. BUTTENWIESER. I would say that we relied on both. Mr. PECORA. Which was the principal inducing factor, the guarantee of the Government or the security behind those bonds, the security consisting of the mortgage loans, or the loans secured by mortgages, I mean ? Mr. BUTTENWIESER. It is impossible to differentiate what the degree was between the two. Mr. PECORA. The fact of the matter is, that you did make some differentiation in view of the fact, as testified to here on yesterday, that you would not have underwritten the bond issue on the security of the mortgage bonds themselves, but you insisted on a Government guarantee. Mr. BUTTENWIESER. That is correct. Mr. PECORA. DO you recall that, in a communication which was put into the record on yesterday that passed between your firm and your representatives in Chile, attention was called, among other things, to the lack of capital on the part of the Mortgage Bank of Chile? Mr. BTTTTENWIESER. That was to Louis Dreyfus & Co. in Paris, when we were first discussing the loan. Mr. PECORA. That is right. Mr. BUTTENWIESER. Yes, sir. The CHAIRMAN. Let me ask you a question right there: Did you consider those mortgages made by the bank and which they held, probably a trustee being somewhere, as security for those bonds? 1094 STOCK EXCHANGE PRACTICES Mr. BUTTENWIESER. Yes, sir. All loans made by the Mortgage Bank of Chile are security for all of these obligations. The CHAIRMAN. Why cannot the bondholders go after that security? Mr. BUTTENWIESER. Because there is at present a moratorium in effect in Chile. I t was put into effect toward the end of July of 1931, and it is still in effect. Mr. PECORA. When did the first default occur on any of those issues ? Mr. BUTTENWIESER. After that moratorium. The CHAIRMAN. Did you make any investigation as to the public debts in Chile ? You must have regarded that as necessary, to have the government guarantee of those bonds looked into. Do you remember what the public debt of Chile was at that time ? Mr. BUTTENWIESER. Yes; and we stated that in the prospectus: * The debt of the Republic and all other obligations guaranteed by it aggregate about $250,000,000 at that time.1 The CHAIRMAN. At the time of the first loan ? Mr. BUTTENWIESER. In 1925; yes, sir. The CHAIRMAN. HOW much is that total ? Mr. BUTTENWIESER. I t is $250,000,000. The CHAIRMAN. Has that debt been increased since? Mr. BUTTENWIESER. Yes, sir. Mr. PECORA. That $250,000,000 indebtedness was, of course, exclusive of the $90,000,000 bond issues that you floated? Mr. BUTTENWIESER. Certainly. The debt I gave was in 1925. Mr. PECORA. SO that between 1925 and 1929 your firm and the Guaranty Co. of New York jointly floated bond issues exceeding one third of the preexisting total indebtedness of Chile ? Mr. BUTTENWIESER. That is quite correct. Mr. PECORA. Was not a study made of any balance sheet of the Republic of Chile prior to your acceptance of the first issue ? Mr. BUTTENWIESER. I know of no balance sheet of any government. Mr. PECORA. Well, you know what I mean by that. Mr. BUTTENWIESER. We made a careful study of the trade figures of Chile which, after all, are the most important factor surrounding the external debt of any country. Mr. PECORA. NOW, those trade reports informed you, didn't they, that the principal export of Chile was nitrates? Mr. BUTTENWIESER. And copper. Mr. PECORA. Yes; and copper. Mr. BUTTENWIESER. Yes, sir. Mr. PECORA. But nitrates more than copper, isn't that a fact ? Mr. BUTTENWIESER. I haven't those figures in my memory, Mr. Pecora. I do not know which is the principal of the two. And, of course, it would depend upon the world price of each of those commodities before we could determine which formed the major portion of those exports. But the balance of trade was very favorable and had been very favorable as far back as 1900. I believe I stated, and I am relying on my memory now, that there were only 3 years between 1900 and 1924 when Chile had not had a substantial favorable trade balance. STOCK EXCHANGE PRACTICES 1095 Mr. PECORA. Didn't your study of those trade reports acquaint^ou with the fact, among other things, that with regard to this nitrate industry, which you admit was probably the principal export product, that Chile's natural nitrate product was coming more and more into competition with synthetic nitrates being manufactured by various European nations? Mr. BUTTENWIESER. Not being an expert on nitrates it is very difficult for me to answer that question. But my understanding of it was, and still is, that one needed the natural nitrates to mix with synthetic nitrates. However, I repeat again that I am not an expert on nitrates and yet I believe the nitrate situation in Chile at that time was quite favorable. The fact that it had such a large favorable trade balance, and the fact that nitrate was one of its important items of export, must show that the nitrate situation in Chile was still very favorable. Mr. PECORA. Are you familiar at all with the production of nitrates? Mr. BUTTENWIESER. NO ; not at all. Mr. PECORA. IS anybody in your firm familiar with Mr. BUTTENWIESER. No. We have no one who would that subject? be conversant with a highly technical subject like nitrates. Mr. PECORA. Well, apart from the technical character of the subject or the technical aspects of the subject, didn't you have some one in your personnel who was familiar with business conditions? Mr. BUTTENWIESER. I think and hope we are all familiar Mr. PECORA (continuing). Sufficiently to enable you to determine whether or not the guarantee of the Chilean Government was a guarantee that could be lived up to if it wanted to live up to it? Mr. BUTTENWIESER. It had been lived up to for 100 years, and it seemed it would be lived up to. But I do not see how anyone could have foreseen in 1925 the world cataclysm that came in 1931, when, through an unprecedented drop in world commodity prices the Chilean export balance dropped. And I might point out that it so happened that the decline in most other countries, occurring as it did before that, showed that Chile was a sound country. Naturally, when the price of nitrates and copper dropped in the world markets, and in some cases below cost of production, that vitally reflected on the trade balance of Chile. Mr. PECORA. When did the decline in the nitrate industry of Chile commence ? Mr. BUTTENWIESER. I could not tell you that definitely. Mr. PECORA. Wasn't it around 1925 and 1926 markedly \ Mr. BUTTENWIESER. I do not think so. But, again, I would have to have that checked. My recollection is that it was at a later time, not in 1925. Mr. PECORA. Have you any recollection at all of when it was, or have you any knowledge of when it was? Mr. BUTTENWIESER. I have no direct knowledge. And once again I must emphasize that we took the composite favorable trade balance of Chile and relied on that. We relied on the unbroken record of Chile for, I believe, 100 years of living up to its every obligation; and that included the period of the World War, which was a trying time for all countries, including South American countries. 1096 STOCK EXCHANGE PRACTICES Mr. PECORA. YOU recognize the fact, don't you, that the American investing public looks to the issuing house's responsibility, or rather reputation and prestige, in buying its issues ? Mr. BUTTENWIESER. Yes, sir. Mr. PECORA. Mr. Kahn testified quite at length about that on yesterday. He emphasized that several times, if you recall. Mr. BUTTENWIESER. And I fully subscribe to that. Mr. PECORA. SO that you feel it was the duty of the issuing house, of your house in this instance, to make a complete study of the situation in Chile before you underwrote its bonds with a view to disposing of them to the American investing public? Mr. BUTTENWIESER. Correct. We thought we should, and we did. Mr. PECORA. NOW, I am trying to find out exactly what study you made of the internal economy of Chile with a view of fortifying your own minds as to the security of these bonds. So far you have told us, and the thing you have emphasized is that you looked to a long record of honoring its obligations by Chile, over a period of 70 or 80 years. Is that the sum and substance of the study you made % Mr. BUTTENWIESER. Oh, no. Mr. PECORA. What else did you do ? Mr. BUTTENWIESER. I stated that we looked at its trade figures as far back as 1900. Mr. PECORA. Did you analyze its industrial situation ? Mr. BUTTENWIESER. I don't think we did that except Mr. PECORA (continuing). Beyond looking at the figures? Mr. BUTTENWIESER. Don't the figures speak for themselves? Mr. PECORA. In other words, you made no breakdown of the figures, did you? Mr. BUTTENWIESER. I don't see how figures like that are susceptible of a break-down. The figures speak for themselves. There was a very favorable trade balance for 24 years preceding the time when we made the issue, and there was a very favorable trade balance for 6 years after we made the issue. Chile continued as long as world commodity prices were maintained, that is, until the very severe decline, an unprecedented decline came, Chile continued to have this very considerable favorable trade balance, which enabled it to meet its obligations. Mr. PECORA. After you took the first issue in 1925 and before you underwrote the four subsequent issues, or any of them, did you make any study of the nitrate industry, not only of Chile but of the world? Mr. BUTTENWIESER. I must repeat again, we relied upon the export balance of Chile, a part of which was nitrates, of course. Mr. PECORA. Did you make any study of the nitrate industry throughout the world? Mr. BUTTENWIESER. AS I recall, we made no specific study of the nitrate situation, though, of course, we realized. Mr. PECORA. YOU realized what? Mr. BUTTENWIESER. We had not seen, as far as I can recall, any reason to change our opinion as to the favorable trade situation of Chile. The CHAIRMAN. Did you make any examination into the political situation there ? Mr. BUTTENWIESER. HOW can anyone make a study of the political situation of another country? And there I must repeat, we relied STOCK EXCHANGE PEACTICES 1097" on the advice of counsel as to the validity of the guarantee endorsed on those bonds. The CHAIRMAN. Well, you knew of the tendency toward revolution, down there. Did you make any study as to whether the revolutions were due to the depressed economic conditions or were the economic conditions due to the revolution? Mr. BUTTENWIESER. Senator Fletcher, I hate to differ from you, but I do not think there was a tendency toward revolution in Chile. As I recall, that was one of the very few they have had doAvn there. I would term it rather a liberal movement than a revolution. The CHAIRMAN. It had one turnover just before the Government went in that guaranteed your issue here, and then there came this one, and I think they have had one or two since. Mr. BUTTENWIESER. This was all the same liberal movement, I believe. Mr. PECORA. Mr. Buttenwieser, will you look among your files and see if you can find a document entitled " Chile First Mortgage Bank Bonds'"? Mr. BUTTENWIESER. Could you read the first sentence of that again to see if I have the right one ? Mr. PECORA. It is: The following memorandum outlines the political situation in Chile at the time of the negotiations for the First Mortgage Bank loan of 1925. Mr. BUTTENWIESER. I have that before me. Mr. PECORA. Well, now, I have what purports to be a copy of that, which was furnished to us by your firm. You follow me as I read from my copy of it, so that the record will get it in accordance with your copy. The memorandum proceeds to say as follows: Chile has had a de facto government since the first week of September 1924,. when military and navy officers formed a council and announced that they were going to take charge of public administration until certain reforms were effected. The cause of this movement was a general feeling of dissatisfaction with political and economic conditions of the country. The President and the House of Deputies represented the popular feeling, but the reactionary majority in the Senate had brought about a deadlock in administration. Various ministers appointed bv the President had been able to hold office for very short terms since their tenure was dependent upon congressional approval. The military council announced that upon the dissolution of the Congress preparations would be made to hold popular elections of delegates to a constituent assembly which would promulgate a new constitution, and then elections will be held in July of 1925. And there also will be an election for a new President. The first military council held power until in January of 1925 it was ousted by a similar council composed, however, of younger officers more in sympathy with general public opinion, .meaning the middle classes and the proletariat as opposed to that of the old conservative vested interests. President Alesandro was then recalled from his " vacation" in Europe. Military councils have promulgated laws and decrees, and exercised all the functions of government. The Chilean Embassy says that the judiciary has recognized such laws a'nd decrees as a part of the legal code. Of course questions have been raised as to the actual status of such measures, but in the meantime they have been effective. There is only one political event like this in the past Chilean history; in 1891 there was a short civil war caused by political differences. Afterward the currency issued by both sides was recognized, and there is no record of the abrogation of administrative measures of a general nature. Now, before I read further from this memorandum I want to ask you who prepared the memorandum. 175541—33—PT 3 10 1098 STOCK EXCHANGE PKACTICES Mr. BUTTENWIESER. This memorandum was shown to me yesterday, and I cannot tell you who prepared it. Mr. PECORA. Well, it was shown to you as being one of the documents in your files with regard to these Chilean issues, was it not? Mr. BUTTENWIESER. Only yesterday, and I had to have it sent from New York, and I cannot tell you who prepared this memorandum. It was among the papers which were marked " preliminary papers." My belief is that this is a translation of papers which came from Chilean counsel. But I say again it is my belief, and I do not know, and of course my recollection cannot be so clear when going back 6 years, and Mr. PECORA (interposing). Is it your present belief that the first time your attention was ever called to this memorandum in your files was yesterday? Mr. BUTTENWIESER. Oh, no. I believe I had seen it in 1925. Mr. PECORA. Have you any recollection of knowing of the existence of this memorandum and familiarity with its contents prior to June 1925 when your firm participated in the flotation of the first $20,000,000 issue? Mr. BUTTENWIESER. I do not know that I saw it prior to June of 1925. I am certain I saw it in 1925, of course. And Mr. PECORA (interposing). Don't you know Mr. BUTTENWIESER (continuing). Pardon me. I believe it came from our Chilean counsel. And in connection with that I should like to read an excerpt from the opinion of our Chilean counsel on this subject, because it refreshes my belief that it was he who furnished it, because he goes into some detail. Mr. PECORA. Well, I will come to that, and you will have every opportunity to present it. Mr. BUTTENWIESER. With your indulgence I could read it now, because it is right along that line. Mr. BUTTENWIESER. It says [reading] : VALIDITY OF THE BONDS As I have already stated above, the Gaja was duly authorized by its organic laws and regulations and by the decree laws of March 9 and June 15, 1925, to issue these bonds and the director of the treasury to sign the State guaranty in behalf of the Government. It only remains to see whether these so-called " decree l a w s " are valid and binding upon the Republic of Chile. I am decidedly of the opinion that they are. It is quite true that the matters of these decree laws are the subject of a law enacted in the form prescribed by our constitution, and that Congress having been dissolved, they can justly be qualified as unconstitutional; but as I pointed out to you in my telegraphic dispatches they are none the less valid and binding upon the Republic, as dictated by the only supreme authority of the country. Decree law dated March 9, 1925, is shaped in the form adopted by the Government for the dictation of its resolutions of a general character; but decree dated June 15, 1925, was only dictated in the form of a simple decree, because it only refers to a particular case. I do not give, though, to this difference the least importance. It is simply a question of names. We have now a de facto Government which has assumed all the faculties; the constitution has been left aside as if it did not exist, while a new one is being drafted and prepared, to be adopted by the people by the means of a plebiscite, and all the Government resolutions, let them be called decree or decree laws, have the same bearing and binding force all through the Republic. It is a well-known doctrine adopted by all the authorities on international law and confirmed by a uniform practice in the whole world that no State has STOCK EXCHANGE PRACTICES 1099 the right to qualify the resolutions or acts of governments of other States, provided they are not contrary to international laws and that any obligations contracted by such governments are perfectly valid and binding especially in regard to foreign parties acting bona fide. This doctrine is accepted even in cases where there are two factions governing in certain parts of the territory of a nation; but doubtless it acquires more strength in a case like the case of Chile where there is but one single Government acting with the tacit consent of all the citizens of all the authorities and of all the armed forces. A great number of decree laws have been dictated by the present Government and of the most varied description, and all of them have been respected by the citizens, by the authorities, and by the courts of justice. New organization has been given to many branches of the public administration, many decree laws of a special character have been enacted, heavy taxes have been imposed; but every citizen considers himself bound to obey them. If a de facto government should dictate a law granting some special concessions to private individuals without receiving a just compensation from them, it might be contended that they are null and void and therefore disavowed by a succeeding legal government; but in our case it is not the question of a concession or special favor accorded by the Government; it is a contract by whose fulfillment the country shall be highly benefited; it is an act in which both parties give as much as they receive; it creates reciprocal obligations, and unless trespassing over the clearest principles of morality nobody would ever dare to raise any doubt as to the perfect validity and binding force of your agreement with the Caja. Furthermore, apart from the direct responsibility that this agreement imposes upon the Gaja, I am strongly of the opinion that the State is also responsible for any acts of this institution, since, as I have already explained, it is an organ of the State, governed by State ofiicials, controlled by the State comptrollers, and even if the Government had not placed its signature on the agreement and on the bond, it could never waive its responsibility derived from acts of its own institutions. It seems to me idle to dwell any longer on this purely academic digression and I close this report by repeating once more that in my opinion the temporary bond issued by the Caja de Credito Hipotecario and with the endorsed guaranty signed by the director of the treasury and the definitive bonds to be issued in substitution for the temporary ones are, or shall be, perfectly valid documents in the hand of their holders of whatever citizenship or residence and are binding upon said Caja and upon the Republic of Chile in time of war as well as in time of peace, in accordance with their terms and with the provisions of the agreement signed in New York on the 25th of June 1925. And subsequent de jure governments have recognized the validity of the guaranty, which has never been questioned. Mr. PECORA. Well, I am not considering so much the naked validity of the guaranty as I am considering the question of actual physical or financial ability of the, Government under the conditions which were existing at that time to live up to its guaranty. Now, in the advice from your counsel, Manuel Foster, which you have just read, there is contained this statement: This doctrine is accepted even in cases where there are two factions governing in certain parts of the territory of a nation; but doubtless it acquires more strength in a case like the case of Chile where there is but one single government acting with the tacit consent of all the citizens of all the authorities and of all the armed forces. Now, Mr. Buttenwieser, did it not appear from this memorandum that you were reminded of yesterday afternoon that the government that was in power in Chile at the time your firm underwrote this issue with the Guaranty Co. was a government established by force, at a time when the Congress had been dissolved, and when there was an election pending for the selection of delegates to what is called a constituent convention or assembly which was to f ormu 1100 STOCK EXCHANGE PRACTICES late a new constitution ? Could you say that that wa& the kind of government that was acting with the tacit consent of all the citizens ?' Mr. BUTTENWIESER. The election was held. The Government was recognized as de jure shortly thereafter. Mr. PECORA. NOW, the election was not to be held until July 1925y according to this memorandum from which you read % Mr. BUTTENWIESER. That is correct. Mr. PECORA. The first issue of these bonds was made in June 1925 ?' Mr. BTTTTENWIESER. That is correct. Mr. PECORA. SO that the election for delegates to a constituent assembly had not yet been held ? Mr. BUTTENWIESER. No. Mr. PECORA. And there was no way of determining at that time what form of government would be established by the new constitution, was there ? Mr. BUTTENWIESER. There was no way of determining it ahead of time; no. As I said before Mr. PECORA. There was no way of determining whether or not in the creation of a new government based upon a new constitution recognition would be given to this indebtedness or this guaranty of the Government, was there ? Mr. BTTTTENWIESER. Under all principles of international law, I repeat again that our counsel advised us they would have to be recognized, and the fact remains they were recognized, and I reiterate they never were questioned.. And interest and sinking fund on them was paid regularly until 6 years later, and there was never any connection between the validity of the guaranty of this Government and the nonpayment of interest. Mr. PECORA. Does it not strike you that the advice your counsel was giving you was similar to the classical advice of the lawyer who advised his client in jail that they could not put him in jail r and the client said, " Well, here I am " ? Mr. BUTTENWLESER. I do not really follow the analogy, Mr. Pecora.. Senator BARKLEY. Does the present Chilean Government still recognize the validity of these issues? Mr. BUTTENWIESER. Sir? Senator BARKLEY. Does the present Government still recognize the validity of these issues? Mr. BUTTENWIESER. Certainly. That letter which Mr. Pecora just read earlier from the Finance Minister of Chile recognized the validity of the bonds. Senator BARKLEY. I do not recall the date. What date was that letter? Mr. BUTTENWIESER. That Vas October 1932, I believe. Mr. PECORA. December 1932. The CHAIRMAN. Was this letter the latest expression that you had from the Government? Mr. BUTTENWIESER. That is the latest we have from the Chilean Government; yes, sir. That followed, of course, after our sending the protest to our State Department and having it returned. Mr. PECORA. NOW, the laws and decrees under which the de facto government was functioning were laws and decrees that were formulated by the military council, were they not, and not by any popular assembly or congress? STOCK EXCHANGE PRACTICES 1101 Mr. BUTTENWIESER. Formulated by the only authority that existed :at the time in Chile. Mr. PECORA. And that only authority was composed of this military council, was it not? Mr. BUTTENWIESER. Which was the governing council. Mr. PECORA. It was a military council composed of military and naval officers, was it not? Mr. BUTTENWIESER. I do not know. The entire situation Mr. PECORA. YOU do not know. Does not the memorandum in your files inform you of that specifically? Does it not say, for instance, a Chile has had a de facto government since the first week of December 1924, when military and navy officers formed a council and announced that they were going to take charge of public administration until certain reforms were effected " ? And does it not say further that, " The first military council held power until in January 1925 it was ousted by a similar council composed, however, of younger officers more in sympathy with general public opinion ", and so forth? Mr. BUTTENWIESER. Yes, sir. That is why I answered I did not know whether this younger—this second council of which you spoke was all officers. But it may have been. And I do not see that it changes the situation any. This government had been in power under this council form for 9 months. The election was held shortly thereafter. The government was recognized. And no one has ever •questioned the validity of the bonds. Mr. PECORA. Did you not know that the first military council was ousted within 4 months by a second military council? Mr. BUTTENWIESER. Again, there was a change in the council; correct, sir. Mr. PECORA. In other words, there was a change in the personnel of what you are pleased to call the de facto government ? Mr. BUTTENWIESER. Which was more in sympathy with the general public opinion, meaning the will of the middle classes and the proletariat. Mr. PECORA. Yes; and which continued to function under its own laws and decrees rather than under laws passed by a popular assembly or Congress? Mr. BUTTENWIESER. An election for which they were going to hold shortly thereafter. Mr. PECORA. And the election for which was not to be held until after you took over the first issue of $20,000,000? Mr. BUTTENWIESER. That is correct, sir. And I repeat again, we liad the best of legal advice that the bonds and the guaranty would be legally binding. And while I realize of course one cannot judge by results, the fact is the validity of the bonds and the guaranty never has been questioned. Mr. PECORA. Well, do you not inquire into something more than the mere naked validity? Do you not give some consideration to the practical question of financial ability to meet the obligations apart from the legal validity of the obligation? Mr. BUTTENWIESER. Certainly we do. We separate the two. As I tried to say yesterday: The one is the legal aspect of it; the other is tlie economic aspect. We tried our best to assure ourselves on 1102 STOCK EXCHANGE PEACTICES both. We got the best advice we could on the legal side and we got the best information we could on the economic side. Mr. PECORA. NOW, on the economic side: Did you learn in your study of the economic side of the question that the railroads of Chile r which were owned by the Government, had been operating at a deficit in 1924? Mr. BTTTTENWIESER. I think I know of many places where the railroads had been operating at a deficit for several years. Mr. PECORA. Well, we are talking about Chile now, where the railroads were government-owned, and hence could be regarded as a source of revenue with which the government could meet its obligation or guaranty. Did you know that, Mr. Buttenwieser? Mr. BUTTENWIESER. I think I knew that; yes. But I again want to lay great stress on the composite picture, which was that Chile did have this very sizable trade balance which enabled it to meet all its obligations, contingent and direct, for 6 years after the issuance of these bonds. Mr. PECORA. DO you know whether Chile had balanced its budget in 1924 or 1925? Mr. BUTTENWIESER. I do not think it had. I might add I do not think there is any reason why one should not buy bonds of a government just because it has not balanced its budget. Mr. PECORA. Well, the fact that it has not balanced its budget is not an argument in favor of the security of the bond, is it ? Mr. BUTTENWIESER. NO. But, on the other hand, I think there are Mr. PECORA. If anything it is an argument against it, is it not ? Mr. BUTTENWIESER. I think you will agree, though, that there are very many prime securities—our own Government securities—which one should not hesitate in buying just because the Government has a very substantial deficit, and in Chile it did not have a substantial deficit. Mr. PECORA. Did the fact that the nitrate industry began to show disturbances, marked disturbances, shortly after you took over the first issue in 1925, influence your judgment in taking over the second issue of $20,000,000 in 1926? Mr. BUTTENWIESER. I do not know that there was any marked falling off in that. Mr. PECORA. Well, now, let us see. You have already testified that in one of the informative documents that you consulted in order to reach a determination as to whether or not you would take over these bond issues were reports of the United States Department of Commerce. Did you know what statement was made about the economic condition of Chile in the Commercial Year Book for the year 1926 that was issued by the United States Department of Commerce ? Mr. BUTTENWIESER. I do not know which particular statement you refer to, Mr. Pecora. Mr. PECORA. Well, this statement: The principal factor in Chile's economic position during 1926 was the weakening demand for nitrate brought about by competition from European artificial fertilizers. Did you ever come across that statement in the Year Book of the United States Department of Commerce for the year 1926 ? STOCK EXCHANGE PKACTICES 1103 Mr. BUTTENWIESER. I think it was down for the year 1926; then went up again. I believe I recall that statement; yes. Mr. PECORA. YOU could not tell in 1926 if it was going up again, could you, any more than you could tell that, after it went up, it suffered a more serious decline ? Mr. BUTTENWIESER. N O ; I could only judge by the figures that we had, and the figures we had were that the favorable trade balance which had been $77,000,000 in 1925 did drop to $42,000,000 in 1926, but still left a very sizable favorable trade balance. And then in 1927, I might add, went up again to $72,000,000. In 1928 it went up to Mr. PECORA. And what did it go down to after that ? Mr. BUTTENWIESER. In 1928 it was up to $92,000,000. And the following year, 1929, $81,000,000. In 1930, which was the one time it became unfavorable, it was $8,000,000, but in 1931 it became favorable again, $26,000,000. And I might add it seems to have had even a favorable trade balance for the first 2 months of this year. Mr. PECORA. Let me ask you: Who prepared the prospectus that accompanied the offering of the first issue of these bonds in 1925 to the American public? Mr. BUTTENWIESER. The controller of the Mortgage Bank of Chile was up here at the time negotiating this loan. He prepared it, doubtless, in consultation with us. Mr. PECORA. Well, you say " doubtless in consultation with us.5* Can you make any such statement unqualifiedly? Mr. BUTTENWIESER. It is difficult for me to remember exactly, but I think we consulted with him as to the form of the prospectus certainly. Mr. PECORA. Who actually wrote the prospectus that was put out to the public here? Mr. BUTTENWIESER. We all worked on it, that is, certain of us in consultation with the Mortgage Bank controller who was up here, in consultation probably with our lawyers. Several of us worked on it, I should say. Mr. PECORA. DO you recall whether you worked on it? Mr. BUTTENWIESER. Yes; I think I worked on it. Mr. PECORA. DO you recall whether any other associates of Kuhn5, Loeb & Co. or any of its partners as then existing worked on it? Mr. BUTTENWIESER. Oh, Mr. PECORA. Who? Mr. BUTTENWIESER. NO yes. one of us would write a prospectus like that alone. Mr. PECORA. Who sat around the composing board for this prospectus from the house of Kuhn, Loeb & Co. ? Mr. BUTTENWIESER. My recollection is that Mr. Mortimer Schiff was consulted on it. My former associate, Mr. Leonard Keesing^ who was at that time the head of the foreign department, and I. And no doubt various others. Those are the ones that I just recollect. Mr. PECORA. NOW, it was known to you at the time, I believe you stated, that at that time and for some years prior thereto the Chilean Government had not balanced its budget, but that its expenditures far exceeded its income. Was any mention made of that fact in the* prospectus ? 1104 STOCK EXCHANGE PRACTICES Mr. BUTTENWIESER. It did not far exceed it. And that budget included capital expenditures. Mr. PECORA. Was any mention made in the prospectus of the fact that the Chilean Government for some years before that had not balanced its budget, but that its expenditures had exceeded its income ? Mr. BUTTENWIESER. AS I recall, there was no statement made of the budget of the Chilean Government in that circular. Mr. PECORA. DO you not think the investing public here whom you sought to have purchase these bonds were entitled to that knowledge through the medium of your prospectus ? Mr. BUTTENWIESER. I must repeat again, Mr. Pecora, I think what is of far vaster importance in the ability of any government to meet its external obligations is its ability to remit those funds to the creditor country. Therefore, the favorable trade balance of Chile was the all-important factor in the ability of Chile to meet its obligations in external centers. Mr. PECORA. I repeat, do you not think that the American investing public was entitled to know what you people knew, namely, that the Government of Chile, whose guaranty you relied upon more than you did upon any other factor, had not balanced its budget for a number of years prior to this issue? Mr. BUTTENWIESER. It had not balanced its budget by a small amount for several years before that, which included, I repeat, capital outlays. And I might add that our own Government when it sells its obligations puts in no budget statement. Mr. PECORA. I repeat again, do you not think that the American investing public was entitled to have the knowledge that you possessed when the circular or prospectus was given to the public in connection with the offering of this issue to it, to the effect that the "Chilean Government had not balanced its budget for a number of years prior thereto? Mr. BUTTENWIESER. NO; the trade figures were more important, Mr. Pecora. And I might point out that when it had a favorable budget we did not put it in the prospectus either, which happened in later years. Mr. PECORA. NOW, when you talk about favorable trade balance you simply mean that the exports exceed in value the imports, do you not? Mr. BUTTENWIESER. That is correct, sir. Mr. PECORA. Well, what bearing has that on the ability of the Government to meet its obligations? Exports are not the exports of the Government, but of individuals living under the Government, are they not? Mr. BUTTENWIESER. A government, as I understand it, of a country which has a favorable trade balance is one whose people are therefore prosperous. Therefore it can raise funds in its own market which it remits to the foreign country where it owes its debts. Mr. PECORA. What was the population of Chile at that time? Mr. BUTTENWIESER. I haven't that figure in mind. I will try and get it. Mr. PECORA. Around 4,000,000, was it not? Mr. BUTTENWIESER. I will take your figure. I do not just know. Mr. PECORA. NO ; I do not want you to take my figure. I have not STOCK EXCHANGE PRACTICES 1105 made an exhaustive Study of it, and I do not want you to trust to* my defective knowledge. Mr. BUTTENWIESER. I will be willing to bow to that, Mr. Pecora. I have not the figure before me. I do not know. I will take it for 4,000,000 for the purposes of discussion. Senator BARKLEY. AS a matter of fact, is it not true that until within the last 2 or 3 decades over large periods of our history therewere unfavorable balances of trade ? Mr. BUTTENWIESER. DO you mean the United States? Senator BARKLEY. The United States. Mr. BUTTENWIESER. If my memory serves me rightly we have had a favorable trade balance. That has been our great strengthSenator BARKLEY. In the last 20 or 30 years, yes; but prior to that have we not had short periods in which we had unfavorable balances ? Mr. BUTTENWIESER. It is a little before my day, Senator. Senator BARKLEY. Well, mine too. Mr. BUTTENWIESER. I think that is probably true, and that is just the time we did borrow money abroad. Senator BARKLEY. That is the point I want to get at; that we have not always had a favorable balance of trade since we were established as a nation 150 years ago. Mr. BUTTENWIESER. But it is a very comfortable feeling to have one. Senator BARKLEY. I realize that. I am not certain that it always has a bearing upon the ability of the Government to pay its debts. Mr. BUTTENWIESER. Well, the places where we borrowed our money when we had the unfavorable balance of which you spoke seemed to think it had a bearing because they loaned us the money. Europe loaned us vast amounts. Senator BARKLEY. They loaned it to us when we had an unfavorable balance, too. Mr. BUTTENWIESER. Well, I guess they thought as well of us as we do of ourselves. Senator BARKLEY. For a long time after this Government was established we brought in more stuff than we shipped out. Mr. BUTTENWIESER. DO you mean the United States Government ? Senator BARKLEY. Yes. We imported more than we exported. Yet the Government was able to borrow money. We did not have any occasion to borrow very much until the Civil War. Mr. BUTTENWIESER. I do not know those figures, Senator Barkley. Qf course, I would yield to your recollection on it, but I think it has been our proud boast that we have had a favorable trade balance for many years. I do not know how far back you would want to go. Senator BARKLEY. But I mean we have not hacl it all during our history ? Mr. BUTTENWIESER. NO ; I should think not. Mr. PECORA. NOW, did you analyze these trade balances of Chile* with a view of ascertaining the diversified character of its exportsor what diversification there was in its exports ? 1106 STOCK EXCHANGE PRACTICES Mr. BUTTENWIESER. I think we mentioned what the major exports were. I think we stated: Chile is a mining and agricultural country. Its mineral products are largely raw materials for essential industries. Exports consist chiefly of nitrates and byproducts of the nitrate industry, copper, borax, wool, and a limited amount of agricultural products. The nitrate deposits are the only large natural deposits so far discovered in the world. The copper industry has been extensively developed, largely by American capital. We stated quite clearly that copper and nitrates were the major factors of export. Mr. Pecora, I want to take this opportunity to compliment you on your memory. The population in Chile was about 4,000,000—3,753,000—in 1920. I would like to make public recognition of your excellent memory. Mr. PECORA. NO ; I knew that when I was a schoolboy. Mr. BUTTENWIESER. Well, you have got a very retentive memory then. Some one has called my attention to the fact that you do not look as though you were a schoolboy in 1920. Mr. PECORA. NOW, you have said in the course of your testimony heretofore, Mr. Buttenwieser, that this Caja or Mortgage Bank of Oiile was only empowered or only made first-mortgage loans. Mr. BUTTENWIESER. Against bonds which it issued. Mr. PECORA. NOW, as a matter of fact, was it not also empowered and did it not also make second-mortgage loans? Mr. BUTTENWIESER. I do not think it made second-mortgage loans. And if it did it did not issue bonds against it. I tried to make quite clear yesterday that it issued its bonds only against first-mortgage loans that it made. Mr. PECORA. NOW, your prospectus contains this statement, does it not: The Caja issues its bonds only against mortgages registered in its name. I t makes only first-mortgage loans. Does it contain that statement? Mr. BUTTENWIESER. The 1925 prospectus? Mr. PECORA. Yes. Mr. BUTTENWIESER. Yes, sir. Subsequent prospectuses, where it did issue notes against other things, changed that wording; that is, supplemented the wording. Mr. PECORA. Have you in your files a report made by this gentleman who was formerly the manager of the foreign department of jour firm, Mr. Leonard Keesing, dated June 4, 1926, in which reference is made to the kind of mortgage loans which were made by the Caja? Mr. BUTTENWIESER. I do not know which memorandum you refer to, Mr. Pecora. Mr. PECORA. Well, I have given it to you by date—June 14, 1926. Mr. BUTTENWIESER. That is a year after this issue. Mr. PECORA. Yes. And before the four subsequent issues. Mr. BUTTENWIESER. DO you mean that part that says: The Caja makes loans on first mortgages only, except, of course, temporarily when a loan is made by it to pay off the previous first mortgage, in wMc(h •case the Caja temporarily obtains a second mortgage which becomes a first mortgage after the old first mortgage is repaid. Is that what you mean ? STOCK EXCHANGE PRACTICES 1107 Mr. PECORA. That is the memorandum I mean. Now, will you continue reading from the point where you stopped, from that memorandum ? Mr. BUTTENWIESER (reading) : There is one provision in the fundamental law of the Caja which has never been cleared up. This was discussed at the time of the last issue, but the point was not insisted upon, because we had the Government's guaranty. Mr. PECORA. DO not read it so fast. I cannot follow you. Mr. BUTTENWIESER. Shall I start over again, Mr. Pecora? Mr. PECORA. Well, go ahead from the point where you left off. Mr. BUTTONWIESER (continuing reading): This provision is as follows: " The Caja may loan on property already mortgaged, provided the loan does not exceed one half of the value in excess of prior liens." Mr. PECORA. SO the Caja may loan on second mortgage to an amount not exceeding 50 percent of the equity over and above an existing first mortgage? Mr. BUTTENWIESER. That seems to be the case from this. But in that case it would not issue its bonds against such a loan. Mr. P^CORA, Was the public ever told that the Caja could make loans on second mortgage? Mr. BUTTENWIESER. I do not think it did to an appreciable extent ever make second-mortgage loans. It may, however, as is stated here, temporarily, of course. But I do not think it made any substantial second-mortgage loans. Mr. PECORA. N O ; it does not say that it may temporarily. The provision that you yourself read is this: The Oaja may loan on property already mortgaged, provided the loan does not exceed one half of the value in excess of prior liens. Mr. BUTTENWIESER. Quite right. It says it may. Mr. PECORA. That does not refer to temporary loans. Mr. BUTTENWIESER. It says it may. But I repeat, I believe it was its practice not to. Mr. PECORA. Well, was the American investing public informed that the Caja had the right to make loans on second mortgage? Mr. BUTTENWIESER. I would have to look up not alone the prospectus but the listing applications and things like that. I do not know of my own memory whether it went in the prospectus or not. Mr. PECORA. DO you know of your own memory whether or not the Caja actually made any of these second mortgages? Mr. BUTTENWIESER. NO ; I do not know. Mr. PECORA. YOU do not know. Were any steps taken to keep yourself informed currently as to the kind of mortgage loans the Caja was making? Mr. BUTTENWIESER. Yes; against any bonds that it issued. Mr. PECORA. Well, now, were these bonds issued against the mortgages or were they issued against the general credit of the bank? Mr. BUTTENWIESER. Both. Mr. PECORA. Where is the provision in the agreement controlling that? Mr. BUTTENWIESER. It is the provision in the bond, the text of the bond, that the bond represents the full faith and credit of the Mortgage Bank protected by all its assets. 1108 STOCK EXCHANGE PRACTICES Mr. PECORA. That is just the point I am seeking to make. The obligation of the bond is merely to the effect—or the statement in the bond is to the effect that it is issued against the credit of the bank? Mr. BUTTENWIESER. It is stipulated that they will not issue bonds except against a stipulated equal sum of mortgages. Mr. PECORA. But without limiting it to first mortgages ? Mr. BUTTENWIESER. Yes; the bonds were limited to first mortgages. Mr. PECORA. Show me the provision in the bond that was sold to the American investor to that effect. Mr. BUTTENWIESER. In answer to your question, Mr. Pecora, I would like to read this statement from the prospectus signed by the Ambassador of the Republic of Chile, which says: The Oaja issues its bonds only against mortgages registered in its name. Then farther along it says: The Caja is not permitted by law to have its bonds outstanding in excess of the mortgage loans against which they are issued. Mr. PECORA. Well, that does not mean that the mortgages themselves are applicable to the liquidation of the bond, does it? I t simply means that the bond is issued on the credit of the bank? fortified by the guaranty of the Government, does it not? Mr. BUTTENWIESER. But it had to have that many first mortgages against any bonds that it issued. Mr. PECORA. But a bondholder could not proceed to enforce those mortgage-loan obligations in order to receive payment of his bonds? could he? Mr. BUTTENWIESER. He could proceed against the Mortgage Bank. Mr. PECORA. Yes? Mr. BUTTENWIESER. For all of its securities. Mr. PECORA. Certainly. Mr. BUTTENWIESER. All of its assets. Mr. PECORA. That is just the point I have been trying to make, Mr. Buttenwieser. JSTow, at what prices did the underwriting houses, namely, your firm and the Guaranty Co., take over this first issue of $20,000,000 in 1925? Mr. BUTTENWIESER. At 93 percent. Mr. PECORA. 93. At what price were they offered to the public? Mr. BUTTENWIESER. 97% percent. Mr. PECORA. That was a spread of 4% percent to the bankers ? Mr. BUTTENWIESER. I want to make it quite clear there was a spread of 4% percent, because there was a one fourth of a percent interest gain in the purchase of those bonds at 93. The CHAIRMAN. What rate of interest did it have ? Mr. BUTTENWIESER. Six and one half percent, this issue. Mr. PECORA. And they matured in 1957? Mr. BUTTENWIESER. That is right; with, of course, a sinking fund. Senator TOWNSEND. What amount was set up for the sinking fund? Mr. BUTTENWIESER. A 1 percent approximately cumulative sinking fund, which is a sinking fund which will eat up a 6% percent— will mature a 6%-percent obligation in 32 years. It was so set up that the sinking fund would mature the entire loan by 1957. STOCK EXCHANGE PRACTICES 1109 Mr. PECORA. NOW, Mr. Buttenwieser, what banking houses or firms participated in this original underwriting? Mr. BUTTENWIESER. In the original? Mr. PECORA. Yes. And what was the extent of their respective participations ? Mr. BUTTENWIESER. The Guaranty Co., 45 percent; Lehman Bros., 10 percent; Kuhn, Loeb & Co., 45 percent, Mr. PECORA. HOW were these bonds floated? Mr. BUTTENWIESER. They were issued by public offering. Mr. PECORA. Well, were any groups formed between the original group and the selling to the public ? Mr. BUTTENWIESER; Yes; there was a syndicate and there was a selling group. Mr. PECORA. Well, now, which came after the original group? The syndicate? Mr. BUTTENWIESER. The syndicate. Mr. PECORA. Who formed that syndicate? Mr. BUTTENWIESER. The Guaranty Co. and ourselves. Mr. PECORA. And who were invited to participate in that syndicate ? Mr. BUTTENWIESER. A larger group of retailing houses which were regularly or habitually members of our usual syndicates. Mr. PECORA. Have you got the names of the participants in that group or that syndicate? Mr. BUTTENWIESER. They would appear in the—no; not for 1925. I have not got that. I was going to say they would appear in your questionnaire there, but they do not. The 1925 group do not. You did not ask for that; so, of course, I did not bring it, but I can easily get it. Probably three or four hundred. I do not know. Mr. PECORA. And they consisted of dealers? Mr. BUTTENWIESER. Dealers throughout the country. Mr. PECORA. And their names were taken from a list kept in your office? Mr. BUTTENWIESER. We have a list of—a relatively large list of names; that is, we think it is large—I think in comparison with most other houses a relatively small list—of dealers throughout the country located in various cities and centers where bonds are distributed. Mr. PECORA. On what terms were the participants or members of this syndicate permitted to participate ? Mr. BUTTENWIESER. Pardon me; I have the letter here. [After referring to documents:] They purchased them from the originating group at 94% percent and interest. Mr. PECORA. SO that gave the original group, composed of yourself, Guaranty Co., and Lehman Bros., a point and a half profit Mr. BUTTENWIESER. NO, Mr. Pecora. Mr. PECORA. Between the origination group and the syndicate? Mr. BUTTENWIESER. N O ; that is not exactly the figure. Mr. PECORA. Well, what is it? Mr. BUTTENWIESER. I think I can aid you in that. We bought it at 93. As I said, there was a quarter of a percent interest gain on it. That brought it down to 92%. We paid a half a percent commission to Louis Dreyfus & Co., which brought it up to 931/4, and we sold it to the syndicate at 9 4 ^ , which left a spread of a point and a STOCK EXCHANGE PEACTICES quarter for the originating group which took the original commitment, from which expenses had to be deducted. Mr. PECORA. NOW, how did this syndicate pass on the bonds offered them to the public ? Mr. BTJTTENWIESER. Through a selling group at 97% percent and allowed a selling commission of 1% percent. Mr. PECORA. Who organized this syndicate ? Mr. BUTTENWIESER. We organized it; the Guaranty Co. and weorganized the syndicate. Mr. PECORA. And who organized the selling group that came after the syndicate? Mr. BUTTENWIESER. The Guaranty Co. and we organized it on behalf of the syndicate. Mr. PECORA. Who managed the syndicate ? Who managed the operations of the syndicate ? Mr. BTJTTENWIESER. Kuhn, Loeb & Co. Mr. PECORA. And who managed the operations of the selling group that came after the syndicate ? Mr. BUTTENWIESER. As is customary, the syndicate managers managed the selling group on behalf of the syndicate. Mr. PECORA. SO that means that Kuhn, Loeb & Co. managed the operations of the selling group ? Mr. BTJTTENWIESER. Correct, sir. Mr. PECORA. And then the selling group is composed of a much larger group than the syndicate group, I assume? Mr. BTJTTENWIESER. Larger. How much larger it was I do not: know. Mr. PECORA. And they were scattered in various parts of the country ? Mr. BUTTENWIESER. Correct, sir. Mr. PECORA. And it was the members of the selling group that passed the bonds on to the investing public; is that right? Mr. BTJTTENWIESER. That is right. Mr. PECORA. At 97% ? Mr. BUTTENWIESER. That is right. Mr. PECORA. NOW, Mr. Buttenwieser, why was it necessary to organize so many intermediate groups between the original group and the investing group, each group taking a profit? Mr. BTJTTENWIESER. The originating group, as was discussed yesterday, took the original commitment. Mr. PECORA. Yes. Mr. BTJTTENWIESER. A very sizable commitment. I t had to stand in the breech until all of the bonds were paid for. I t was a larger commitment than one would want to carry comfortably, so naturally we would form a larger group to share that responsibility with us, although, of course, it does not one bit diminish your original commitment from the party from whom we bought the bonds. Mr. PECORA. What I am trying to get at is this, Mr. Buttenwieser: I am trying to find out the reason why the original group composed of yourselves, the Guaranty Co., and Lehman Bros, found it necessary to organize first a syndicate, composed of a large number of persons, and then after that to organize a selling group composed of a still larger number of persons, in order to dispose of these bonds to the investing public. STOCK EXCHANGE PKACTICES 1111 Mr. BUTTENWIESER. It is very analogous to an insurance company which spreads its risk. We had that original commitment of $20,000,000, and we wanted to diversify that risk, although, I repeat, we had the original commitment, and then it being a new issue for this market, we wanted as diversified distribution as we could get, therefore we formed this larger selling group, which got its compensation for distributing the bonds. Mr. PECORA. Why could not you form the larger selling group without the intervention of the syndicate between the original group and the selling group ? Mr. BTJTTENWIESER. That would not spread the risk. The selling group merely sells for a commission, a selling commission. Mr. PECORA. Are you speaking now of merely spreading the underwriting risk? Mr. BUTTENWIESER. Yes, sir. Mr. PECORA. Then the original group or the underwriters which took over the issue at 93 from the Chilean bank was not assuming a risk that it wanted to carry all alone ? Mr. BUTTENWIESER. It continued to carry that risk. It merely tried to redistribute its risk, but it continued that original risk. Mr. PECORA. When you say redistribute its risk, what you really mean is to try to get other shoulders in addition to its own shoulders to support that risk ? Mr. BUTTENWIESER. Yes, that is correct. Mr. PECORA. TO sustain that risk? Mr. BUTTENWIESER. That is correct. Just like—I come back to the insurance analogy—if an insurance company writes a very large risk it likes to redistribute that among others who can share that risk with them. Mr. PECORA. But the insurance company does not pass on the cost of the spreading of that risk to the insured, does it? Mr. BUTTENWIESER. I rather expect it does. I do not think the other insurance companies would take that risk for it for nothing. Mr. PECORA. Don't you know, as a matter of fact, that the premium paid by the insured is a fixed figure based upon tables in the office of the insurer irrespective of the subsequent spreading of the risk by the original insurer? Mr. BUTTENWIESER. Surely. So was the spread here, Mr. Pecora. .Mr. PECORA. N O ; each group took a different profit, didn't it? Didn't each group take an independent profit ? Mr. BUTTENWIESER. It is again the insurance analogy. If the insurance company wanted to make the entire premium it would take the entire risk itself. If we had wanted to take that entire risk ourselves for the larger margin, we could have, but we did not think it was a prudent risk to take. Mr. PECORA. The price at which you offered these bonds to the public was not a fixed actuarial figure, was it ? Mr. BUTTENWIESER. NO, sir. Mr. PECORA. It is one that is arbitrarily determined by the underwriters, by the issuers, isn't it? Mr. BUTTENWIESER. I do not want to quibble over words, Mr. Pecora, of course. It is not arbitrarily fixed. It is fixed commensurate with what similar securities are selling for in the investment market. 1112 STOCK EXCHANGE PKACTICES Mr. PECORA. And that figure is determined by the original group, isn't it? Mr. BUTTENWIESER. That figure is determined by—you mean the price at which securities are selling in the market? Mr. PECORA. NO ; the price at which it is offered to the public. Mr. BTJTTENWIESER. Yes; that is determined by the originating :group. Mr. PECORA. In the analogy that you draw of an insurance company distributing its risk among other companies the premium paid by the insured is a fixed figure, isn't it ? Mr. BTTTTENWIESER. I do not know, but I rather think insurance rates vary according to companies. I know it seems that way to me when I pay my insurance premiums. Mr. PECORA. But the premium, the figure is a fixed figure, fixed ] by each company for its own business ? Mr. BUTTENWIESER. Yes. Mr. PECORA. SO that persons coming within certain age classifications pay the same rate of premium, don't they? Mr. BXJTTENWEISER. In each company. Mr. PECORA. Yes. Now, in a case of the distribution of bonds by the original group, an originating group, to the investing public, you say that the originators seek to distribute among others' shoulders the risk which they have assumed in the underwriting? Mr. BUTTENWEISER. Yes; if they so desire, yes. Mr. PECORA. And in order to enable them to do that they organize syndicates or groups intermediate between themselves and the investing public? Mr. BTTTTENWIESER. That is correct. Mr. PECORA. And in this instance there were two such groups organized, one after the other? Mr. BUTTENWIESER. No; there was only one such underwriting group. The other is a selling group. Mr. PECORA. There are two such groups organized at the instance of the underwriters, first the syndicate, then the selling group? Mr. BTJTTENWIESER. Yes, but the selling group does not take any risk. The selling group merely sells for a commission. I t takes no obligation, no commitment. The CHAIRMAN. The point, as I understood it, is, why didn't you as the original underwriters distribute these securities yourself without these intervening agencies? Mr. BUTTENWIESER. We ourselves, Senator Fletcher, are not retail distributors. As I think we brought out yesterday, we maintain no selling organization at all. We are what they call wholesalers. Mr. PECORA. YOU sell through these distributing agencies? Mr. BUTTENWIESER. That is right. Mr. PECORA. Throughout the country? Mr. BUTTENWIESER. That is correct, sir. Mr. PECORA. And you have a list in your office and you invite them to participate in the organization of selling groups from time to time, don't you? Mr. BUTTENWIESER. That is correct. Mr, PECORA. In other words, they are part of your machinery for rselling bonds to the public, aren't they? STOCK EXCHANGE PRACTICES 1113 Mr. BUTTENWEISER. They are part of everyone's selling machinery. Mr. PECOEA. Well, I am now inquiring into yours. Mr. BTTTTENWIESER. Yes, sir. Senator ADAMS. This selling group, they actually buy the bonds from you, don't they? They do not merely have them on consignment? That is, if they should fail to sell them they cannot return them to you or to the syndicate? Mr. BTTTTENWIESER. No. Your description is quite accurate. The day that they offer the bonds if some customer, Jones or Smith, comes to them and says, " I want 10 bonds of that issue," they order from us 10 bonds. The moment those bonds are allotted to them against that subscription then they are responsible for them. Senator ADAMS. SO to that extent they are carrying that much of the risk; in other words, of disposing of that part of the bonds? They have bought the bonds; they are no longer acting for you ? M r . BlJTTENWIESER. N o . Senator ADAMS. They are the owners of those bonds, and it is up to them to dispose of them if thejr wish? Mr. BUTTENWIESER. After they have ordered them from us, predicated on the sale to some one of their clients, then they are committed to us; yes. Senator ADAMS. That is, the distributing group, yourself, send out telegrams offering to them an allotment of so much and they will say yes or no to that ? Mr. BTTTTENWIESER. NO ; not the distributing group. To the syndicate we offer a certain underwriting, and if they accept they are committed for that share of the underwriting. To the distributors we send another letter or telegram saying these bonds are for sale, and we send along a description of them. Then if their clients, their retail clients, want to purchase those bonds they go to their distributor, from whom they have been purchasing bonds, or through whom, and say " We would like to buy a certain number of those bonds." That distributor in turn communicates with ns and says " We would like so many bonds ", sending in an order to cover what all of their clients together have ordered. As soon as they have given us that order and we have confirmed to them the number of bonds that we can give them against that order, then they are committed. Senator ADAMS. But this ultimate distributor sells no bonds that he does not own, that he has not asked for and contracted finally to pay you or pay the syndicate for? Mr. BUTTENWIESER. That is correct* Mr. PECORA. NOW, will you describe, step by step, the history, in chronological order, of the underwriting, syndicating, distribution, and selling of this first issue of bonds to the public ? Let me assume that we are all schoolboys and we want to get some elementary education into this financing operation. Mr. BUTTENWIESER. I hesitate to be the " little child leading ", but I will try my best to give you a picture of how this is done. The first step is to sign your contract with the borrower. That is the originating group. It may be one; in this case it was two. Mr. PECORA. Three; wasn't it? Lehman Bros, were given a subsequent participation? 175541—33—PT 3 11 1114 STOCK EXCHANGE PRACTICES Mr. BUTTENWIESER. They were not co-contractors. They participated with us on the original terms, but they were not co-contractors. The Guaranty Co. and ourselves were the original contractors, and we, of course when I say we I mean the Guaranty Co. and ourselves— remained responsible to the party from whom we purchased those bonds, in this case the Mortgage Bank, throughout the entire operation. Mr. PECOEA. When you say you remained responsible, let me ask you, did you discharge that responsibility by turning over to the Chilean bank the price at which you took over these bonds, which was 93? Mr. BUTTENWIESER. Yes, sir. Mr. PECORA. And when did you do that? Mr. BJJTTENWIESER. At the request of the Mortgage Bank, which wanted those funds over a period of time, we paid them four million six hundred—and wherever I say " we " I mean, of course, the Guaranty Co. and ourselves—paid them $4,650,000 on July 1, $4,650,000 on July 10, $9,300,000 on July 29, all of these dates 1925. That is a total of $18,600,000, which is the purchase price at 93 percent for 20,000,000 bonds, and I repeat again the installment purchase was done at their request, and that accounts for that one quarter of a percent interest gain to which I called your attention. Mr. PECORA. All right. Now when was the syndicate organized? Mr. BUTTENWIESER. Then after we had signed the contract with the Mortgage Mr. PECORA. Give us the date of that event. Mr. BUTTENWIESER. June 25, 1925. Mr. PECORA. Yes. Mr. BUTTENWIESER. On the evening of June 25, 1925 we would send out the syndicate letters, a letter seeking to form a syndicate to share this risk with us. Mr. PECORA. And when was the organization of that syndicate completed ? Mr. BUTTENWIESER. Only when the parties to whom wTe had sent such invitations accepted them and took the commitment. Mr. PECORA. When did that happen? Mr. BUTTENWIESER. That may have been the next day or in the course of the next 2 days. I cannot tell you just when all of them accepted the invitation to join. Mr. PECORA. Then the syndicate was organized within a few days after June 25 ? Mr. BUTTENWIESET. Yes. But after the signing of the contract. Mr. PECORA. After the signing of the contract, which was on June 25? Mr. BUTTENWIESER. Eight, sir. Mr. PECORA. And did the members of that syndicate pay to the originating group any moneys representing the extent of their participation in the syndicate? Mr. BUTTENWIESER. NO. In this case they did not have to, because the bonds were purchased by the members of this selling group. So they were all paid for by the selling group. But they stood committed to. Mr. PECORA. They stood committed. They merely assumed a risk but did not part with a dollar, is that right? STOCK EXCHANGE PKACTICES 1115 Mr. BUTTENWIESER. In that particular case, that is correct. Mr. PECORA. Yes. Now, when was the selling group formed? Mr. BUTTENWIESER. At the same time we would send out invitations to this larger list to which you have referred inviting them to sell these bonds to offer them to the public. Mr. PECORA. I understood you to say in answer to certain questions that were put to you by Senator Adams that the members of the selling group were the ones wjio bought the bonds and then they in turn retailed them to the public. Did I misunderstand your testimony ? _Mr. BUTTENWIESER. No; I do not think you misunderstood it. Maybe I did not make it quite clear. What I meant to show was that they purchased no bonds; at least, I assume they purchased no bonds, until they had clients who wanted to purchase those bonds from them. In other words, the exact situation is this, Mr. Pecora: If you would want to purchase some bonds you would go to the dealer through whom you normally purchase bonds and say, " I have seen this issue advertised today; I would like to buy some of those bonds ", whatever the number may be. .1 do not want to estimate your fortune. And the dealers in turn would communicate with us and say, " We want a certain number of those bonds." Then when we had his order we would confirm to him an allotment of a certain percentage against his subscription. Mr. PECORA. When was this selling group definitely organized and their sales to them confirmed ? Mr. BUTTENWIESER. The sales to them confirmed the next day, if they succeeded in selling all those bonds for fhe syndicate the next day. Mr. PECORA. What was the date when your selling group was fully organized, completed, and allocations made to their respective members ? Mr. BUTTENWIESER. The next day. Mr. PECORA. The next day from what? Mr. BUTTENWIESER. I believe they were all sold the next day. Mr. PECORA. The day following which date'! Mr. BUTTENWIESER. That would be June 26. Mr. PECORA. SO that, at the time the original group who were the underwriters organized the syndicate, they also organized the selling group and got their commitments on their orders. Is that right ? Mr. BUTTENWIESER. That is correct, except I want to make it quite clear that the underwriting risk had not been definitely consummated at the time we sent out these invitations to the selling group to sell these bonds. In other words, the two go out simultaneously, but there is no assurance to the originators that the syndicate to whom it wants to distribute will accept that responsibility. Does that make it quite clear, Mr. Pecora ? Mr. PECORA. N O ; I still do not understand when the originating group were informed by the various persons whom they invited into the selling group that the entire issue had been or would be absorbed by the selling group members. Do you see what I am after? Mr. BUTTENWIESER. That depends on the public response to the offering. In other words, if the offering is quickly absorbed by the investing public, then the orders come in relatively quickly during 1116 STOCK EXCHANGE PRACTICES the first day of the offering, and you are enabled that evening to make your allotments against the subscriptions which you have rceived from the many members of this selling group. Mr. PECORA. When do you receive finally all the subscriptions from the members of the selling group? Mr. BUTTENWIESER. On the 26th of June in this particular case. Mr. PECORA. On the 26th day of June. So that within 24 hours after the originators committed themselves to this entire issue or agreed to pay, in other words, $18,600,000 for these $20,000,000 par value of bonds, it had definite commitments from many members of the selling group to the effect that the entire issue would be absorbed by them? Mr. BUTTENWIESER. That is correct. In this particular instance it is correct. Mr. PECORA. I am speaking of this particular instance, Mr. BUTTENWIESER. There have been many cases, you appreciate, of course, where the public response has not always been that satisfactory, and then we had Mr. PECORA (interposing). I want to see the history of this particular issue. Mr. BUTTENWIESER. Quite right, sir. The CHAIRMAN. Then you had in your possession remittances covering the entire amount that you transmitted to the Mortgage Bank ? Mr. BUTTENWIESER. We had the commitment, Senator Fletcher, yes, but we did not have the money. Mr. PECORA. Well, you had succeeded in 24 hours5 time after you had assumed the risk by the original underwriting in passing on that risk or distributing it to the syndicate and to this selling group ? Mr. BUTTENWIESER. That is correct. We distributed, but we did not have the money, and I repeat again, and I cannot overemphasize it, we were still committed for $18,600,000, and we did not have that money in our till from these distributors for quite some days. Mr. PECORA. And when did you get the remittances from the distributors for the issue? Mr. BUTTENWIESER. July 15. Mr. PECORA. July 15. That is when payment was finally made for all the issue, to the entire issue? Mr. BUTTENWIESER. That is when the distributors paid for the entire issue; yes, sir. Senator STEIWER. YOU received it, then, in one payment? Mr. BUTTENWIESER. The bonds we sold we sold to distributors, and they paid for them in full. Senator STEIWER. Did they pay all in one payment? Mr. BUTTENWIESER. All made in one payment. Senator STEIWER. On one day? Mr. BUTTENWIESER. On one day. The delivery of the bonds is made simultaneously. Mr. PECORA. NOW, these dealers who composed in the main the distributing group, the selling group, were all persons of known responsibility to you, were they not ? Mr. BUTTENWIESER. Yes; we esteemed them as being responsible. Mr. PECORA. Persons with whom you had dealt on similar matters on many prior occasions? Mr. BUTTENWIESER. Yes, sir. STOCK EXCHANGE PEACTICES 1117 Mr. PECORA. YOU felt that their responsibility would be respected and would be lived up to by them to you ? Mr. BUTTENWIESER. We try to be scrupulously careful to do business only with people that we think are thoroughly responsible. Mr. PECORA. And with regard to this particular issue that responsibility, I suppose, was lived up to fully by the members of the selling group? Mr. BUTTENWIESER. It Mr. PECORA. SO that was. you received all remittances covering the entire issue or the purchase of the entire issue from the members of the selling group by July 15 ? Mr. BUTTENWIESER. That is correct, sir. Mr. PECORA. NOW, what profits accrued to the members of the original group from this issue? Mr. BUTTENWIESER. The original profit? Mr. PECORA. All the profits that accrued to Kuhn, Loeb & Co. for their participation in this underwriting? Mr. BUTTENWIESER. Our profit in this issue was $111,207.24. Mr. PECORA. IS that the entire profit ? Mr. BUTTENWIESER. That was our entire profit in that originating group; yes, Mr. Pecora. Mr. PECORA. NO ; I mean the entire profit that you got, not only as a member of the originating group but as a member and manager of the syndicate and as a member and manager of the distributing group. Mr. BUTTENWIESER. Pardon me a minute. I will have to see what further profit we may have made. [After referring to documents.] Mr. Pecora, I am sorry, I haven't any data to show whether or not we had any participation in that syndicate. I haven't that figure with me, but I can readily have it looked up and will let you know. It could not have been anything sizable, and my associate, Mr. Stewart, says his recollection is there was no further profit to us in that transaction. Subject to our checking that, I would like to make that my reply. If there is any correction, I will see that you get it this afternoon or tomorrow morning if it can be determined. Mr. PECORA. Is that net or gross, this figure of $111,207.24? Mr. BUTTENWIESER. That is net. Mr. PECORA. What was the gross? Mr. BUTTENWIESER. YOU appreciate, of course, when I say " net ", that does not include any allowance for our overhead expense of our doing business, which was described to you yesterday. Mr. PECORA. What was the gross profit ? Mr. BUTTENWIESER. In this particular transaction the gross and the net to the originating group was exactly the same. Mr. PECORA. NOW, I assume from the fact that the Guaranty Co.'s interest in the originating group was equivalent to yours that they obtained a similar profit ? Mr. BUTTENWIESER. That is correct, sir. Mr. PECORA. And that Lehman Bros, obtained a proportionate profit for their 10 percent interest in the originating group? Mr. BUTTENWIESER. Yes, sir. Mr. PECORA. What were the total profits to the originating group ? Mr. BUTTENWIESER. $247,127.20, which you will see is just about that 1^4 percent that you and I arrived at a little earlier. 1H8 STOCK EXCHANGE PKACTICES Mr. PECORA. And that was the profit accruing to the members of the original group or the underwriters from this transaction in which they assumed a risk, which they succeeded in passing on in its entirety in 24 hours to hundreds of dealers throughout the country. Is that a fair statement ? Mr. BUTTENWIESER. In this case it is correct, Mr. Pecora, but I must point out again in many other cases that was not our experience, to our regret, and I can refer again, for instance, to the case where the Lusitania sank, where we were committed for the issue and where it did not go off quite so smoothly and untrammeled as this did. Mr. PECORA. In these various bond issues that you underwrite you do not often have Lusitania sinkings ? Mr. BUTTENWIESER. Fortunately not, but there are other events which might equally affect the ability to distribute that risk and to sell the bonds. Mr. PECORA. Have you the contract that was entered into between the underwriters and the Mortgage Bank of Chile? Mr. BUTTENWIESER. YOU mean between the original group ? Mr. PECORA. Yes. Mr. BUTTENWIESER. Yes, sir. Mr. PECORA. Will you produce it, please, so I may offer it in evidence ? Mr. BUTTENWIESER. Mr. Pecora, here again, this is the only copy I have. Mr. PECORA. The reporter will be very careful to return it to you. Mr. DE GERSDORFF. This is not a signed copy. Mr. PECORA. That is all right. It embodies all the terms and provisions of the agreement. I offer this in evidence and ask that it be spread on the record. The CHAIRMAN. It may be marked and spread on the record. (Document entitled "Agreement Between Caja de Credito Hipotecario and Kuhn, Loeb & Co., and Guaranty Co. of New York ", dated June 25, 1925, was thereupon designated " Committee Exhibit 10, June 28,1933 ", and appears on page 1154.) Mr. PECORA. NOW, in order that we may get a second lesson in this, Mi. Buttenwieser Mr. BUTTENWIESER. I appreciate the flattering term. Mr. PECORA. Let me ask you what your custom was with respect to allocating or offering these bonds to the selling group, the distributors in other words. Was it the custom for the underwriters or originators to offer more in amount tha-n they actuallyy had to sell? Mr. BUTTENWIESER. NO. YOU would offer the original issue. You would state quite clearly that you had an issue of such and such proportion to sell, and then you would hopefully await their orders. Mr. PECORA. Well, as a matter of fact, wasn't it customary and isn't it customary for the original group to confirm sales to an amount in excess of the actual amount that is to be offered ? Mr. BUTTENWIESER. Very often the case. Mr. PECORA. Was it done in this instance? Mr. BUTTENWIESER. Yes, sir. STOCK EXCHANGE PRACTICES 1119 Mr. PECORA. What was the extent of that excess in percentage, or in dollars and cents? Mr. BUTTENWIESER. In amount $539,000 of principal amount of bonds. Mr. PECORA. Why is that done, Mr. Buttenwieser ? Mr. BUTTENWIESER. That is done because a great many people feel that they want to purchase those securities. They very often overestimate their ability to pay for them, or for some reason or other they change their mind between the time they order the bonds and the time the time comes to pay for them. To use the analogy of the retail department store, you cannot very well give it back. You can sell it in the market. Therefore, in the case of a new issue, until it becomes thoroughly absorbed, the syndicate or the selling group, or whatever it may be, must be standing ready to purchase any bonds from customers who want to, so to speak, return their goods from a sale; and, therefore, in order to be able to repurchase these bonds and give them a proper market till they find their ultimate investment status, you must stand ready to purchase them. Mr. PECORA. That is, you must stand ready to stabilize or give support to the market during the period of time that is usually fixed for disposing of the issues to the investing public? Mr. KAHN. May I for a moment " butt " in, Mr. Pecora? Have I your permission ? Mr. PECORA. Certainly. TESTIMONY OF OTTO H. KAHtf, A PARTNER OP KUHN, LOEB & CO.—Resumed Mr. KAHN. Our experience is that when we have 20 million bonds for sale we have, as a matter of fact, 21 millions or 2 1 ^ millions. It is not guessing. It is based upon many years of experience, that there are perhaps 5 percent, perhaps 2y2 percent, perhaps 3 percent, of the subscribers who take more than they really mean to keep. They either take it more as I might go into a department store and buy something that appeals to me, and when I got home my wife would say to me, " What on earth did you buy that for? There isn't a bit of use for it." I say, " Well, I will try and get rid of it again." And I go to the department store, and they say, " No; no giving back here." So I will try and sell it. And there are a number of distributors Mr. PECORA (interposing). Mr. Kahn, isn't that a rather unfortunate analogy, in view of the growing practice of the department stores to make refunds? Mr. KAHN. AS far as I know that practice does not prevail. It has never prevailed in my instance. Mr. PECORA. Then you do not shop in the same stores as Mrs. Pecora does. [Laughter.] Mr. KAHN. And furthermore, Mr. Pecora, there are a number of distributors—and again I want to emphasize I am not now guessing ; I am speaking of what a long experience has taught us to be a definite and reliable fact—there are a number of distributors who, either because their optimism is greater than their placing power or 1120 STOCK EXCHANGE PRACTICES because they want to make a good impression, subscribe for rather more than they can get rid of. Now there are people also—1928 and 1926 have shown that lamentably—there are people also who might be persuaded by a plausible distributor that they had better buy some of those bonds, and when the man has thought it over for a day or two and the date of payment comes along he says, " Well, I better get out of that if I can." Now, I think it is the duty of the originator to see to it as far as he reasonably can and as far as his means permit him without " busting " himself in the process, to see to it, not that a market is made for the time that the ordinary distribution takes, but that a market is made for a reasonable length of time for the people at large, including distributors, to make up their minds whether these bonds are really definitely placed. Mr. PECORA. Mr. Kahn, what is that reasonable period of time usually ? Mr. KAHN. Pardon? Mr. PECORA. What is the extent of that reasonable period of time ? Mr. KAHN. Well, it varies, Mr. Pecora, depending upon the nature of the bond. Mr. PECORA. Well, in the average case? Mr. KAHN. If you have a bond which has a ready, current, wellestablished market, a kind of bond that savings banks and insurance companies and conservative investors have been trained to buy, it would not take very long, I should say a month or two. Mr. PECORA. It is usually a period that does not exceed 60 days, isn't it? Mr. KAHN. N O ; not usually; except that sometimes the banker of his own volition, or the originator, go beyond that period. But that depends upon the circumstances of the case. If it is a bond that is unusually difficult to place it may take a little longer, but ordinarily you are right in saying it is about 60 days. Now, a bond is not like a stock that shoots up like weeds. A bond is a tender plant. It has got to be nursed. It has got to be watered. I do not mean " watered " in the sense of stock. [Laughter.] I do not mean " watered " in the sense the word is used as applied to " stock watering." But the bond is in no way like a stock, especially in this country. In this country we are naturally—well, I don't want to say speculators, but we prefer something that has got life and movement to it rather than something which brings 4 percent or 5 percent or 3 percent, and we cannot get any more. We are optimists. We like to take a chance on these things that we have bought turning out well. Therefore, a stock is a very different thing to deal with from a bond. Senator ADAMS. Mr. Kahn, if one of your optimistic distributors overestimates his capacity, do you let him simply rescind to that extent or do you simply take it off his hands at the market ? Mr. KAHN. We take it off his hands at the market. Senator ADAMS. SO that if the market has gone down, why, he suffers a loss to that extent? * Mr. KAHN. I should say in the market, rather. We put orders to a reasonable extent in the market which are to enable people that have overbought to get out without extra loss or without a STOCK EXCHANGE PEACTICES 1121 loss of any more than the commission that they have counted on. And we feel that this is the duty of a banker, both toward the public and toward the corporation whose credit he is called upon to protect. A very small offering of bonds for which there is no market may depreciate the price to an almost unbelievable extent. I have seen four or five bonds hanging over the market when there was no purchaser, by accident, by chance, and those four or five bonds depreciated the market by several percent until someone came along and bought them. We do not think that is the right thing to do, and we think it is part of our duty and part of our syndicate's duty to put our money in at our own risk and expense and the syndicate's risk and expense and say, " Well, now, we will see that decent protection is offered to those who bought the bonds." As Mr. Pecora says, it does not take more than 60 days, but it may take more. Senator ADAMS. Mr. Pecora, I was going to tell you of an instance that happened in one of the committee hearings. There was an issue of stock brought out and they wanted to protect it, and in order to do so they bought back more stock than the total issue. That came out in one of these hearings. Mr. KAHN. The very reverse of the system—if I may go on one minute longer; I will only be 1 minute—that prevails in England, and I think ours is a far more ethical system and a much more protective system. In England when you issue a bond the issuing house sends around a broker and that broker forms an underwriting group who get a certain, definite percentage for the underwriting. After the issue is made, whether it was a success or it was no success, the issuing house says, " Well, now my job is done. What is not taken goes to the so-called ' underwriters' and they can sell it at any price they please, and if in selling it that depreciates the price down 2 percent or 3 percent, it is not my job to stand in the breech, it is not my job to do anything to protect the market." The public understands very well that they take the risk of the underwriters being . " stuck." We do not want the public to be stuck any more than we can help it. TESTIMONY OF BENJAMIN J. BUTTENWIESER, A MEMBER OF THE FIRM OF KTJHN, LOEB & CO.—Resumed The CHAIRMAN. IS the contract there, for a subsequent issue of these bonds, similar to the contract that you put in evidence ? Mr. BTXTTENWIESER. Yes,, sir. Mr. PECORA. I am not sure that the witness understood what may have been in your mind, Mr. Chairman. Are you referring to the four subsequent issues? The CHAIRMAN. Yes; and are those contracts the same as this that has been put in here? Mr. BUTTENWIESER. Similar; yes. Mr. PECORA. NOW, Mr. Buttenwieser, this period of time that was referred to by Mr. Kahn in the statement he just made, is fixed in advance by the originating group with the selling group, is it not? Mr. BUTTENWIESER. That is correct, sir. Mr. PECORA. What was the period of time that was fixed in connection with this first Chilean issue of 1925 ? 1122 STOCK EXCHANGE PKACT1CES Mr. BTJTTENWIESER. Sixty days. Mr. PECORA. I t was 60 days? Mr. BTJTTENWIESER. Yes, sir. Mr. PECORA. And during that time the originating group virtually took a short position on those bonds to the extent of from 2y2 to 5 percent of the total issue, didn't it, under this plan that has been described by Mr. Kahn? Mr. BTJTTENWIESER. Mr. Pecora, just so that we may keep this technically correct, the syndicate. Mr. PECORA. The syndicate did, which was organized by the originating group. Mr. BUTTENWIESER. Yes, sir. Mr. PECORA. And it included the members of the originating group. Mr. BUTTENWIESER. Yes, sir; that is correct, made an overallotment of just slightly more than 2y2 percent. Mr. PECORA. Have you with you here a copy or the form of the offering letter to the selling group from the members of the originating group in connection with this issue ? Mr. BUTTENWIESER. Yes, sir. Mr. PECORA. Kindly produce it for the record. Mr. BUTTENWIESER. Here it is. Mr. PECORA. I thank you. Mr. Chairman, I offer this in evidence, and ask that it may be spread on the record of the subcommittee's hearing. The CHAIRMAN. Let it be admitted and placed in the record. COMMITTEE EXHIBIT NO. 11 [Confidential] NEW YORK, June 25, 1925. DEAR SIRS : We have agreed to purchase $20,000,000, principal amount, guaranteed sinking fund 6% percent gold bonds, due June 30, 1957, of the Mortgage Bank of Chile (caja de Credito Hipotecario, Chile), unconditionally guaranteed as to principal and interest by endorsement by the Republic of Chile, as more fully described in the enclosed copy of a letter from His Excellency, the Hon. Beltran Mathiou, Ambassador of Extraordinary and Plenipotentiary of the Republic of Chile to the United States. We are offering these bonds for subscription, subject to allotment at 97% percent and accrued interest, payable in New York against delivery of interim certificates, deliverable if, when, and as issued and received by us. At the offering price, the bonds will yield 6.70 percent to maturity. We shall allow you a commission of 1% percent on all bonds allotted to you, of which you may reallow not exceeding one-fourth percent to bankers, brokers, financial institutions, and insurance companies. This 1% percent commission will be payable about August 24, 1925, and will not be paid as to any bonds that before that date may have been repurchased by us in the market at or below the offering price mentioned above. The right is reserved to close the subscription at any time without notice, to reject any application, to allot a smaller amount than applied for, and to make allotments in our uncontrolled discretion. The allotment of any bonds to you is subject to the agreement on your part that you will not, for a period of 60 days from the date hereof, directly or indirectly sell or offer any of such bonds for sale below the terms authorized in this letter and is subject to the approval by our counsel of all legal proceedings in connection with the issuance and guaranty of the bonds. Yours very truly, KUHN, LOEB & Co., GUARANTY CO. OF NEW YORK, By KUHN, LOEB & Co. STOCK EXCHANGE PRACTICES 1123 Mr. PECORA. NOW, in this letter which has been marked " Committee Exhibit No. 1 1 " of this date, the concluding paragraph reads as follows: The allotment of any bonds to you is subject to the agreement on your part that you will not, for a period of 60 days from the date hereof, directly or indirectly sell or offer any of such bonds for sale below the terms authorized in this letter and is subject to the approval by our counsel of all legal proceedings in connection with the issuance and guaranty of the bonds. Why are the dealers, or rather the members of the selling group, restricted to such a condition? Mr. BUTTENWIESER. Obviously, we pay them, or the syndicate pays them a selling commission to sell them to ultimate investors, not at the offering price, not immediately to sell them in the market right back to us, for that we wouldn't have to pay a selling commission ; Mr. PECORA. In your experience isn't it a fact that practically upon the expiration or termination of this 60-day period there is a depreciation in the market value of bonds? Mr. BTTTTENWIESER. NO, not as a general rule. I wouldn't say that that was the general thing. That depends, of course, on market conditions at the time that the selling group period happens to expire. In some cases, if the price, if the market for that type of security has depreciated, then of course that price would depreciate. If, on the other hand, the investment rating, the investment market, for bonds of that category has risen these bonds will equally rise. Mr. PECORA. NOW, will these dealers sell to investors these bonds at the offering price of 97% and accrued interest within the 60-day period, and will any of those investors or purchasers within that 60-day period throw back their bonds on the market, and if ,fco, doesn't the originating group stand by to absorb those bonds at 97% in the market? Mr. BUTTENWIESER. Yes; and that is just the operation that Mr. Kahn sought to describe to you. Mr. PECORA. SO that one of the main purposes, if not the main purpose, of this operation is to support the market at the offering price for the 60-day period in order to enable distributors or the selling group to sell to the public at the offering price and not less, isn't that it? Mr. BTJTTENWIESER. Well, the ultimate investors will absorb the new offering. Mr. PECORA. NOW, do you know what happened to the market immediately after the expiration of the 60-day period in this particular instance ? Mr. BuTTEisrwiESER. I have those figures here. Mr. PECORA. What have you on that score ? Mr. BTJTTENWIESER. The market for these bonds temporarily, at the expiration of the syndicate or selling group, did decline somewhat. Mr. PECORA. TO what figure ? Mr. BUTTENWIESER. To about 95, and very shortly thereafter, or I wouldn't say very shortly but thereafter, they recovered their price again. But I want to make clear this, too, which I forgot to mention 1124 STOCK EXCHANGE PRACTICES Mr. PECORA (interposing). Wait a minute. You said 95. Mr. BUTTENWIESER. 94%. Mr. PECORA. Didn't the market the week of August 29, which was practically upon the expiration of this 60-day period, go down to 94 for these bonds ? Mr. BUTTENWIESER. I haven't that figure, but it may be correct. Ninety-four and a half is the low figure I have, but it may well have been 94. I want to make clear, though, where you said something about pegging, that we do not stand ready to buy or take them all at 97%, or Y/hatever was the issue price. Mr. PECORA. I didn't use the word " peg." But I was going to ask you if that wasn't the process of pegging the market. Mr. BUTTENWIESER. NO. Because one does not necessarily keep the price that you say, or I may say is pegged at any level. You try to absorb the bonds which seem to be hanging over the market. Mr. PECORA. Well, isn't that a species of pegging the market at the market price until all of the bonds are disposed of ? Mr. BUTTENWIESER. We do not maintain a fixed bid, which is what X understand from hearsay, because we do not indulge in it, to be a pegging operation. Mr. PECORA. Why did you use that word yourself, then—that word "pegging"? Mr. BUTTENWIESER. It is a colloquialism. Mr. PECORA. It is a pretty accurate description of the operation, isn't it? Mr. BUTTENWIESER. I shouldn't say that colloquialism and accuracy are synonymous. Mr*. PECORA. DO you know of any word better than pegging or a term that is more descriptive of th^e operation ? Mr. BUTTENWIESER. Yes; supporting. Mr. PECORA. YOU wouldn't say, of course, rigging? Mr. BUTTENWIESER. NO, sir. Mr. PECORA. It is too harsh. Mr. KAHN. I would use the words " aiding the market" to absorb the bonds which have been offered to investors until they are definitely placed in the hands of bona fide investors. That is the purpose of a bond issue as distinguished from a stock issue. As to a stock issue you don't care where it is placed. It will find its level somehow by and by. A bond issue is not placed to our satisfaction or to the satisfaction of the corporation until it has found its level in the hands of ultimate investors. And that sometimes takes a little time, and sometimes you have overestimated the market value which is properly placeable upon those bonds, and sometimes conditions change. We are not pegging, we are not supporting; we are trying to aid the distribution of bonds, which is our duty as agents for the corporation, and it is our duty toward investors to help them, if need be, to get those bonds placed that for one reason or another they might try to get rid of. If you were to peg them, they would always be 97%. We use our judgment as to what is a fair level as to which we should come to the rescue of the market. Mr. PECORA. NOW, Mr. Buttenwieser, as a matter of fact, during the 60-day life of this selling group wasn't the range of those bonds in the market from 97% to 97% ? STOCK EXCHANGE PRACTICES 1125 Mr. BUTTENWIESER. Yes, sir. Mr. PECOEA. SO that, call it supporting the market or pegging the market or aiding the market or what you will, the fact is that during the 60-day period the operation of pegging or supporting or aiding resulted in keeping the price in. the market for those bonds at the offering price, 97%, or a little above that. That was the actual result, wasn't it, in this case? Mr. BUTTENWIESER. That was the actual result in this instance, but I am quite certain we were not the people who bought them above that issue price. The CHAIRMAN. Did they ever go above that price ? Mr. BUTTENWIESER. Do you mean in subsequent years, Senator Fletcher? The CHAIRMAN. At any time. Mr. BUTTENWIESER. Yes. I have right before me where they were 98, and 97%. Yes; I see them here on this list selling quite often above that price. Here is 98%. Mr. PECORA. HOW far above ? Mr. BUTTENWIESER, Well, I have them here at one spot selling at 99%. The CHAIRMAN. When was that? Mr. BUTTENWIESER. That was the 2d of May 1928. Mr. PECORA. That was when all securities were selling high, wasn't it? Mr. BUTTENWIESER. I rather expect so. These wouldn't be an exception to any market level. Mr. PECORA. NOW, isn't it a fact that by the time of the expiration of this 60-day life of this selling syndicate, the bankers had disposed of all of their bonds to the public ? Mr. BUTTENWIESER. The syndicate through the selling group had sold all the bonds. The CHAIRMAN. The subcommittee will now stand in recess until 2 o'clock p.m. of this day. (Thereupon, at 12:30 p.m., Wednesday, June 28, 1933, the subcommittee recessed until 2 o'clock p.m. of the same day.) AFTER RECESS The subcommittee resumed at 2 p.m. on the expiration of the noon recess. The CHAIRMAN. The subcommittee will come to order. Mr. Pecora may proceed. TESTIMONY OF BENJAMIN J. BUTTENWIESER, A MEMBER OF THE FIEM OF KUHN, LOEB & CO.—Resumed Mr. PECORA. Mr. Buttenwieser, reference was made in the testimony on yesterday with respect to the Chilean bank loans, to the payment of a commission to Louis Dreyfus & Co. Who paid that commission ? Mr. BUTTENWIESER. The originating group. Mr. PECORA. That means your firm, the Guaranty Co., and Lehman Bros.? Mr. BUTTENWIESER. Yes, sir. 1126 STOCK EXCHANGE PRACTICES Mr. PECORA. What did that commission amount to ? Mr. BUTTENWIESER. One half of 1 percent. Mr. PECORA. Of the total issue ? Mr. BUTTENWIESER. Of the total issue; yes. That was the total, you understand. Mr. PECORA. Was it $100,000? Mr. BUTTENWIESER. Yes, sir. Mr. PECORA. And was that paid out of this profit that you mentioned this morning to the originating group, of $247,127.20, or was it paid in addition thereto? Mr. BUTTENWIESER. It was paid before that profit had been made. In other words, the figure I gave you was our net profit. Mr. PECORA. Well, I asked you this morning to give me the gross, and I understood you to say, in substance, that this was the net, this figure of in round numbers $247,000, which you gave as gross, was also virtually net. Now, the gross was at least $347,127.20, wasn't it ? Mr. BUTTENWIESER. I am sorry if you got that impression then. I must have misunderstood your question. What I meant to say was that that was the net Oif the spread to the originating group, because the originating group really considered that it had that onehalf-percent expense charged to itself, so to speak, before it realized its own profit. Mr. PECORA. NOW, were there any other payments that were made by the originating group out of their gross profits before they realized this net profit of $247,000? Mr. BUTTENWIESER. NO, sir. Mr. Pecora, I should like to make it perfectly clear: If you mean that the selling group commission should be deducted from the gross profit, and the syndicate gross spread should be deducted from the gross spread, then, of course, I must amend the answer I made this morning. But that was not the way I understood your question. In other words, there was a gross spread, as I indicated, of 4% percent. If you want me to rephrase my answer that our gross profit was so and so, and the net profit was the figure which I gave you, I can do that. Mr. PECORA. Will you do that then ? Mr. BUTTENWIESER. All I would have to do is to calculate 4% percent on $20,000,000. Mr. PECORA. All right. Mr. BUTTENWIESER. That is $925,000. Mr. PECORA. NOW, how was this gross profit of $925,000 distributed ? Mr. BUTTENWIESER. First, there was one half percent to Messrs. Louis Dreyfus & Co. Then 1*4 percent, which was the originating group spread, and that was the figure I indicated this morning. The reason it is not exactly $250,000 is because that one fourth percent to which I made reference this morning was an interest gain and naturally had to be estimated, and instead of being $250,000 that profit was $247,000. That was as close as we could estimate it. Then the syndicate gross spread was 1% percent less all expenses, which reduced its actual profit to eighty one hundredths percent. And the selling group commission was 1% percent. Mr. PECORA. Did your firm participate in the 1*4 percent spread to the syndicate? STOCK EXCHANGE PRACTICES 1127 Mr. BUTTENWIESER. Yes. That was the figure you asked for this morning, and I told you I would get it during the luncheon recess. Mr. PECORA. Have you got it now? Mr. BUTTENWIESER. Yes, sir. We had a participation of $1,400,000 principal amount of bonds in that syndicate, on which we realized a net profit of $11,198.83. Mr. PECORA. NOW, did your firm participate or did it receive any compensation for the managing of the selling group ? Mr. BUTTENWIESER. No, sir; none whatsoever. Senator STEIWER. TO what did you refer this morning when you said the net and the gross were one and the same thing? Mr. BUTTENWIESER. I wTas referring, Senator, to the originating group profit, and there was no expense chargeable to that original margin which we retained for ourselves, or which we kept for ourselves, and that was what led me to make the statement that the net and the gross were exactly the same on that originating group profit. Mr. PECORA. Which group paid the $25,000 to Mr. Norman H. Davis? Mr. BUTTENWIESER. AS was embodied in that memorandum we read yesterday, Mr. Norman Davis on that loan received a commission of $25,000, of which the syndicate paid $15,000, and the Guaranty Co. of New York paid $10,000. Mr. PECORA. NOW, is this finder's commission of one half of 1 percent the usual commission or perquisite in such instances? Mr. BUTTENWIESER. The paying of a finder's commission is very usual. The size of that varies, of course. Mr. PECORA. What is the range of the commission paid to the finder in such issues? Mr. BUTTENWIESER. SO far as our own experience is concerned I think it varies anywhere from one fourth to one half percent. Mr. PECORA. In this case, then, Louis Dreyfus & Co. received the maximum that is usually allowed? Mr. BUTTENWIESER. I have no way of telling whether that is the maximum. I would say that between one fourth and one half percent is a usual range. It may be less than one fourth percent, too. It varies in each particular instance. Mr. PECORA. YOU stated it varies from a range that reaches to one half of 1 percent. Mr. BUTTENWIESER. Yes, sir; and by that I mean Mr. PECORA (continuing). In this case I assume that Louis Dreyfus & Co. received the maximum that is usually allowed to a finder. Mr. BUTTENWIESER. SO far as our experience is concerned; yes. And I might add that as you will see in the Louis Dreyfus & Co. correspondence, that was a reciprocal arrangement which we entered into with Dreyfus & Co. Mr. PECORA. What do you mean by that? Mr. BUTTENWIESER. That on issues which we made in this country they would receive a commission, and on issues which they made in Europe we would get an interest. Mr. PECORA. That is, where you were the finders and Louis Dreyfus & Co. were the underwriters of any European issue, you would get one half of 1 percent finder's commission? 1128 STOCK EXCHANGE PEACTICES Mr. BUTTENWIESER. Well, Mr. Pecora, we could not make any general arrangement as to how large or how small the commission would be. We merely said that that would be arranged. Nor did we make any arrangement with Louis Dreyfus & Co. that their commission would always be one half of 1 percent. We said they would be compensated on future issues which might be made in our country by us, -and we would be compensated on issues which they might make on their side. Mr. PECORA. Was this one half of 1 percent paid as a maximum because it was considered by your firm that this issue was an especially attractive and profitable undertaking? Mr. BUTTENWIESER. No. I think we considered that this was an important piece of business, and it was a new relationship which had been brought to us. The CHAIRMAN. Did they receive that on the total issues of $90,000,000? Mr. BUTTENWIESER. Yes, sir. Mr. PECORA. That is, they received that one half of 1 percent on each of the four subsequent issues? Mr. BUTTENWIESER. Yes, Mr. PECORA. And would sir. have received it had there been any other or additional issues underwritten by the same group ? Mr. BUTTENWIESER. Well, each case would, of course, have to be determined by the circumstances that surrounded it. But if we could we hoped to compensate them on the same basis. Mr. PECORA. Isn't that a rather large commission to pay merely for introducing a piece of business of this kind ? Mr. BUTTENWIESER. I do not think it is a large commission. Mr. PECORA. Well, in this particular instance, where your firm and the Guaranty Co. of New York underwrote these five loans for the Mortgage Bank of Chile, aggregating $90,000,000, they received a total commission of $450,000, didn't they? Mr. BUTTENWIESER. That is correct. Mr. PECORA. A finder's commission aggregating $450,000. Mr. BUTTENWIESER. Yes, sir. Mr. PECORA. Merely for introducing the subject to Mr. BUTTENWIESER. Well, other commissions, some you. of which are even fixed by law, are as I understand it, very much higher. Eeal estate and brokerage commissions of that kind, for instance, are much higher. There are other commissions that are as a rule much higher. The amount sounds large in the aggregate, but percentagewise I do not think it is unduly large. And you realize, of course, that Messrs. Louis Dreyfus & Co. are an important banking house. They were not merely a broker or a finder, they were an old established firm of the first rank. Mr. PECORA. The only service they rendered here was that of finder, wasn't, it? Mr. BUTTENWIESER. N O ; they were in a position to be more than that. If it became, because of market conditions, impossible to issue bonds of the Mortgage Bank of Chile in this country they stood ready to sponsor those issues for the Mortgage Bank in France. Mr. PECORA. Would not they have gotten an additional compensation for that service? STOCK EXCHANGE PRACTICES 1129 Mr. BUTTENWIESER. No. Mr. Pecora, the point I am trying to make is that they were more than just a finder. They were definitely interested in this business. Mr. PECORA. But the only function they served here was that of bringing the business to your attention, wasn't it ? Mr. BTJTTENWIESER. They rendered considerable service in the actual negotiation of this business, as you will notice in the correspondence and cables which we had with the representative of the Mortgage Bank of Chile. Some of the negotiations were handled through them. Mr. PECORA. Then what service did Mr. Norman H. Davis render ? Mr. BUTTENWIESER. Mr. Davis, as yesterday's memorandum shows, was the man who brought this business to the attention of the Guaranty Co. Mr. PECORA. YOU have a copy, haven't you, of a cable that was sent by Mr. Leval, the manager of Louis Dreyfus & Co., on June 26, 1925, to the director of the Mortgage Bank of Chile? Mr. BUTTENWIESER. Pardon me a moment while I try to find that. Mr. PECORA. All right. Mr. BUTTENWIESER. I do not seem to find that, Mr. Pecora. Mr. PECORA. Well, it reads as follows, and is addressed to Mr. Louis Barros Borgono, director of the Mortgage Bank of Chile: Congratulations on the result of negotiations, which constitute a great triumph for the bank as well as for Chile. Mr. BUTTENWIESER. I do not think I have a copy of it here, but there may very well have been such a cable. Oh, I beg pardon. Yes; I find it here, and that was the June 26 cablegram ? Mr. PECORA. Yes. Mr. BUTTENWIESER. It was embodied in a copy of a number of cables, and that was why I could not find it on my first search of the files. Mr. PECORA. DO you think that he advisedly limited the extent of his congratulations to the Mortgage Bank of Chile ? Mr. BUTTENWIESER. I am sorry, but I did not get that question. Mr. PECORA. I will ask the committee reporter to read it. (Which was done.) Mr. BUTTENWIESER. It is very difficult for me to tell you what was. in another man's mind 8 years after he sent the cablegram. Mr. PECORA. Very well. Now, let us pass on to the second Chilean loan of $20,000,000 of July 1926. Mr. BUTTENWIESER. All right. Mr. PECORA. Have you a copy of the prospectus that was issued when this second issue was floated to the American public ? Mr. BUTTENWIESER. Yes, sir. Mr. PECORA. Will you produce it for our record, please ? Mr. BUTTENWIESER. I say again, Mr. Pecora, this is my only copy> and it has certain pencil markings on it. If it is agreeable to the committee I should |ike to have it returned.. Mr. PECORA. Mr. Chairman, I offer this in evidence and ask that it may be spread on the record of the hearing. The CHAIRMAN. Let it be admitted, and the committee reporter will make it a part of the hearings, omitting the pencil markings that may appear thereon. 175541—33—PT 3 12 1130 STOCK EXCHANGE PBACTICES (The prospectus issued by Kuhn, Loeb & Co. and the Guaranty Co. of New York for the second loan of $20,000,000 to the Mortgage Bank of Chile, was marked " Committee Exhibit No. 12, June 28, 1933 ", and will be found on page 1164.) The CHAIRMAN. This is a similar prospectus to the first prospectus introduced in evidence, is it ? Mr. BUTTEKWIESER. Yes, sir. The CHAIRMAN. But the rate of interest here was 6% percent Instead of 6% percent as was shown there. Mr. BUTTENWIESER. Yes, sir. The CHAIRMAN. What is the price? Mr. BUTTENWIESER. The price was 9 9 ^ percent and accrued in- terest. Mr. PECORA. TO the public? Mr. BUTTENWIESER. Yes, sir. Mr. PECORA. What was the price to the underwriters ? Mr. BUTTENWIESER. DO you mean the original price that we paid ? Mr. PECORA. Yes. Mr. BUTTENWIESER. 95% percent. And here again I want to point out that there was an interest gain, which made the actual price 94% percent. Mr. PECORA. What did you say was the offering price to the public? Mr. BUTTENWIESER. It was 99^4 percent. Mr. PECORA. What was the political condition of Chile at the time of this second issue ? Mr. BUTTENWIESER. That was July 29, 1926, and my recollection is that there was a de jure government in power, which was after the election which we had been discussing this morning, after that election had been held. I should like to refresh my memory on that, too. Mr. PECORA. All right. [After waiting a few minutes and the witness had not refreshed his memory Mr. Pecora continued.] At the time that your firm and the Guaranty Co. agreed to underwrite this second issue of $20,000,000 in 1926 did you know that the United States Department of Commerce had said in its yearbook concerning Chile as follows: The principal factor in Chile's economic position during 1926 was the weakening demand for nitrates, brought about by competition from European artificial fertilizers, and, lack of buying for future delivery caused plants to close down, until in December only one third as many were operating as at the beginning of the year. The Government's financial situation was adverse. Total revenues, owing to a decline in the yield of the tax on nitrate exports, which did not increase to the extent expected, and expenditures were higher in 1925. The Government was therefore obliged to resort to borrowing. Depression in the nitrate industry produced an unfavorable situation for commerce, and an acute problem of unemployment was created. The nonsettlement of the Tacna-Arica question complicated the situation and increased taxation, and the burden of new social legislation reducing the purchasing power. The year 1926 closed with the nitrate industry in a very serious situation and with no prospect of improvement. The effects of overproduction, coupled with a lessening demand, began to be felt early in the year. Mr. BUTTENWIESER. Before I answer that, may I complete the answer to your previous question? I did not have the date before me then and I have it now. In December of 1925 Emilano Figuarno Lorrain was elected president, and I have here a note which says that on December 23 he assumed the chief magistracy, and that the STOCK EXCHANGE PRACTICES 1131 former relations were maintained with this Government, and that the United States Ambassador attended his inauguration in his official capacity. Mr. PECORA. Well, I suppose that helped to make the guarantee more secure, but I asked you if you wer6 familiar with that portion of the United States Department of Commerce report on the economic situation of Chile. Mr. BUTTENWIESER. I merely wanted to complete my answer to your previous question. Now, answering the excerpt which you have read from the United States Department of Commerce report, may I ask you what was the date of that ? Mr. PECORA. It was in their year book for 1926. Mr. BUTTERWIESER. Well, the bond issue was made July 29, 1926. So while I haven't that before me, of course, I cannot tell when that was published, but inasmuch as the excerpt speaks of the close of 1926 I should doubt that it could have been available to us at the end of July of 1926. Mr. PECORA. But the Department of Commerce said in that report: The effects of overproduction, coupled with lessening demand, began to be felt early in the year. Now, this bond issue was brought out in July of 1926. Had your firm caused to be made a study of economic conditions in Chile prior to bringing out this second bond issue? Mr. BUTTENWIESER. I have no doubt we did. And I am perfectly ready to repeat what I said this morning, that it is true the trade figures of Chile diminished somewhat during 1926, and that the favorable trade balance of Chile had been reduced from $77,000,000 in 1925 to $42,000,000 in 1926. But it was still a considerable favorable trade balance. Mr. PECORA. In view of the economic situation pointed out in this report of the United States Department of Commerce, why did you pay 94% for the issue, whereas you had paid 93 for the previous issue in the year before, when economic conditions seemed to be better? Mr. BUTTENWIESER. This bond was a 6%-percent bond, and the other was 6% percent. One would naturally pay a higher price because of the higher coupon. AndMr. PECORA (interposing). Well, doesn't it seem Mr. BUTTENWIESER (continuing). Might I complete this? The yield to the public on the first issue was 6.70 percent, while the yield on the second issue was 6.80 percent. So that you will see we did bring it out at a somewhat lower basis to the public. Mr. PECORA. Does the increase in interest rate between the second issue and the first issue indicate that the risk at the time of the second issue was greater than at the time of the first issue? Mr. BUTTENWIESER. NO. It is the basis that counts. The coupon rate is merely a matter of convenience of the borrower. It is the actual return basis to the borrower that is the determining factor. Mr. PECORA. DO you know what were the determining factors that brought about an increase in the rate of interest on the bonds, over the rate of interest paid on the first issue? 1132 STOCK EXCHANGE PRACTICES Mr. BUTTENWIESER. Yes; there are two possibilities, but on this I want to say this is only a guess: One is that the mortgages which they got in Chile and which were issued out of the proceeds of this loan may have had a higher coupon rate. The other is that the sinking fund would operate on a slightly different basis for a 6%percent bond than it would for a 6%-percent bond. The sinking fund in each case being what one calls a cumulative sinking fund. Mr. PECORA. Your firm underwrote the second issue in conjunction with the Guaranty Co. of New York, didn't it ? Mr. BUTTENWIESER. I beg pardon ? Mr. PECORA. I asked, your firm underwrote the second issue in conjunction with the Guaranty Co. of New York? Mr. BUTTENWIESER. Yes. Mr. PECORA. And I assume that in the course of the negotiations leading up to that underwriting of the second issue, your firm kept in touch with the officers of the Guaranty Co. with respect to this proposed second issue. Mr. BUTTENWIESER. Yes, sir. Mr. PECORA. Are you familiar with the fact that Mr. B. Atterbury, at that time in Santiago, Chile, representing the Guaranty Co. of New York, cabled to Mr. Stanley, the then president of that company, as follows: The nitrate situation, figures on Government finances, and the general commercial feeling, not encouraging. Mr. BUTTENWIESER. Yes, sir. Mr. Atterbury at the time was correct, and I dislike reiterating all these things, but the fact remains that, while the nitrate situation was for the time being unfavorable, and while I appreciate, of course, that one cannot go by results, the ultimate result was that, while the trade balance did diminish somewhat for the year 1926, due in part, I have no doubt, to the nitrate situation, none the less the favorable trade balance remained substantial. And I might add that that was evidently a rather temporary situation because in the following year the favorable trade balance increased again to a point where it was almost as much as in 1925. Mr. PECORA. YOU could not tell what was going to happen the following year, could you ? Mr. BUTTENWIESER. I prefaced my remark by saying one cannot go by results, but that was the fact. Mr. PECORA. But you had the definite statement; from a representative of the Guaranty Co. of New York in Chile that the general commercial feeling was not encouraging. Mr. BUTTENWIESER. That was his survey of the situation, I admit, and I admit that at the time he was correct, butMr. PECORA (interposing). And you were not deterred by that report in taking over the second bond issue, were you? Mr. BUTTENWIESER. Well, the point is this: The situation might not have been as good as it was in 1925, but it was still favorable. And, after all, one does not stop buying bonds of a country itself because its favorable trade situation declines somewhat. Mr. PECORA. Have you here with you any reports from your own advisers or from any other advisers of the Guaranty Co. of New York, showing just how favorable conditions were prior to your taking over the second bond issue? STOCK EXCHANGE PRACTICES 1133 Mr. BUTTENWIESER. It is stated in the circular on those trade figures. Mr. PECORA. What advices did you have that caused you to put that in the circular and to underwrite the second bond issue ? Mr. BUTTENWIESER. Well, you see at the time we were negotiating this issue the Controller of the Mortgage Bank of Chile was in New York, and we could discuss those figures with him, and he assured us that while temporarily those figures did show some decline, yet they still reflected a substantial favorable trade balance. Mr. PECORA. Were you induced to buy the second bond issue by the representations of the representative of the borrower? Mr. BUTTENWIESER. No; by the facts which he adduced to support his statement. Mr. PECORA. Did you make any independent study of the economic situation of Chile? Mr. BUTTENWIESER. I have no doubt that we did have figures before us as to the trade situation. Mr. PECORA. Did you make any independent study? In other words, did you have any trained or expert advisers to go down and make an independent study and render confidential reports to yourselves ? Mr. BUTTENWIESER. I do not know what confidential reports we could have gotten that would have weighed quite so heavily as the actual trade figures which we had. Senator STEIWER. DO you mean by that that your answer is no? Mr. BUTTENWIESER. Sir? Senator STEIWER. DO you mean to say that your answer is in the negative to that question? Mr. BUTTENWIESER. My answer is that the figures which we had seemed more eloquent than any independent study that could be made or any opinion of Mr. Atterbury's. Senator STEIWER. I am not quarreling with you at all, and that possibly is full justification for what you did, but do I understand that your answer to the question propounded by counsel to the committee is no ? In other words, you did not send anybody down there ? Mr. BUTTENWIESER. The answer to that question is no. Mr. PECORA. What is the answer to the question as to whether or not you made or caused to be made any independent study or investigation of economic conditions in Chile? Mr. BUTTENWIESER. The answer to that is that it cannot be answered categorically. We did make a study of the figures which were available to us here, and that, I repeat, showed that while temporarily the figures had declined somewhat, they still reflected a favorable trade balance. Mr. PECORA. Well, is that all you acted upon, Mr. Buttenwieser, in underwriting this issue with a view to offering it to the investing public here ? Mr. BUTTENWIESER. NO, Mr. Pecora, that is not all. It was one of the important factors. Mr. PECORA. Well, what were the other important factors ? Mr. BUTTENWIESER. Well, I must go back again to the long record of Chile for having met all its obligations; to the fact that its trade had for many years been favorable, and to the general standing of Chilean credit throughout the world. 1134 STOCK EXCHANGE PRACTICES Senator BARKLEY. YOU made this loan, then, on the general situation as you understood it—from the reputation of Chile over a period of years and such figures as you had—but you did not make any particular investigation with reference to this particular loan that was out of the ordinary from what you did in any case of that sort; is that true ? Mr. BUTTEISTWIESER. That is substantially correct, Senator; yes, sir. Mr. PECORA. DO you not think that an independent study or investigation of economic conditions undertaken for you or in your behalf with a view of enabling you to determine the real risk involved in taking over this second issue would have revealed to you the information that was obtained by the United States Department of Commerce when it said in its Year Book for 1926: The year 1926 closed with the nitrate industry in a very serious situation and with no prospect of improvement. The effects of overproduction, coupled with lessening demand, began to be felt early in the year. Mr. BUTTENWIESER. Frankly I do not> Mr. Pecora, because the following year proved that there was an improvement, when the figures improved from $42,000,000 to $72,000,000. Mr. PECORA. But you did not know—you did not have the facts which the United States Department of Commerce apparently had succeeded in gathering when you took over this second issue? Mr. BUTTENWIESER. But they were wrong in their forecast, so any other person that we might have sent down there would very likely have been equally wrong. Mr. PECORA. Were they wrong in their statement that " The effects of overproduction, coupled with lessening demand, began to be felt early in the year 1926"? Mr. BUTTENWIESER. Doubtless they were not wrong about early in the year, but that forecast that they showed no signs of improving was wrong. Mr. PECORA. Were they wrong in their statement when the United States Department of Commerce said: Heavy accumulations of stocks— meaning of nitrate stocks— and lack of buying for future delivery caused plants to close down until in December only one third as many were operating as in the Beginning of the year. The Government's financial situation was adverse? Mr. BUTTENWIESER. It might very well be, Mr. Pecora—and again I want to say I do not want to quibble about these things—but it might very well be that shutting down some of the nitrate plants might better the situation in Chile—the nitrate situation in Chile— just the same as restrictive measures in production of other commodities elsewhere in the world have improved conditions in that particular commodity in that country. Mr. PECORA. NOW, bearing in mind that you knew that the American investing public to which you expected to sell these bonds were going to buy those bonds largely upon their reliance on the integrity and standing of your firm and the Guaranty Co., you felt that you and the Guaranty Co. owed a duty to the American investing public to make a complete, full, and independent investigation of all the factors that entered into the risk, did you not? STOCK EXCHANGE PEACTICES 1135 Mr. BUTTENWIESER. The main factor, I repeat, that entered into this was the general credit, all the resources of Chile which were pledged with us as well as the general good name of Chile which stood behind its unconditional guaranty of the bonds. Mr. PECOEA. Well, whatever else was done by you to assure yourself of the safety of this issue, you did not make or cause to be made any independent investigation of the economic situation, did you ? Mr. BUTTENWIESER. That is correct. Mr. PECORA. All right. Mr. BUTTENWIESER. But I might add that as regards any government it is difficult to make an independent economic study of its situation. Mr. PECORA. Well, the United States Department of Commerce apparently was doing it year after year ? Mr. BUTTENWIESER. Well, with all due deference to the Department of Commerce their forecast was not extremely accurate. Mr. PECORA. But their statement of existing conditions was accurate, was it not ? Mr. BUTTENWEISER. Yes; it was a temporary situation. Mr. PECORA. And nobody knew how long that temporary situation was going to last or whether it was going to get better or worse ? Mr. BUTTENWIESER. That is correct. Mr. PECORA. And you took a chance against that, did you not? Mr. BUTTENWIESER. But I must add again: There is no reason why one should not buy securities of a country of good standing just because temporarily the situation might not be as good as it was,, though it is still favorable. Mr. PECORA. And you considered a country of good standing to be one whose government was based upon armed force and upon the dissolution of its popular assembly and the nullification or setting aside of its constitution, did you? Mr. BUTTENWIESER. I am sorry, Mr. Pecora—at that time there was a perfectly constitutional, recognized government—we are speaking now of the 1926 issue—elected government, and it was recognized by our Government, and it was a government which was elected by the people. Mr. PECORA. But the government in 1925 was not such a government? Mr. BUTTENWIESER. That is correct, sir. Mr. PECORA. NOW, how long did that government of 1926 remain in power—this stable government that you are speaking of now ? Mr. BUTTENWIESER. I believe it stayed right through until 1931. The data I have before me seems to indicate that. Mr. PECORA. Who became the president of the government after the adoption of the constitution in 1926 ? Mr. BUTTENWIESER. Carlos Ibanez, it seems, in July of 1927. Mr. PECORA. NO ; I said in 1926. Mr. BUTTENWIESER. This man that I mentioned before, Emiliano Figueroa Larrain. Mr. PECORA. Had he supplanted Alessandri, who apparently was at the head of the government, with the aid and assistance of this military council in 1925? 1136 STOCK EXCHANGE PRACTICES Mr. BUTTENWIESER. This Figueroa is the president who was elected. Now, the exact date of his election, I think, was December 23, 1925, from this little memorandum I have. Mr. PECORA. HOW long did he remain the head of the government? Mr. BUTTENWEISER. It seems until May 23 of 1927. Mr. PECORA. SO that this constitutional government lasted a little over a year? Mr. BUTTENWIESER. N O ; I believe there was an election in 1927 where Carlos Ibanez was elected. Mr. PECORA. Well, are you familiar with the political conditions tKat existed in connection with Ibanez's administration? Mr. BUTTENWIESER. I do not know what conditions you are referring to, Mr. Pecora. Mr. PECORA. Well, the conditions that were indicated by what I understand to be the fact that he arrested all of his political rivals in order to maintain himself in office. Are you acquainted with those facts? Mr. BUTTENWIESER. I have not seen those facts stated. Mr. PECORA. NOW, was a syndicate formed by the original group with regard to this second issue ? Mr. BUTTENWIESER. NO, Mr. Pecora; there was no syndicate in this transaction. Mr. PECORA. Well, what was formed? A selling or distributing group ? Mr. BUTTENWIESER. Yes, sir. Mr. PECORA. And that was formed by the members of the original group, namely, yourselves and the Guaranty Co. ? Mr. BUTTENWIESER. That is correct, sir. Mr. PECORA. On what terms did the members of the selling group participate ? Mr. BUTTENWIESER. They offered them to the public at 9914 percent, and they received 2^4 percent selling commission. Mr. PECORA. That is one half of 1 percent over the commission allowed to the selling group of the preceding year on the occasion of the first issue, was it not ? Mr. BUTTENWIESER. Yes, sir. Mr. PECORA. They rendered the same kind of service, did they not? Mr. BUTTENWIESER. Well, in the previous issue a great many of the members of the selling group were also members of the syndicate. So that in effect while it is true they performed two services, to a considerable extent they participated in a spread which was V/g percent for one and 1% percent for the other. Mr. PECORA. What was the gross profit to the original group in connection with the second issue? Mr. BUTTENWIESER. DO you want the entire gross now, Mr. Pecora ? Mr. PECORA. Yes. Mr. BUTTENWIESER. $824,850. That is 4% points. And to clarify that figure for you, Mr. Pecora, that was the issue of which the total it was of $20,000,000 but we only purchased and offered $18,330,000. The remaining $1,670,000 having been taken by the Mortgage Bank itself for its reserve fund. STOCK EXCHANGE PRACTICES 1137 The CHAIRMAN. DO you remember what that reserve fund amounted to at that time? Mr. BUTTENWIESER. I t was approximately $5,000,000—slightly over $5,000,000. Mr. PECORA. What do they do ? Take as their reserve fund their own bonds? Mr. BUTTENWIESER. Yes, sir. They would have that many more mortgages against which there would not be bonds publicly outstanding. Mr. PECORA. DO you mean that they took as their reserve fund their own obligation? Mr. BUTTENWIESER. That is customary among very many public bodies. I might mention any number of them. New York City does that. Mr. PECORA. NOW, let us pass on to the third loan of $10,000,000. But before I pass on to that, will you produce the contract covering the underwriting of the second issue ? Mr. BUTTENWIESER, Yes. I make my usual request. Do you mean the loan agreement, Mr. Pecora ? Mr. PECORA. Yes. Mr. BUTTENWIESER. Mr. PECORA. I offer Yes [handing same to Mr. Pecora]. this in evidence and ask to have it spread on the record. The CHAIRMAN. It will be admitted in evidence and spread on the record. (Agreement between Caja de Credito Hipotecario (Chile) and Kuhn, Loeb & Co. and Guaranty Co. of New York. July 29, 1926. Guaranteed sinking fund 6% percent gold bonds of 1926, was received in evidence, marked " Committee Exhibit 13, of June 28, 1933." See p. 1167.) Mr. PECORA. NOW, in connection with this second issue, Mr. Buttenwieser, was a 60-day period fixed between the underwriters and the selling group for the marketing of the bonds? Mr. BUTTENWIESER. The second issue; yes, sir. Mr. PECORA. And during that 60-day period did the underwriters or bankers succeed in disposing of the entire issue ? Mr. BUTTENWIESER. Yes, sir. Mr. PECORA. And in this instance, as on the .occasion of the first issue of the preceding year, was the selling group formed and commitments for the entire issue received from its members by the underwriters within 24 hours after the agreement between the underwriters and the Mortgage Bank of Chile was consummated ? Mr. BUTTENWIESER, I cannot be certain, of course, about the 24 hours, but the bonds were successfully sold. Mr. PECORA. IS the investing public ever advised in these matters by the underwriters or the selling group of this 60-day period during which support will be given to the market by the underwriters ? Mr. BUTTENWIESER. I t is not officially stated, but I think Mr. PECORA. IS it unofficially stated? Mr. BUTTENWIESER. But I think it is rather well known. Mr. PECORA. Why is the letter embodying that agreement between the underwriters .and the members of the selling group marked "confidential"? 1138 STOCK EXCHANGE PRACTICES Mr. BUTTENWIESER. Practically any letter of ours which would involve a statement of a selling commission allowed or any such other matter would be marked " confidential." Mr. PECOEA. Well, does not that imply that no information concerning those terms and provisions of the agreement between the underwriters and the selling group is to be made public ? Mr. BUTTENWIESER. It is implied. How well it is respected I am not prepared to state. I might add that it is done largely because of the fact that the dealers will tell the investing public to whom they sell those bonds that if they want to resell them they prefer to have them resold to them rather than to have them pressing on the market. Mr. PECORA. And the reason for that is to maintain the price during the process of unloading on the public, is it not? Mr. BUTTENWIESER. No; I think it is not that. Mr. PECORA. What is it for? Mr. BUTTENWIESER. I think it is because the distributor would rather get those bonds back again from some client who does not want them for investment, and redistribute them to some other client ivho might want them for investment. Mr. PECORA. And redistribute them at the offering price to the public rather than to take the risk of the original investor selling them at a lower price in the open market ? Mr. BUTTENWIESER. Not necessarily at a lower price; no. He gets his commission for placing these bonds with ultimate investors. Consequently, it is to his advantage if there be an instance where the investor to whom he has first sold changes his mind, to get them back so that he can place them again with the investor who wants them for permanent investment and thereby earn his commission. Mr. PECORA. YOU are not receding, are you, from the position that was very frankly stated during the forenoon session today, that during this 60-day period of the life of the selling syndicate or group the market is maintained or supported or aided or pegged, whatever term you want to use ? Mr. BUTTENWIESER. I do not think there is any conflict between the statement I made and the statement you have just made. Mr. PECORA. It still is the desire of the underwriters to see that the market is supported, aided, or pegged during the life of the Mr. BUTTENWIESER. It is the desire of the underwriters to see that the issue is absorbed by real investors. Mr. PECORA. And absorbed at the offering price rather than a lower price during that 60-day period ? Mr. BUTTENWIESER. I t is obviously our intention that they be placed with the public at that price. Mr. PECORA. And after the expiration of that 60-day period the underwriter's interest in the public market for the bonds practically ceases ? Mr. BUTTENWIESER. Oh, no; I would not say that. I would not subscribe to that statement at all. Mr. PECORA. Well, do they continue to do anything to peg the price? STOCK EXCHANGE PEACTICES 1139 Mr. BUTTENWIESER. We very often repurchase sizable amounts of bonds long after a syndicate is terminated and lose a fair amount of money on that sometimes. Mr. PECORA. Did you do that in this instance ? Mr. BUTTENWIESER. In this instance I do not think the market required it. Mr. PECORA. Did you do it in the first instance when, as it appeared in this morning's testimony, upon the expiration of the 60day period the market dropped to 94 and 9 4 ^ ? Mr. BUTTENWIESER. I do not think we did. Mr. PECORA. NOW, the third issue was one of $10,000,000, was it not? Mr. BUTTENWIESER. Yes. Mr. PECORA. And that was underwritten in December 1926? Mr. BUTTENWIESER. That is right. Mr. PECORA. And those were 5-year 6-percent notes? Mr. BUTTENWIESER. Yes, sir. Mr. PECORA. NOW, did your firm cause any independent investiga- tion to be made, before it agreed to underwrite this issue, of the political and economic conditions in Chile ? Mr. BUTTENWIESER. I think I will have to stand on the answer I made previously. Mr. PECORA. The answer, then, is no ? Mr. BTTENWIESSER. The answer is no, except that by that time we had figures for a longer period of 1926, so that our judgment could be reinforced by the figures as they existed for practically the entire year. Mr. PECORA. NOW at what price did you and the Guaranty Co. take over these $10,000,000 par value of 5-year 6 percent notes'? Mr. BUTTENWIESER. 95% percent. Mr. PECORA. At 95%. At what price were they offered to the public ? Mr. BUTTENWIESER. 98% percent. Mr. PECORA. And accrued interest? Mr. BUTTENWIESER. And accrued interest; yes, sir. The CHAIRMAN. DO you know the purpose of this loan? Mr. BUTTENWIESER. Yes; Senator Fletcher. As we stated in our circular, the notes were issued for the purpose of making loans secured by agricultural products or implements, which loans may not exceed 50 percent of the estimated value of the collateral. The CHAIRMAN. DO you know what the purpose was of securing these loans by agricultural products? What do you mean by that? What did the bank do? Did it take mortgages on agricultural products ? Mr. BUTTEWIESER. Or implements. The CHAIRMAN. Or implements? Mr. BUTTENWIESER. Agricultural implements. Mr. PECORA. Your firm was appointed the fiscal agent for the Mortgage Bank of Chile in connection with the first two issues, was it not? Mr. BUTTENWIESER. Our firm and the Guaranty Trust Co. were appointed fiscal agent for each of the loans. Mr. PECORA. What commission did you get for your service as such fiscal agent? 1140 STOCK EXCHANGE PRACTICES Mr. BUTTENWIESER. One fourth of 1 percent of the amount of all payments made for interest and sinking fund. Mr. PECORA. Have you got any calculation that could give us the aggregate sums that you received in connection with all five of these loans for your services as fiscal agents ? Mr. BUTTENWIESER. I haven't that, and it would be a rather tedious operation to get those figures. But we can get them for you if the committee desires. Mr. PECORA. Can you give us any approximation at this time? Mr. BUTTENWIESER. It would be almost impossible for me to approximate that now with any degree of accuracy. You appreciate, of course, that is for a totally different service and has nothing to do with the issuance. It is for the payment of coupons and payment of bonds. Mr. PECORA. It is for acting as fiscal agents ? Mr. BUTTENWTESER. Yes, exactly. Mr. PECORA. NOW, did your firm keep on deposit any of the proceeds from the sale of these first two issues of bonds for any period of time? Mr. BUTTENWIESER. I haven't that fact before me. Mr. PECORA. Well, what is your recollection of it? Mr. BUTTENWIESER. My recollection is that they disposed of those sums as they needed them. But here again I am relying on my memory. And that is why I brought out that we only paid them a certain portion of the proceeds of the loan at certain periods, because they felt they did not require those funds in the first instance, and preferred to have the payments made over' a period, and that accounted for the interest gain which we enumerated in each instance. Mr. PECORA. Well, now, during the time that any of those funds remained on deposit with you, did you allow the Mortgage Bank of Chile any interest thereon? Mr. BUTTENWIESER. Yes, sir. Mr. PECORA. What rate? Mr. BUTTENWIESER. That would vary, of course. Whatever the rate for such funds was in New York. I do not remember that it was fixed, but I am not certain about it. Mr. PECORA. Are you certain that any interest at all was allowed on those funds? Mr. BUTTENWIESER. Oh, yes; I am quite certain of that. Mr. PECORA. AS a mater of fact, whatever commissions or fees you earned as fiscal agents came to you directly by reason of the flotation of these issues, did they not, because the loan agreements provided that you were to be the fiscal agents ? Mr. BUTTENWIESER. That is correct, sir. But of course the service of fiscal agent had to be performed by someone. The coupons had to be paid in New York. The bonds drawn for sinking fund had to be paid in New York. And the commission which we got for paying them is almost a standardized rate. Mr. PECORA. NOW, how was this third issue disposed of to the public ? Mr. BUTTENWIESER. In the same manner as the second. Mr. PECORA. That is, by the organization of a selling group ? Mr. BUTTENWIESER. That is correct, sir. Mr. PECORA. With no intervening syndicate? STOCK EXCHANGE PRACTICES 1141 Mr. BUTTENWIESER. That is correct, sir. Mr. PECORA. And what was the gross profit that accrued to the original group in connection with this third issue ? Mr. BUTTENWIESER. Three and one quarter percent, which is $325,000. Do you want the split-up of that, Mr. Pecora ? Mr. PECORA. Yes. Mr. BUTTENWIESER. One half percent went to Messrs. Louis Dreyfus & Co.; 1% percent, less expenses, to the original group, which in that case was the underwriter. And 1 percent selling commission to the selling group. There was no interest gain in that transaction. Mr. PECORA. NOW, when was the fourth issue brought out ? Mr. BUTTENWIESER. April 30, 1928. Mr. PECORA. And the par value of that was $20,000,000, was it not ? Mr. BUTTENWIESER. Yes, sir. Mr. PECORA. Six percent bonds? Mr. BUTTENWIESER. Yes, sir. Mr. PECORA. Maturing in 1961? Mr. BUTTENWIESER. Yes, sir. Mr. PECORA. Who were the members of the original group in that instance ? Mr. BUTTENWIESER. The Guaranty Co., the National City Co., Lehman Bros., and ourselves. Mr. PECORA. Well, now, for the first time in connection with these Chilean issues the National City Co. was brought into the original group. What was the reason for that? Mr. BUTTENWIESER. AS I recall, that was at the request of the Chilean Government. Mr. PECORA. DO you know what prompted that request ? Mr. BUTTENWIESER. I do not really know what prompted that request. Mr. PECORA. YOU complied with it readily? Mr. BUTTENWIESER. Yes, sir. Mr. PECORA. What were the respective interests of these four participants in the original group in connection with the fourth loan ? Mr. BUTTENWIESER. Lehman Bros. 10 percent; each of the other three, 30 percent. Mr. PECORA. YOU did not need the financial assistance of the National City Co. in the flotation of this fourth loan, did you ? Mr. BUTTENWIESER. We did not need it. We welcome any financial assistance. Refreshing my memory now I believe the National City Bank or company—I do not recall which—had been appointed fiscal agent of the Chilean Government in the United States at that time, and that probably accounts for that request. I was trying to see whether it was about that time, and I believe it was. Mr. KAHN. May I interrupt a minute* Mr. Pecora? I can tell you positively from my recollection. Mr. PECORA. All right, sir. Mr. KAHN. SO you do not have to guess. Mr. PECORA. If you will. Mr. KAHN. I do not want to try your patience. But the National City Bank at that time, after lengthy negotiation, was appointed fiscal agent for all the financial affairs of the Chilean Government, direct or guaranteed by the Chilean Government, The whole thing 1142 STOCK EXCHANGE PRACTICES by the wish of the Chilean Government was contemplated under the auspices of the National City Bank. Mr. PECORA. I recall of some testimony given before this committee last February in which one of the officers of the National City Co., in testifying with regard to some external financing which that company undertook with some South American country, said that somebody was trying to chisel in. Is this an instance where the National City Bank tried to chisel in on your firm and the Guaranty Co. ? Mr. KAHN. May I leave that to your own interpretation, Mr. Pecora? May I leave that to your own interpretation? Mr. PECORA. Would you be satisfied with my conclusion about it? Mr. KAHN. Wouldn't that Mr. PECORA (after a pause). Now, I will resume with Mr. Buttenwieser. With regard to the fourth Chilean Bank loan of $20,000,000, when was that brought up ? Mr. BUTTENWIESER. That is the one of April 30, 1928. Mr. PECORA. And the par value of that was $20,000,000? Mr. BUTTENWIESER. Yes, sir. Mr. PECORA. Six percent bonds due in 1961, is that right? Mr. BUTTENWIESER. Yes, sir. Mr. PECORA. NOW, at what price did the underwriters buy this issue ? Mr. BUTTENWIESER. Ninety-two percent. Mr. PECORA. Wasn't it 91% ? Mr. BUTTENWIESER. NO. We allowed them one fourth percent more after the signing of the contract, our agreement being that if we were able to issue above 95% percent they would get the increase. Those bonds were issued at 95% percent, and consequently the bank got the extra one fourth percent. Mr. PECORA. Well, that was an arrangement that was entered into subsequent to the original agreement for this issue, was it not? Mr. BUTTENWIESER. It was simultaneous, I think. Mr. PECORA. Have you a copy of the original agreement ? Mr. BUTTENWIESER. Yes, sir. Mr. PECORA. Covering this issue ? Mr. BUTTENWIESER. Yes. Mr. PECORA. Will you produce it, please, for the record ? Mr. BUTTENWIESER. Yes. Mr. D E GERSDORFF. What is the date of this ? Mr. PECORA. The date of this is April 30, 1928. Well, now, I notice that under the terms of this contract or agreement the Guaranty Co. and the firm of Kuhn, Loeb & Co. are named also as fiscal agents for this loan. Mr. BUTTENWIESER. "That is correct, sir. Mr. PECORA. The fact, then, that the National City Co. had meanwhile become fiscal agents for the Chilean Government did not extend that agency to cover this issue, did it ? Mr. BUTTENWIESER. NO, sir. We were fiscal agents for this issue, which is a Mortgage Bank issue. Mr. PECORA. NOW, where is the other agreement under which you permitted or sanctioned the National City Co. coming in as a participant on equal terms with yourself and the Guaranty Co. ? Mr. BUTTENWIESER. That was done by letter. STOCK EXCHANGE PRACTICES 1143 Mr. PECORA. Will you produce the letter? Mr. BUTTENWIESER. Yes. [Handing same to Mr. Pecora.] The arrangements were made verbally, Mr. Pecora. That is the confirmation letter, of which Mr. McEldowney has a copy. The fact is that is a copy he made. Mr. PECORA. What did you say was the cost to the underwriters for this fourth issue? Mr. BUTTENWIESER. Ninety-two percent. Mr. PECORA. Well, the agreement provides for a price of 91% percent. Mr. BUTTENWIESER. That is correct, but we supplemented that agreement by assuring the Mortgage Bank that if we issued above 9 5 ^ percent they would get the difference, and the bonds were issued at 95% percent and the Mortgage Bank got the extra onefourth percent. Mr. PECORA. Have you got a copy of that supplemental agreement here? Mr. BUTTENWIESER. It was embodied in a cable which was sent to the Mortgage Bank by Mr. Laval of Louis Dreyfus & Co.—I believe it is Mr. McEldowney's copy, exhibit 1—which says— The bankers plan to issue at 9 5 ^ percent, but if the market for Chile 6 percent bonds permits we will try to issue higher and if so we will give Caja full benefit of such higher price. Mr. PECORA. NOW, the letter that you have produced, or rather the copy of the letter which you have produced here with respect to the admittance of the National City Co. as a participant with yourselves and the Guaranty Co. in the original group is dated April 30,; 1928, which is the date of the loan agreement with the Chilean Bank? Mr, BUTTENWIESER. That is correct, sir. Mr. PECORA. I offer this copy of the letter in evidence. Is this a correct copy of the original ? Mr. BUTTENWIESER. Yes, sir. It has a very slight change in pencil, because all these copies were made by your staff and we compared them. There is a slight change there. That pencil correction should go in there. Mr. PECORA. Should go into the record ? Mr. BUTTENWIESER. Yes. Mr. DE GERSDORFF. It is merely a typographical error. Mr. BUTTENWIESER. Yes; it is merely a typographical error. Mr. PERCORA. Yes. I offer it in evidence and ask that it be spread upon the record. The CHAIRMAN. It will be admitted in evidence and spread upon the record. (Copy of letter of April 30, 1928, from Kuhn, Loeb & Co. to the National City Co., was marked " Committee Exhibit 14 ", of June 28, 1933, and is here printed in the record in full, as follows:) COMMITTEE EXHIBIT 14 APEIIL 30, RONALD M. BYRNES, 1928. Esq., Vice President the National City Co., New York City, N.Y. DEAR SIR: Jointly with the Guaranty Co. of New York we have agreed to purchase $20,000,000 principal amount Mortgage Bank of Chile (Caja de Credito Hipotecario, Chile) guaranteed sinking fund 6 percent gold bonds of 1928, due April 30, 1961, as mo^e fully described in the enclosed circular. 1144 STOCK EXCHANGE PRACTICES We hereby confirm that you have been ceded an interest of 30 percent in this business on original terms. The cost of the bonds will be 91% percent and accrued interest to May 21, 1928, payable as follows: $7,912,000 on May 21, 1928, $1,500,000 on June 15, 1928, and the balance of the purchase price, being $9,008,000, on August 1, 1928, this, last installment to remain on deposit until September 29, 1928, at interest at the rate of iy2 percent per. annum. An intermediary fee of one-half percent is to be paid. ,, No syndicate will be formed, but the bonds are to be offered for public subscription by us, the Guaranty Co. of New York, and yourselves at 95% percent and accrued interest, less a selling commission of 2 percent, of which one fourth percent may be reallowed to bankers, brokers, national banks, State banks, savings banks, trust companies, and insurance companies. Kindly confirm that the above is in accordance with your understanding, and oblige, Yours very truly, KUHN, LOEB & Co. Mr. PECORA. I also want to offer in evidence and ask to have spread on the record the printed copy ,of the loan agreement with regard to this fourth issue, furnished by the witness. The CHAIRMAN. Let it be admitted and placed in the record. (Agreement between Caja de Credito Hipotecario (Chile) and Kuhn, Loeb & Co., and Guaranty Co. of New York. April 30, 1928. Guaranteed sinking fund 6 percent gold bonds of 1928, was received in evidence, marked " Committee Exhibit 15, of June 28, 1933." See p. 1177.) Mr. PECORA. NOW I see no mention in this letter to the National City Co. of April 30,1988, of any request made of you by the Chilean Government or the Mortgage Bank of Chile to cede an interest in this underwriting to the National City Co. Have you any written evidence of that request? Mr. BUTTENWIESER. Yes; I think that was embodied in a cable. It is embodied in a cable, of which you have a copy. Mr. PECORA. Will you read the cable? Mr. BUTTENWIESER. Do you want me to read the cable or that excerpt ? Mr. PECORA. Well, the portion of it relating to the interest to be given the National City Co. Mr. BUTTENWIESER. The Mortgage Bank said: We can add that Government will be very glad to learn our bankers and Chilean Government bankers cooperate in this loan. Mr. PECORA. HOW does that read ? Mr. DE GERSDORFF. Who is that from ? Mr. BUTTENWIESER. This is a cable from the Mortgage Bank of Chile, which says: We can add that Government Mr. PECORA. Addressed to whom? Mr. BUTTENWIESER. I can not tell definitely. It was obviously addressed to us, but whether it was addressed to us through Dreyfus & Co. I don't know. Mr. PECORA. What is the date of it ? Mr. BUTTENWIESER. It is your copy that I am reading from, Mr. Pecora, and I do not find the date on that, but it would appear to be April 10. Mr. PECORA. And what is the statement in it referring to the request to include the National City Co. ? Mr. BUTTENWIESER (reading) : STOCK EXCHANGE PRACTICES 1145 We can add that Government would be very glad to learn our bankers and Chilean Government bankers cooperate in this loan. Mr. PECOEA. Well, that is not the request, is it ? Mr. BUTTENWIESER. That is the request. Mr. PECORA. Was that the only request that was made, couched in those terms? Mr. BUTTENWIESER. That is the only request I find, but that request is ample reason, I should think, for us to be glad to have the National City Co. join hands with us for that loan. Mr. PECORA. What were the gross profits accruing to the original group on the flotation of this fourth Chilean loan ? Mr. BUTTENWIESR. The gross spread was 4.315 percent, which included the interest gain, because you see the margin was 3% percent. The interest gain was 0.565 percent. Mr. PECORA. What was the gross profit in dollars and cents? Mr. BUTTENWIESER. $863,000. And at this point, Mr. Pecora, might I add for the record what the original group's profit was in each of these transactions, so that in addition to the gross you have the net? Mr. PECORA. What was the net, now? Mr. BUTTENWIESER. The net to the originating group was $199,562. The way that was split up was one half percent to Louis Dreyfus & Co., 1.815 percent less expenses for the originating group, and 2 percent selling group commission. Mr. PECORA. HOW was this issue marketed ? Mr. BUTTENWIESER. The same as the previous issue, through a selling group. Mr. PECORA. Not through an intermediate syndicate between the selling group and the original group? Mr. BUTTENWIESER. N O ; no syndicate. Mr. PECORA. Was the personnel of the selling group practically the same in all these issues? Mr. BUTTENWIESER. I would say it varied. The people on our selling group list would vary from year to year. Substantially the same, but naturally we kept on our list only those that we considered desirable people with whom to do business. Would you want for the record the net profits on these other issues which we have had under discussion, because I can dictate it very easily ? Mr. PECORA. Well, you can prepare a statement on that, if you will, after today's session, that we can put in the record toworrow. Mr. BUTTENWIESER. All right, sir. It is only three figures. The CHAIRMAN. YOU have already stated the other profits? Mr. BUTTENWIESER. We stated the original group profit in the first transaction. In the second and third we did not. It is a matter of dictating six figures. Mr. PECORA. All right; if you have the figures there. Mr. BUTTENWIESER. In the 6% percent issue of 1926 the original group's profit was $252,975.87. That was split 10 percent to Lehman Bros., 45 percent Guaranty Co., 45 percent to Kuhn, Loeb & Co. In the third issue, which is the 6-percent notes issued December 1926, the originating group's profit was $159,386.82, split on the same basis, 10 percent Lehman Bros., 45 percent Guaranty Co., 45 percent Kuhn, Loeb & Co. 175541—33—PT 3 13 1146 STOCK EXCHANGE PRACTICES The 6-percent issue of 1928, which is the one we are at present discussing, the original group's profit, as I stated, was $199,562.87, divided Lehman Bros., 10 percent; Guaranty Co., National City Co., Kuhn, Loeb & Co., 30 percent each. r - Thank you, sir. Mr. PECORA. In between the third and fourth issues did your firm and the Guaranty Co. make a loan of $8,000,000 to the Mortgage Bank of Chile? Mr. BUTTENWIESER. Yes, sir. Mr. PECORA. For a short term? Mr. BUTTENWIESER. Yes, sir. Mr. PECORA. Will you give us the details of that? Mr. BUTTENWIESER. On February 3, 1928, we • made them an $8,000,000 loan. Mr. PECORA. For what period? Mr. BUTTENWIESER. For 6 months. That is, it was to be; due August 1, 1928. At par less discount at the rate of 5% percent per annum. There no intermediary commission. Mr. PECORA (interposing). Did you distribute that loan among any other participants than yourself and the Guaranty Co. ? Mr. BUTTENWIESER. No•; the Guaranty Co., Kuhn, Loeb Co., and Lehman Bros, had that entire loan. Mr. PECORA. In the respective proportions of 45, 45, and 10 percent ? Mr. BUTTENWIESER. Yes, sir. Mr. PECORA. NOW, that $8,000,000 short-term advance was repaid when? Mr. BUTTENWIESER. That was repaid out of the proceeds of the fourth issue, as was contemplated in that loan arrangement. Mr. PECORA. In which loan arrangement, the one for the $8,000,000 short-term advance? Mr. BUTTENWIESER. Yes, sir. Mr. PECORA. Was any statement made to the investing public at the time the fourth issue was circularized and offered to indicate that out of the proceeds of that fourth issue—$20,000,000—$8,000,000 was to be repaid on account of this short-term advance? Mr. BUTTENWIESER. The bonds which were security for this $8,000,000 loan were the bonds which were offered to the public. So you see there was no change in the status of the Mortgage Bank so jar as the issue in question was concerned. It was merely a temporary loan made in contemplation of the issuance of this ^20,000,000 of bonds, Mr. PECORA. But no representation about that was made in the prospectus offering the fourth issue, was it ? Mr. BUTTENWIESER. I do not think it was, Mr. Pecora. The CHAIRMAN. This was the only loan that was ever paid ? Mr. BUTTENWIESER. Sir? The CHAIRMAN. This was the only loan that was ever paid ? Mr. PECORA. This short-term advance of $8,000,000? Mr. BUTTENWIESER. Well, they paid interest and substantial sinking funds on the other issues, until the time that they were precluded from doing it by the Chilean moratorium. Mr. PECORA. But this loan was repaid both as to principal and interest in full? STOCK EXCHANGE PRACTICES 1147 Mr. BUTTENWIESER. Very shortly afterwards; yes. It was a temporary loan. I suppose I might mention the other $8,000,000 temporary advance which was referred to yesterday, which was temporary only at its inception and then became long term. That is the one that is not repaid. It was a loan undertaken similarly, intended to be repaid by an issue of bonds, but the issue was never consummated. The CHAIRMAN. When was that loan made ? Mr. BUTTENWIESER. That was made August 7, 1930. The CHAIRMAN. Eight million? Mr. BUTTENWIESER. $8,000,000. I t was intended to come due February 6, 1931. The CHAIRMAN. That was never paid? Mr. BUTTENWIESER. Never paid. The CHAIRMAN. Didn't you share that with the Guaranty Co. ? Mr. BUTTENWIESER. Yes, sir. Mr. PECORA. He said they shared that and their total participation of that loan amounted to only $600,000. Mr. BUTTENWIESER. Not originally. Originally our participation was $3,600,000. Mr. PECORA. But you distributed that among other participants until you were left with only $600,000 of it? Mr. BUTTENWIESER. The real fact is at that time it was considered by the people who sought it as a desirable means of investing their short-term funds, and they wanted to participate. Mr. PECORA. And it was granted to them, with the result that you were left with only $600,000 participation of your original $3,600,000? Mr. BUTTENWIESER. That is correct. Mr. PECORA. Did you in the case of this fourth issue, Mr. Buttenwieser, cause any independent study or investigation to be made of the political, financial, and economic conditions of Chile? Mr. BUTTENWIESER. N O ; but if we had it would have reflected a very good picture. Mr. PECORA. When was the fifth loan brought out? Mr. BUTTENWIESER. In 1929; June 26. Mr. PECORA. And that was of a par amount of $20,000,000? Mr. BUTTENWIESER. $20,000,000. Mr. PECORA. Six percent interest, and due in 1962 ? Mr. BUTTENWIESER. Yes, sir. Mr. PECORA. In any of the underwriting of this issue did you cause any independent investigation or study to be made of the political, financial, or economic conditions in Chile? Mr. BUTTENWIESER. NO. I repeat again, the figures spoke for themselves there. At the end of 1928—I think I said this this1 morning—the favorable trade balance of Chile was close to $93,000,000. At the end of 1929 it was $81,500,000. The CHAIRMAN. This short-time loan of eight million, was that evidenced by bonds or debentures or notes ? Mr. BUTTENWIESER. That was evidenced by discount notes with the bonds as collateral, the bonds that it was planned to issue but which never were issued. 1148 STOCK EXCHANGE PRACTICES Mr. KAHN. May I interject one remark, Mr. Pecora? Our total profits, my firm's total profits on those four transactions, which have been set forth by my partner, were less than $370,000. Our loss on the loans we made is $600,000. In other words, " loss " is a strong word to use. I hope it will not be a loss, but at present we are stuck with $600,000, against which we have an offset of total profits made over a number of years aggregating less than $370,000. I hope the future will present a pleasanter picture, but that is the picture today. Mr. PECORA. YOU might complete the picture, Mr. Kahn, by indicating what the loss to the investing public is from, its purchase of these $90,000,000 of the bonds under existing conditions. Mr. KAHN. I do not wish, Mr. Pecora, to take any more of your time than I have to, but if you permit me to answer, if you will go through the list of American investments that were considered thoroughly safe and sound in 1929, and even at 1930, and even at the beginning of 1931, I am afraid you will find similar dismal pictures, fully as dismal. Mr. PECORA. I haven't any doubt of that, but I thought we might put in the whole picture, include the loss to the investing public from the purchase by it of this $90,000,000 worth of these Chilean bank bonds. Mr. KAHN. I cannot dispute that. I regret it fully as much as you do^and I hope that the public in the future, just as we with our loss, will see a pleasanter picture and have a pleasanter story to tell. The CHAIRMAN. The public have some bonds left and may get something, but you do not even have any bonds left ? Mr. KAHN. I beg your pardon ? The CHAIRMAN. I said the public has some bonds left from which they may get something yet, but you do not have any bonds ? Mr. KAHN. We have a note, Senator Fletcher. We hope for the best. Mr. PECORA. NOW, at what price did you and the Guaranty Co. take over the fifth issue in June 1929 ? Mr. BUTTENWIESER. At 8 9 ^ percent. There was an interest gain of 1% percent. Do you want the rest, Mr. Pecora? Mr. PECORA. At what price were they disposed of? Mr. BUTTENWIESER. They were issued at 92 percent and accrued interest. That made the total spread 4% percent. Do you want me to continue with the split-up of that? Mr. PECORA. Yes; if you will. Mr. BUTTENWIESER. One half percent went to Messrs. Louis Dreyfus & Co., 2!/4 percent went to the selling group as selling group commission, iy2 percent less expenses was for the originating group, and I regret to add the actual loss on that turned out to be 0.16 percent. So that our net figure on that to the group was a loss of $33,518.32, split 10 percent to Lehman Bros., 30 percent to Guaranty Co., 30 percent National City Co., 30 percent Kuhn, Loeb. Mr. PECORA. Did you have any independent investigation or study made of the political, financial, and economic conditions of Chile for the purpose of determining whether or not you would underwrite this issue? STOCK EXCHANGE PEACTICES 1149* Mr. BUTTENWIESER. In June of 1929 everything seemed flourishing throughout the world, but my answer to your question is, no. But I repeat again that conditions at that time were very favorable* Mr. PECORA. There was a 4 point spread there ? Mr. BUTTENWIESER. Four and one quarter spread; yes. That interest accounted for that. Mr. PECORA. NOW, Mr. Buttenwieser, had not the financial condition respecting the Chilean bank materially changed between the fourth and fifth issues? Mr. BUTTENWIESER. I do not know to what you allude, Mr. Pecora, If you will amplify it. Mr. PECORA. Have you got the balance sheet of the Mortgage Bank of Chile as of December 31, 1928 ? Mr. BUTTENWIESER. Yes, sir. Mr. PECORA. Will you look at the balance sheet of the bank as of December 31, 1928? Mr. BUTTENWIESER. Yes, sir; I have it before me. Mr. PECORA. And you find an item there, don't you, amounting to $26,262,491.12, among its assets? Mr. BUTTENWIESER. Yes, sir. Mr. PECORA. What does that represent? Mr. BTTENWIESER. That is a guaranty of the Chilean Government in respect of bonds issued under the law of June 15, 1925, and January 31, 1928. Mr. PECORA. And that was the guaranty of the Government to that extent back of some of these mortgage bonds, wasn't it ? Mr. BUTTENWIESER. That is their way of entering the guaranty of the Government on particular bonds; yes. Mr. PECORA. And the total assets, inclusive of that figure, of the bank was $88,732,000 odd dollars? Mr. BTTENWIESER. NO, Mr. Pecora. In Chilean pesos it was 1,526,000,000. In pounds sterling it was 133,000. In French francs it is 44,000,000. And United States dollars it was 88,000,000. Mr. PECORA. Well, I am speaking of it now in terms of American dollars. Mr. BUTTENWIESER. NO. YOU have got to add them crosswise. In other words all the assets of the bank are not 133,000 pounds. You have got to add that crosswise. They keep their balance sheet in Chilean pesos, pounds sterling, French francs and United States dollars, the way they had obligations outstanding, just the same as the liabilities of the bank are kept that way. They had for instance $88,000,000 of United States dollar, obligations. They had assets of $88,000,000. You have to take the cross total of these two columns. Mr. PECORA. Have you a copy of the loan agreement covering this fifth issue? Mr. BUTTENWIESER. Yes, Mr. Pecora. Mr. PEOORA. Will you produce it for the record ? Mr. BUTTENWIESER. Yes, surely [producing document]. Mr. PECORA. I offer that in evidence and ask that it be spread on the record. The CHAIRMAN. Let it be received. (Document headed " Agreement between Caja de Credito Hipotecario (Chile) and Kuhn, Loeb & Co. and Guaranty Co. of New York> 1150 STOCK EXCHANGE PRACTICES May 1, 1929, guaranteed sinking fund 6 percent gold bonds of 1929 ", was thereupon designated " Committee Exhibit 16, June 28, 1933." See p. 1187.) Mr. PECORA. I think I would like to examine Mr. Kahn now for a while, if I may. TESTIMONY 0E OTTO H. KAHN, A PARTNER OF KUHN, LOEB & CO.—Resumed , Mr. PECOKA. Mr. Kahn, who prepares the income-tax returns to the Federal Government for your firm ? Mr. KAHN. Mr. Langenbach, our chief accountant. Mr. PECORA. And does he also prepare the income-tax returns for the individual members of the firm, do you know ? Mr. KAHN. Some of them, yes, I believe. Mr. PECORA. Did he prepare them in your individual behalf? Mr. KAHN. NO. Mr. PECORA. Who prepared Mr KAHN. That is rather a yours? confused story. Mine was being prepared until a couple of years ago mainly with the cooperation of one gentleman who has since died. I t is now being prepared with the cooperation of a number of people, one of them being my secretary. $ir. PECORA. DO you recall whether or not you paid any income taxes for the year 1930 ? Mr. KAHN. NO, sir. Mr. PECORA. That is, you do not recall, or you recall that you did not? Mr. KAHN. I recall that I paid no income tax for 1930. Mr. PECORA. HOW about for the year 1931? Mr. KAHN. None for 1931. Mr. PECORA. HOW about for the year 1932? •Mr. KAHN. And none for 1932'. I hope there will be a different picture for 1933, Mr. PECORA. YOU did pay a very substantial one for 1929 ? Mr. KAHN. Yes, Mr. Pecora. Mr. PECORA. And for 1928 ? Mr. KAHN. Also, yes. Mr. PECORA. NOW, do you recall having made any sales of securities during the last part or, to be specific, on about December 30, 1930, at an indicated loss of $117,584, the securities in question being 1,000 shares of Electric Power & Light Corporation, 1,000 shares of International Nickel Co., 500 shares of Manhattan-Dearborn Co., 250 shares of Reynolds Metal Co., and 600 shares of Tubize Chatillon Co., series B ? Mr. KAHN. DO I recall having made those sales, Mr. Pecora? Is that your question ? Mr. PECORA. I beg your pardon, sir ? Mr. KAHN. IS your question whether I recall having made those ? Mr. PECORA. Yes. Mr. KAHN. I am afraid I do not. Mr. PECORA. DO you recall owning securities of the kind that I have mentioned? Mr. KAHN. I am afraid I may be forfeiting whatever opinion for knowledge I may have gained heretofore, but if there is one STOCK EXCHANGE PRACTICES 1151 subject on which my knowledge is less than it is on -income-tax affairs I do not know it. My ignorance of income-tax affairs is abysmal, and always has been, I am afraid always will be, and I am afraid, with every desire to answer your questions categorically, I cannot tell* you anything about it which would be any more than the merest guesswork, Mr. PECORA. NO; I simply asked you if you recall owning securities of the kind that I have referred to or mentioned. I will repeat : Electric Power & Light Corporation, International Nickel Co., Manhattan-Dearborn Co., Reynolds Metal Co., Tubize Chatillon Co., series B. Mr. KAHN. Some of. them have a gloomily familiar sound. [Laughter.] Mr. PECORA. YOU say a gloomingly familiar sound? Mr. KAHN. A gloomily familiar sound. Mr. PECORA. Why are they gloomily familiar? Mr. KAHN. Because, according to my recollection, they did not turn out well. They turned out lemons, most of them, not all ,of them. Mr. PECORA. Well, perhaps because they did not turn out well it might refresh your recollection as to whether or not, on December 30, 1930, you sold blocks of those securities at an indicated total loss of $117,584. Mr. KAHN. I am afraid I cannot answer anything differently, but that I do not recall. Mr. PECORA. Is there anything, any record or memoranda in your possession, that would refresh your recollection about any such sale of those securities on that date, namely, December 30, 1930 ? Mr. KAHN. There are none in my possession. Mr. MOORE. YOU asked Mr. Kahn's office for a schedule, and we might check to see, if you call those off again. I don't know whether it refreshes Mr. Kahn's memory or not, but there are^—Mr. PECORA (interposing). One thousand shares of Electric Power & Light Corporation. Mr. MOORE. Wait just a minute. Yes; we found 1,000 shares of Electric Power & Light. Mr. PECORA. One thousand shares of International Nickel Co. Mr. KAHN. Yes. Mr. MOORE. Yes; rights. Mr. DE GERSDORFF. Eights. Mr. MOORE. Eights or shares ? Oh, here it is up here, 1,000 International Nickel Co. Mr. KAHN. Eight. Mr. PECORA. Five hundred shares of Manhattan-Dearborn Co. Mr. MOORE. HOW many shares ? Mr. PECORA. Five hundred. I understand they are included in a block of 2,000. Mr. MOORE. Oh, yes; 2,000 shares. Mr. PECORA. TWO hundred and fifty shares of Eeynolds Metal Co., which I understand are included in a block of 1,000 shares. Mr. MOORE. Yes; a thousand shares. Mr. PECORA. Six hundred shares of Tubize Chatillon Co. B, which I understand is included in a block of 2,400. Mr. MOORE. There is 2,400 on this list. 1152 STOCK EXCHANGE PEACTICES Mr. KAHK. Yes. Mr. PECORA. NOW, from the records I see before you, can you refresh your recollection, then tell us whether or not on December 30, 1930, you sold those securities at an indicated or reported loss of $117,584? Mr. KAHN. I am trying to find out, Mr. Pecora. Mr. MOORE. Will you read off the amounts of that again, because the only thing we have are the amounts sold ? Mr. PECORA. What amounts do you want me to read off? Mr. MOORE. I mean the number of shares you refer to, because we haven't got it here. Mr. PECORA. One thousand shares of Electric Power & Light. Mr. MOORE. All right. Mr. PECORA. One thousand shares of International Mckel Co. Mr. MOORE. Eight. Mr. PECORA. Five hundred shares of Manhattan-Dearborn. Mr. MOORE. Out of 2,000 ? Is that right ? Mr. PECORA. I understand so. Two hundred and fifty shares of Reynolds Metal Co. Mr. MOORE. Out of 1,000? Two hundred and fifty Reynolds Metal Co. Mr. PECORA. And 600 shares of Tubize Chatillon Co. B out of a block of 2,400. Mr. MOORE. HOW many, 600 ? Mr. PECORA. Six hundred shares. (Mr. Kahn and Mr. Moore and others conferred and referred to documents.) Mr. PECORA. Have you any recollection of those transactions, Mr. Kahn? Mr. KAHN. I have no recollection, Mr. Pecora. I am afraid I would have to give you the same answer as to pretty nearly anything that you may ask about my income-tax returns. They were prepared, they were put before me by people in whom I had implicit confidence, and who are good enough to charge themselves with relieving me, an exceedingly busy man, of the details of these accounting matters, of which I am particularly little competent— an exceedingly busy man not merely in my own business but in a great many other matters that interest me and take by time, and probably less interested in my own financial affairs than in anything else which I am paying attention to and having a duty towards. Therefore, I fear, with the greatest desire to give you all the facts, you will not find me as responsive a witness as I would like to be, not from any lack of desire but from lack of actual knowledge. Now, I find these stocks that you have indicated on this list, and the presumption from this list is that they were sold, but I cannot tell you from my own knowledge. Mr. PECORA. Did you direct the sales of securities owned by you? Mr. KAHN. Some of them I would. Some of them others would. A good many people butted in, with my full willingness and consent. I was. only too glad to be relieved of looking after these matters. Mr. PECORA. Well now, do you recall that on December 30, 1930, there were assigned to you by your daughter, Maude E. Marriot, STOCK EXCHANGE PRACTICES 1153 certain securities which included the five blocks of stock that I have enumerated ? Mr. KAHN. Not to my knowledge, Mr. Pecora. Mr. PECORA. DO you recall having been questioned by any representative of the Internal Eevenue Department with respect to these particular sales of securities that I have referred to? Mr. KAHN. NO, Mr. Pecora; I have not been so questioned, but I know that every return of mine has been gone over by a revenue officer very carefully, spending days at my office, and I have been asked no such question. Mr. PECORA. Mr. Kahn, have you in your possession—by that I mean anywhere under your control, if not physically in your possession at the moment—a copy of your income-tax return for the year 1930? Mr. KAHN. I believe Mr. Moore has one; yes. Mr. PECORA. IS it with you? Mr. MOORE. Yes. Mr. KAHN. Yes. Mr. PECORA. Have you got it before you? Mr. KAHN. Yes. Mr. PECORA. Will you refer to it and from it see if you can refresh your recollection as to whether or not you made on December 30, 1930, sales of the five blocks of securities that I have already enumerated? Senator TOWNSEND. Mr. Kahn, you are not in the habit of making your own income-tax report, I am sure ? Mr. KAHN. Oh, no indeed. Senator TOWNSEND. I S there anyone here who makes your reports for you? Mr. KAHN. NO. Mr. Pecora, I wonder whether you would help me a little. Those things are quite unfamiliar to me. Can you tell me where I can find that ? You probably have a copy of that report before you. Mr. PECORA. Will you look in the itemized list known as " schedule C " attached to your report? Mr. DE GERSDORFF. Mr. Pecora, the items you have inquired about, I understand, were made the subject of an objection by the internalrevenue examiner. The matter was taken up, I think, at Washington and finally decided in Mr. Kahn's favor. I knew nothing about it. I know nothing about it now. Mr. Stroock, who handled it, is here, and he can explain it to you if you wish him to do so. The protest was made while Mr. Kahn was in Europe. He never saw it. He didn't sign it, and it was signed by somebody on his behalf, and I suppose that is why he is so utterly ignorant about it. Mr. PECORA. Well, if he can refresh his recollection from the sheet before him right now, I have no objection to that being a means of refreshing his recollection. Mr. DE GERSDORFF. The statement has just been made to me. I do not know anything about it. Mr. PECORA. What is that? Mr. DE GERSDORFF. That statement has just been made to me by Mr. Stroock, who is sitting behind me and who conducted this protest in Washington. The CHAIRMAN. Protest as to what items ? 1154 STOCK EXCHANGE PEACTICES Mr. DE GERSDORFF. These items were deducted as losses in this report, and the internal-revenue examiner disallowed them. Mr. PECORA. Disallowed the deduction? Mr. DE GERSDORFF. Yes. Mr. PtocoRA. Of one hundred seventeen thousand-odd dollars ? Mr. DE GERSDORFF. Yes; whatever the amount was. And an appeal of the protest to that was taken up with the Department at Washington and was decided in Mr. Kahn's favor, so I am advised. That was while he was in Europe. He did not sign the protest. Mr. PECORA. Substantially that accords with my information, Mr. de Gersdorff. Mr. KAHN. Would that explain my incapacity to find what you want me to find ? Mr. PECORA. Well, now, what I would like to have you refresh your recollection about is with respect to a certain assignment to you by Maude E. Marriott, who, I understand, is your daughter. Mr. KAHN. Yes. Mr. PECORA. Of certain securities, under an assignment that bears date December 31, 1930. Do you recall such an assignment, Mr. Kahn? Mr. KAHN. I recall certain assignments, the same way in which I recall other events which have passed out of my consciousness and out of my knowledge. Perhaps I may be permitted to say that in order to recall those matters which are of real importance in the duties which I fulfill I deliberately discharge from my mind those things which I think I do not have to remember. I do it by habit and by training, and this is one of the things which I do not remember, because^ presumably, I did not have to remember it. I am far from disputing that it occurred, but I cannot tell you that it did occur. Mr. PECORA. Well, have you completely forgotten anything about such an assignment made to you by your daughter under an instrument dated December 31, 1930? Mr. KAHN. I have a recollection that there was such an assignment. I do not recollect the circumstances of the case. I do not recollect the details. I could not possibly tell them to you. Mr. PECORA,. I would suggest, then, Mr. Kahn, that between now and the session tomorrow morning you seek to refresh your recollection, either by consulting records or by consulting the recollection of any of your counsel, with respect to this particular instrument of assignment. Mr. KAHN. I will diligently do so. I will try my best to do so, Mr. Pecora, and I hope to be able to be a more competent witness tomorrow than I am just now. Mr. PECORA. I suggest, then, Mr. Chairman, that we adjourn until tomorrow morning. The chairman (after informal discussion off the record). We will take a recess now until tomorrow morning at 10 o'clock. (Whereupon, at 4:20 o'clock p.m., a recess was taken until tomorrow, Thursday, June 29, 1933, at 10 o'clock a.m.) COMMITTEE EXHIBIT NO. 10, JUNE 28, 1933 Agreement, dated June 25, 1924, made in the city and State of New York, in the United States of America, between Caja de Oredito Hipotecario, of Santiago, Chile, organized under the laws of Chile (hereinafter called the Caja) acting STOCK EXCHANGE PRACTICES 1155 by His Excellency, the Honorable Beltran Mathieu, Chilean Ambassador to the United States of America, thereunto duly authorized, and Kuhn, Loeb & Co., a copartnership of the city and State of New York, and Guaranty Co. of New York, a corporation organized under the laws of the State of New York (hereinafter called the bankers). In consideration of the mutual covenants hereinafter set forth, it is agreed as follows: 1. The Caja will forthwith create an issue of bonds to be known as " the guaranteed sinking fund 6% percent gold bonds of the Caja " (hereinafter called the bonds) limited to $20,000,000 principal amount, to constitute the loan designated " amprestito oro Caja Hipotecario, 1925." The bonds shall be issued in accordance with the law of the Republic of Chile of August 29, 1855, establishing the Caja, and the law of the Republic of Chile, dated September 10, 1892, which authorizes the issue of obligations payable in foreign moneys, and in accordance with the decree law dated March 9, 1925, and the Executive decree dated June 15, 1925 (supplementing said decree law), which authorize the guaranty of the bonds by the Republic of Chile. The bonds shall be in coupon form, payable to bearer, shall be dated June 30, 1925, shall mature June 30, 1957, shall bear interest from June 30, 1925, at the rate of 6% percent per annum, payable semiannually on June 30 and December 31 in each year and shall be in the denominations of $1,000 and $500 in such proportions as the bankers may request. The principal of and interest on the bonds shall be payable without deduction for any taxes, imposts, levies, or duties of any nature, now or at any time hereafter imposed by the Republic of Chile or by any State, Province, municipality, or other taxing authority thereof or therein, and shall be paid, at the option of the holders, in the Borough of Manhattan, city and State of New York, at the Office of Kuhn, Loeb & Co., or at the principal office of Guaranty Trust Co. of New York, in gold coin of the United States of America of or equal to the standard of weight and fineness existing June 30, 1925, or in the city of Santiago, Chile, at the office of the Caja, by sight draft on New York City, and shall be paid in time of war as well as in time of peace and whether the holder be a citizen or resident of a friendly or hostile state. The bonds shall be authenticated by the certificate endorsed thereon of Guaranty Trust Co. of New York, registrar of the loan hereinafter appointed. The Republic of Chile shall unconditionally guarantee to the holders of the bonds prompt payment of the principal of, and the interest on, the bonds, as and when the same shall become due and payable, and also' prompt payment to the fiscal agents, hereinafter appointed, of the semiannual payments for the service of interest and amortization of the bonds hereinafter mentioned as and when the same shall become due and payable, and such guaranty shall be endorsed on the bonds. The text of the guaranty shall be substantially in the form hereto annexed and marked " schedule B ". 2. The text of the definitive engraved bonds shall be in the English language substantially in the form hereto annexed and marked " schcedule A ", and shall bear a notation in Spanish substantially in the form shown on said schedule A. The text of the usual certificate of the Treasury Department of the Republic of Chile on bonds of the Caja shall be in Spanish, or in both English and Spanish, as the bankers may elect, in such form as may be required by Chilean law. The Caja hereby authorized the bankers to cause to be prepared without delay engraved bonds for execution by or on behalf of the Caja, such bonds to be' engraved and printed in New York in accordance with the requirements of the New York Stock Exchange. The bankers may issue or cause to be issued by a bank or trust company in New York temporary interim certificates which, if issued, shall in due course be exchangeable without cost or expense to the bankers or the holders for definitive engraved bonds. The definitive bonds shall bear the facsimile signature of Don Louis Barros Borgono, the president of the board of directors of the Caja, and shall be manually signed by Don Francisco Bahamondes, the cashier of the Caja, or other duly authorized officer of the Caja. The certificate of the Treasury Department shall be signed manually or otherwise as may be required by Chilean law. The coupons shall bear the facsimile signature of Don Louis Barros Borgono, the president of the board of directors of the Caja. The guaranty of the Republic of Chile endorsed on the bonds shall be manually signed by His Excellency, the Honorable Beltran Mathieu, the Chilean Ambassador to the United States of America, thereunto duly authorized by the Government of 1156 ( STOCK EXCHANGE PRACTICES the Republic of Chile or by some other duly authorized representative of the -Republic of Chile. 3. Until all of the bonds shall have been retired or redeemed, the Caja shall pay to the fiscal agents as an annuity for the service of interest and amortization of the bonds the sum of $1,492,800 pen annume in gold coin of the United States of America of the standard aforesaid,, except as hereinafter in this aricle provided. Such sums shall be paid in equal semiannual instalments at least 15 days before the 30th day of June and the 31st day of December in each year as hereinafter in article 5 hereof provided. The fiscal agents shall apply each installment to the payment of the interest maturing on the next succeeding interest date on the bonds then outstanding and shall apply the part of each such installment not required for the payment of such interest as a sinking fund for the redemption of bonds on such interest date as hereinafter provided. The Caja may, at its option, increase the amount of any semiannual installment to be applied to the redemption of bonds on any semiannual interest date, and, in the event of any such increase, all subsequent semiannual installments shall be reduced to an amount sufficient to provide for the semiannual service of interest and amortization of the bonds which shall be outstanding after the application of such increased sinking-fund installment to the redemption of bonds, such amount to be calculated as a cumulative sinking fund compounded semiannually at the rate of 6% percent per annum to redeem, on or before June 30, 1957, all of the bonds so outstanding. Any such reduced semiannual installment may similarly be increased in which event subsequent semiannual installments shall be similarly reduced. This right is reserved because repayments of the mortgage loans made by the Caja may be made by the borrowers either in cash or in bonds of the Caja in excess of the fixed minimum amortization payments, and the Caja is not permitted by law to have its bonds outstanding in excess of the mortgage loans against which they are issued. The part of each semiannual installment available for the redemption of bonds shall be applied to the redemption of bonds by lot at 100 percent of their principal amount on the interest date next succeeding the date of such payment. The numbers of the bonds to be redeemed on each such interest date shall be drawn by lot in any usual manner. The drawings shall be held in public at the principal office of the Caja in the city of Santiago. The Caja shall notify the fiscal agent of the aggregate principal amount and numbers of the bonds to be redeemed on each interest date and such notification shall be sent to the fiscal agents at the onice of Kuhn, Loeb & Co. in the city of New York so as to be received at said office at least 45 days prior to such interest date. The numbers of the bonds so drawn for redemption shall be advertised at least twice in two daily newspapers of general circulation in the Borough of Manhattan, city and State of New York, the first advertisement to appear not less than 30 days prior to the redemption date. If the New York Stock Exchange so requires, the advertisement shall be further published. The bonds so called for redemption shall on the redemption date des-gnated in such notice become due and payable at one hundred percent of their principal amount and shall be payable, at the option of the holders, in the Borough of Manhattan, city and State of New York, at the office of Kuhn, Loeb & Co. or at the principal office of Guaranty Trust Co. of New York, in gold coin of the United States of America of the standard aforesaid, or in the city of Santiago, Chile, at the office of the Caja, by sight draft on New York City, and shall be paid by the Caja on and after the redemption date at the redemption price aforesaid on presentation and surrender of such bonds at any of said offices, together with all coupons thereto appertaining maturing after the redemption date. If any bond so presented shall not be accompaned by all coupons maturing after the redemption date, then said bond shall be paid at the redemption price aforesaid less the aggregate principal amount of all coupons maturing after the redemption date not presented and surrendered with said bonds; provided that if more than four such coupons are not presented and surrendered with said bond, the fiscal agents or the Caja may refuse to pay said bond. Notice having been so given by publication, the bonds so called for redemption shall cease to bear interest from the redemption date unless they shall not be so paid by the Caja upon presentation and surrender thereof with all coupons maturing after the redemption date. No expenses in connection with the redemption of the bonds or the operation of the sinking fund shall be charged against the sinking fund, but such expenses shall be paid by the Caja. STOCK EXCHANGE PRACTICES 1157 4. All notices or other announcements relating to the redemption of the bonds, the payment of the coupons or any other matter in connection with the bonds may be given or made by the fiscal agents, jointly or severally, on behalf of the Caja as the fiscal agents shall deem proper, but all expenses in connection therewith shall be paid by the Caja. All bonds redeemed through the sinking fund with all miniatured coupons thereto appertaining and all coupons paid by the fiscal agents shall deem proper, but all expenses in connection therewith shall be paid by the Caja. All bonds redeemed through the sinking fund with all unmatured coupons thereto appertaining and all coupons paid by the fiscal agents shall be cancelled by the fiscal agents and by them delivered to a representative of the Caja, for that purpose in the city of New York or sent by registered mail insured to and at the risk and expense of the Caja. All bonds paid in Santiago by the Caja, and all bonds delivered to the Caja in payment of its loans shall be sent, as soon as practicable after such payment or delivery, to the fiscal agents for cancellation at the risk and expense of the Caja, and no bonds delivered to the Caja in payment of its loans shall be re'ssued or renegotiated by the Caja. 5. So long as any of the bonds shall be outstanding the Caja covenants to pay to the fiscal agents at their respective offices in the c t y of New York in gold coin of the United States of America of the standard aforesaid— (a) At least 15 days before June 30 and December 31 in each year the sum of $746,400 (or, in the event that the Caja shall have increased the amount of any previous semiannual installment as provided in art. 3 hereof, such lesser amount as may be due as provided in said art. 3) to be applied to the service of interest and amortization of the bonds as provided in art. 3 hereof, the first payment to be made at least 15 days before December 31. 1925, and the last payment to be made at least 15 days before June 30'. 1957; and if the Caja shall elect to increase the amount of any such semiannual installment as provided in art. 3 hereof, the amount of any such increase at least 15 days before the interest date on which such amount is to be applied to the redemption of bonds. One half of each payment made pursuant to this paragraph (a) shall be made to Kuhn, Loeb & Co. at their office in the city of New York, and one half of each such payment shall be made to Guaranty Trust Co. of New York, at its principal office in the city of New York: (&) At least 15 days before June 30, 1957, a sum equal to the principal amount of all the bonds then outstanding, one half of such payment to be made to Kuhn, Loeb & Co. at their office in the city of New York, and one half of such payment to be made to Guaranty Trust:Co. of New York, at its principal office in the City of New York. Any amounts in the sinking fund to be apr plied to the redemption of bonds on, June'30, 1957, at the time of the payment made pursuant to this paragraph (b) shall be credited against such payment; and (c) Such amounts as may be required to meet all expenses incident to the service of the loan, including the compensation and expenses of the registrar; such payments to be made from time to time, on the joint written or cabled request of the fiscal agent or agents stated in such request. The fiscal agents shall not be required to segregate any moneys paid to or deposited with them as hereinbefore provided. The Caja irrevocably authorizes and directs the fiscal agents and each of them to pay out of the moneys paid to them as hereinbefore provided the interest on the bonds to the bearers of the coupons upon presentation and surrender thereof, and the principal of the bonds at maturity or on the redemption dates, as the case may be, to the bearers of the bonds to be paid or redeemed upon presentation and surrender thereof, and to apply the moneys in the sinking fund to the redemption of the bonds, and to make every such payment without further formality except as the fiscal agents or either of them may be advised may be necessary to comply with some law or regulation of the United States of America or other public authority therein, 6. The Caja during the life of the loan will maintain in tlie Borough of Manhattan, in the City of New York, a fiscal agency or fiscal agencies of the loan and a registry of the loan. The Caja appoints Kuhn, Loeb & Co. and Guaranty Trust Co. of New York, of the city and State of New York, United States of America, to be fiscal agents of the loan during the life of the loan subject to the terms and conditions of this agreement. The Caja also appoints said .Guaranty Trust Co. of New York as registrar of the loan during the life of the loan subject to the terms and conditions of this agreement. 1158 STOCK EXCHANGE PBACTICES 7. Neither the fiscal agents nor the registrar shall be liable otherwise than for good faith and the exercise of reasonable care. The fiscal agents and the registrar and each of them shall be protected in any action which any of them may take in acting on any bond or coupon or any notice, request or other paper believed by them or it be genuine as well as in or in respect of any action taken or suffered in good faith under the advice of counsel. Neither of the bankers and neither of the fiscal agents shall be liable for any act or omission of the other. 8. The Caja shall pay each of the fiscal agents as compensation for their services a commission of one quarter of 1 percent of the amount of all payments made to such fiscal agent pursuant to paragraphs (a) and (b) of article 5 hereof, such compensation to be paid to the fiscal agents at the time when such payments are made to the fiscal agents. The Caja shall also pay the fiscal agents as compensation for their services a compensation of one quarter of 1 percent of the principal amount of all bonds delivered to the Caja in payment of its mortgage loans; one half of such compensation to be paid to each of the fiscal agents at the time when such bonds are sent to the fiscal agents for cancelation as provided in article 4 hereof. 9. In case any of the bonds shall become mutilated, destroyed, or lost, a new bond (having endorsed thereon the guaranty of the Republic of Chile in this agreement provided for) Qf like amount, tenor, and date, bearing the same number and bearing all unmatured coupons, shall be issued by the Caja, but only if permitted by and in accordance with Chilean law, and the registrar shall authenticate the same for delivery in exchange for, and upon cancelation of, the bond so mutilated and its unmatured coupons, or in lieu of the bond so destroyed or lost and its unmatured coupons, but in the case of destroyed or lost bonds only upon receipt by the Caja and the registrar of evidence satisfactory to each of them that such bonds were destroyed or lost and, if required, upon receipt also of indemnity satisfactory to each of them in their discretion. The registrar shall incur no liability for such action. 10. The Caja agrees to sell and deliver to the bankers and the bankers agree to purchase from the Caja and pay for $20,000,000 aggregate principal amount of the bonds at the price of 93 percent of the principal amount thereof, being $18,600,000'. In the first instance an appropriately executed temporary bond (which may be printed, written, or typewritten) for $20,000,000 in substantially the form hereto annexed and marked " Schedule C ", and endorsed with the guaranty of the Republic of Chile substantially in the form hereto annexed and marked " Schedule D", shall be delivered on or before June 30, 1925, to Banco de Chile, in Santiago, Chile, which is hereby designated as the agent of the bankers to receive such delivery. The charges of such representative in Santiago, Chile, shall be paid by the Caja. Payment of $4,650,000, the first installment of the purchase price, shall be made on July 1, 1925, unless such time be extended by the bankers at the request of the Caja, and, in that case, within the period of such extension on 5 days' notice to the bankers in writing, but such payment shall not be made until after receipt of cable advice from Banco de Chile by Guaranty Trust Co. of New York of the delivery of such "temporary bond. Payment of $4,650,000, the second installment, of the purchase price, shall be made on the ninth day following the payment of the first installment, and payment of $9,300,000, the final installment of the purchase price, shall be made on the nineteenth day following the payment of the first installment. Such payments shall be made by placing the amount of each installment of the purchase price to the credit of the Caja in dollars in the city of New York, one half of each such installment to be credited to the account of the Caja with Kuhn, Loeb & Co. and one half of each such installment to be credited to the account of the Caja with Guaranty Trust Co. of New York. The amounts so credited to the Caja shall be withdrawn upon the order of such person or persons as may be authorized to draw upon the same by the Caja, and all withdrawals shall be made in substantially equal amounts from Kuhn, Loeb & Co. and from Guaranty Trust Co. of New York. Kuhn, Loeb & Co. and Guaranty Trust Co. of New York shall each credit the Caja with interest at the Current rate which New York Clearing House banks may then be paying on the amounts so credited with them respectively, until disbursed by the Caja. 11. Forthwith upon the execution of this agreement the Caja will deliver or cause to be delivered to the bankers a prospectus letter or letters con STOCK EXCHANGE PEACTICES 1159 taining information concerning the financial position of the Caja and of the Bepublic of Chile, its debts, income and expenditures and financial administration and such other information and in such form as the bankers may reasonably request and as shall be satisfactory to the bankers' consul, such letter or letters to be signed by the Chilean Ambassador to the United States of America. 12. It is a condition precedent to any obligation of the bankers hereunder (a-) that the Caja shall have promptly delivered a prospectus letter as sat forth above in article 11 hereof, and (&) that on or before June 30, 1925, unless the time be extended by the bankers at the request of the Caja as hereinbefore provided, and, in that case, within the period of such extension, (1) the Caja shall have delivered to the representative of the bankers in Chile duly authenticated copies of the laws or decrees or other instruments authorizing the issue of the bonds by the Caja and the guaranty of the bonds by the Republic of Chile in accordance with the terms of this agreement and also duly certified copies of all proceedings of the Caja and all executive and other decrees of the Government of the Republic of Chile necessary to comply with said laws in connection with the execution and delivery of the bonds hereunder; (2) the bankers shall have received an opinion satisfactory to the bankers' counsel in New York, approving the proceedings of the Caja authorizing the creation, issue, and sale of the bonds and approving the guaranty of the bonds by the Republic of Chile, in accordance with the terms of this agreement, and the validity of the bonds, both temporary and definitive, in the hands of holders of whatever citizenship or residence, in accordance with the terms of the bonds and of this agreement; and (3) that the bankers' counsel in New York shall have approved the form of the bonds and coupons. 13. The Caja will pay all stamp and other duties, if any, to which under the laws of Chile or of the United States of America this agreement or the bonds may be subject. The Caja will also pay the cost of printing, engraving, executing, and authenticating the temporary and definitive bonds and interim certificates, the expense of exchanging the temporary bond and interim certificates for definitive bonds and of transporting the temporary and definitive bonds to and from Santiago, and the compensation and expenses of the registrar. The Caja will also pay the fees and disbursements of the Chilean counsel referred to in article 12 hereof. 14. The Caja hereby covenants and agrees that no bonds issued or guaranteed by it other than the bonds .purchased by the bankers hereunder shall be sold or offered for sale in the United States of America prior to January 1, 1926, except with the written consent of the bankers. The Caja will deliver to the bankers on or before June 30, 1925, in form satisfactory to the bankers' counsel, the written! assurance of the Republic of Chile that no issue of bonds of the Republic of Chile or guaranteed by the Republic of CMle, will be sold or offered for sale in the United States, of America prior to October 1; 1925, at a price which will yield to maturity a higher rate of interest than the rate which the bonds purchased by the bankers hereunder will yield to maturity at the price at which the bonds shall be offered for public subscription by the bankers. 15. The Caja hereby covenants and agrees that it-will not issue or sell any securities of the Caja in the United States of America, or issue or sell any securities intended to be sold or offered for sale in the United States of America prior to July 1, 1928, without first giving the bankers a 30-day option to purchase such securities on terms and conditions at least as favorable to the bankers as the Caja is able to obtain from other sources at the time when such issue or sale is proposed. If the bankers shall not exercise such option within the 30-day period, the Caja shall have the right to offer such securities elsewhere on terms and conditions not less favorable to the Caja than those offered to« the bankers. The Caja will not reoffer such securities, or accept offers therefor, on terms and conditions less favorable to the Caja without giving the bankers a 30-day option to purchase such securities oh such less favorable terms and conditions. The Caja, however, reserves the right to negotiate through an agent who will be instructed to work in accordance with these conditions. 16. The Caja will at the request of the bankers make or cause to be made application for the listing of the bonds and interim certificates on the New York Stock Exchange or the bankers may themselves make such application for and on account of the Caja. The Caja will furnish to the bankers all documents deemed by the bankers to be advantageous for the making of such appli 1160 STOCK EXCHANGE PEACTICES cation and it will take and undertake air such action as may be requisite in accordance with the requirements of said exchange in order to secure such listing. The cost and expenses of such application, whether made by the bankers or by the Caja, shall be paid by the Caja. 17. Reference in this agreement to the fiscal agents or either of them shall be deemed to include any successor firm or corporation however constituted continuing the business of Kuhn, Loeb & Co. and/or Guaranty Trust Co. of New York. Reference in this agreement to the registrar shall be deemed to include any successor corporation continuing the business of Guaranty Trust Co. of New York. Reference in this agreement to the bankers, or either of them, shall be deemed to include any successor firm or corporation however constituted continuing the business of Kuhn, Loeb & Co. and/or Guaranty Co. of New York. In witness whereof Caja de Credito Hipotecario has caused this agreement to be signed in its behalf by His Excellency the Honorable Beltran Mathieu thereunto duly authorized and Kuhn, Loeb & Co. have signed this agreement and Guaranty Co. of New York has caused this agreement to be signed by its president or one of its vice presidents and its corporate seal to be affixed hereto and attested by its secretary or an assistant secretary as of the day and year first above written. [SEALI CAJA DE CEEDITO HIPOTECAEIO, By B. MATHIEU. KUHN, LOEB & Co. [L. S.] GUAEANTY CO. OF NEW YOEK, By H. STANLEY, President. Attest: W. R. NELSON, Secretary. The undersigned accept their appointment as fiscal agents under the foregoing agreement upon the terms and conditions thereof; and the undersigned Guaranty Trust Co. of New York also accepts its appointment as registrar thereunder upon the terms and conditions thereof. KUHN, LOEB & Co. GUARANTY TRUST CO. OF NEW YORK, By H. STANLEY, Vice President. SCHEDULE A [Form of definitive bond] No. $ CAJA DE CEEDITO HIPOTECARIO (CHILE) (MOETGAGE BANK OF CHILE) GUAEANTEED SINKING FUND 6 i PERCENT GOLD BOND DUE JUNE 30, 1957 Letra de credito al Portador, por U.S.—$ oro (dollars americanos) que ganan el 6% percent de interes anual.—Reembolsable por sorteos semestrales a mas tardar en 32 anos.—Los interes y amortizaci ones se pagan el 31 de Deciembre y 30 de Junio, en cambio del cupon respectivo o de la letra amortizada.—Caja de Credito Hipotecario (herein called the Caja), for value received, promises to pay to the bearer on June 30, 1957, the sum of $ and to pay interest thereon from June 30, 1925, until the pr:ncipal of this bond is paid at the rate of 6% percent per annum, sem:annually, on June 30 and December 31 in each year, upon presentation and surrender of the coupons hereto annexed as they severally mature. The principal of, and interest on, this bond are payable at the option of the holder, in the Borough of Manhattan, city and State of New York, at the office of Kuhn, Loeb & Co. or at the principal office of Guaranty Trust Co. of New York, in gold coin of the United States of America of or equal to the standard of weight and fineness existing on June 30,1925, or in the city of Santiago, Chile, at the office of the Caja, by sight draft on New York City, and will be paid without deduction for any taxes, imposts, levies or duties of any nature now or at any time hereafter imposed by the Republic of Chile or by any State, Province, municipality, or other taxing authority thereof or therein, and will be paid in time of war as well as in time of peace and whether the holder be a citizen or resident of a friendly or hostile State. STOCK EXCHANGE PRACTICES 1161 This bond is one of an issue of bonds known as the " Guaranteed sinking fund 6% percent gold bonds of the Caja" (herein called the bonds) limited to $20,000,000 principal amount, issued in accordance with the laws of the Republic of Chile dated August 29, 1855 and September 10, 1892, the decree law dated March 9, 1925, and the Executive decree dated June 15, 1925, supplementing said decree law, constituting the loan designated Emprestito oro Caja Hipotecaria, 1925. Until all the bonds shall have been retired or redeemed the Caja will pay to the fiscal agents as an annuity for the service of interest and amortization of the bonds the sum of $1,492,800 per. annum in gold coin of the United States of America of the standard aforesaid, except as hereinafter provided. Such sums shall be paid in equal semiannual installments before the 30th day of June and the 31st day - of December in each year, the first payment to be made before December 31, 1925, and the last payment to be made before June 30, 1957. The fiscal agents shall apply each such installment, to the payment of the interest maturing on the next succeeding interest date on the bonds then outstanding and shall apply the part of each such installment not required for the payment of such interest as a sinking fund for the redemption of bonds on such interest date as hereinafter provided. The Caja may, at its option, increase the amount of any semiannual installment to be applied to the redemption of bonds on any semiannual interest date, and, in the event of any such increase, all subsequent semiannual installments shall be reduced' to an amount sufficient to provide for the semiannual service of interest and amortization of the bonds which shall be outstanding after the application of such increased sinking fund installment to the redemption of bonds, such amount to be calculated as a cumulative sinking fund compounded semiannually at the rate of 6% percent per annum to redeem, on or before June 30, 1957, all of the bonds so outstanding. Any such reduced semiannual installment may similarly be increased in which event subsequent semiannual installments shall be similarly reduced. The part of each semiannual installment available for the redemption of bonds shall be applied to the redemption of bonds by lot at 100 percent of their principal amount on the interest date next succeeding the date of such payment. The numbers of the bonds to be redeemed on each such interest date shall be drawn by lot in any usual manner. The drawings shall be held in public in the principal office of the Caja in the city of Santiago. The numbers of the bonds so drawn for redemption shall be advertised at least twice in two daily newspapers of general circulation in the Borough of Manhattan, city and State of New York, the first advertisement to appear not less than 30 days prior to the redemption date. The bonds so called for redemption shall on the redemption date designated in such notice become due and payable at 100 percent of their principal amount, and shall be payable, at the option of the holders, in the Borough of Manhattan, city and State of New York, at the office of Kuhn, Loeb & Co. or at the principal office of Guaranty Trust Company of New York, in gold coin of the United States of America of the standard aforesaid, or in the city of Santiago, Chile, at the office of the Caja on and after the redemption date at the redemption price aforesaid on presentation and surrender of such bonds at any of said offices, together with all coupons thereto appertaining maturing after the redemption date. If any bond so presented shall not be accompanied by all coupons maturing after the redemption date, then said bond shall be paid at the redemption price aforesaid less the aggregate principal amount of all coupons maturing after the redemption date not presented and surrendered with said bond; provided that, if more than four such coupons are not presented and surrendered with said bond the fiscal agents or the Caja may refuse to pay said bond. Notice having been so given by publication the bonds so called for redemption shall cease to bear interest from the redemption date unless they shall not be so paid by the Caja upon presentation and surrender thereof with all coupons maturing after the redemption date. This bond and the coupons appertaining thereto shall pass by delivery. This bond shall not become valid or obligatory for any purpose until it shall be authenticated by the certificate of the registrar hereon endorsed. In witness whereof, the Caja de Credito Hipotecario has caused this bond to be executed in its name bearing the facsimile signature of the president of its board of directors and to be manually signed by its cashier thereunto duly authorized and to be impressed with its seal and the interest coupons bearing 175541—33—PT 3 14 1162 STOCK EXCHANGE PEACTICES the facsimile signature of the president of its board of directors to be hereto annexed. Dated June 30, 1925. CAJA DB CREDITO HlPOTECARlO, By —, Cashier. Louis BARROS BORGONO, President of the Board of Directors. [Form of registrar's certificate] This is one of the within-described guaranteed sinking fund 6% percent gold bonds of the Caja de Hipotecario (Chile). GUARANTY TRUST CO. OF NEW YORK, By . Registrar. [Form of coupon] No. —• . $ On •— , 19—, unless t h e bond hereinafter mentioned shall have been called for previous redemption, t h e Caja de Hipotecario (Chile) promises to pay to bearer, a t his option, in t h e Borough of M a n h a t t a n , city and S t a t e of New York, a t t h e office of K u h n , Loeb & Co. oi? a t t h e principal office of G u a r a n t y T r u s t Co. of New York, in gold coin of t h e United S t a t e s of America of or equal to t h e s t a n d a r d of weight a n d fineness existing J u n e 30, 1925, or in t h e city of Santiago, Chile, a t t h e office of the Caja, by sight d r a f t on New York City $ w i t h o u t deduction for any taxes, imposts, levies, or d u t i e s of any n a t u r e now or a t a n y t i m e hereafter imposed by t h e Republic of Chile or by a n y State, Province, municipality, or other t a x i n g a u t h o r i t y thereof or therein, in time of w a r a s well a s in t i m e of peace and w h e t h e r the holder be a citizen or resident of a friendly or hostile state, being 6 m o n t h s ' i n t e r e s t then due on i t s g u a r a n t e e d sinking fund 6% percent gold bond, dated J u n e 30, 1925 (no. ). C A J A DE CREDITO HIPOTECARIO, By L o u i s BARROS BORGONO, President of the Board of Directors. SCHEDULE B The Republic of Chile, for a valuable consideration, hereby unconditionally guarantees to the holder of the within bond prompt payment of the principal amount of said bond in accordance with its terms, when same shall become due and payable, whether at the maturity thereof or otherwise, and of the interest thereon at the rate and at the times specified in said bond and in the appurtenant coupons, upon presentation and surrender of said coupons as they severally mature, and also prompt payment to the fiscal agents of the semiannual payments mentioned in said bond for the service of interest and amortization of the bonds, when the same shall become due and payable. Dated, June 30, 1925. REPUBLIC OF CHILE, By . SCHEDULE C [Form of temporary bond] CAJA DE CREDITO HIPOTECARIO (CHILE) (MORTGAGE BANK OF CHILE) DUE JUNE 30, 1957, GUARANTEED SINKING FUND 6£ PERCENT GOLD BOND The Caja de Credito Hipotecario (herein called the Caja) for value received, promises to pay to the bearer on June 30, 1957, the sum of $20,000,000, and STOCK EXCHANGE PRACTICES 1163 to pay interest thereon from June 30, 1925, until the principal of this bond is paid at the rate of 6% percent per annum, semiannually, on June 30 and December 31, in each year. The principal of, and interest on, this bond are payable at the option of the holder, in the Borough of Manhattan, city and State of New York, at the office of Kuhn, Loeb & Co. or at the principal office of Guaranty Trust Co. of New York, in gold coin of the United States of America of or equal to the standard of weight and fineness existing June 30, 1925, or in the city of Santiago, Chile, at the office of the Caja, by sight draft on New York City, and will be paid without deduction for any taxes, imposts, levies, or duties of any nature now or at any time hereafter imposed by the Republic of Chile or by any State, Province, municipality, or other taxing authority thereof or therein, and will be paid in time of war as well as in time of peace and whether the holder be a citizen or resident of a friendly or hostile state. This bond is a temporary bond without coupons and is one of an issue of bonds known as the guaranteed sinking fund 6% percent gold bonds of the Caja (herein called the bonds) limited to $20,000,000 principal amount, issued in accordance with the laws of the Republic of Chile dated August 29, 1855, and September 10, 1892, the decree law dated March 9, 1925, and the executive decree dated June 15, 1925, supplementing said decree law, constituting the loan •designated Emprestito oro Caja Hipotecaria, 1925. Until all the bonds shall have been retired or redeemed the Caja will pay to the fiscal agents as an annuity for the service of interest and amortization of the bonds the sum of at least $1,492,800 per annum in gold coin of the United States of America of the standard aforesaid except as hereinafter provided. Such sums shall be paid in equal semiannual installments before the 30th day of June and the 31st day of December in each year, the first payment to be made before December 31, 1925, and the last payment to be made before June 30, 1957. The fiscal agents shall apply each such installment to the payment of the interest maturing on the next succeeding interest date on the bonds then outstanding and shall apply the part of each such installment not required for the payment of such interest as a sinking fund for the redemption of bonds on such interest date as hereinafter provided. The Caja may, at its option, increase the amount of any semiannual installment to be applied to the redemption of bonds on any semiannual interest date and, in the event of any such increase, all subsequent semiannual installments shall be reduced to an amount sufficient to provide for the semiannual service of interest and amortization of the bonds which shall be outstanding after the application of such increased sinking-fund installment to the redemption of bonds, such amount to be calculated as a cumulative sinking fund compounded semiannually at the rate of 6% per cent per annum to redeem, on or before June 30, 1957, all of the bonds so outstanding. Any such reduced semiannual installment may similarly be increased in which event subsequent semiannual installments shall be similarly reduced. The part of each semi-annual installment available for the redemption of bonds shall be applied to the redemption of bonds by lot at 100 per cent of their principal amount on the interest date next succeeding the date of such payment. The numbers of the bonds to be redeemed on each such interest date shall be drawn by lot in any usual manner. The drawings shall be held in public at the principal office of the Caja in the city of Santiago. The numbers of the bonds so drawn for redemption shall be advertised at least twice in two *daily newspapers of general circulation in the Borough of Manhattan, city and State of New York, the first advertisement to appear not less than 30 days prior to the redemption date. The bonds so called for redemption shall on the redemption date designated in such notice become due and payable at 100 percent of their principal amount, and shall be payable, at the option of the holders, in the Borough of Manhattan, city and State of New York, at the office of Kuhn, Loeb & Co. or at the principal office.of Guaranty Trust Co. of New York, in gold coin of the United States of America of the standard aforesaid, or in the city of Santiago, Chile, at the office of the Caja, by sight draft on New York City, and shall be paid by the Caja on and after redemption date at the redemption price aforesaid on presentation and surrender of such bonds at any of said offices, together with all coupons thereto appertaining maturing after the redemption date. If any bond so presented shall not be •accompanied by all coupons maturing after the redemption date, then said 1164 STOCK EXCHANGE PRACTICES bond shall be paid at the redemption price aforesaid less the aggregate princi*pal amount of all coupons maturing after the redemption date not presented and surrendered with said bond; provided, that if more than four such couponsare not presented and surrendered with said bond the fiscal agents or the Caja may refuse to pay said bond. Notice having been so given by publication the bonds so called for redemption shall cease to bear interest from the redemption date unless they shall not be so paid by the Caja upon presentation and surrender thereof with all coupons maturing after the redemption date. This temporary bond is exchangeable for definitive engraved bonds of this issue of like tenor and for a like aggregate principal amount when engraved and prepared, endorsed with the guaranty of the Republic of Chile, corre^ sponding so far as appropriate with the guaranty her eon endorsed. This bond shall pass by delivery. In witness whereof, the Caja de Credito Hipotecario has caused this bond to be executed and its name bearing the signature of the president of the board of directors and of its cashier thereunto duly authorized and to be impressed with its seal. Dated, June 30, 1925. CAJA DE CREDITO HIPOTECAKIO, By , Cashier. Louis BAEEOS BORGONO, President of the board of directors. SCHEDULE D The Republic of Chile, for a valuable consideration hereby unconditionally guarantees to the holder of the within bond prompt payment of the principal amount of said bond in accordance with its terms, when the same shall become due and payable, whether at the maturity thereof or otherwise, and of the interest thereon at the rate and at the times specified in said bond, and also prompt payment to the fiscal agents of the semiannual payments mentioned in said bond for the service of interest and amortization of the bonds, when the same shall become due and payable, and the Republic of Chile hereby agrees to endorse on the several definitive engraved bonds to be delivered in exchange for the within temporary bond its guaranty substantially as aforesaid with appropriate variations. Dated, June 30, 1925. REPUBLIC OOF CHILE, By COMMITTEE EXHIBIT NO. 12 JUNE 28, . 1933 $20,000,000 MORTGAGE BANK OF CHILE (OAJA DE 0BEDITO HIPOTEOAEIO, CHILE) GUARANTEED SINKING FUND 6 | PERCENT GOLD BONDS OF 1926, DUB JUNE 30, 1961 Unconditionally guaranteed as to principal, interest, and sinking fund, by endorsement, by the Republic of Chile Coupon bearer bonds in denominations of $1,000 and $500 each. Principal and interest to be payable at the option of the holders, in New York City at the office of Kuhn, Loeb & Co. or of Guaranty Trust Co. of New York, in United States gold coin of or equal to the standard of weight and fineness existing: June 30, 1926, or in Santiago, Chile, at the office of the Caja by sight draft on New York City, without deduction for any taxes, imposts, levies or duties of any nature now or at any time hereafter imposed by the Republic of Chile or by any State, province, municipality or other taxing authority thereof or therein and to be payable in time of war as well as in time of peace and whether the holder be a citizen or a resident of a friendly or a hostile State. Interest payable June 30 and December 31. For further information regarding this issue of bonds, reference is made to* the accompanying letter received from His Excellency, the Honorable Miguel Cruchaga, Ambassador Extraordinary and Plenipotentiary of the Republic of Chile to the United States, and from which the following is summarized: STOCK EXCHANGE PRACTICES 1165 The bonds are to be unconditionally guaranteed as to principal, interest, and linking fund, by endorsement, by the Republic of Chile, pursuant to the law of August 29, 1855, creating the Caja, as amended by decree law, dated December 15, 1925, and pursuant to decree law, dated March 9, 1925, and to decree of the President of the Republic of Chile, dated July 27, 1926. Beginning December 31, 1926, the bonds will be redeemable through a cumulative sinking fund calculated to retire the whole issue by June 30, 1961, to be applied on each semiannual interest date to the redemption by lot of bonds at par. The Caja will have the right to increase the amount of any sinking fund installment for the redemption of additional bonds on any interest date, and in any'such case appropriate reductions will be made in subsequent sinkingfund installments. This right is reserved because repayments on the mortgage loans to be made by the Caja, against which these bonds are to be issued, can l)e made by the borrowers either in cash or in bonds of the Caja in excess of the fixed minimum amortization payments, and the Caja is not permitted l)y law to have its bonds outstanding in excess of the mortgage loans against which they are issued. Application will be made in due course to list these bonds on the New York Stock Exchange. The undersigned will receive subscriptions for $18,330,000 bonds, subject to ^allotment, at 991,4 per cent and accrued interest to date of delivery, to yield over 6.80 to maturity. The mortgage bank is withdrawing the remaining :$1,670,000 bonds for its reserve fund. The; undersigned reserve the right to close the subscription at any time without notice, to reject any application, to allot a smaller amount than applied for, and to make allotments on their uncontrolled discretion. *The above bonds are offered if, when, and as issued and received by the undersigned, and subject to the approval of counsel. In the first instance, interim certificates of Guaranty Trust Co. of New York will be delivered against payment in New York for bonds allotted, which interim certificates will be exchangeable for definitive bonds when prepared. KUHN, LOEIB & Co. GUARANTY TRUST CO*, OF NEW YORK. NEW YORK, July 29, 1926. WASHINGTON, D.C., July 29, 19{26. Messrs. KUHN, LOEB & Co., and Guaranty Co. of New York, N.Y. DEAR SIRS : Referring to the issue of $20,000,000 principal amount of guaranteed sinking fund 6% percent gold bonds of 1926, due June 30, 1961, of the Mortgage Bank of Chile (Caja de Credito Hipotecario, Chile), of which you have agreed to purchase $18,330,000, the Caja withdrawing the balance of $1,670,000 for its reserve fund, I beg to give you the following information: The bonds are to be unconditionally guaranteed as to principal, interest and sinking fund, by endorsement, by the Republic of Chile, pursuant to the law creating the Caja, as amended by decree law, dated December 15, 1925, and pursuant to decree law, dated March 9, 1925, and to decree of the President of the Republic of Chile, dated July 27, 1926. The Caja de Credito Hipotecario was created by law of August 29, 1855, for the purpose of making available credit facilities on reasonable terms for the development and improvement of real property in Chile. The board of directors, the president of the board, the chief counsel, the cashier, the controller and the secretary are appointed by the President of the Republic. During its existence of over 70 years, the Caja has operated successfully and lias never failed to meet its obligations. The record of its loan collections is Tery satisfactory. The losses incurred by the Caja on property foreclosed under its mortgages have not exceeded $40,000 in the aggregate for the last 10 years. In his report, published February 1, 1924, to the Department of Commerce of the United States, Mr. Charles A. McQueen, special agent of the Bureau of foreign and Domestic Commerce of the Department, states that in the course of is long existence the Caja has conducted its affairs with uniform safety and success. The Caja has no capital stock and is not operated for profit. It has power to charge a commission to provide for its expenses and for a reserve fund, as additional security for its bonds, but having accumulated a sufficient reserve, the Caja has now discontinued charging such commission. 1166 STOCK EXCHANGE PRACTICES The Caja issues its bonds only against mortgages registered in its name. It makes only first mortgage loans. The loans are made on a conservative basis; and the risk is greatly diversified. On December 31, 1925, the Caja had outstanding various issues of bonds aggregating $100,219,000, at gold par of exchange, against which it had made 10,198 mortgage loans being an averageof less than $10,000 per loan. These loans aggregated less than 25 percent of the aggregate appraised improvement value of the properties mortgaged assecurity therefor. As further security for its bonds, the Caja has accumulated, a reserve fund of approximately $5,028,450, at gold par of exchange. The law authorized the Caja to issue bonds and to make mortgage loans; payable in foreign currencies. It is the practice of the Caja to make itsmortgage loans, against which bonds payable in a foreign currency are issued, also payable in the same currency, except in cases where it has obtained a. guaranty of the Republic of Chile for any loss resulting from exchange fluctuations. This was done in 1912 when Fes. 58,823,500 gold bonds were issued (of which there are still Fes. 27,982,500 gold now outstanding) and in 1925 when $20,000,000 United States gold bonds were issued in the United States by you. The mortgage loans against $5,000,000 of the present issue will be madeat the request of the Republic of Chile for special purposes at lower interest rates than the Caja is paying on the bonds and the Republic has agreed topay the difference and to guarantee those mortgage loans. The entire present, issue of bonds will also be guaranteed by endorsement by the Republic of Chile. The bonds of the Caja are legal investments for savings banks and trust funds in Chile. Prior to the war, in 1911 and 1912, three issues of 5 percent bonds of the Caja, not endorsed with the guaranty of the Government, were made in Europe, at prices from 96% to 9)9:|}4 percent. These issues are listed on the stoclc exchange of Paris and Berlin. The present debt of the Republic of Chile, including the present and all other obligations guaranteed by it, aggregates about $270,000,000, at gold par of exchange. The proceeds of the Government loans have been largely used for the construction or improvement of railways, harbors and other publicworks. The Government owns 3,624 miles of railroads, telegraph lines and other property, of an estimated value of approximately $650,000,000, at gold par of exchange, which is well in excess of the entire amount of the debt. In addition, the Government owns large and very valuable tracts of nitratelands. Chile is a mining and agricultural country. Its mineral products are largely raw materials for essential industries. Exports consist chiefly of nitrates^ byproducts of the nitrate industry, copper, borax, wool, and a limited amount of agricultural products. The nitrate deposits are the only large natural deposits so far discovered in the world. The copper industry has been extensively developed, largely by American capital. The trade balance of Chile is favorable. The total foreign trade for 1924 (the last year for which official figures were available) aggregated $352,000,000 at the present gold parity of exchange, and the balance of exports over imports amounted to $96,000,000. Since 1915 imports have exceeded exports in only one year. Chile is on a gold basis. Its currency is the peso, equivalent to United States $0.12166. Currency notes are issued by the Central Bank of Chile, similar to the Federal Reserve banks of the United States. The above-mentioned $20,000,000 principal amount of guaranteed sinking fund 6% percent gold bonds of 1926 of the Caja, constitutfing the loan designated Emprestito oro Caja Hipotecaria, 1926, will be in coupon bearer form, in denominations of $1,000 and $500', will be dated June 30, 1926, will mature June 30, 1961, and will bear interest at the rate of 6% percent per annum from June 30, 1926, payable semiannually on June 30 and December 31 of each year. Principal and interest will be payable at the option of the holders, in the Borough of Manhattan, in the city of New York, at the office of Kuhn, Loeb & Co. or at the principal office of the Guaranty Trust Co. of New York, in gold coin of the United States of America of or equal to the standard of weight and fineness existing June 30, 1926, or in Santiago, Chile, at the office of theCaja, by sight draft on New York City, without deduction for any taxes, imposts, levies, or duties of any nature now or at any time hereafter imposed by the Republic of Chile, or any State, Province, municipality, or other taxing authority thereof or therein, and will be paid in time of war as well as in time of STOCK EXCHANGE PRACTICES 1167 peace, and whether the holder be a citizen or a resident of a friendly or a hostile State. Beginning December 31, 1926, the bonds will be redeemable through a cumulative sinking fund calculated to retire the whole issue by June 30, 1961, to be applied on each semiannual.interest date to the redemption by lot of bonds at par. Notice of redemption is to be given by advertisement, the first advertisement to appear at least 30 days before each redemption date. The Caja will have the right to increase the amount of any sinking-fund installment for the redemption of additional bonds on any interest date, and in any such case appropriate reductions will be made in subsequent sinking-fund installments. This right is reserved because repayments on the mortgage loans can be made by the borrowers either in cash or in bonds of the Caja in excess of the fixed minimum amortization payments and the Caja is not permitted by law to have its bonds outstanding in excess of the mortgage loans against which they are issued. Application will be made in due course to list the bonds on the New York Stock Exchange. Very truly yours, (Signed) MIGUEL CBUCHAGA, Ambassador Extraordinary and Plenipotentiary of the Republic of Chile to the United States. COMMITTEE EXHIBIT NO. 13, JUNE 28, 1933 Agreement, dated July 29, 1925, made in the city and State of New York in the United States of America between Caja de Credito Hipotecario, of Santiago, Chile, organized under the laws of Chile (hereinafter called the "Caja"), acting by His Excellency the Honorable Miguel Cruchaga, Chilean ambassador to the United States of America, thereunto duly authorized, and Kuhn, Loeb & Co., a copartnership of the city and State of New York, and Guaranty Co., of New York, a corporation organized under the laws of the State of New York (hereinafter called the " bankers " ) . In consideration of the mutual covenants hereinafter set forth, it is agreed as follows: 1. The Caja will forthwith, create an issue of bonds to be known as its " guaranteed sinking fund 6% percent gold bonds of 1926 " (hereinafter called the "bonds") limited to $20,000,000 principal amount, to constitute the loan designated "Emprestito oro Caja Hipotecaria, 1926." The bonds shall be issued in accordance with the law of the Republic of Chile of August 29, 1855, establishing the Caja, as amended by the decree law dated December 15, 1925, which decree law was duly approved by the commission appointed for that purpose by both Houses of Congress (and with the decree law of Mar. 9, 1925), and with the decree of the President of the Republic of Chile, dated July 27, 1926, which authorize the guaranty of the bonds by the Republic of Chile. The bonds shall be in coupon form, payable to bearer, shall be dated June 30, 1926, shall mature June 30, 1961, shall bear interest from June 30, 1926, at the rate of 6% percent per annum, payable semiannually on June 30 and December 31 in each year, and shall be in the denominations of $1,000 and $500 in such proportions as the bankers may request. The principal of, and interest on the bonds shall be payable without deduction for any taxes, imposts, levies, or duties of any nature, now or at any time hereafter imposed by the Republic of Chile or by any State, Province, municipality, or other taxing authority thereof or therein, and shall be paid, at the option of the holders, in the Borough of Manhattan, city and State of New York, at the office of Kuhn, Loeb & Co., or at the principal office of Guaranty Trust Co. of New York in gold coin of the United States of America of or equal to the standard of weight and fineness existing June 30, 1926, or in the city of Santiago, Chile, at the office of the Caja, by sight draft on New York City, and shall be paid in time of war as well as in time of peace and whether the holder be a citizen or resident of a friendly or hostile state. The bonds shall be authenticated by the certificate endorsed thereon of Guaranty Trust Co. of New York, registrar of the loan hereinafter provided. The Republic of Chile shall unconditionally guarantee to the holders of the bonds prompt payment of the principal of, and the interest on, the bonds, as, and when the same shall become due and payable and also prompt payment to the fiscal agents, hereinafter appointed, of the semiannual payments for the service of interest and amortization of the bonds hereinafter mentioned as and. 1168 STOCK EXCHANGE PEACTICES when the same shall become due and payable, and such guaranty shall be endorsed on the bonds. The test of the guaranty shall be substantially in the form hereto annexed and marked " Schedule B." 2. The text of the definitive engraved bonds shall be in the English language substantially in the form hereto annexed and marked " Schedule A," and shall bear a notation in Spanish substantially in the form shown on said schedule A. The text of the usual certificate of the Treasury Department of the Republic of Chile on. bonds of the Caja shall be in Spanish, or in both English and Spanish, as the bankers may elect, in such form as may be required by Chilean law. The Caja hereby authorizes the bankers to cause to be prepared without delay definitive engraved bonds for execution by or on behalf of the Caja, such bonds to be engraved and printed in New York in accordance with the requirements of the New York Stock Exchange. The bankers may issue or cause to be issued by a bank or trust company in New York temporary interim certificates which, if issued, shall, in due course be exchangeable without cost or expense to the bankers or the holders, for definitive engraved bonds. The definitive bonds shall bear the facsimile signature of. Don Louis Barros Borgono, the president of the board of directors of the Caja, and shall be manually signed by Don Francisco Bahamondes, the cashier of the Caja, or other duly authorized officer of the Caja. The certificate of the Treasury Department shall be signed manually or otherwise as may be required by •Chilean law. The coupons shall bear the facsimile signature of Don Louis Barros Borgono, the president of the board of directors of the Caja. The guaranty of the Republic of Chile endorsed on the bonds shall be manually signed by His Excellency, the Honorable Miguel Cruchaga, the Chile Ambassador to the United States of America, thereunto duly authorized by the Government of the Republic of Chile or by some other duly authorized representative of the Republic of Chile. 3. Until all of the bonds have been retired or redeemed, the Caja shall pay to the fiscal agents as an annuity for the service of interest and amortization of the bonds the sum of $1,500,000 per annum in gold coin of the United States of America of the standard aforesaid, except as hereinafter in this article provided. Such sums shall be paid in equal semiannual installments at least 15 days before the 30th day of June and the 31st day of December in each year, as hereinafter in article 5 hereof provided. The fiscal agents shall apply each such installment to the payment of the interest maturing on the next succeeding interest date on the bonds then outstanding, and shall apply the part of each such installment not required for the payment of such interest as a sinking fund for the redemption of bonds on such interest date as hereinafter provided. The Caja may, at its option, increase the amount of any semiannual installment to be applied to the redemption of bonds on any semiannual interest date, and in the event of any such increase all subsequent semiannual installments shall be reduced to an amount sufficient to provide for the semiannual service of interest and amortization of such increased sinking-fund installment to the redemption of bonds, such amount to be calculated as a cumulative sinking fund compounded semiannually at the rate of 6% percent per annum to redeem, on or before June 30, 1961, all of the bonds, so outstanding. Any such reduced semiannual installment may similarly be increased, in which •event subsequent semiannual installments shall *be similarly reduced. This right is reserved, because repayments of the mortgage loans made by the Caja may be made by the borrowers either in cash or in bonds of the Caja in excess of the fixed minimum amortization payments, and the Caja is not permitted by law to have its bonds outstanding in excess of the mortgage loans against which they are issued. The part of each semiannual installment available for the redemption of bonds shall be applied to the redemption of bonds by lot at 100 percent of their principal amount on the interest date next succeeding the date of such payment. The numbers of the bonds to be redeemed on each such interest date shall be drawn by lot in any usual manner. The drawings shall be held in public at the principal office of the Caja in the city of Santiago. The Caja shall notify the fiscal agents of the aggregate principal amount and numbers of the bonds to be redeemed on each interest date and such notification shall be sent to the fiscal agents at the office of Kuhn, Loeb & Co. in the city of New York so as to be received at said office at least 45 days prior to such interest date. The numbers of the bonds so drawn for redemption shall be advertised at least twice STOCK EXCHANGE PRACTICES 1169 in two daily newspapers of general circulation in the Borough of Manhattan, city and State of New York, the first advertisement to appear not less than 30 days prior to the redemption date. If the New York Stock Exchange so requires, the advertisement shall be further published. The bonds so called for redemption shall on the redemption date designated in such notice become due and payable at 100 percent of their principal amount and shall be payable, at the option of the holders, in the Borough of Manhattan, city and State of New York, at the office of Kuhn, Loeb & Co. or at the principal office of Guaranty Trust Co. of New York, in gold coin of the United States of America of the standard aforesaid, or in the city of Santiago, Chile, at the office of the Caja, by sight draft on New York City, and shall be paid by the Caja on and after the redemption date at the redemption price aforesaid on presentation and surrender of such bonds at any of said offices, together with all coupons thereto appertaining maturing after the redemption date. If any bond so presented shall not be accompanied by all coupons maturing after the redemption date, then said bond shall be paid at the redemption price aforesaid less the aggregate principal amount of all coupons maturing after the redemption date not presented and surrendered with said bond: Provided, That if more than four such coupons are not presented and surrendered with said bond, the fiscal agents or the Caja may refuse to pay said bond. Notice having been so given by the publication, the bonds so called for redemption shall cease to bear interest from the redemption date unless they shall not be so paid by the Caja upon presentation and surrender thereof with all coupons maturing after the redemption date. No expense in connection with the redemption of the bonds or the operation of the sinking fund shall be charged against the sinking fund but such expenses shall be paid by the Caja. 4. All notices or other announcements relating to the redemption of the bonds, the payment of the coupons or any other matter in connection with the bonds may be given or made by the fiscal agents, jointly or severally, on behalf of the Caja as the fiscal agents shall deem proper, but all expenses in connection therewith shall be paid by the Caja. All bonds redeemed through the sinking fund with all unmatured coupons thereto appertaining and all coupons paid by the fiscal agents sail be canceled by the fiscal agents and by them delivered to a representative of the Caja for that purpose in the city of New York or sent by registered mail insured to and at the risk and expense of the Caja. All bonds paid in Santiago by the Caja, and all bonds delivered to the Caja in payment of its loans shall be sent, as soon as practicable after such payment or delivery, to the fiscal agents for cancellation at the risk and expense of the Caja, and no bonds delivered to the Caja in payment of its loans shall be reissued or renegotiated by the Caja. 5. So long as any of the bonds shall be outstanding the Caja covenants to pay to the fiscal agents at their respective offices in the city of New York in gold coin of the United States of the standard aforesaid— (a) At least 15 days before June 30 and December 31 in each year the sum of $750,000 (or, in the event that the Caja shall have increased the amount of any previous semiannual installment as provided in article 3 hereof, such lesser amount as may be due as provided in said article 3) to be applied to the service of interest and amortization of the bonds as provided in article 3 hereof, the first payment to be made at least 15 days before December 31, 1926, and the last payment to be made at least 15 days before June 30, 1961; and if the Caja shall elect to increase the amount of any such semiannual installment as provided in article 3 hereof, the amount of any such increase at least 15 days before the interest date on which such amounts are to be applied to the redemption of bonds. One half of each payment made pursuant to this paragraph (a) shall be made to Kuhn, Loeb & Co. at their office in the city of New York, and one half of each such payment shall be made to Guaranty Trust Co. of New York, at its principal office in the city of New York; (&) at least 15 days before June 30, 1961, a sum equal to the principal amount of all the bonds then outstanding, one half of such payment to be made to Kuhn, Loeb & Co. at their office in the city of New York, and one half of such payment to be made to Guaranty Trust Co. of New York, at its principal office in the city of New York. Any amounts in the sinking fund to be applied to the redemption of bonds on June 30, 1961, at the time of the payment made pursuant to this paragraph (&) shall be credited against such payment; and 1170 STOCK EXCHANGE PRACTICES (o) such amounts as may be required to meet all expense incident to the service of the loan, including the compensation and expenses of the registrar; such payments to be made from time to time, on the joint written or cabled request of the fiscal agents, to the fiscal agent or fiscal agents stated in such request. The fiscal agents shall not be required to segregate any moneys paid to or deposited with them as hereinbefore provided. The Oaja irrevocably authorizes and directs the fiscal agents and each of them to pay out of the moneys paid to them as hereinbefore provided the interest on the bonds to the bearers of the coupons upon presentation and surronder thereof, and the principal of the bonds at maturity or on the redemption dates, as the case may be, to the bearers of the bonds to be paid or redeemed upon presentation and surrender thereof, and to apply the moneys in the sinking fund to the redemption of the bonds, and to make every such payment without further formality except as the fiscal agents or either of them may be advised may be necessary to comply with some law or regulation of the United States of America or other public authority therein. , 6. The Caja during the life of the loan will maintain in the Borough of Manhattan, in the city of New York, a fiscal agency or fiscal agencies of the loan and a registry of the loan. The Caja appoints Kuhn, Loeb & Co. and Guaranty Trust Co. of New York, of the city and State of New York, United States of America', to be fiscal agents of the loan during the life of the loan subject to the terms and conditions of this agreement. The Caja also appoints said Guaranty Trust Co. of New York as registrar of the loan during the life of the loan subject to the terms and conditions of this agreement. 7. Neither the fiscal agents nor the registrar shall be liable otherwise than for good faith and the exercise of reasonable care. The fiscal agents and the registrar and each of them shaU be protected in any action which any of them may take in acting on any bond or coupon or any notice, request, or other paper believed by them or it to be genuine as well as in or in respect of any action taken or suffered in good faith under the advice of counsel. Neither of the bankers and neither of the fiscal agents shall be liable for any act or omission of the other. 8. The Caja shall pay each of the fiscal agents as compensation for their services a commission of one quarter of 1 percent of the amount of all payments made to such fiscal agent pursuant to paragraphs (a) and (ft) of article 5 hereof, such compensation to be paid to the fiscal agents at the lime when such payments are made to the fiscal agents. The Caja shall also pay the fiscal agents as compensation for their services a commission of one quarter of 1 percent of the principal amount of all bonds delivered to the Caja in payment of its mortgage loans; one half of such compensation to be paid to each of the fiscal agents at the time when such bonds are sent to the fiscal agents for cancelation as provided in article 4 hereof. 9. In case any of the bonds shall become mutilated, destroyed, or lost, a new bond (having endorsed thereon the guaranty of the Republic of Chile in this agreement provided for) of like amount, tenor, and date, bearing the same number and bearing all unmatured coupons, shall be issued by the Caja; but only if permitted by and in accordance with Chilean law, and the registrar shall authenticate the same for delivery in exchange for, and upon cancelation of, the bond so mutilated and its unmatured coupons, or in lieu of the bond so destroyed or lost and its unmatured coupons, but in the case of destroyed or lost bonds only upon receipt by the Caja and the registrar of evidence satisfactory to each of them that such bonds were destroyed or lost and, if required, upon receipt also of indemnity satisfactory to each of them in their discretion. The registrar shall incur no liability for such action. 10. The Caja agrees to sell and deliver to the bankers and the bankers agree to purchase from the Caja and pay for $18,330,000 aggregate principal amount •of the bonds at the price of 95% percent of the principal amount thereof, being $17,528,062.50. The remaining $1,670,000 principal amount of the bonds will be retained by the Caja for its reserve fund, and the Caja agrees that it will not sell or offer for sale said $1,670,000 principal amount of the bonds until January 1, 1927, and thereafter will sell or offer same for sale only to the bankers. In the first instance an appropriately executed temporary bond (which may be printed, written, or typewritten) for $20,000,000 in substantially the form hereto annexed and marked *' Schedule C" and endorsed with the guaranty of the Republic of Chile, in substantially the form hereto annexed and marked STOCK EXCHANGE PEACTICES 1171 "* Schedule D ", shall be delivered on or before July 31, 1926, unless the bankers consent to postpone this date, to Banco de Chile, for account of Guaranty Trust Oo. of New York. The charges of Banco de Chile shall be paid by the Caja, As promptly as practicable after the delivery of the temporary bond for $20,000,000, as aforesaid, Guaranty Trust Co. of New York shall deliver to or upon the order of the Caja an interim receipt or receipts 1representing said $1,670,000 principal amount of the bonds and shall deliver to or on the order of the bankers interim receipts representing said $18,330,000' principal amount of the bonds. Payment of $4,382,015.62, the first instalment of the purchase price, shall be made on August 2, 1926, unless the time for such delivery shall be extended by the bankers at the request of the Caja, as above provided, and, in that ease, within the period of such extension on 5 days' notice to the bankers in writing, but such payment shall not be made until after receipt of cable advice from Banco de Chile to Guaranty Trust Co. of New York of the delivery of such temporary bond. Payment of $4,382,015.62, the second instalment of the purchase price, shall be made on the eighteenth day following the payment of the first instalment, and payment of $8,764,031.26, the final instalment of the purchase price, shall be made on the twenty-second day following the payment of the first instalment. Such payments shall be made by placing the amount of each installment of the purchase price to the credit of the Caja in dollars in the city of New York, one half of each such installment to be credited to the account c«f the 'Caja with Kuhn, Loeb & Co. and one half of each such installment to be credited to the account of the Caja with Guaranty Trust Co. of New York. The amounts so credited to the Caja shall be withdrawn upon the order of such person or persons as may be authorized to draw upon the same by the Caja, and all withdrawals shall be made in substantially equal amounts from Kuhn, Loeb & Co. and from Guaranty Trust Co. of New York. Kuhn, Loeb & Co. and Guaranty Trust Co. of New York shall each credit the «Caja with interest at the current rate which New York clearing house banks may then be paying on the amounts so credited with them respectively, until disbursed by the Caja. 11. Forthwith, upon the execution of this agreement the Caja will deliver or *cause to be delivered to the bankers a prospectus letter or letters containing information concerning the financial position of the Caja and of the Republic of Chile, its debts, income and expenditures, and financial administration, and :such other information and in such form as the bankers may reasonably request and as shall be satisfactory to the bankers' counsel, such letter or letters to be signed by the Chilean Ambassador to the United States of America. 12. It is a condition precedent to any obligation of the bankers hereunder (a) that the Caja shall have promptly delivered a prospectus letter as set forth above in article 11 hereof, and (&) that on or before July 31, 1926, unless the time be extended by the bankers at the request of the Caja as hereinbefore provided, and, in that case, within the period of such extension, (1) the Caja shall have delivered to the representative of the bankers in Chile duly authenticated copies of the laws or decrees or other instruments authorizing the issue of the bonds by the Republic of Chile in accordance with the terms of this agreement and also duly certified copies of all proceedings of the Caja and all executive and other decrees of the Government of the Republic of Chile necessary to comply with said laws in connection with the execution and delivery of the bonds hereunder; (2) the bankers shall have received an opinion satisfactory to the bankers' •counsel in New York, of Chilean counsel approved by the bankers' counsel in New York, approving the proceedings of the Caja authorizing the creation, issue, and sale of the bonds and approving the guaranty of the bonds by the Republic of Chile, in accordance with the terms of this agreement, the sufficiency of all .action taken thereunder, the validity of this agreement, and the validity of the bonds, both temporary and definitive, in the hands of holders of whatever citizenship or residence, in accordance with the terms of the bonds and of this agreement; and (3) that the bankers' counsel in New York shall have approved the form of the bonds and coupons. 13. The Caja will pay all stamp and other duties, if any, to which under the laws of Chile or of the United States of America this agreement or the bonds may be subject. The Caja will also pay the cost of printing, engraving, executing, and authenticating the temporary and definitive bonds and interim certificates for definitive bonds and of transporting the temporary and definitive 1172 STOCK EXCHANGE PRACTICES bonds to and from Santiago, and the compensation and expenses of the* registrar. The Caja will also pay the fees and disbursements of the Chileancounsel referred to in article 12 hereof. 14. The Caja hereby covenants and agrees that no bonds issued or guaranteed by it other than the bonds purchased by the bankers hereunder shall be sold or offered for sale in the United States of America prior to January 1, 1927,. except with the written consent of the bankers, and except as hereinafter provided. The bankers understand that the Caja intends to issue before said January 1, 1927, but not before October 15, 1926, unless with the consent of the bankers, up to $10,000,000 principal amount of agricultural bonds guaranteed as to principal, interest, and sinking fund, if any, by the Republic of Chile, by endorsement, of which not more than one half may be 6% percent 35-year bonds with a three fourths of 1 percent cumulative sinking fund similar to the bonds of the present issue and the balance will be 6% percent bond& maturing serially within from 6 months to 5 years after their date; and the bankers agree, subject to the further provisions of this article, to buy from, the Caja, and the Caja agrees to sell to the bankers, said agricultural boBd& up to $10,000,000 principal amount at the same net price to the bankers (considering accrued interest and dates of payment of the installments of the purchase price) as paid by the bankers for the bonds of the present issue,, pursuant to article 10 hereof: Provided, however, That if the short-term serial bonds above mentioned should, by agreement between the Caja and the bankers,: be issued with a lower coupon rate than 6% percent, the net price of such, bonds to the bankers shall be adjusted accordingly; and provided further, that if market conditions, in the opinion of the bankers, permit, the bankers wilL offer more favorable prices and terms to the Caja for said agricultural bonds. The obligation of the bankers to purchase said agricultural bonds is subject to< the condition that if between the date of this agreement and the offering of said agricultural bonds for public subscription by the bankers any conditions of the nature of force majeure or any political, financial, or commercial developments or market conditions shall, in the opinion of the bankers., whose conclusion in this respect shall be final, render inadvisable the issue to the public of said agricultural bonds, or of a portion thereof, then the bankers shall be at liberty, at their option, to give the Caja notice of their determination not to? proceed with the purchase of said agricultural bonds, or of a portion thereof, and thereupon the obligations of the bankers under this article 14 with respect to the purchase of said agricultural bonds, or such thereof as they shall have decided not to purchase, shall forthwith terminate, but all the other obligations of either party to the other under this agreement shall continue in force. 15. The Caja hereby covenants and agrees that it will not issue or sell any securities of the Caja in the United States of America, or issue or sell any securities intended to be sold or offered for sale in the United States of America prior to July 1, 1928, without first giving the bankers a 30-day option to purchase such securities on terms and conditions at least as favorable to the bankers as the Caja is able to obtain from other sources at the time when such issue or sale is proposed. If the bankers shall not exercise such option within the 30-day period the Caja shall have the right to offer such securities elsewhere on terms and conditions not less favorable to the Caja than those offered to the bankers. The Caja will not reoffer such securities, or accept offers therefore, on terms and conditions less favorable to the Caja without giving the bankers a 30-day option to purchase such securities on such less favorable terms and conditions. The Caja, however, reserves the right to negotiate through an agent who will be instructed to work in accordance with these conditions. 16. The Caja will at the request of the bankers make or cause to be made application for the listing of the bonds and interim certificates on the New York Stock Exchange or the bankers may themselves make such application for and on account of the Caja. The Caja will furnish to the bankers all documents deemed by the bankers to be advantageous for the making of such application and it will take and undertake all such action as may be requisite in accordance with the requirements of said exchange in order to secure such listing. The cost and expenses of such application, whether made by the bankers or by the Caja, shall be paid by the Caja. 17. Reference in this agreement to the fiscal agents or either of them shall be deemed to include any successor firm or corporation however constituted continuing the business of Kuhn, Loeb & Co. and/or Guaranty Trust Co. of New York. Reference in this agreement to the registrar shall be deemed to include STOCK EXCHANGE PRACTICES 1173 any successor corporation continuing the business of Guaranty Trust Co. of New York. Reference in this, agreement to the bankers, or either of them, shall be deemed to include any successor firm or corporation however constituted continuing the business of Kuhn, Loeb & Co. and/or Guaranty Trust Co. of New York. In witness whereof Caja de Credito Hipotecario has caused this agreement to be signed in its behalf by His Excellency, the Hon. Miguel Cruchaga, thereunto duly authorized, and Kuhn, Loeb & Co. have signed this agreement and Guaranty Co. of New York has caused this agreement to be signed by its president or one of its vice presidents and its corporate seal to be affixed hereto and attested by an assistant treasurer as of the day and year first above written. CAJA DE CREDITO HIPOTECARIO, By MIGUEL CRUCHAGA. KUHN, LOEB & Co. [L. S.] GUARANTY CO. OF NEW YORK, [SEAL] ByH. STANLEY, President. Attest: R. T. WILLIS, Assistant Treasurer, The undersigned accept their appointment as fiscal agents under the foregoing agreement upon the terms and conditions thereof; and the undersigned Guaranty Trust Co. of New York also accepts its appointment as registrar thereunder upon the terms and conditions thereof. GUARANTY TRUST CO>. OF NEW YORK, By C. H. PLATNER, Vice President. SCHEDULE A [Form of definitive bond] OAJA DE CREDITO HIPOTECARIO (CHILE) (MORTGAGE BANK OF CHILE), GUARANTEED SINKING FUND 6 % PERCENT GOLD BOND OF 1926, DUE JUNE 30, 1961 Letra de Credito al Portador, por United States—$ oro (dollars americanos) que ganan el 6% de interes anual.—Reembolsable por sorteos semestrales a mas tardar en 35 anos—Los intereses y amortizaciones se pagan el 31 de Diciembre y 30 Junio, en cambio, del coupon respective o de la letra amortizada.— Caja de Credito Hipotecario (herein called the Caja) for value received, promises to pay to the bearer on June 30, 1961, the sum of $ and to pay interest thereon from June 30, 1926, until the principal of this bond is paid, at the rate of 6% percent per annum, semiannually, on June 30 and December 31 in each year upon presentation and surrender of the coupons hereto annexed as they they severally mature. The principal of, and interest on, this bond are payable at the option of the holder, in the Borough of Manhattan, city and State of New York, at the office of Kuhn, Loeb & Co., or at the principal office of Guaranty Trust Co. of New York, in gold coin of the United States of America of or equal to the standard of weight and fineness existing June 30, 1926, or in the city of Santiago, Chile, at the office of the Caja, by sight draft on New York City, and will be paid without deduction for any taxes, imposts, levies, or duties of any nature now or at any time hereafter imposed by the Republic of Chile or by any State, Province, municipality or other taxing authority thereof.or therein, and will be paid in time of war as well as in time of peace and whether the holder be a citizen or resident of a friendly or a hostile State. This bond is one of an issue of bonds known as the " Guaranteed sinking fund 6% percent gold bonds'of 1926" of the Caja (herein called the bonds) limited to $20,000,000 principal amount, issued in accordance with the law of the Republic of Chile dated, August ,29, 1855, the decree law dated March 9, 1925, the decree law date*-December' 15, 1925, and the decree of the President of the Republic of Chile dated July 27, 1926, constituting the loan designated Emprestito oro Caja Hipotecaria, 1926. 1174 STOCK EXCHANGE PRACTICES Until all the bonds shall have been retired or redeemed the Caja will pay to the fiscal agents as an annuity for the service of interest and amortization of the bonds the sum of $1,500,000 per annum in gold coin of the United States of America of the standard aforesaid, except as hereinafter provided. Such sums •shall be paid in equal semiannual installments before the 30th day of June and the 31st day of December in each year, the first payment to be made before December 31, 1926, and the last payment to be made before June 30, 1961. The fiscal agents shall apply each such installment to the payment of the interest maturing on the next succeeding interest date on the bonds then outstandingand shall apply the part of each such installment not required for the payment of such interest as a sinking fund for the redemption of bonds on such interest date as hereinafter provided. The Caja may, at its option, increase the amount of any semiannual installment to be applied to the redemption of bonds on any semiannual interest date, and, in the event of any such increase, all subsequent semiannual installments shall be reduced to an amount sufficient to provide for the semiannual service of interest and amortization of the bonds which shall be outstanding after the application of such increased sinking fund installment to the redemption of bonds, such amount to be calculated as a cumulative sinkins* fund compounded semiannually at the rate of 6% percent per annum to -redeem, on or before June 30, 1961, all of the bonds so outstanding. Any such reduced semiannual installment may similarly be increased, in which event subsequent semiannual installments shall be similarly reduced. The part of each semiannual installment available for the redemption of bonds shall be applied to the redemption of bonds by lot at 100 percent of their principal amount on the interest date next succeeding the date of such, payment. The numbers of the bonds to be redeemed on each such interest date shall be drawn by lot in any usual manner. The drawings shall be held in public at the principal office of the Caja in the city of Santiago. The numbers of the bonds so drawn for redemption shall be advertised at least twice in two daily newspapers of general circulation in the Borough of Manhattan, city and State of New York, the first advertisement to appear not less than 30 days prior to the redemption date. The bonds so called for redemption shall on the redemption date designated in such notice become due and payable at 100 percent of their principal amount, and shall be payable, at the option of the holders, in the Borough of Manhattan, city and State of New York, at the office of Kuhn, Loeb & Co., or at the principal office of Guarantj^ Trust Co. of New York, in gold coin of the United States of America of the standard aforesaid, or in the city of Santiago, Chile, at the office of the Caja, by sight draft on New York City, and shall be paid by the Caja on and after the redemption date at the redemption price aforesaid on presentation and surrender of such bonds at any of said offices, together with all coupons thereto appertaining maturing after the redemption date. If any bond so presented shall not be accompanied by all coupons maturing after the redemption date, then said bond shall be paid at the redemption price aforesaid less the aggregate principal amount of all coupons maturing after the redemption date not presentee! and surrendered with said bond: Provided, That if more than four such coupons are not presented and surrendered with said bond the fiscal agents or the Caja may refuse to pay said bond. Notice having been so given by publication the bonds so called for redemption shall cease to bear interest from the redemption date unless they shall not be so paid by the Caja upon presentation and surrender thereof with all coupons maturing after the redemption date. This bond and the coupons appertaining thereto shall pass by delivery. This bond shall not become valid or obligatory for any purpose until it shall be authenticated by the certificate of the registrar hereon endorsed. In witness whereof Caja de Credito Hipotecario has caused this bond to be executed in its name bearing the facsimile signature of the President of itss board of directors and to be manually signed by its cashier thereunto duly authorized and to' be impressed with its seal and the interest coupons bearingthe facsimile signature of the president of its board of directors to be hereto* annexed. Dated, June 30, 1926. CAJA DE CREDITO HIPOTECARIO,. By , Cashier. Louis BARROS BORGONO, President of the Board of Directors STOCK EXCHANGE PRACTICES 1175 [Form of registrar's certificate] This is one of the within described guaranteed sinking-fund 6% gold bonds of 1926 of Caja de Credito Hipotecario (Chile). GUARANTY TRUST CO. OF NEW YORK, Registrar, By . [Form of coupon] No. . $ . On , 19—, unless the bond hereinafter mentioned shall have been called for previous redemption, Caja de Credito Hipotecario (Chile) promises to pay to bearer, at his option, in the Borough of Manhattan, city and State of New York, at the office of Kuhn, Loeb & Co. or at the principal office of Guaranty Trust Co. of New York, in £old coin of the United States of America, of or equal to the standard of weight and fineness existing on June 30, 1926, or in the city of Santiago, Chile, at the office of the Caja, by sight draft on New York City, $ without deduction for any taxes, imposts, levies, or duties of any nature new or at any time hereafter imposed by the Republic of Chile or by any State, Province, municipality, or other taxing authority thereof or therein in time of war as well as in time of peace and whether the holder be a citizen or resident of a friendly or a hostile state, being 6 months' interest then due on its guaranteed sinking-fund 6%-percent gold bond of 1926, dated June 30, 1926 (No. ). CAJA DE CREDITO HIPOTECARIO, By Louis BARROS BORGONO, President of the Board of Directors. SCHEDULE B The Republic of Chile, for a valuable consideration, hereby unconditionally guarantees to the holder of the within bond prompt payment of the principal amount of said bond in accordance with its terms when the same shall become due and payable, whether at the maturity thereof or otherwise, and of the interest thereon at the rate and at the times specified in said bond and in the appurtenant coupons, upon presentation and surrender of said coupons as they severally mature, and also prompt payment to the fiscal agents of the semiannual payments mentioned in said bond for the service of interest and amortization of the bonds when the same shall become due and payable. Dated June 30, 1926. By REPUBLICS OF CHILE, . SCHEDULE C [Form of temporary bond] CAJA DE CREDITO HIPOTEOARIO (CHILE) (MORTGAGE BANK OF CHILE) GUARANTEED SINKING-FUND 6%-PERCENT GOLD BOND OF 1926, DUE JUNE 30, 1961 Caja de Credito Hipotecario (herein called the "Caja"), for value received, promises to pay to the bearer on June 30, 1961, the sum of $20,000,000, and to pay interest thereon from June 30, 1926, until the principal of this bond is paid at the rate of 6% percent per annum, semiannually, on June 30 and December 31 each year. The principal of, and interest on, this bond are payable at the option of the holder, in the Borough of Manhattan, city and State of New York, at the office of Kuhn, Loeb & Co. or at the principal office of Guaranty Trust Co., of New York, in gold coin of the United States of America of or equal to the standard of weight and fineness existing June 30, 1926, or in the city of Santiago, Chile, at the office of the Caja, by sight draft on New York City,, and will be paid without deduction for any taxes, imposts, levies or duties of 1176 STOCK EXCHANGE PRACTICES any nature now or at any time hereafter imposed by the Republic of Chile or by any &tate, Province, municipality, or other taxing authority thereof or therein, and will be paid in time of war as well as in time of peace and whether the holder be a citizen or resident of a friendly or a hostile state. This bond is a temporary bond without coupons and is one of an issue of bonds known as the " guaranteed sinking-fund 6%-percent gold bonds of 1926 of the Caja" (herein called the "bonds"), limited to .$20,000,000 principal amount, issued in accordance with the law of the Republic of Chile dated August 29, 1855, the decree law dated March 9, 1925, the decree law dated December 16, 1925, and the decree of the President of the Republic of Chile dated July 27, 1926, constituting the loan designated " Bmprestito oro Caja Hipotecaria, 1926," Until all the bonds shall have been retired or redeemed the Caja will pay to the fiscal agents as an annuity for the service of interest and amortization of the bonds the sum of $1,500,000 per annum in gold coin of the United States of America of the standard aforesaid, except as hereinafter provided. Such sums shall be paid in equal semiannual installments before the 30th day of June and the 31st day of December in each year, the first payment to be made before December 31, 1926, and the last payment to be made before June 30, 1961. The fiscal agents shall apply each installment to the payment of the interest maturing on the next succeeding interest date on the bonds then outstanding and shall apply the part of each such installment not required for the payment of such interest as a sinking fund for the redemption of bonds on such interest date, as hereinafter provided. The Caja may, at its option, increase the amount of any semiannual installment to be applied to the redemption of the bonds on any semiannual interest date, and, in the event of any such increase, all subsequent semiannual installments shall be reduced to an amount sufficient to provide for the semiannual service of interest and amortization of the bonds which shall be outstanding after the application of such increase sinking-fund installment to the redemption of bonds, such amount to be calculated as a cumulative sinking fund compounded semiannually at the rate of 6% percent per annum to redeem, on or before June 30,1961, all of the bonds so outstanding. Any such reduced semiannual installment may similarly be increased, in which event subsequent semiannual installments shall be similarly reduced. The part of each semiannual installment available for the redemption of bonds shall be applied to the redemption of bonds by lot at 100 percent of their principal amount on the interest date next succeeding the date of such payment. The numbers of the bonds to be redeemed on each such interest date shall be drawn by lot in any usual manner. The drawings shall be held in public in the principal office of the Caja in the city of Santiago. The numbers of the bonds so drawn for redemption shall be advertised at least twice in two daily newspapers of general circulation in the Borough of Manhattan, city and State of New York, the first advertisement to appear not less than 30 days prior to the redemption date. The bonds so called for redemption shall on the redemption date designated in such notice become due and payable at 100 percent of their principal amount, and shall be payable, at the option of the holders, in the Borough of Manhattan, city and State of New York, at the office of Kuhn, Loeb & Co. or at the principal office of Guaranty Trust Co. of New York, in gold coin of the United States of America of the standard aforesaid, or in the city of Santiago, Chile, at the office of the Caja, by sight draft on New York City, and shall be paid by the Caja on and after the redemption date at the redemption price aforesaid on presentation and surrender of such bonds at any of said offices, together with all coupons thereto appertaining maturing after the redemption date. If any bond so presented shall not be accompanied by all coupons maturing after redemption date, then said bond shall be paid at the redemption price aforesaid, less the aggregate principal amount of all coupons maturing after the redemption date not presented and surrendered with said bond; provided, that if more than four such coupons are not presented and surrendered with said bond the fiscal agents or the Caja may refuse to pay said bond. Notice having been so given by publication the bonds so called for redemption shall cease to bear interest from the redemption date unless they shall not be so paid by the Caja upon presentation and surrender thereof with all coupons maturing after the redemption date. This temporary bond is exchangeable for definitive engraved bonds of this issue of like tenor .and for, a like: aggregate principal amount when engraved STOCK EXCHANGE PEACTICES 1177 and prepared, endorsed with the guaranty of the Republic of Chile, corresponding so far as appropriate with the guaranty hereon endorsed. This bond shall pass by delivery. In witness whereof, Caja de Credito Hipoteeario has caused this bond to be executed in its name bearing the signature of the president of its bo'atfd of directors and of its cashier thereunto duly authorized and to be impressed with its seal. Dated June 30, 1926. CAJA DE CREDITO HIPOTEOARIO, By , Cashier. President of the Board of Directors. SCHEDULE D The Republic of Chile, for a valuable consideration, hereby unconditionally guarantees to the holder of the within bond prompt payment of the principal amount of said bond in accordance with its terms, when the same shall become due and payable, whether at the maturity thereof or otherwise, and of the interest thereon at the rate and at the times specified in said bond, and also prompt payment to the fiscal agents of the semiannual payments mentioned in said bond for the service of interest and amortization of the bonds, when the same shall become due and payable, and the Republic of Chile hereby agrees to endorse on the several definitive engraved bonds to be delivered in exchange for the within temporary bond its guaranty as aforesaid, with appropriate variations. Dated June 30, 1926. REPUBLIC OF CHILE, By COMMITTEE EXHIBIT 15, JUNE 28, . 1933 AGREEMENT BETWEEN OAJA DE CREDITO* HIPOTECAEJO (CHILE) AND KUHN, LOEB & CO. AND GUARANTY 00. OF NEW YORK APRIL 30, 1928. GUARANTEED SINKING FUND 6 PERCENT GOLD BONDS OF 192 8 Agreement, dated April 30, 1928, made in the city and State of New York in the United States of America between Caja de Credito Hipotecario, of Santiago, Chile, organized under the laws of Chile (hereinafter called the Caja), acting by His Excellency, the Honorable Carlos G. Davila, Chilean Ambassador to the United States of America, thereunto duly authorized, and Kuhn, Loeb & Co., a copartnership of the city and State of New York, and Guaranty Co. of New York, a corporation organized under the laws of the State of Delaware (hereinafter called the bankers). In consideration of the mutual covenants hereinafter set forth, it is agreed as follows; 1. The Caja will forthwith create an issue of bonds to be known as its .guaranteed sinking fund 6 percent gold bonds of 1928 (hereinafter called the bonds) limited to $20,000,000 principal amount, to constitute the loan-designated Emprestito oro Caja Hipotecaria, 1928. The bonds shall be issued in accordance with the law of the Republic of Chile of August 29, 1855, establishing the Caja, as amended by the decree law dated December 15, 1925, which decree law was duly approved by the commission appointed for that purpose by both Houses of Congress, and with the decree law no. 308 of March 9, 1925, and with the decree of the President of the Republic of Chile, dated January 31, 1928, which authorize the guaranty of the bonds by the Republic of Chile. Eight million dollars principal amount, of the bonds, are to provide for construction purposes according to said decree law no. 308, dated March 9, 1925, and $12,000,000 principal amount are to provide for other corporate purposes. The bonds shall be in coupon form, payable to bearer, shall be dated April 30, 1928, shall mature April 30, 1961, shall bear interest from April 30, 1928, at the rate of 6 percent per annum, payable semiannually on April 30 and October 31 in each year and shall be in the denominations of $1,000 and $500 Aji such proportions as the bankers may request. The principal of, and interest otf-' the bonds shall be payable without deduction for any taxes, imposts, levies, or duties of any nature, now or at any time hereafter imposed by the Republic 1 175541—33—FT 3 15 1178 STOCK EXCHANGE PKACTICES of Chile or by any state, province, municipality, or other taxing authority thereof or therein, and shall be paid, at the option of the holders, in the Borough of Manhattan, city and State of New York, at the office of Kuhn, Loeb & Co. or at the principal office of Guaranty Trust Co. of New York in gold coin of the United States of America of or equal to the standard of weight and fineness existing April 30, 1928, or in the city of Santiago, Chile, at the office of the Caja, by sight draft on New York City, and shall be paid in time of war as well as in time of peace and whether the holder be a citizen or resident of a friendly or a hostile state. The bonds shall be authenticated by the certificate endorsed thereon of Guaranty Trust Co. of New York, registrar of the loan hereinafter appointed. The Republic of Chile shall unconditionally guarantee to the holders of the bonds prompt payment of the principal of, and the interest on, the bonds, as and when the same shall become due and payable and also prompt payment to the fiscal agents, hereinafter appointed, of the semiannual payments for the service of interest and amortization of the bonds hereinafter mentioned as and when the same shall become due and payable, and such guaranty shall be endorsed on the bonds. The text of the guaranty shall be substantially in the form hereto annexed and marked " Schedule B ". 2. The text of the definitive engraved bonds shall be in the English language substantially in the form hereto annexed and marked " Schedule A", and shall bear a notation in Spanish substantially in the form shown on said schedule A. The text of the usual certificate of the Treasury Department of the Republic of Chile on bonds of the Caja shall be in Spanish, or in both English and Spanish, as the bankers may elect, in such form as may be required by Chilean law. The Caja hereby authorizes the bankers to cause to be prepared without delay definite engraved bonds for execution by or on behalf of the Caja, such bonds to be engraved and printed in New York in accordance with the requirements of the New York Stock Exchange. The bankers may issue or cause to be issued by a bank or trust company in New York temporary interim certificates which, if issued, shall, in due course, be exchangeable without cost or expense to the bankers or the holders, for definitive engraved bonds. The definitive bonds shall bear the facsimile signature of Don Luis Barros Borgono, the director of the Caja, and shall be manually signed by Don Francisco Bahamondes, the cashier of the Caja, or other duly authorized officer of the Caja. The certificato of the Treasury Department shall be signed manually or otherwise as may be required by Chilean law. The coupons shall bear the facsimile signature of Don Luis Barros Borgono, the director of the Caja. The guaranty of the Republic of Chile endorsed on the bonds shall be manually signed by His Excellency, the Honorable Carlos G. Davila, the Chilean Ambassador to the United1 States of America, thereunto duly authorized by the Government of the Republic of Chile or by some other duly authorized representative of the Republic of Chile. 3. Until all of the bonds shall have been retired or redeemed, the Caja shall pay to the fiscal agents as an annunity for the service of interest and amortization of the bonds the sum of $1,400,000 per annum in gold coin of the United States of America of the standard aforesaid, except as hereinafter in this article provided. Such sums shall be paid in equal semiannual instalments at least 15 days before the 30th day of April and the 31st day of October in each year as hereinafter in article 5 hereof provided. The fiscal agents shall apply each such instalment to the payment of the interest maturing on the next succeeding interest date on the bonds then outstanding and shall apply the part of each such instalment not required for the payment of such interest as a sinking fund for the redemption of bonds on such interest date as hereinafter provided. The Caja may, at its option, increase the amount of any semiannual installment to be applied to the redemption of bonds on any semiannual interest date, and, in the event of any such increase, all subsequent semiannual installments shall be reduce® to an amount sufficient to provide for the semiannual service of interest and amortization of the bonds which shall be outstanding after the application of such increased sinking fund installment to the redemption of bonds, such amount to be calculated as a cumulative sinking fund compounded semiannually at the rate of 6 percent per annum to redeem, on or before April 30, 1961, all of the bonds so outstanding. Any such reduced semiannual installment may similarly be increased in which event subsequent semiannual installments shall be similarly reduced. This right is reserved because repayments of the mortgage loans made by the Caja may fje \nade STOCK EXCHANGE PRACTICES 1170 by the borrowers either in cash or in bonds of the Caja in excess of the fixed minimum amortization payments, and the Gaja is not permitted by law to have its bonds outstanding in excess of the mortgage loans against whieli they are issued. The part of each semiannual installment available for the redemption of bonds shall be applied to the redemption of bonds by lot at 100 percent of their principal amount on the interest date next succeeding the date of sucli payment. The numbers of the bonds to be redeemed on each such interest date shall be drawn by lot in any usual manner. The drawings shall be held in pu)bli<? at the principal office of the Caja in the city of Santiago. The Caja shall notify the fiscal agents of the aggregate principal amount and numbers of th& bonds to be redeemed on each interest date and such notification shall be sen! to the fiscal agents at the office of Kuhn, Loeb & Co., in the city of New York, so as to be received at said office at least 45 days prior to such interest date, The numbers of the bonds so drawn for redemption shall be advertised a| least twice in two daily newspapers of general circulation in the borough of Manhattan, city and State of New York, the first advertisement to appear not less than 30 days prior to the redemption date. If the New York Stoclt Exchange so requires, the advertisement shall be further published. The bonds so called for redemption shall on the redemption date designated in such notice become due and payable at 100 percent of their principal amount and shall be payable, at the option of the holders, in the borough of Man* hattan, city and State of New York, at the office of Kuhn, Loeb & Co. of at the principal office of Guaranty Trust Co. of New York, in gold coin .of the United States of America of the standard aforesaid, or in the city of Santiago, Chile, at the office of the Caja, by sight draft on New York €ity, and shall be paid by the Caja on and after the redemption date at the re^emp^ tion price aforesaid on presentation and surrender of such bonds at any of said offices, together with all coupons thereto appertaining maturing afte? the redemption date. If any bond so presented shall not be accompanied by all coupons maturing after the redemption date, then said bond shall be paid at the redeunptioit price aforesaid less the aggregate principal amount of all coupons maturing after the redemption date not presented and surrendered with said bond, provided that if more than four such coupons are not presented and sur* rendered with said bond, the fiscal agents or the Caja may refuse to pay saif bond. Notice having been so given by publication, the bonds so called for redemption shall cease to bear interest from the redemption date unless they shall not be so paid by the Caja upon presentation and surrender thereof witli all coupons maturing after the redemption date. No expenses in connection with the redemption of the bonds or the opera* tion of the sinking fund shall be charged against the sinking but such expenses shall be paid by the Caja. 4. All notices or other announcements relating to the redemption of the bonds, the payment of the coupons, or any other matter in connection witlj the bonds may be given or made by the fiscal agents, jointly or severally, OIJ behalf of the Caja as the fiscal agents shall deem proper, but all expenses is connection therewith shall be paid by the Caja. All bonds redeemed through the sinking fund, with all unmatured couponsthereto appertaining and all coupons paid by the fiscal agents, shall be can* celed by the fiscal agents and by them delivered to a representative of the Cajg, for that purpose in the city of New York or sent by registered mail insured to and at the risk and expense of the Caja. All bonds paid in Santiago by the Caja and all bonds delivered to the Caja in payment of its loans shall be sent, as soon as practicable after such payment or delivery, to the fiscal agents for cancellation at the risk and expense of the C-aja, and no bonds delivered to the Caja in payment of its loans shall be reissued or renegotiated by the Caja. 5. So long as any of the bonds shall be outstanding the Gaja covenants ta pay to the fiscal agents at their respective offices in the city of New York i i gold coin of the United States of America of the standard aforesaid— (a) At least 15 days before April 30 and October 31 in each year the sum of $700,000 (or, in the event that the Caja shall have increased the amount of any previous semiannual insthallment as provided in article 3 thereof, sue!$ lesser amount .as may be due as provided in said article -3>) to be applied -\& 1180 STOCK EXCHANGE PRACTICES the service of interest and amortization of the bonds as provided in article 3 hereof, the first payment to be made at least 15 days before October 31, 1928, and the last payment to be made at least 15 days before April 80, 1961; and if the Oaja shall elect to increase the amount of any such semiannual installment as provided in article 3 hereof, the amount of any such increase at least 15 days before the interest date on which such amount is to be applied to the redemption of bonds. One half of each payment made pursuant to this paragraph (a) shall be made to Kuhn, Loeb & Co. at their office in the city of New York, and one half of each such payment shall be made to Guaranty Trust Co. of New York at its principal office in the city of New York; (&) At least 15 days before April 30, 1961. a sum equal to the principal amount of all the bonds then outstanding, one half of such payment to be made to Kuhn, Loeb & Co., at their office in the city of New York, and one half of such payment to be made to Guaranty Trust Co. of New York, at its principal office in the city of New York. Any amounts in the sinking fund to be applied to the redemption of bonds on April 30, 1961, at the time of the payment made pursuant to this paragraph (&) shall be credited against such payment; and (c) Such amounts as may be required to meet all expenses incident to the service of the loan, including the compensation and expenses of the registrar; such payments to be made from time to time, on the joint written or cabled request of the fiscal agents, to the fiscal agent or fiscal agents stated in such request. The fiscal agents shall not be required to segregate any moneys paid to or deposited with them as hereinbefore provided. The Caja irrevocably authorizes and directs the fiscal agents and each of them to pay out of the moneys paid to them as hereinbefore provided the interest on the bonds to the bears of the coupons upon presentation and surrender thereof, a'nd the principal of the bonds at maturity or on the redemption dates, as the case may be, to the bearers of the bonds to be paid or redeemed upon presentation and surrender thereof, and to apply the moneys in the sinking fund to the redemption of the bonds, and to make every such payment without further formality except as the fiscal agents or either of them may be advised may be necessary to comply with some law or regulation of the United States of America or other public authority therein. 6. The Caja during the life of the loan will maintain in the Borough of Manhattan, in the city of New York, a fiscal agency or fiscal agencies of the loan and a registry of the loan. The Caja appoints Kuhn, Loeb &i Co. and Guaranty Trust Co. of New York, of the city and State of New York,( United States of America, to be fiscal agents of the loan during the life of the loan, subject to the terms and conditions of this agreement. The Caja also appoints said Guaranty Trust Co. of New York as registrar of the loan during the life of the loan subject to the terms and conditions of this agreement. 7. Neither the fiscal agents nor the registrar shall be liable otherwise than for good faith and the exercise of reasonable care. The fiscal agents and the Tegistrar and each of them shall be protected in any action which any of them may take in acting on any bond or coupon or any notice, request, or other paper believed by them or it to be genuine as well as in or in respect of any action taken or suffered in good faith under the advice of counsel. Neither of the bankers and neither of the fiscal agents shall be liable for any act or omission of the other. 8. The Caja shall pay each of the fiscal agents as compensation for their services a commission of one quarter of 1 percent of the amount of all payments made to such fiscal agent pursuant to paragraphs (a) and (&) of article 5 iiereof, such compensation to be paid to the fiscal agents at the time when such payments are made to the fiscal agents. The Caja shall also pay the fiscal agents as compensation for their services a commission of one quarter of 1 percent of the principal amount of all bonds delivered to the Caja in payment of its mortgage loans; one half of such compensation to be paid to each of the fiscal agents at the time when such bonds are sent to the fiscal agents for cancelation as provided in article 4 hereof. 9. In case any of the bonds shall become mutilated, destroyed, or lost, a new bond (having endorsed thereon the guaranty of the Republic of Chile in this agreement provided for) of like amount, tenor, and date, bearing the same number and bearing all unmatured coupons shall be issued by the Caja, but only if permitted by and in accordance with Chilean law, and the registrar shall authenticate the same for delivery in exchange for, and upon cancelation of, the bond so mutilated and its unmatured coupons, or in lieu of the bond so de STOCK EXCHANGE PRACTICES 1181 stroyed or lost and its unmatured coupons, but in the case of destroyed or lost bonds only upon receipt by the Caja and the registrar of evidence satisfactory to each of them that such bends were destroyed or lost and, if required, upon: receipt also of indemnity satisfactory to each of them in their discretion. The registrar shall incur no liability for such action. 10. The Caja agrees to sell and deliver to the bankers and the bankers agree to purchase from the Caja and pay for $20,000,000 aggregate principal amount of the bonds at the price of 91% percent of the principal amount thereof and accrued interest to May 21, 1928, being $18,420,000. In the first instance an appropriately executed temporary bond (which may be printed, written, or typewritten) for $20,000(,000, in substantially the form hereto annexed and marked " Schedule C ", and endorsed with the guaranty of the Republic of Chile, in substantially the form hereto annexed and marked " Schedule D ", shall be delivered on or before May 17, 1928, unless the bankers consent to postpone this date, to Banco de Chile, for account of Guaranty Trust Co. of New York. The charges of Banco de Chile shall be paid by the Caja. Payment of $7,912,000, the first installment of the purchase price, shall be made on May 21, 1928, unless the time for such delivery shall be extended by the bankers at the request of the Caja, as above provided, and in that case, within the period of such extension on 5 days' notice to the bankers in writing, but such payment shall not be made until after receipt of cable advice from Banca de Chile to Guaranty Trust Co. of New York of the delivery of such temporary bond. Payment of $1,500,000, the second installment of the purchase price,, shall be made on June 15, 1928, and payment of $9,008,000, the final installment of the purchase price, shall be made on August 1, 1928. Payment of the first installment of the purchase price shall be made by paying one half of the amount thereof to Kuhn, Loeb & Co. and one half of theamount thereof to Guaranty Trust Co. of New York in full payment of the $8,000,000, 5%-percent notes of the Caja issued under the agreement between the Caja and the bankers*, dated February 3, 1928. Payment of the second and third installments shall be made by placing the amount of each such installment of the purchase price to the credit of the Caja in dollars in the city of New York, one half of each such installment to be credited to the account of the Caja with Kuhn, Loeb & Co. and one half of each such installment to be credited to the account of the Caja with Guaranty Trust Co. of New York. The amounts so credited to the Caja shall be withdrawn upon the order of such person or persons as may be authorized to draw upon the same by the Caja, and all withdrawals shall be made in substantially equal amounts from Kuhn, Loeb & Co. and from Guaranty Trust Co. of New York: Provided, 7ww-, ever, That no part of the final installment of the purchase price shall be withdrawn before September 29', 1928. Kuhn, Loeb & Co-, and Guaranty Trust Co. of New York shall each credit the Caja with interest at the current rate which New York Clearing House banks; may then be paying on the amounts so> credited with them, respectively, until disbursed by the Caja; except that they will pay interest only at the rate of iy2 percent per annum from August 1, 1928, to September 29, 1928, on the amount of said final installment on deposit with them. 11. Forthwith upon the execution of this agreement the Caja will deliver or cause to be delivered to the bankers a prospectus letter or letters containing information concerning the financial position of the Caja and of the Republic of Chile, its debts, income, and expenditures, and financial administration and such other infomation and in such form as the bankers may reasonably request and as shall be satisfactory to the bankers' counsel, such letter or letters to be signed by the Chilean Ambassador to the United States of America. 12. It is a condition precedent to any obligation of the bankers hereunder (a) that the Caja shall have promptly delivered a prospectus letter as set forth above in article 11 hereof, and (~b) that on or before May 17, 1928, unless, the time be extended by the bankers at the request of the Caja as hereinbefore provided, and, in that case, within the period of such extension. (1) The Caja shall have delivered to the representative of the bankers in Chile duly authenticated copies of the laws or decrees or other instruments authorizing the issue of the bonds by the Caja and the guaranty of the bonds, by the Republic of Chile in accordance with the terms of this agreement and. also duly certified copies of all proceedings of the Caja and all executive and other decrees of the Government of the Republic of Chile necessary to comply with said laws in connection with the execution and delivery of the bonds hereunder. 1182 STOCK EXCHANGE PKACTICES (2) The bankers shall have received an opinion satisfactory to the bankers' counsel in New York, of Chilean counsel approved by the bankers' counsel in New York, approving the proceedings of the Oaja authorizing the creation, issue, and sale of the bonds and approving the guaranty of the bonds by the Republic of Chile, in accordance with the terms; of this agreement, the sufficiency of all action taken thereunder, the validity of this agreement, and the Validity of the bonds, both temporary and definitive, in the hands of holders of Whatever citizenship or residence, in accordance with the terms of the bonds and of this agreement. (3) That the bankers' counsel in New York shall have approved the form of the bonds and coupons. 13. The Caja will pay all stamp and other duties, if any, to which under the laws of Chile or of the United States of America this agreement or the bonds 2nay be subject. The Caja will also pay the cost of printing, engraving, executing, and authenticating the temporary and definitive bonds and interim certificates, the expense of exchanging the temporary bond and interim certificates for definitive bonds, and of transporting the temporary and definitive bonds to and from Santiago, and the compensation and expenses of the registrar, ^he Caja will also pay the fees and disbursements of the Chilean counsel deferred to in article 12 hereof. 14. The Caja hereby covenants and agrees that no bonds issued or guaranteed by it other than the bonds purchased by the bankers hereunder shall be sold or offered for sale in the United States of America prior to November 1, 1928, except with the written consent of the bankers. 15. If between the date of this agreement and the offering of the bonds for public subscription by the bankers any conditions of the nature of force toajeure or any political, financial, or commercial developments, or market conditions, shall in the opinion of the bankers, whose conclusions in this 2-espect shall be final, render inadvisable the issue to the public of the bonds, or of a portion thereof, then the bankers shall be at liberty, at their option, to give the Caja notice of their determination not to proceed with the purchase of the bonds, or of a portion thereof, and thereupon the obligations of the bankers under article 10 hereof with respect to the purchase of the bonds, or such thereof as they shall have decided not to purchase, shall forthwith terminate, but all the other obligations of either party to the other under this agreement shall continue in force. 16. The Caja hereby covenants and agrees that it will not issue or sell any securities of the Caja in the United States of America, or issue or sell any securities intended to be sold or offered for sale in the United States of America, prior to May 1, 1931, without first giving the bankers a 30-day option to purchase such securities on terms and conditions at least as favorable to the bankers as the Caja is able to obtain from other sources at the time when such issue or sale Is proposed. If the bankers shall not exercise such option within the 30-day period, the Caja shall have the right to offer such securities elsewhere on terms and conditions not less favorable to the Caja than those offered to the bankers, The Cajo will not reoffer such securities, or accept offers therefor, on terms and conditions less favorable to the Caja without giving the bankers a 30-day option to purchase such securities on such less favorable terms and conditions. The Caja, however, reserves the right to negotiate through an agent, who will be instructed to work in accordance with these conditions. 17. The Caja will, at the request of the bankers, make or cause to be made application for the listing of the bonds and interim certificates on the New York Stock Exchange, or the bankers may themselves make such application for and on account of the Caja. The Caja will furnish to the bankers all documents deemed by the bankers to be advantageous for the making of such application, and it will take and undertake all such action as may be requisite in accordance with the requirements of said exchange in order to secure such listing. " The cost and expenses of such application,, whether made by the bankers or by the Caja, shall be paid by the Caja. 18. Reference in this agreement to the fiscal agents or either of them shall be deemed to include any successor firm or corporation, however constituted, continuing the business of Kuhn, Loeb & Co. and/or Guaranty Trust Co., of New York. Reference in this agreement to the registrar shall be deemed to include any successor corporation continuing the business of Guaranty Trust Co., of New York. Reference in this agreement to the bankers, or either of them, shall be deemed to include any successor firm or corporation, however constituted, continuing the business of Kuhn, Loeb & Co. and/or Guaranty Co., of Kew York. STOCK EXCHANGE PRACTICES 1183 In witness whereof Caja de Credito Hipotecario has caused this agreement to he signed in its behalf by His Excellency the Honorable Carlos G. Davila, thereunto duly authorized, and Kuhn, Loeb & Co. have signed this agreement, and Guaranty Co., of New York, has caused this agreement to be signed by its president or one of its vice presidents, and its corporate seal to be affixed hereto and attested by its secretary as of the <lay and year first above written. CAJA DE CREDITO HIPOTECARIO, By CARLOS G. DAVILA. KUHN, LOEB & Co. GUARANTY CO. OF NEW YORK, By BURNETT WALKER, [SEAL] Vice President. Attest: W. R. NELSON, Secretary. The undersigned accept their appointment as fiscal agents under the foregoing agreement upon the terms and conditions thereof; and the undersigned Guaranty Trust Co. of New York also accepts its appointment as registrar thereunder upon the terms and conditions thereof. GUARANTY TRUST CO. OF NEW YORK, By BURNETT WALKER, Vice President. SCHEDULE A [Form of definitive bond] No. . $- . OAJA DE CREDITO HBPOTEIOARIO (OHILEl)—(MORTGAGE BANK OF CHILE) GUARANTEED SINKING FUND 6 PER CENT GOLD! BOND OF 1928, DUE APRIL 30, 1961 Letra de Credito nl Portador por U.S. $ oro (dollars americanos) que ganan el 6 percent de interes annual. Reembolsable por sorteos semestrales a mas tardar en 33 anos. Los intereses y amortizaciones se pagan el 31 de Octubre y 30 de Abril, en cambio del cupon respectivo' o de la letra amortizada. Caja de Credito Hipotecario (herein called the "Caja") for value received, promises to pay to the bearer on April 30, 1961, the sum of dollars (& ) and to pay interest thereon from April 30, 1928, until the principal of this bond is paid, at the rate of 6 percent per annum, semiannually, on April 30 and October 31 in each year, upon presentation and surrender of the coupons hereto annexed as they severally mature. The principal of, and interest on this bond are payable at the option of the holder in the borough of Manhattan, city and State of New York, at the office of Kuhn, Loeb & Co., or at the principal office of Guaranty Trust Co., of New York, in gold coin of the United States of America of or equal to the standard of weight and fineness existing April 30, 1928, or in the city of Santiago, Chile, at the office of the Caja, by sight draft on New York City, and will be paid without deduction for any taxes, imposts, levies, or duties of any nature now or at any time hereafter imposed by the Republic of Chile or by any State, Province, municipality, or other taxing authority thereof or therein, and will be paid in time of war as well as in time of peace, and whether the holder be a citizen or resident of a friendly or a hostile state. This bond is one of an issue of bonds known as " the guaranteed sinking fund 6 percent gold bonds of 1928", the Caja (herein called the bonds) limited to $20,000,000 principal amount, issued in accordance with the law of the Republic of Chile dated August 29, 1855, the decree law no. 308 dated March 9, 1925, the decree law dated December 15, 1925, and the decree of the President of the Republic of Chile dated January 31, 1928, constituting the loan designated " Emprestito oro Caja Hipotecario, 1928 ", of which $8,000,000 principal amount, of the bonds are to provide for construction purposes according to said decree law no, 308, dated March 9, 1925, and $12,000,000 principal amount, are to provide for other corporate purposes. Until all the bonds shall have been retired or redeemed the Caja will pay to the fiscal agents as an annuity for the service of interest and amortization of 1184 STOCK EXCHANGE PEACTICES the bonds the sum of $1,400,000 per annum in gold coin of the United States of America of the standard aforesaid, except as hereinafter provided. Such sums shall be paid in equal semiannual installments before the 30th day of April and the 31st day of October in each year, the first payment to be made before October 31, 1928, and the last payment to be made before April 30, 1961. The fiscal agents shall apply each such installment to the payment of the interest maturing on the next succeeding interest date on the bonds then outstanding and shall apply the part of each such installment not required for the payment of such interest as a sinking fund for the redemption of bonds on such interest date as hereinafter provided. The Oaja may, at its option, increase the amount of any semiannual installment to be applied to the redemption of bonds on any semiannual interest date, and, in the event of any such increase, all subsequent semiannual instalments shall be reduced to an amount sufficient to provide for the semiannual service of interest and amortization of the fronds which shall be outstanding after the application of such increased sinking-fund installment to the redemption of bonds, such amount to be calculated as a cumulative sinking fund compounded semiannually at the rate of 6 percent per annum to redeem, on or before April 30, 1961, all of the bonds so outstanding. Any such reduced semiannual installment may similarly be increased, in which event subsequent semiannual installments shall be similarly reduced. The part of each semiannual installment available for the redemption of bonds shall be applied to the redemption of bonds by lot at 100 percent of their principal amount on the interest date next succeeding the date of such payment. The numbers of the bonds to be redeemed on each such interest date shall be drawn by lot in any usual manner. The drawings shall be held in the public at the principal office of the Oaja in the city of Santiago. The numbers of the bonds so drawn for redemption shall be advertised at least twice in two daily newspapers of general circulation in the Borough of Manhattan, city and State of New York, the first advertisement to appear not less than 30 days prior to the redemption date. The bonds so called for redemption shall on the redemption date designated in such notice become due and payable at 100 percent of their principal amount, and shall be payable, at the option of the holders, in the Borough of Manhattan, city and State of New York, at the office of Kuhn, Loeb & Co., or at the principal office of Guaranty Trust Co., of New York, in gold coin of the United States of America of the standard aforesaid, or in the city of Santiago, Chile, at the office of the Caja, by sight draft on New York City, and shall be paid by the Caja on and after the redemption date at the redemption price aforesaid on presentation and surrender of such bonds at any of said offices, together with all coupons thereto appertaining maturing after the redemption date. If any bond so presented shall not be accompanied by all coupons maturing after the redemption date, then said bond shall be paid at the redemption price aforesaid less the aggregate principal amount of all coupons maturing after the redemption date not presented and surrendered with said bond: Provided, That if more than four such coupons are not presented and surrendered with said bond the fiscal agents or the Caja may refuse to pay said bond. Notice having been so given by publication the bonds so called for redemption shall cease to bear interest from the redemption date unless they shall not be so paid by the Caja upon presentation and surrender thereof with all coupons maturing after the redemption date. This bond and the coupons appertaining thereto shall pass by delivery. This bond shall not become valid or obligatory for any purpose until it shall be authenticated by the certificate of the registrar hereon endorsed. In witness whereof, Caja de Credito Hipotecario has caused this bond to be executed in its name, bearing the facsimile signature of the director and to be manually signed by its cashier thereunto duly authorized and to be impressed with its seal and the interest coupons bearing the facsimile signature of the director to be hereto annexed. Dated April 30, 1928. CAJA DE CREDITO HIFJTEIOARLO, By Luis BARROS BORGONO, Director. , Cashier. STOCK EXCHANGE PEACTICES 1185 [Form'of registrar's certificate] This is one of the within described guaranteed sinking fund G percent gold bonds of 1928 of Caja de Credito Hipotocario (Chile). GUARANTY TRUST CO. OF NEW YORK, By Registrar, . [Form of coupon] No. $ On , 19—, unless the bond hereinafter mentioned shall have been called for previous redemption, Caja de Credito Hipotecarlo (Chile), promises to pay to bearer, at his option, in the Borough of Manhattan, city and State of New York, at the office of Kuhn, Loeb & Co. or at the principal office of Guaranty Trust Co. of New York, in gold coin of the United States of America of or equal to the standard of weight and fineness existing April 30, 1928, or in the city of Santiago, Chile, at the office of the Caja, by sight draft on New York City, — dollars ($ ) without deduction for any taxes, imposts, levies, or duties of any nature now or at any time hereafter imposed by the Republic of Chile or by any State, province, municipality or other taxing authority thereof or therein, in time of war as well as in time of peace and whether the holder be a citizen or resident of a friendly or a hostile state, being 6 months*' interest then due on its guaranteed sinking fund 6 percent gold bond of 1928, dated April 30, 1928, No. . CAJA BE CREDITO HIPOTECARIO, By Luis BARROS BORGONO, Director. SCHEDULE; B The Republic of Chile, for a valuable consideration, hereby unconditionally guarantees to the holder of the within bond prompt payment of the principal amount of said bond in accordance with its terms when the same shall become due and payable, whether at the maturity thereof or otherwise, and of the interest thereon at the rate and at the times specified in said bond and in the appurtenant coupons, upon presentation and surrender of said coupons as they severally mature, and also prompt payment to the fiscal agents of the semiannual payments mentioned in said bond for the service of interest and amortization of the bonds when the same shall become due and payable. Dated April 30, 1928, REPUBLIC OF CHILE, By . SCHEDULE C [Form of temporary bond] CAJA DE CREDITO HIPOTECARIO (CHILE) (MORTGAGE BANK OF CHILE) GUARANTEED SINKING FUND 6 PERCENT GOLD BOND OF 1928, DUE APRIL 30, 1961 Caja de Credito Hipotecario (herein called the Caja) for value received promises to pay to the bearer on April 30, 1961, the sum of $20,000,000 and to pay interest thereon from April 30, 1928, until the principal of this bond is paid, at the rate of 6 percent per annum semiannually, on April 30 and October 31 in each year. The principal of and interest on this bond are payable at the option of the holder, in the Borough of Manhattan, city and State of New York, at the office of Kuhn, Loeb & Co., or at the principal office of Guaranty Trust Co. of New York, in gold coin of the United Statesi of America of or equal to the standard of weight and fineness existing April 30, 1928, or in the city of Santiago, Chile, at the office of the Caja, by sight draft on New York City, and will be paid without deduction for any taxes, imposts, levies, or duties of any nature now or at any time hereafter imposed by the Republic of Chile or by any state, province, municipality, or other taxing authority thereof or therein, and will be paid in time of war as well as in time of peace and whether the holder be a citizen or resident of a friendly or a hostile State. 1186 STOCK EXCHANGE PRACTICES This bond is a temporary bond without coupons and is one of an issue of bonds known as the guaranteed sinking fund 6 percent gold bonds of 1928 of the Caja (herein called the bonds) limited to $20,000,000 principal amount, issued in accordance with the law of the Republic of Chile dated August 29, 1855, the decree law no. 308 dated March 9, 1925, the decree law dated December 15, 1925, and the decree of the President of the Republic of Chile dated January 31, 1928, constituting the loan designated Emprostito oro Caja Hipotecario, 1928, of which $8,000,000 principal amount of the bonds are to provide for construction purposes according to said decree law no. 308, dated March 9, 1925, and $12,000,000 principal amount, are to provide for other corporate purposes. Until all the bonds shall have been retired or redeemed the Caja will pay to the fiscal agents as an annuity for the service of interest and amortization of the bonds the sum of $1,400,000 per annum in gold coin of the United States of America of the standard aforesaid, except as hereinafter provided. Such sums shall be paid in equal semiannual installments before the 30th day of April and the 31st day of October in each year, the first payment to be made before October 31, 1928, and the last payment to be made before April 30, 1961. The fiscal agents shall apply each such installment to the payment of the interest maturing on the next succeeding interest date on the bonds then outstanding and shall apply the part of each such installment not required for the payment of such interest as a sinking fund for the redemption of bonds on such interest date as hereinafter provided. The caja may, at its option, increase the amount of any semiannual installment to be applied to the redemption of bonds on any semiannual interest date, and in the event of any such increase all subsequent semiannual installments shall be reduced to an amount sufficient to provide for the semiannual service of interest and amortization of the bonds which shall be outstanding after the application of such increased sinking-fund installment to the redemption of bonds, such amount to be calculated as a cumulative sinking fund, compounded semiannually at the rate of 6 percent per annum, to redeem on or before April 30, 1961, all of the bonds so outstanding. Any such reduced semiannual installment may similarly be increased, in which event subsequent semiannual installments shall be similarly reduced. The part of each semiannual installment available for the redemption of bonds shall be applied to the redemption of bonds by lot at 100 percent of their principal amount on the interest date next succeeding the date of such payment. The numbers of the bonds to be redeemed on each such interest date shall be drawn by lot in any usual manner. The drawings shall be held in public at the principal oflace of the caja in the city of Santiago. The numbers of the bonds so drawn for redemption shall be advertised at least twice in two daily newspapers of general circulation in the borough of Manhattan, city and State of New York, the first advertisement to appear not less than 30 days prior to the redemption date. The bonds so called for redemption shall on the redemption date designated in such notice become due and payable at 100 percent of their principal amount, and shall be payable, at the option of the holders, in the Borough of Manhattan, city and State of New York, at the office of Kuhn, Loeb & Co., or at the principal office of Guaranty Trust Co. of New York, in gold coin of the United States of America of the standard aforesaid, or in the city of Santiago, Chile, at the office of the Caja, by sight draft on New York City, and shall be paid by the Caja on and after the redemption date at the redemption price aforesaid on presentation and surrender of such bonds at any of said offices, together with all.coupons thereto appertaining maturing after the redemption date. If any bond so presented shall not be accompanied by all coupons maturing after the redemption date, then said bond shall be paid at the redemption price aforesaid less the aggregate principal amount of all coupons maturing after the redemption date not presented and surrendered with said bond; provided, that if more than four such coupons are not presented and surrendered with said bond the fiscal agents or the Caja may refuse to pay said bond. Notice having been so given by publication the bonds so called for redemption shall cease to bear interest from the redemption date unless they shall not be so paid by the Caja upon presentation and surrender thereof with all coupons maturing after the redemption date. This temporary bond is exchangeable for definitive engraved bonds of this issue of like tenor and for a like aggregate principal amount when engraved STOCK EXCHANGE PKACTICES 1187 and prepared, endorsed with the guaranty of the Republic of Chile, corresponding so far as appropriate with the guaranty hereon endorsed. This bond shall pass by delivery. In witness whereof, Caja de Credito Hipotecario has caused this bond to be executed in its name bearing the signature of the director and of its cashier thereunto duly authorized and to be impressed with its seal. Dated April 30, 1928. CAJA DE CKEDITO HIPOTKCARIO^ By , Cashier. SCHEDULE D The Republic of Chile, for a valuable consideration, hereby unconditionally guarantees to the holder of the within bond prompt payment of the principal amount of said bond in accordance with its terms, when the same shall become due and payable, whether at the maturity thereof or otherwise, and of the interest thereon at the rate and at the times specified in said bond, and also prompt payment to the fiscal agents of the semiannual payments mentioned in said bond for the service of interest and amortization of the bonds, when the same shall become due and payable, and the Republic of Chile hereby agrees to endorse on the several definitive engraved bonds to be delivered in exchange for the within temporary bond its guaranty substantially as afore* said with appropriate variations. Dated April 30, 1928. REPUBLIC OF GH.IL% By, COMMITTEE EXHIBIT 16, JUNE 28, _ . 1933 AGREEMENT BETWEEN CAJA DE OEEDITO HIPOTEOAKIO (CHILE) AND KUHN, LOEB & CO, AND GUARANTY CO. OF NEW YORK, MAY 1, 192 9. GUARANTEED SINKING-FUND 6 PERCENT GOLD BONDS OF 1929 Agreement, dated as of May 1, 1929, made in the city and State of New Yorli in the United States of America between Caja de Credito Hipotecario, of Santiago, Chile, organized under the laws of Chile (hereinafter called the "Caja"), acting by His Excellency, Carlos G. Davila, Chilean Ambassador to the United States of America, thereunto duly authorized, and Kuhn, Loeb & Co., a copartnership of the city and State of New York, and Guaranty Co. of New York, a corporation organized under the laws of the State of Delaware (here* inafter called the "Bankers"). In consideration of the mutual covenants hereinafter set forth, it is agreed as follows: 1. The Caja will forthwith create an issue of bonds to be known as its guar* anteed sinking-fund 6 percent gold bonds of 1929 (hereinafter called the " Bonds") limited to $20,000,000 principal amount, to constitute the loan designated " Emprestito oro Caja Hipotecaria, 1929." The bonds shall be issued in accordance with the law of the Republic of Chile of August 29, 1855, establishing the Caja, as amended by decree law no. 743, dated December 15, 1928, which decree law was duly approved by the Commission appointed for that purpose by both Houses of Congress, and mith law no. 4074, dated July 27, 1928, as amended by law no. 4327, dated March 26, 1928, and with the decree of the President of the Republic of Chile, no. 2694, dated June 25, 1929, which au« thorize the guaranty of the bonds by the Republic of Chile. Ten million dol* lars, principal amount, of the bonds are to provide for agricultural loans in. accordance with said laws no. 4074 and no. 4327, and ' $10,000,000, principal amount, of the bonds are to provide for the redemption of outstanding bonds of the Caja. The bonds shall be in coupon form, payable to bearer, shall be dated May 1, 1929, shall mature May 1, 1962, shall bear interest from May 1, 1929, at the rate of 6 percent per annum, payable semiannually on May 1 and November 1 in each year, and shall be in the denominations of $1,000 anct $500 in such proportions as the bankers may request. The principal of, and interest on, the bonds shall be payable without dedue* tion for any taxes, imposts, levies, or duties of any nature, now or at any time 1188 STOCK EXCHANGE PRACTICES iiereafter imposed by the Republic of Chile or by any State, Province, municipality, or other taxing authority thereof or therein, and shall be paid, at the -option of the holders, in the Borough of Manhattan, city and State of New York, at the office of Kuhn, Loeb & Co. or at the principal office of Guaranty Trust Co. of New York in gold coin of the United States of America of or equal to the standard of weight and fineness existing May 1, 1929, or in the city of Santiago, Chile, at the office of the Caja, by sight draft on New York City, and shall be paid in time of war as well as in time of peace and whether the holder be a citizen or resident of a friendly or a hostile state. The bonds shall be authenticated by the certificate endorsed thereon of Guaranty Trust Co. of New York, registrar of the loan hereinafter appointed. The Republic of Chile shall unconditionally guarantee to the holders of the bonds prompt payment of the principal of. and the interest on, the bonds, as and when the same shall become due and payable and also prompt payment to the fiscal agents, hereinafter appointed, of the semiannual payments for the service of interest and amortization of the bonds hereinafter mentioned as and when the same shall become due and payable, and such guaranty shall be endorsed on the bonds. The text of the guaranty shall be substantially in the form hereto annexed and marked schedule B. 2. The text of the definitive engraved bonds shall be in the English language substantially in the form hereto annexed and marked schedule A, and shall l)ear a notation in Spanish substantially in the form shown on said schedule A. The text of the usual certificate of the Treasury Department of the Republic of Chile on bonds of the Caja shall be in Spanish, or in both English and Spanish, as the bankers may elect, in such form as may be required by Chilean law. The Caja hereby authorizes the bankers to cause to be prepared without delay definitive engraved bonds for execution by or on behalf of the Caja, such bonds to be engraved and printed in New York in accordance with the requirements of the New York Stock Exchange. The bankers may issue or cause to be issued toy a bank or trust company in New York temporary interim certificates which, if issued, shall, in due course, be exchangeable without cost or expense to the bankers or the holders, for definitive engraved bonds. The definitive bonds shall bear the facsimile signature of Don Luis Barros Borgono, the director of the Oaja, and shall be manually signed by Don Francisco Bahamondes, the cashier of the Caja, or other duly authorized officer of the Caja. The certificate of the Treasury Department shall be signed manually or otherwise as may be required by Chilean law. The coupons shall bear the facsimile signature of Don Luis Barros Borgono, the director of the Caja. The guaranty of the Republic of Chile endorsed on the bonds shall be manually signed by His Excellency, Carlos G. Davila, the Chilean Ambassador to the United States of America, thereunto duly authorized by the Government of the Republic of Chile or by some other duly authorized representative of the Republic of Chile. 3. Until all of the bonds shall have been retired or redeemed, the Caja shall pay to the fiscal agents as an annuity for the service of interest and amortization of the bonds the sum of $1,400,000 per annum in gold coin of the United States of America of the standard aforesaid, except as hereinafter in this article provided. Such sums shall be paid in equal semiannual installments at least 15 days before the 1st day of May and the 1st day of November in each year as hereinafter in article 5 hereof provided. The fiscal agents shall apply each such installment to the payment of the interest maturing on the next succeeding interest date on the bonds then outstanding and shall apply the part of each such installment not required for the payment of such interest as a sinking fund for the redemption of bonds on such interest date as hereinafter provided. The Caja may, at its option, increase the amount of any semiannual installment to be applied to the redemption of bonds on any semiannual interest date, and, in the event of any such increase, all subsequent semiannual installments may be reduced to an amount sufficient to provide for the semiannual service of interest an°d amortization of the bonds which shall be outstanding after the application of such increased sinking-fund installment to the redemption of bonds, such amount to be calculated as a cumulative sinking fund compounded semiannually at the rate of 6 percent per annum to redeem, on or before May 1, 1962, all of the bonds so outstanding. Any such reduced semiannual installment may similarly be increased in which event subsequent semiannual installments may be similarly reduced. STOCK EXCHANGE PEACTICES 1189 The part of each semiannual installment available for the redemption of bonds shall be applied to the redemption of bonds by lot of 100 percent of their principal amount on the interest date next succeeding the date of suchpayment. The numbers of the bonds to be redeemed on each such interest date shall be drawn by lot in any usual manner. The drawings shall be held in public at the principal office of the Caja in the city of Santiago. The Oaja shall notify the fiscal agents of the aggregate principal amount and numbers of the bonds to be redeemed on each interest date and such notification shall be sent to the fiscal agents at the office of Kuhn, Loeb & Co. in the city of New York so as to be received at said office at least 45 days prior to such interest date. The numbers of the bonds so drawn for redemption shall be advertised at least twice in two daily newspapers of general circulation in the Boroughi of Manhattan, city and State of New York, the first advertisement to appear not less than 30 days prior to the redemption date. If the New York Stock Exchange so requires, the advertisement shall be further published. The bonds so called for redemption shall on the redemption date designated in such notice become due and payable at 100 percent of their principal amount and shall be payable, at the option of the holders, in the borough of Manhattan, city and State of New York, at the office of Kuhn, Loeb & Co. or at the principal office of Guaranty Trust Co. of New York, in gold coin of the United States of America of the standard aforesaid, or in the city of Santiago,, Chile, at the office of the Caja, by sight draft on New York City, and shall be paid by the Caja on and after the redemption date at the redemption price aforesaid on presentation and surrender of such bonds at any of said offices, together with all coupons thereto appertaining maturing after the redemption date. If any bond so presented shall not be accompanied by all coupons maturing after the redemption date, then said bond shall be paid at the redemption price aforesaid less the aggregate principal amount of all coupons maturing after the redemption date not presented and surrendered with said bond: Provided, That if more than four such coupons are not presented and surrendered with said bond, the fiscal agents or the Caja may refuse to pay said bond. Notice having been given by publication, the bonds so called for redemption shall cease to bear interest from the redemption date unless they shall not be so paid by the Caja upon presentation and surrender thereof with, all coupons1 maturing after the redemption date. No expenses in connection with the redemption of the bonds or the operalion of the sinking fund shall be charged against the sinking fund, frut such expenses shall be paid by the Caja. 4. All notices or other announcements relating to the redemption of the bonds, the payment of the coupons, or any other matter in connection with the bonds may be given or made by the fiscal agents, jointly or severally, on behalf of the Oaja as the fiscal agents shall deem proper, but all expenses in connection therewith shall be paid by the Caja. All bonds redeemed through the sinking fund, with all unmatu^ed coupons thereto appertaining and all coupons paid by the fiscal agents, shall be canceled by the fiscal agents and by them delivered to a representative of the Caja for that purpose in the city of New York or sent by registered mail insured to and at the risk and expense of the Caja. All bonds paid in Santiago by the Caja, and all bonds delivered to the Caja in payment of its loans shall be sent, as soon as practicable after such payment or delivery, to the fiscal agents for cancellation at the risk and expense of the Caja, and no bonds delivered to the Caja in payment of its loans shall be reissued or renegotiated by the Caja. 5. So long as any of the bonds shall be outstanding the Caja covenants to? pay to the fiscal agents at their respective offices in the city of New York in gold coin of the United States of America of the standard aforesaid. (a) At least 15 days before May 1 and November 1 in each year the sum of" $700,000 (or, in the event that the Caja shall have increased the amount of any previous semiannual installment as provided in article 3 hereof, such lesser amount as may be due as provided in said article 3) to be applied to> the* service of interest and amortization of the bonds as provided in article 3 hereof,, the first payment to be made at least 15 days before November 1, 1929, and the last payment to be made at least 15 days before May 1, 1962; and if the Caja shall elect to increase the amount of any such semiannual installment as provided in article 3 hereof, the amount of any such increase at least 15 days: before the interest date on which such amount is to be applied to the redemption 1190 STOCK EXCHANGE PEACTICES of bonds. One half of each payment made pursuant to this paragraph (a) shall be made to Kuhn, Loeb & Co. at their office in the city of New York, and one half of each such payment shall be made to Guaranty Trust Co. of New York at its principal office in the city of New York; (b) At least 15 days before May 1, 1962, a sum equal to the principal amount of all the bonds then outstanding, one half of such payment to be made to Kuhn, Loeb & Co. at their office in the city of New York, and one half of such payment to be made to Guaranty Trust Co. of New York. Any amounts in the sinking fund to be applied to the redemption of bonds on May 1, 1962!, at the time of the payment made pursuant to this paragraph (&) shall be credited against such payment; and (c) Such amounts as may be required to meet all expenses incident to the service of the loan, including the compensation and expenses of the registrar; such payments to be made from time to time, on the joint written or cabled request of the fiscal agents, to the fiscal agent or fiscal agents stated in such request. The fiscal agents shall not be required to segregate any moneys paid to or deposited with them as hereinbefore provided. The Caja irrevocably authorizes and directs the fiscal agents and each of them to pay out of the moneys paid to them as hereinbefore provided, the interest on the bonds to the bearers of the coupons upon presentation and surrender thereof, and the principal of the bonds at maturity or on the redemption dates, as the case may be, to the bearers of the bonds to be paid or redeemed upon presentation and surrender thereof, and to apply the moneys in the sinking fund to the redemption of the bonds, and to make every such payment without further formality except as the fiscal agents or either of them may be advised may be necessary to comply with some law or regulation of the United States of America or other public authority therein. 6. The Caja during the life of the loan will maintain in the borough of Manhattan, in the city of New York, a fiscal agency or fiscal agencies of the loan and a registry of the loan. The Caja appoints Kuhn, Loeb & Co. and Guaranty Trust Co. of New York, of the city and State of New York, United States of America, to be fiscal agents of the loan during the life of the loan subject to the terms and conditions of this agreement. The Caja also appoints said Guaranty Trust Co. of New York as registrar of the loan during the life of the loan subject to the terms and conditions of this agreement. 7. Neither the fiscal agents nor the registrar shall be liable otherwise than for good faith and the exercise of reasonable care. The fiscal agents and the registrar and each of them shall be protected in any action which any of them may take in acting on any bond or coupon or any notice, request, or other paper believed by them or it to be genuine as well as in or in respect of any action taken or suffered in good faith under the advice of counsel. Neither of the bankers and neither of the fiscal agents shall be liablefor any act or omission of the other. 8. The Caja shall pay each of the fiscal agents as compensation for their services a commission of one quarter of 1 percent of the amount of all payments made to such fiscal agent pursuant to paragraphs (a) and (b) of article 5 hereof, such compensation to be paid to the fiscal agents at the time when such payments are made to the fiscal agents. The Caja shall also pay the fiscal agents as compensation for their services a commission of one quarter of 1 percent of the principal amount of all bonds delivered to the Caja in payment of its mortgage loans, one half of such compensation to be paid to each of the fiscal agents at the time when such bonds are sent to the fiscal agents for cancellation as provided in article 4 hereof. 9. In case any of the bonds shall become mutilated, destroyed, or lost, a new bond (having endorsed thereon the guaranty of the Republic of Chile in this agreement provided for) of like amount, tenor, and date, bearing the same number and bearing all unmatured coupons shall be issued by the Caja, but only if permitted by and in accordance with Chilean law, and the registrar shall authenticate the same for delivery in exchange for, and upon cancelation of, the bond so mutilated and its unmatured coupons, or in lieu of the bond so destroyed or lost and its unmatured coupons, but in the case of destroyed or lost bonds, only upon receipt by the Caja and the registrar of evidence satisfactory to each of them that such bonds were destroyed or lost, and, if required, upon receipt also of indemnity satisfactory to each of them, in their discretion. The registrar shall incur no liability for such action. 10. The Caja agrees to sell and deliver to the bankers and the bankers agree to purchase from the Caja and pay for $20,000,000 aggregate principal amount STOCK EXCHANGE PBACTICES 1191 of the bonds at the price of 89% percent of the principal amount thereof, being $17,900,000. In the first instance an appropriately executed temporary bond (which may be printed, written, or typewritten) for $20,000,000, in substantially the form hereto annexed and marked " Schedule C", and endorsed with the guaranty of the Republic of Chile, in substantially the form hereto annexed and marked " Schedule D ", shall be delivered on or beore July 8, 1929, unless the bankers consent to postpone this date, to Banco de Chile, for account of Guaranty Trust Co., of New York. The charges of Banco de Chile shall be paid by the Caja. Payment of $8,000,000, being the first installment of the purchase price above stated, shall be made on July 16, 1929, unless the time for such delivery shall be extended by the bankers at the request of the Caja, as above provided, and in that case within the period of such extension on 5-days' notice to the bankers in writing, but such payment shall not be made until after receipt of cable advice from Banco de Chile to Guaranty Trust Co., New York, of the delivery of such temporary bond. Payment of $7,000,000, being the second installment of said purchase price, shall be made on September 27, 1929, and payment of $2,900,000, being the final installment of said purchase price, shall be made on October 24, 1929. Payment of each instalment of said purchase price shall be made by placing the amount thereof to the credit of the Caja in dollars in the city of New York, one half of each such installment to be credited to the account of thq Caja with Kuhn, Loeb & Co. and one half thereof to be credited to the account of the Caja with Guaranty Trust Co. of New York. The amounts so credited to the Caja shall be withdrawn upon the order of such person or persons as may be authorized to draw upon the same by the Caja, and all withdrawals shall be. made in substantially equal amounts from Kuhn, Loeb & Co. and from Guaranty Trust Co. of New York. Kuhn, Loeb & Co. and Guaranty Trust Co. of New York shall each credit the Caja with interest at the current rate which New York Clearing House banks may then be paying on the amounts so credited with them, respectively, until disbursed by the Caja. 11. Forthwith upon the execution of this agreement the Caja will deliver or cause to be delivered to the bankers a prospectus letter or letters containing information concerning the financial position of the Caja and of the Republic of Chile, their debts, income and expenditures, and financial administration and such ..other information and in such form as the bankers may reasonably request and as shall be satisfactory to the bankers' counsel, such letter or letters to be signed by the Chilean Ambassador to the United States of America. 12. It is a condition precedent to any obligation of the bankers hereunder (a) that the Caja shall have promptly delivered a prospectus letter as set forth above in article 11 hereof, and (&) that on or before July 8, 1929, unlessi the time be extended by the bankers at the request of the Caja as hereinbefore provided, and, in that case, within the period of such extension— (1) The Caja shall have delivered to the representative of the bankers in Chile duly authenticated copies of the laws or decrees or other instruments authorizing the issue of the bonds by the Caja and the guaranty of the bonds by the Republic of Chile in accordance with the terms of this agreement, and also duly certified copies of all proceedings of the Caja and all executive and other decrees of the Government of the Republic of Chile necessary to comply with said laws in connection with the execution and delivery of the bonds hereunder; (2) The bankers shall have received an opinion satisfactory to the bankers' counsel in New York, of Chilean counsel approved by the bankers' counsel in New York, approving the proceedings of the Caja authorizing the creation, issue, and sale of the bonds and approving the guaranty of the bonds by the Republic of Chile, in accordance with the terms of this agreement, the sufficiency of all action taken thereunder, the validity of this agreement, and the validity of the bonds, both temporary and definitive, in the hands of holders of whatever citizenship or residence, in accordance with the terms of the bonds and of this agreement; and (3) That the bankers' counsel in New York shall have approved the form of the bonds and coupons. 13. The Caja will pay all stamp and other duties, if any, to which under the laws of Chile or of the United States of America this agreement or the bonds may be subject. The Caja will also pay the cost of printing, engraving, executing, and authenticating the temporary and definitive bonds and interim certifi 1192 STOCK EXCHANGE PRACTICES cates, the expense of exchanging the temporary bond and interim certificates for definitive bonds and of transporting the temporary and definitive bonds to and from Santiago, and the compensation and expenses of the registrar. The Caja will also pay the fees and disbursements of the Chilean counsel referred to in article 12 hereof. 14. The Caja hereby covenants and agrees that no bonds issued or guaranteed by it other than the bonds purchased by the bankers hereunder shall be sold or offered for sale in the United States of America prior to January 1, 1930, except with the written consent of the bankers. 15. If between the date of this agreement and the offering of the bonds for public subscription by the bankers, any conditions of the nature of force majeure or any political, financial, or commercial developments, or market conditions, shall in the opinion of the bankers, whose conclusions in this respect shall be final, render inadvisable the issue to the public of the bonds, or of a portion thereof, then the bankers shall be at liberty, at their option, to give the Caja notice of their determination not to proceed with the purchase of the bonds, or of a portion thereof, and thereupon the obligations of the bankers under article 10 hereof with respect to the purchase of the bonds, or such thereof as they shall have decided not to purchase, shall forthwith terminate, but all the other obligations of either party to the other under this agreement shall continue in force. 16. The Caja hereby covenants and agrees that it will not issue or sell any securities of the Caja in the United States of America, or issue or sell any securities intended to be sold or offered for sale in the United States of America prior to May 1, 1931, without first giving the bankers a 30-day option to purchase such securities on terms and conditions at least as favorable to the bankers as the Caja is able to obtain from other sources at the time when such issue or sale is proposed. If the bankers shall not exercise such option within the 30-day period, the Caja shall have the right to offer such securities elsewhere on terms .and conditions not less favorable to the Caja than those offered to the bankers. The Caja will not reoffer such securities, or accept offers therefor, on terms and conditions less favorable to the Caja without giving the bankers a 30-day option to purchase such securities on such less favorable terms and conditions. The Caja, however, reserves the right to negotiate through an agent who will be instructed to work in accordance with these conditions. 17. The Caja will at the request of the bankers make, or cause to be made, application for the listing of the bonds and interim certificates on the New York Stock Exchange, or the bankers may themselves make such application for and on account of the Caja. The Caja will furnish to the bankers all documents deemed by the bankers to be advantageous for the making of such application, and it will take and undertake all such action as may be requisite in accordance with the requirements of said exchange in order to secure such listing. The cost and expenses of such application, whether made by the bankers or by the Caja, shall be paid by the Caja. 18. Reference in this agreement to the fiscal agents or either of them shall be deemed to include any successor firm or corporation however constituted continuing the business of Kuhn, Loeb & Co. and/or Guaranty Trust Co. of New York. Reference in this agreement to the registrar shall be deemed to include any successor corporation continuing the business of Guaranty Trust Co. of New York. Reference in this agreement to the bankers, or either of them, shall be deemed to include any successor firm or corporation however constituted continuing the business of Kuhn, Loeb & Co. and/or Guaranty Co. of New York. In witness whereof Caja de Credito Hipotecario has caused this agreement to be signed in its behalf by His Excellency, Carlos G. Davila, thereunto duly authorized and Kuhn, Loeb & Co. have signed this agreement and Guaranty Co. of New York has caused this agreement to be signed by its president or one of its vice presidents and its corporate seal to be affixed hereto and attested by its assistant secretary as of the day and year first above written. CAJA DE CREDITO HIPOTEIOARIO, By CARLOS G. DAVILA. KUHN, LOEB & Co. GUARANTY CO. OF NEW YORK, [SEAL] Attest: W. FALION, Assistant Beeretary. By B. ATTERBURY, Vice President. STOCK EXCHANGE PRACTICES 1193 The undersigned accept their appointment as fiscal agents under the foregoing agreement upon the terms and conditions thereof; and the undersigned Guaranty Trust Co. of New York also accepts its appointment as registrar thereunder upon the terms and conditions thereof. K U H N , LOEB & Co. GUARANTY TRUST CO. OF NEW YORK, By BURNETT WALKER, Vice President. SCHEDULE A [ F o r m of definitive bond] CAJA DE CREDITO HIPOTECARIO (CHILE) (MORTGAGE BANK OF CHILE) GUARANTEED SINKING FUND 6-PERCENT GOLD BOND OF 1929, DUE MAY 1, 1962 Letra de Credito al Portador por U. S.—$ oro (dollars americanos) que ganan el 6% de interes annual.—Reembolsable por sorteos semestrales a mas tardar en 33 anos.—Los intereses y amortizaciones se pagan el 1 de Maya y 1 de Noviembre, en cambio del cupon respectivo o de la letra amortizada.— Caja de Credito Hipotecario (herein called the " C a j a " ) , for value received, promises to pay to the bearer on May 1, 1962, the sum of $ , and to pay interest thereon from May 1, 1929, until the principal of this bond is paid, at the rate of 6 percent per annum, semiannually, on May 1 and November 1 in each year, upon presentation and surrender of the coupons hereto annexed as they severally mature. The principal of, and interest on, this bond are payable at the option of the holder, in the Borough of Manhattan, city and Sate of New York, at the office of Kuhn, Loeb & Co. or at the principal office of Guaranty Trust Co., of New York, in gold coin of the United States of America of or equal to the standard of weight and fineness existing May 1, 1929, or in the city of Santiago, Chile, at the office of the Caja, by sight draft on New York City, and will be paid without deduction for any taxes, imposts, levies, or duties of any nature now or at any time hereafter imposed by the Republic of Chile or by any state, province, municipality, or other taxing authority thereof or therein, and will be paid in time of war as well as in time of peace and whether the holder be a citizen or resident of a friendly or a hostile state. This bond is one of an issue of bonds known as the guaranteed sinking fund 6 percent gold bonds of 1929 of the Caja (herein called the bonds) limited to $20,000,000 principal amount, issued in accordance with the law of the Republic of Chile, dated August 29, 1855, decree law no. 743, dated December 15, 1925, law no. 4074, dated July 27, 1926, law no. 4327, dated March 26, 1928, and the decree of the President of the Republic of Chile, no. 2694, dated June 25, 1929, constituting the loan designated " Emprestito oro Caja Hipotecario, 1929," of which $10,000,000, principal amount, are to provide for agricultural loans in accordance with said laws no. 4074 and no. 4327 and $10,000,000, principal amount, are to provide for the redemption of bonds of the Caja. Until all the bonds shall have been retired or redeemed the Caja will pay to the fiscal agents as an annuity for the service of interest and amortization of the bonds the sum of $1,400,000 per annum in gold coin o£ the United States of America of the standard aforesaid, except as hereinafter provided. Such sums shall be paid in equal semiannual installments before the 1st day of May and the 1st day of November in each year, the first payment to be made before November 1, 1929, and the last payment to be made before May 1, 1962. The fiscal agents shall apply each such installment to the payment of the interest maturing on the next succeeding interest date on the bonds then outstanding and shall apply the part of each such installment not required for the payment of such interest as a sinking fund for the redemption of bonds on such interest date as hereinafter provided. The Caja may, at its option, increase the amount of any semiannual installment to be applied to the redemption of bonds on any semiannual interest date, and, in the event of any such increase, all subsequent semiannual installments may be reduced to an amount sufficient to provide for the semiannual service of interest and amortization of the bonds which shall be outstanding after the application of such increased sinking fund installment to the redemption of bonds, such amount to be calculated as a cumulative sinking fund compounded semiannually at the rate of 6 percent per annum to redeem, on or before May 1, 1962, all of the bonds so outstanding. Any such reduced semiannual installment may similarly be increased in which event subsequent semiannual installments may be similarly reduced. 175541—33—PT 3 16 1194 STOCK EXCHANGE PRACTICES The part of each semiannual installment available for the redemption of bonds shall be applied to the redemption of bonds by lot at 100 percent of their principal amount on the interest date next succeeding the- date of such payment. The numbers of the bonds to be redeemed on each such interest date shall be drawn by lot in any usual manner. The drawing shall be held in public at the principal office of the Caja in the city of Santiago. The numbers of the bonds so drawn for redemption shall be advertised at least twice in two daily newspapers of general circulation in the borough of Manhattan, city and State of New York, the first advertisement to appear not less than 30 days prior to the redemption date. The bonds so called for redemption shall on the redemption date designated in such notice become 4ue and payable at 100 percent of their principal amount, and shall be payable, at the option of the holders, in the Borough of Manhattan, city and State of New York, at the office of Kuhn, Loeb & Co., or at the principal office of Guaranty Trust Co. of New York, in gold coin of the United States of America of the standard aforesaid, or in the city of Santiago, Chile, at the office of the Caja, by sight draft on New York City, and shall be paid by the Caja on and after the redemption date at the redemption price aforesaid on presentation and surrender of such bonds at any of said offices, together with all coupons thereto appertaining maturing after the redemption date. If any bond so presented shall not be accompanied by all coupons maturing after the redemption date, then said bond shall be paid at the redemption price aforesaid less the aggregate principal amount of all coupons maturing after the redemption date not presented and surrendered with said bond; provided, that if more than four such coupons are not presented and surrendered! with said bond and fiscal agents or the Caja may refuse to pay said bond. Notice having been so given by publication, the bonds so called for redemption shall cease to bear interest from the redemption date unless they shall not be so paid by the Caja upon presentation and surrender thereof with all coupons maturing after the redemption date. This bond and the coupons appertaining thereto shall pass by delivery. This bond shall not become valid or obligatory for any purpose until it shall be authenticated by the certificate of the registrar hereon endorsed. In witness whereof, Caja de Credito Hipotecario has caused this bond to be executed in its name bearing the facsimile signature of the director and to be manually signed by its cashier thereunto duly authorized and to be impressed with its seal and the interest coupons bearing the facsimile signature of the director to be hereto annexed. Dated May 1, 1929. CAJA DE CREDITO HIPOTECARIO, By ., Cashier. Luis; BARROS PORGENE, Director. [Form of registrar's certificate] This is one of the within described guaranteed sinking fund 6 percent gold bonds of 1929 of Caja de Credito Hipotecario (Chile). GUARANTY TRUST CO. OF NEW YORK, Registrar, By [Form of coupon] $ No On 19__, unless the bond hereinafter mentioned shall have been called for previous redemption, Caja de Credito Hipotecario (Chile) promises to pay to bearer, at his option, in the borough of Manhattan, city and State of New York, at the office of Kuhn, Loeb & Co., or at the principal office of Guaranty Trust Co. of New York, in gold coin of the United States of America of or equal to the standard of weight and fineness existing May 1, 1929, or in the city of Santiago, Chile, at the office of the Caja, by sight draft on New York City, dollars ($ ) without deduction for any taxes, imposts, levies, or duties of any nature now or at any time hereafter imposed by the Republic of Chile or by any State, Province, municipality, or other taxing authority thereof or therein, in time of war as well as in time of peace, and whether the holder be a citizen or resident of a friendly or a hostile State, being 6 months' interest then due on its guaranteed sinking fund 6 percent gold bond of 1929, dated May 1, 1929, No. CAJA DE CREDITO HIPOTECARIO, By LUIS BARROS BORGONO, Director. STOCK EXCHANGE PEACTICES 1195 SCHEDULE B (Form of guaranty) The Republic of Chile, for a valuable consideration, hereby unconditionally guarantees to the holder of the within bond prompt payment of the principal amount of said bond in accordance with its terms, when the same shall become due and payable, whether at the maturity thereof or otherwise, and of the interest thereon at the rate and at the times specified in said bond and in the appurtenant coupons, upon presentation and surrender of said coupons as they severally mature, and also prompt payment to the fiscal agents of the semiannual payments mentioned in said bond for the service of interest and amortization of the bonds, when the same shall become due and payable. Dated May 1, 1929. REPUBOC OF CHILE, BySCHEDULE C [Form of temporary bond] No.CAJA DB CBEDITO HIP0TE0ARIO (CHILE) (MORTGAGE BANK OF CHILE) GUARANTEED SINKING FUND 6-PEiRGENT GOLD BOND OF 1929, DUE MAY 1, 1962 Caja de Credito Hipotecario (herein called the "Caja") for value received, promises to pay to the bearer on May 1, 1962, the sum of $20,000,000 and to pay interest thereon from May 1, 1929, until the principal of this bond is paid, .at the rate of 6 percent per annum, semiannually, on May 1 and November 1 in each year. The principal of, and interest on, this bond are payable at the option of the liolder, in the Borough of Manhattan, city and State of New York, at the office of Kuhn, Loeb & Co. or at the principal office of Guaranty Trust Co. of New York, in gold coin of the United States of America of or equal to the standard of weight and fineness existing May 1, 1929, or in the city of Santiago, Chile, at the office of the Caja, by sightdraft on New York City, and will be paid without deduction for any taxes, imposts, levies, or duties of any nature now or at any time hereafter imposed by the Republic of Chile or by any State, Province, municipality, or other taxing authority thereof or therein, and will be paid in time of war as well as in time of peace and whether the holder be a citizen or resident of a friendly or a hostile State. This bond is a temporary bond without coupons and is one of an issue of bonds known as the " guaranteed sinking-fund 6-percent gold bonds of 1929 of the Caja " (herein called the " bonds ") limited to $20,000,000 principal amount, issued in accordance with the law of the Republic of Chile dated August 29, 1855; Decree Law No. 743, dated December 15, 1925; law no. 4074, dated July 27, 1926; law no. 4327, dated March 26, 1928; and the decree of the President of the Republic of Chile, no. 2694, dated June 25, 1929, constituting the loan designated " Emprestito oro Caja Hipotecaria, 1929", of which $10,000,000, principal amount, are to provide for agricultural loans in accordance with said laws no. 4074 and no. 4327 and $10,000,000, principal amount, are to provide for the redemption of bonds of the Caja. Until all the bonds shall have been retired or redeemed the Caja will pay to the fiscal agents as an annuity for the service of interest and amortization of the bonds the sum of $1,400,000 per annum in gold coin of the United States of America of the standard aforesaid, except as hereinafter provided. Such sums shall be paid in equal semiannual installments before the 1st day of May and the 1st day of November in each year, the first payment to be made before November 1, 1929, and the last payment to be made before May 1, 1962. The fiscal agents shall apply each such installment to the payment of the interest maturing on the next succeeding interest date on the bonds then outstanding, and shall apply the part of each such installment not required for the payment of such interest as a sinking fund for the redemption of bonds on such interest date as hereinafter provided. The Caja may, at its option, increase the amount of any semiannual installment to be applied to the redemption of bonds on any semiannual interest date and, in the event of any such increase, all subsequent semiannual installments may be reduced to an amount 1196 STOCK EXCHANGE PRACTICES sufficient to provide for the semiannual service of interest and amortization &i the bonds which shall be outstanding after the application of such increased sinking-fund installment to the redemption of bonds, such amount to be calculated as a cumulative sinking fund compounded semiannually at the rate of 6 percent per annum to redeem, or or before May 1, 1962, all of the bonds so outstanding. Any such reduced semiannual installment may similarly be increased in which event subsequent semiannual installments may be similarly reduced. The part of each semiannual installment available for the redemption of bonds shall be applied to the redemption of bonds by lot at 100 percent of their principal amount on the interest date next succeeding the date of such payment. The numbers of the bonds to be redeemed on each such interest date shall be drawn by lot in any usual manner. The drawings shall be held in public at the principal office of the Caja in the city of Santiago. The numbers of the bonds so drawn for redemption shall be advertised at least twice in two daily newspapers of general circulation in the Borough of Manhattan, city and State of New York, the first advertisement to appear not less than 30 days prior to the redemption date. The bonds so called for redemption shall on the redemption date designated in such notice become due and payable at 100 percent of their principal amount,, and shall be payable, at the option of the holders, in the Borough of Manhattan, city and State of New York, at the office of Kuhn, Loeb & Co. or at the principal office of Guaranty Trust Co. of New York, in gold coin of the United States of America of the standard aforesaid, or in the city of Santiago, Chile, at the office of the Caja, by sight draft on New York City, and shall be paid by the Caja on and after the redemption date at the redemption priceaforesaid on presentation and surrender of such bonds at any of said offices, together with all coupons thereto appertaining maturing after the redemption date. If any bond so presented shall not be accompanied by all coupons maturing after the redemption date, then said bond shall be be paid at the redemption price aforesaid less the aggregate principal amount of all coupons maturing after the redemption date not presented and surrendered with said bond; provided, that if more than four such coupons are not presented and surrendered with said bond the fiscal agents or the Caja may refuse to pay said bond. Notice having been given by publication the bonds so called for redemption shall cease to hear interest from the redemption date unless they shall not be so paid by the Caja upon presentation and surrender thereof with all coupons maturing after the redemption date. This temporary bond is exchangeable for definitive engraved bonds of this issue of like tenor and for a like aggregate principal amount when engraved and prepared, endorsed with the guaranty of the Republic of Chile, corresponding so far as appropriate with the guaranty hereon endorsed. This bond shall pass by delivery. In witness whereof, Caja de Credito Hipotecario has caused this bond to be executed in its name bearing the signature of the director and of its cashier thereunto duly authorized and to be impressed with its seal. Dated, May 1, 1929. CAJA DE CEEDITO HIPOTECAEIO, , Director. Cashier. By 1 SCHEDULE D [Form of guaranty for temporary bond] The Republic of Chile, for a valuable consideration, hereby unconditionally guarantees to the holder of the within bond prompt payment of the principal amount of said bond in accordance with its terms, when the same shall become due and payable, whether at the maturity thereof or otherwise, and of the interest thereon at the rate and at the times specified in said bond, and also prompt payment to the fiscal agents of the semiannual payments mentioned in said bond for the service of interest and amortization of the bonds, when the same shall become due and payable, and the Republic of Chile hereby agrees to endorse on the several definitive engraved bonds to be delivered in exchange for the within temporary bond its guaranty substantially as aforesaid with appropriate variations. CATE, May 1, 1929. REPUBLIC OF CHILE, By . STOCK EXCHANGE PEACTICE8 THURSDAY, JUNE 29, 1933 UNITED STATES SENATE, SUBCOMMITTEE OF THE COMMITTEE ON BANKING AND CURRENCY, Washington, D.C. The subcommittee met, pursuant to adjournment on yesterdayy at 10 a.m., in the caucus room of the Senate Office Building, Senator Duncan U. Fletcher presiding. Present: Senators Fletcher (chairman), Adams, Goldsborough, and Townsend. Present also: Ferdinand Pecora, counsel to the committee, Julius Silver and David Saperstein, associate counsel to the committee, and Frank J. Meehan, chief statistican to the committee; Carl A. de Gersdorff, Eobert T. Swaine, and M. T. Moore, counsel for Kuhn, Loeb & Co. The CHAIRMAN. The subcommittee will come to order. Mr. Kahn, will you resume the stand, please ? TESTIMONY OF OTTO H. KAHN, A PARTNER OF KUHN, LOEB & CO.—Resumed Mr. PECORA. Mr. Kahn, have you since the termination of the session yesterday been able to refresh your recollection with regard to the stock transactions that I questioned you about yesterday afternoon ? Mr. KAHN. Yes; Mr. Pecora. Mr. PECORA. What is now your recollection as to whether or not on December 30, 1930, you sold 1,000 shares of Electric Power & Light Corporation, 1,000 shares of International Nickel Co. stock, 500 shares of Manhattan-Dearborn Co., 250 shares of Eeynolds Metal Co., and 600 shares of Tubize Chatillon Co. at an indicated loss of $117,584? Mr. KAHN. I made such sales. Mr. PECORA. DO you recall the circumstances under which the sales of those securities were made? Mr. KAHN. Perhaps I may be allowed to read a little statement which is based upon what my counsel told me, to whom I telephoned yesterday evening asking him to ascertain the facts before coming here, so that I would be able to tell you the precise situation as it was. Mr. PECORA. IS it a statement prepared by your counsel or by you ? Mr. KAHN. Partly by him, but mainly upon facts within my knowledge, gone over by him. 1197 1198 STOCK EXCHANGE PEACTICES Mr. PECORA. Have you a copy of the statement with you, in addition to one that you have there? Mr. KAHN. NO, sir. It is not really a formal statement. It is just a memorandum to help me in being sure that my facts are recorded straight. Mr. PECORA. All right. Mr. KAHN. I am informed this morning that the following are the facts with regard to the securities mentioned yesterday as having been sold by me in December 1930, to my daughter Maude. Counsel reports to me that in December 1930 these securities were sold by myself for cash at the regular market prices on that day, and the amount received thereafter duly credited to me. The securities sold include those which you have mentioned, Mr. Pecora. In March 1931 my daughter arrived in this country, and about that time I discussed her affairs with counsel acquainted with English law, who called in English solicitors in order to devise and carry out a plan by which trusts should be set up for her. It was part of that plan that she should turn over to me all of her securities and also cancel the trust which had been set up for her many years ago. Pursuant to this plan she made an assignment to me of a large number of her securities. This assignment was executed on March 30, 1931. It was executed at my house in the presence of counsel. The assignment was dated December 31, 1930. It was executed March 30, 1931. It was dated December 31,1930, because counsel with whom I had consulted as to my daughter's affairs suggested that the cancelation of the old trust and the inception of the new trust take effect as of the close of the preceding calendar year, namely, December 31, 1930. Subsequently and after the execution of the assignment on March 31, 1931, the securities were duly transferred from my daughter to me and duly recorded in the regular1^ way on her books and mine. The securities which I sold in December, and which you mentioned, Mr. Pecora, resulted in a loss of about $117,000. Some time later, namely, about April 1932, the field agent for the Government raised the point that the securities which I had sold in December had been reacquired within 30 days after the sale, and that, therefore, no loss could be allowed on their sale. I was in Europe at the time that this happened, and a protest was filed on my behalf by my attorneys in fact, through Messrs. Stroock & Stroock, in which the contention was that the securities were actually not reacquired until March 30? 1931, which was about 3 months after the date they had been sold. A hearing was held, at which my attorneys were present, and subsequently my original contention was confirmed and the agent's contention was disallowed, both by the revenue agent in charge in New York and by the Deputy Commissioner of Internal Revenue at Washington, to whom the matter had been referred. My counsel arrived this morning and has brought with him the original assignment, a copy of the protest filed with the report of the revenue agent in New York sustaining my contention, and the original letter from the Deputy Commissioner of Internal Revenue also sustaining it. I understand that at the hearing the question was; gone into very carefully as to when these securities were reacquired by me, and that proof was submitted that they were not reacquired until March 30, 1931, such proof being based upon the assignment STOCK EXCHANGE PEACTICES 1199 and the evidence of Mr. Levine who was present when it was executed. Mr. PECORA. Will you be good enough to let me have the statement that you have just read into the record ? Mr. KAHN. This was just jotted down in a rough way. Mr. PECORA. That is the one that has gone into the record. I simply want to use it in my examination. Mr. DE GERSDORFF. Let him have it. Mr. KAHN. There are two or three things that I did not read and which perhaps should not be, for that reason, referred to. The CHAIRMAN. Was there any bulletin issued by the collector of internal revenue or the deputy collector ? Mr. KAHN. SO I understand. I believe it was referred to in this statement. No; I am told it was not. The CHAIRMAN. They print a bulletin of their decisions. I did not know but what this case was one of that kind. Mr. DE GERSDORFF. The Board of Tax Appeals never got as far as that. It was decided by the conferees. We got a letter. Mr. PECORA. The typewritten statement which you have just read into the record begins with the following sentence: I was informed by counsel, who has just arrived this morning from New York, that the following are the facts with regard to the securities mentioned yesterday as having been sold by me in December 1930 to my daughter Maude. The securities referred to, Mr. Kahn, were sold to your daughter in December 1930 by you ? Mr. KAHN. SO I am informed. Mr. PECORA. Did you cause the sale to be made ? Mr. KAHN. It is exceedingly difficult after 3 years to determine whether I caused the sale to be made or whether one of the two or three other men that were concerned in the running of my accounts. It is within my own recollection, because that was a universal rule,, that my daughter Maude was informed of it, that revenue stamps were attached, that the market price was observed, that the necessary money was transferred from her to me. That I can say of my knowledge is the general rule. I cannot say with any precision as appertaining to this particular transaction, but it would be more than surprising if it did not so apply. Mr. PECORA. Were the sales made at one time; that is, the sales of these five blocks? Mr. KAHN. I am afraid I could not tell you, Mr. Pecora. Mr. PECORA. From the fact that they were made on the same date, namely, December 30, 1930, would you say that the sales were made of these five blocks of securities at the one time? Mr. KAHN. That would seem plausible and natural. Mr. PECORA. Were they made through a broker? Mr. KAHN. Again I am afraid I could not say with any definiteness. They would either be made through a broker or would be made through my office. The resulting cash value would be settled through the accounts of my daughter and myself, respectively, in my office. Mr. PECORA. Were those securities listed on any public exchange at the time of the sale ? Mr. KAHN. Yes. Mr. PECORA. Were they sold through the exchange? 1200 STOCK EXCHANGE PEACTICES Mr. KAHN. May I correct myself? I do not know whether the Manhattan-Dearborn was or not. I believe the others were, to the best of my recollection, either on the stock exchange or on the curb exchange. Mr. PECORA. Were the sales of those blocks, which were listed on the public -exchange, made to your daughter through the exchange ? Mr. KAHN. Not necessarily. Mr. PECORA. What is your recollection of the fact ? Mr. KAHN. My recollection of the fact is, I am afraid, nil; but I am told—I mean I could not possibly recollect amongst so many hundreds of transactions which went through my books, whether in each instance a particular transaction went through the stock exchange, the curb market, the Chicago market, or in what other way; but I am told that these particular transactions did not go through the exchange but were settled at the prevailing prices in my office. Mr. PECORA. That is, they were made directly by you to your daughter, and not through any exchange ? Mr. KAHN. SO I understand. Mr. PECORA. I want to ask you whether the purchase price was paid by your daughter directly to you. Mr. KAHN. Yes. Mr. PECORA. In what form Mr. KAHN. The payment was the payment made? was made in cash, or what was the equivalent of cash, debiting her account and crediting my account. Mr. PECORA. That is, by the transference of credits ? Mr. KAHN. Yes. I suppose that is the correct term. To me it was cash. Mr. PECORA. There was no actual cash passed or any token payment, such as a check ? Mr. KAHN. There was presumably—I cannot be positive, but presumably no check passed. I never make payments with checks except for small items. Mr. PECORA. YOU would not be called upon to make the payment in this case; your daughter would be ? Mr. KAHN. The same thing would hold true of my daughter. Mr. PECORA. Had you, prior to the date of the making of the sales of these five blocks of securities, discussed the matter with your daughter ? Mr. KAHN. The matter was discussed with my daughter; yes. Whether it was discussed on that particular day, I could not swear to. The fact was that I had power of attorney for my daughter; my wife had power of attorney for my daughter; and an intimate friend of mine, Mr. Stein, had power of attorney for my daughter. I could not, 3 years after the event, tell you precisely when and by whom the matter was discussed with my daughter. 1 can tell you it was fully approved by my daughter. Mr. PECORA. I thought perhaps, in view of the fact that this transaction was reviewed by the Internal Revenue Department in April of last year, your recollection of the transaction might have been considerably refreshed because of such review. Mr. KAHN. I am afraid you are giving me credit for a more vivid recollection than I possess for matters which, as I tried to say yesterday, I do not necessarily have to remember. There are so many other things that I have to remember. STOCK EXCHANGE PRACTICES 1201 Mr. PECORA. In this particular instance, on the occasion of the review of this transaction by the officials of the Internal Revenue Department, you filed or caused to be filed a protest against the ruling or determination of the field agent who sought to assess a tax upon you ? Mr. KAHN. Yes, Mr. Pecora. I have a number of volunteer advisers here, but I can tell you without the advisers that I was in Europe at the time. Mr. PECORA. At what time ? Mr. KAHN. In June, I believe it was, of 1932, when this protest was filed. It was never signed by me; it was signed by my attorneys in fact. Mr. PECORA. In the typewritten statement which you read into the record, and which I have before me, you say as follows: The securities which I sold in December resulted in a loss of about $117,000. Some time later, namely, about April 1931 Mr. Mr. KAHN. PECORA 1932 it should be. (continuing reading) : The field agent for the Government raised the point You say that should have been 1932 ? Mr. KAHN. Yes; that should be 1932. Mr. PECORA. DO you recollect whether or not at any time prior to the making of the sale of these five blocks of securities to your daughter, you personally had any discussion relating to the proposed sale with your daughter? Mr. KAHN. I could not say, after 3 years, Mr. Pecora. I beg your pardon for emphasizing the 3 years, but I could not say whether I personally discussed it with her prior to the sale. I am quite certain that I did discuss this and many other matters with her in the course of events when she came here, after the sale, and I am quite certain that she approved every sale. She was apprised of it either before or after. Mr. PECORA. Was the purchase price at which these sales were made consistent with the market quotations at the time? Mr. KAHN. TO my own knowledge, I cannot say, but I am quite certain that that was so. I am informed by my mentors that that was the case. The CHAIRMAN. Were you in New York in December 1930? Mr. KAHN. Presumably I was. I could not say positively. I may have been in your own delightful country—I may have been in Florida, where I usually do go in the winter. But we can easily look it up. But either in December 1930 or shortly after that I was in Florida. The CHAIRMAN. Was your daughter in New York then ? Mr. KAHN. My daughter came, I believe, a couple of months afterwards to join me in Florida. Mr. PECORA. DO you recall whether or not at the time you made this sale to your daughter there was a falling market for these securities ? Mr. KAHN. That is trying to tax me for the recollection of things which I would much rather forget. Mr. PECORA. I was trying to find out in asking you that question, Mr. Kahn, what might have motivated you in making the sale; in 1202 STOCK EXCHANGE PRACTICES other words, whether or not you thought at the time you made the sale that the value of these securities would continue to decline in the market, and in order not to sustain any further loss you decided to make a sale of them. Was there any such element that motivated you? Mr. KAHN. That would be a very mean element, and I hope I was not guilty of it. Mr. PECORA. DO you recall what prompted you to make the sale to your daughter at that time ? Mr. KAHN. I do not recall, Mr. Pecora. Mr. PECORA. Had you on other occasions, either prior or since, made sales of securities owned by you to your daughter or any other member of your family at about the end of the tax year? Mr. KAHN. Yes, Mr. Pecora; either I myself or one of those acting on a power of attorney or as recognized agents. Mr. PECORA. Did you do that every year for a period of years? Mr. KAHST. Again I am not certain how frequently the occurrence was. Mr. PECORA. And did you on each of those other occasions when you made sales of securities either to your daughter or some other member of your family at the end of the tax year reacquire by any means whatsoever the securities or like securities ? Mr. KAHN. TO the best of my knowledge, never within 30 days, and very rarely at all. But I have got to say again, to the best of my knowledge, because, strange though it may sound to you, I tried as" much as I could to avoid making personal decisions if I could put them on somebody else's shoulders. Mr. PECORA. Did you have anyone else make decisions for you with regard to your purchase and sale of securities, or did you make those upon your own judgment, impulse? Mr. KAHN. I used yesterday the term " confused ", which was a very bad term to use. What I mant to say is that I had power of attorney for my children, my wife. She had. My friend, in whom I had implicit confidence, Mr. Steinam, had. Another man who was in my office and who was statistician of recognized standing and adviser on value, Mr. Gourrich, had. I could not possibly pick out on what particular instance I made the decision or one of those three made the decision. My secretary sometimes had. Mr. PECORA. Was it customary for persons other than yourself to sell or buy securities for your account without previously consulting you? Mr. KAHN. Yes, sir; quite customary. Mr. PECORA. And persons who did that on occasion bore what relationship to you ? Mr. KAHN (after conferring with an associate). I beg your pardon? Mr. PECORA, What relation did the persons who did that for you on occasion bear to you? Mr. KAHN. They would be friends of mine in whom I had particular confidence. They would be representatives of mine if I was here, and partly for reasons of health and for other reasons, I was unfortunately absent quite a considerable part of the year in the last 5 or 6 years. But if I was here presumably they would come to me and say they thought it was a good thing for me to buy that. STOCK EXCHANGE PRACTICES 1203 Senator TOWNSEND. Mr. Kahn, would they be acting through power of attorney from you? Mr. KAHN. They would be acting through power of attorney from me, or they would be acting as my recognized agents, having been established as such by usage, by tradition, and by recognition both on my part and the part of others. Mr. PECORA. What persons had authority, either by power of attorney or otherwise, to make sales or purchases of securities for you in December 1930 ? Mr. KAHN. My wife through power of attorney; my wife, Mr. Steinam, possibly others, because I was at the point of going away or had just gone away, and I would leave powers of attorney for my absence with my secretary, with Mr. Gourrich. I was pretty free in giving powers of attorney. Mr. PECORA,. Well, were these powers of attorney given by you for the purpose of enabling your attorneys in fact or your representatives to physically consummate such transactions, or were they also intended to enable them and authorize them to make decisions for you without previous consultation with you with respect to the buying and selling of securities for your account? Mr. KAHN (after conferring with Mr. Moore). When I was here Mr. PECORA (interposing). Is the gentleman who is whispering to you one of your counsel ? Mr. KAHN. Yes. Mr. PECORA. I have no objection to his advising you before you answer any question, but I think the record ought to show that any answer you make is made after having been advised in some fashion or other by someone connected with you. Will the gentleman kindly put his name on the record here ? Mr. MOORE. It is on the record. Mr. PECORA. What is that ? Mr. MOORE. It is on the record; and I was not advising anyone. Mr. PECORA. What is that? Mr. MOORE. I say it is on the record. I was not advising him, but I will gladly Mr. PECORA (interposing). If you do not advise him, I think it might be better for you not to interrupt the witness. It might disconcert him. The CHAIRMAN. What is the name? Mr. KAHN. Mr. Moore. Your question was, if I understand it rightly, whether the people Tiaving such power of attorney would act for me when I was in New York. Mr. PECORA. NO; the question was a little bit broader than that. The question was whether or not in giving these powers of attorney to these agents you did so for the purpose merely of legally qualifying them to consummate a transaction for you or did you do it also with a view of having them make decisions without previous consultation with you on the matter of buying or selling securities for your individual account ? Mr. KAHN. I did it for the purpose of my convenience, for the purpose of relieving my mind of a mass of matters, and whilst I 1204 STOCK EXCHANGE PRACTICES was in New York, presumably and to the best of my recollection, they would come to me either before or immediately after, but they were quite at liberty to do so. But the custom, as I recall it, and the natural custom, would be that when I was in New York I would be advised. Mr. PECORA. Well, do you want the committee to understand that in order to relieve you of a mass of detail or labor involved in making decisions as to when you should buy or sell securities without previous consultation with you, you empowered your wife to do that? Mr. KAHN. Oh, decidedly; yes. Mr. PECORA. TO transfer that burden to her, or the responsibility, call it that if you will ? Mr. KAHN. Yes; undoubtedly. Mr. PECORA. YOU do not want the committee to understand that you considered your wife just as well qualified to make such decisions in your behalf as you yourself were? Mr. KAHN. I do not. And I do not believe she would make such decisions except under competent advice, or under what she believed to be competent advice. Mr. PECORA. What is your recollection now as to whether or not the sale of these five blocks of securities to your daughter on December 30, 1930, were made by you directly or by some one acting under a power of attorney for you? Mr. KAHN. My recollection now is nil. Mr. PECORA. That is, you do not know one way or the other what the fact might have been ? Mr. KAHN. I do not. I do not even know whether at that particular date I was in New York or I was in Florida. Mr. PECORA. Would it not be relatively easy for you to ascertain the fact as to whether or not at the time of the making of this sale you were actually in New York ? Mr. KAHN. Oh, yes; quite easy. Mr. PECORA. Will you undertake to do that ? Mr. KAHN. Yes, sir. Mr. PECORA. Before the hearing is over ? Mr. KAHN. Gladly. Mr. PECORA. NOW, do you recall whether or not your daughter, to whom these blocks of securities were sold, was in New York or was even in this country on December 30, 1930 ? Mr. KAHN. Again, I do not recall precisely, Mr. Pecora. My impression is that she came somewhat later. Mr. PECORA. HOW long after did she come here ? Mr. KAHN. I am guessing. And I dislike to guess under oath. Mr. PECORA. DO you recall if she came here later where she was on December 30, 1930—that is, in what country, continent? Mr. KAHN. In France or in England presumably. She may have been in Italy. I could not possibly know without ascertaining. Mr. PECORA. DO you know whether or not she was consulted prior to the making of the sale to her for the purpose of ascertaining whether or not she wanted to buy these securities ? Mr. KAHN. AS I tried to explain, Mr. Pecora, she had several people here who had the power of attorney for her. STOCK EXCHANGE PRACTICES 1205 Mr. PECORA. Were any of those persons the same persons to whom you had given power of attorney? Mr. KAHN. Yes. Mr. PECORA. Were they in all instances the same person ? Mr. KAHN. In all instances the same person? Mr. PECORA. Yes. Mr. KAHN. I should think so. Mr. PECORA. And who were those persons? Give us their names, if you have not already given the names of all of them. You have already mentioned your wife. Mr. KAHN. I have mentioned my wife. Mr. PECORA. And Mr. Steinam—is it? Mr. KAHN. Mr. Steinam, yes. Mr. PECORA. Were there any other attorneys in fact for yourself and your daughter at that time? Mr. KAHN. Attorneys in fact but without having specific power of attorney in all cases, there would be a Mr. Gourrich. Mr. PECORA. What relationship did he bear to you ? Mr. KAHN. He was the chief statistician in my office and advisor on the intrinsic value of securities. I do not now recall whether he had a specific power of attorney or whether he acted by what I might call tacit recognition, by usage and by habit. Mr. PECORA. Was there any special reason for making this particular sale on the 30th of December or just as the tax year was about to expire? Mr. KAHN. I could not recall, Mr. Pecora, what the specific reason was, if any. Mr. PECORA. Isn't it a fact that usually for a period of years during the last week of December of each year in that period you made substantial sales of many blocks of securities ? Mr. KAHN. I believe that is so. Mr. PECORA. That was sort of an annual custom of yours, wasn't it? Mr. KAHN. I believe it was. Mr. PECORA. Was there any reason why you picked out that particular time in each year for the making of sales of substantial blocks of securities? Mr. KAHN. I suppose the reason was, Mr. Pecora, to determine how much I owed the Government. Mr. PECORA. Just what do you mean by that? Mr. KAHN. TO determine what was my loss as compared to my income. Mr. PECORA. Well, do you mean by that that they were made in order to enable you to take what is known as a tax loss ? Mr. KAHN. Tax loss is an ugly term and is an ugly connotation. I suppose it will be abolished forever after you finish with it here. Mr. PECORA. I hope so. Mr. KAHN. But at that time Mr. I. B. LEVINE. Mr. Pecora, may I say something? It may help you. I have gone over all these records last night, and it may help if I can have a little conference with him to refresh his recollection as to all those things. Mr. PECORA. Let us see how far his recollection may need to be refreshed, and if it does need to be refreshed, why, Mr. Kahn will 1206 STOCK EXCHANGE PRACTICES be given every opportunity to refresh his recollection. So far he is answering questions with a more or less degree of familiarity. I think the record ought to show the name of the gentleman who just addressed the committee. Mr. MOORE. Mr. Levine, of Stroock & Stroock. Mr. PECORA. And what are your initials, Mr. Levine ? Mr. LEVINE. I. B. Levine. Mr. PECORA. An attorney? Mr. LEVINE. Yes. Mr. PECORA. Connected with the firm of Stroock & Stroock, New York City? Mr. LEVINE. Yes. Mr. PECORA. Well, you were remarking, Mr. Kahn, in answer to my last question addressed to you, that the term I used, " tax loss J\ had a rather ugly connotation. Mr. KAHN. I also remarked that I hoped that it will be buried forever after you are through. Mr. PECORA. YOU mean the remark or the connotation ? Mr. KAHN. Not the remark. The fact. Mr. PECORA. YOU mean the custom? Mr. KAHN. The custom. I think any law which is apt, however just in itself it may have been intended, which is apt to irritate public sentiment and cause resentment on the part of the people is a bad law and ought to be amended. Senator STEIWER. Aside from public reaction, Mr. Kahn, don't you perceive certain objections to the capital loss and gain law? Mr. KAHN. I do, Senator. I have long felt that it was a risky provision. I know it exists in England, and it works fairly well in England, but England has not got the tremendous ups and downs that we have in this country, and here it really means that the Government speculates on people making money or losing money. In my humble opinion, that is not the business of the Government. The Government ought to be assured of a steady revenue in good or in bad times. Senator STEIWER. Does not the capital-gain tax prevent liquidation sometimes ? Mr. KAHN. It does. Senator STEIWER. Keeps the investor from taking his profit, and therefore leads to inflation—is that so ? Mr. KAHN. Quite correct, Senator. Senator STEIWER. Was it a factor in the great inflation of 1928 and 1929? Mr. KAHN. It was, in my opinion, a very substantial factor. Over and over again I heard people tell me, come to me triumphant,, and show me a slip and say, " Here, I have got such and such profits." And I said, " Well, I congratulate you." And he says, " Wait. I cannot afford to take them. I am not going to take them. I will let them run on." And you are absolutely right that it had a great effect in causing the inflation, which was one of the reasons for the disaster of 1929. The CHAIRMAN. They would not take the profit because of the tax? Mr. KAHN. Yes. Senator BARKI^EY. On the contrary, does not the custom of selling in order to establish a loss at the end of the taxable year create an STOCK EXCHANGE PRACTICES 1207 artificial situation which may depress the value of stocks at the same time ? Mr. KAHN. Exactly the same situation exists there, Senator, plus another undesirable concomitant; namely, that it encourages bear cliques who throw themselves upon the market and say " This is our chance. This is our time. Let us depress the market for a while. We will get a chance to buy back." . I t seems to me that from every point of view it is for the Government a hazardous piece of business to gamble on the country's prosperity in the way of a gain-and-profit provision. It is a bad thing from the point of view of making it easier to inflate and to stop th# natural flow of sales and purchases, of credit, and of currency. It is, as you have rightly pointed out, Senator, an element which injects an artificial depression upon the market, usually at one particular month, and in my opinion all these elements are bad, and if some way can be devised by which the Government will get no less money, by which rich people will pay, as in my own opinion I believe they would pay, more money to the Government, by which this temptation to do that which the law plainly permits is definitely removed for all time and people pay what they manifestly and on the face of their income ought to pay, I think you would have rendered a very great service to the community. The CHAIRMAN. There has been already some modification of that. Mr. KAHN. I know, Senator, to a certain extent that has already been remedied, but I do not believe it has been completely remedied. Senator STEIWER. YOU are the first witness connected with the New York banking fraternity, I believe, who has stated to this committee that the bears are able to depress the market. Do you care to elaborate that statement ? Mr. KAHN. I haven't any doubt about it, Senator. Twice two makes four, and if an artificial offering of the market is created it is bound to have an effect upon the market. Now, the people who may be doing that may be acting in perfect good faith. They are doubtless acting within the law. They may be acting entirely ethically. I think it depends to a large extent upon the motives. If the bear goes about seeking whom he can devour, then I think he is a danger to the community and he ought to be restricted, and to the extent that it is possible he ought to be prevented from damaging the natural flow of prices. I think the natural flow of prices in every way is a thing which legislation, if I may be permitted to say so, ought to encourage in whatever field of activity it may be, and anything which interferes with the natural flow of prices, whether it is artificial and conscienceless or not, exaggerated bull pools or bear pools, are in my opinion a social evil. Senator STEIWER. Are you conscious of a difference of opinion between yourself and Mr. Richard Whitney and other officials of the New York Stock Exchange and other gentlemen who have appeared before the committee and assured us that the evils are very small with respect to this question ? Mr. KAHN. Well, " very small", Senator, is a relative term. In my opinion, they are distinctly social evils, and, in my opinion, they ought to be looked into; and, in my humble opinion, whatever your 1208 STOCK EXCHANGE PRACTICES committee can do to regulate and correct the damaging effect upon the community ought to be done. I am not prepared at this moment and without preparation to suggest any precise remedies; but whilst I do believe that buying activity and selling activity are the proper functions of the stock exchange, I do not believe that artificial activities of whatever kind are the proper functions of any exchange. Senator STEIWER. Mr. Pecora, will you develop this later? We may have included it at the wrong place in the hearing. I do not care to pursue it. Senator TOWNSEND. May I ask you one question: Mr. Kahn, is there a difference, in your judgment, between a " bear raid" and " short selling " ? Mr. KAHN. Yes; I think there is a difference, Senator. Senator TOWNSEND. What would be your description of that? Mr. KAHN. Short selling is the action of one particular individual in reaching conclusions that prices are too high, that events are likely to materialize in the remoter or nearer future upon which he is willing to back his judgment. His judgment is that he had better get out of stocks, and he had better go a little further than that, just as he would buy stocks when he thinks they are very cheap, so he would sell stocks when he thinks they are very dear or when he believes that an event is going to happen which will affect their prices. I think that is, in my opinion, a perfectly legitimate exercise of individual activity. I think when you get" bear raids " you are doing a socially damaging thing, when you get a gang of people together and they say, " Now, we will raid the market. JN"ow we will spread rumors. Now we will create fear. Now we will scare people out of their stocks "— I think they are doing a socially illegitimate thing. Senator TOWNSEND. But the short seller may reach his conclusion by his intimate knowledge with corporations in which he might be a member. Mr. KAHN. Yes. Senator TOWNSEND. And then short sell. What would you think jofthat? Mr. KAHN. I am afraid, Senator, you overestimate the inside knowledge of directors. I do not believe that directors do possess as a general rule that inside knowledge. Mr. PECORA. What prevents them from having it? Mr. KAHN. Indifference, Senator. Not only that, but you cannot run a corporation in such a way that it is taken out of the hands of the executive officials. They must necessarily run the corporation. Your board of directors is supposed to be, to a large extent, a " brain trust." They are supposed to be advisors. They are supposed to keep posted. But I do not believe that a corporation can be run by a body of 15 men. I think it has got to be run by a very small body of men. Mr. PECORA. What is the sense of having large boards, then? Mr. KAHN. Large boards I do not believe in. A reasonably large board, I think, is, to use the expression I used in the common parlance, a kind of a " brain trust." Mr. PECORA. Would you say that large boards, th«L. are resorted to for so-called window-dressing purposes? STOCK EXCHANGE PRACTICES 1209 Mr. KAHN. Partly that and partly because there is a hope that they will bring business. And I do not believe I had quite finished my answer to the Senator's question, or had I ? Senator TOWNSEND. I think you have. I am surprised to hear you say that you did not think the directors would have a knowledge of their own company. Mr. KAHN. I do not say that, Senator. At least I did not mean to say it. I did not mean to imply that they did not have knowledge of their own company, but I doubt whether they would have sufficient knowledge of their own company in all cases, outside of the officers and outside of perhaps an executive committee, to draw from figures put before them, from a report put before them, a definite conclusion as to what is likely to be the future next month of that company. Are things likely to be better: or things likely to be worse? It is vejy largely guessing. It is very largely a sixth sense. I t is developed in the case of the officers, because the officers are in constant contact with their customers, and I suppose out of that they do gain some knowledge which an ordinary director would not possess, a knowledge which is very frequently wrong, as we have seen in 1929, 1930,1931, and 1932. But I wanted to add this thing: As I understand the law—and if it is not the law in my opinion it ought to be the law as soon as possible—but I understand the law is that no director is permitted to sell short stock of his own company. If it is not the law, it ought to be the law. The CHAIRMAN. YOU have been dwelling somewhat, Mr. Kahn, on the general consequences of speculation. While on the subject I just would like to have your view as to the economic effect of speculation generally. Mr. KAHN. I think speculation fulfills a legitimate purpose, provided it is speculation and it is not gambling. I think gambling fulfills no legitimate purpose whatsoever. Mr. PECORA. What are the earmarks of speculation as differentiated from gambling? Mr. KAHN. Well, speculation you must indulge in almost necessarily in every line of business in foreseeing, for instance, whether you should buy your raw material in December or in March; you must hedge against it from time to time. If you are a banker, to a certain extent you indulge in speculation every time you take the responsibility of buying a large issue of bonds. I think it is a part of business which cannot be dispensed with. Again I would say the test is the motive. If speculation is a part of your business, a just part of your business, and not the purpose of your business, then I should say speculation is not only permitted but probably unavoidable. If your purpose is to enrich yourself through gambling then I think you are engaged in an illegitimate transaction. It may be an absolutely legal transaction, but I think from the point of view of the public welfare it is an illegitimate transaction. It is difficult enough to meet the situation in such a way that the distribution of rewards is reasonably fairly effected. The world has not solved that problem, yet. But I think we can all agree in this 175541—33—PT 3 17 1210 STOCK EXCHANGE PRACTICES way, that wealth acquired by gambling serves no good purpose, and that the man who indulges as a profession in gambling is not entitled as a part of the community to any reward. The CHAIRMAN. Would you call trading in stocks and bonds on margin gambling or speculation? Mr. KAHN. I would call that speculation. If people have money they must employ it. Mr. PECOEA. And when would trading in stocks and other securities on margin be gambling, as distinguished from speculation? Mr. KAHN. When it exceeds reasonable proportions. Mr. PECORA. DO you mean when it is successful to an inordinate degree ? Mr. KAHN. Mr. Pecora, I do not mean that. I think it is gambling when it is not in proportion to a man's available means. When the transactions he indulges in are plainly such as to endanger him if they go wrong, are plainly such as to go beyond that wise provision which he owes to his family—in other words, if they are plainly improvident and if they are plainly engaged in for the purpose of sheer gambling, then I think they are wrong. But I see nothing wrong in a man instead of putting all his money into bonds, as against a man going to the extent of his available cash resources counted out to the last dollar—I see nothing wrong in a man saying, "Now I have-got $5,000. I see that Tom or Smith or Brown tell me that it is a good thing to buy some of this stock. I cannot afford to pay for1 all of it, but I can pay for a substantial part of it, sufficient not to risk my own future, not to risk the provisions for my wife, and not to risk paying my insurance premium when it comes due." I think it is a matter of motive, and I think it is a matter of moderation. I do not believe in fact anyone would find any real difficulty in determining when a transaction is a gambling transaction and when a transaction is a reasonable market transaction. Mr. PECORA. YOU say that a gambling transaction contains substantial elements of speculation? Mr. KAHN. It does. Mr. PECORA. And would you say that a speculation transaction contains elements of gambling? Mr. KAHN. That is a matter of Mr. Einstein's relativity. Mr. PECORA. That deals with time and, space, so far as I understand it. I am not one of the 10 or 12 that are said to understand his theories. Mr. KAHN. Well, time certainly enters into the element of speculation. I do not believe space does. Senator BARKLEY. Sometimes space may cut some figure. I t depends on the gyrations. Mr. KAHN. But I think you can say that speculation is an inevitable element in almost all activities of every man who is engaged in business. Mr. PECORA. Well, would you say that all gamblers are speculators, but not all speculators are gamblers ? Mr. KAHN. Yes. And I would be complimenting the gamblers in saying it. Mr. PECORA. SO far as I have been able to understand your distinction to the point that you have attempted to define it between STOCK EXCHANGE PRACTICES 1211 gambling and speculation, the principal element of difference between the two is one of financial ability on the part of the individual who indulges either in gambling or speculation ? Mr. KAHN. Oh, no. Mr. PECORA. Have I misunderstood your philosophy ? Mr. KAHN. I am afraid my philosophy was badly expressed. That was merely said, in response to Senator Steiwer's question as to whether a man is justified—or I believe it was Senator Fletcher's question—as to whether a man is justified in indulging in margin transactions. That was my specific answer to a specific question. I do not think that that is a test. I think the test is the motive to a very large exent—to an almost controlling extent, and the test is what good or what harm is done to the community. I can see distinct good to the community in the smaller men of the country having the opportunity in taking part in profit—sometimes they are not profitable—but in taking part in putting some of their capital into industries and benefiting from the activities of the country. I think that is not only permitted—I think it ought to be encouraged. I think it is not right that the great mass of the people should feel that only the fellows near the stock exchange can benefit from the type of financial advantages which the prosperity of the country and the labor of the country as a whole produces. And I think that to the extent that it is possible to get the plain man, the common man, the man of small means to participate in those benefits—I cordially think he should have that opportunity, and I think it is a social advantage, and I think he is entitled to it. I think that some of the feeling which exists in respect to the stock market activities is this very feeling that you fellows who sit next to the stock market, next to Wall Street, you get all the opportunities of benefiting from it, and we men who are a thousand or 2,000 or 3,000 miles away, we are not permitted to participate. And I think that is wrong. I think they should be permitted to participate within the limits of prudence. Mr. PECORA. And those limits of prudence are suggested by the personal worth, the personal value of the individual, is that right? Mr. KAHN. Yes. Mr. PECORA. SO that a transaction involving, we will say, investments of or risking $5,000 by an individual whose total capital wealth might be $5,000 would be gambling? Mr. KAHN. It would be very unwiseMr. PECORA (continuing). But a similar transaction on the part of a person who might have a capital wealth of $100,000 would not be gambling; is that right? _ Mr. KAHN. Yes. Mr. PECORA. The Mr. KAHN. The market effect is the same, is it not? market effect is the same, except—I would not even say that in the one case it would be gambling and in the other case it would not be gambling. It depends upon the nature of the security involved. Now, if the man having $100,000, as you said, puts $5,000, which is the figure you mentioned, into the wildest kind of cats and dogs, I call it gambling, irrespective of the fact that it is only one twentieth of his capital. On the other hand, if a man, having $5,000, actually puts, let us say, 50 or 60 percent of it in a 1212 STOCK EXCHANGE PRACTICES security which, whilst he believes in its future, whilst he would like to benefit from its capital appreciation is something that by test and trial has proved itself pretty near to being an investment, then he is not gambling. Mr. PECORA. And when a trade is in a security that you call one ©f the cats and dogs you would say that was gambling? Mr. KAHN. Yes. Mr. PECORA. And where it was in a stable security you would say it was not gambling? Mr. KAHN. Yes. Mr. PECORA. Then you recognize, do you not, that some of the trades on the stock exchange are gambling trades ? Mr. KAHN. Yes. Mr. PECORA. IS that because they have cats Mr. KAHN. NO, Mr. Pecora. That enters and dogs listed there? another of the many fields into which gambling is subdivided, and into which socially undesirable practices or socially desirable practices are subdivided. That has nothing whatever to do with the nature of the security. That is an evil in itself. The raiding of the stock market, the violently marking up and down of other people's possessions is in my opinion a social evil. Mr. PECORA. And that occurs frequently through stock exchange transactions or operations, does it not? Mr. KAHN. Perhaps " stock exchange transactions " puts an onus where it does not quite belong. Now, the stock exchange is merely the market place. These transactions may originate many, many miles away from the stock exchange Mr. PECORA. That may be, but the medium through which the transaction is effected is very frequently the stock exchange? Mr. KAHN. Yes. And the fellow who drifts into New York, into Wall Street, nowadays, and goes on a financial spree may be coming from Kalamazoo or anywhere else, and yet he would call himself a financier. He would go into the stock market. He would start to a very large extent transacting bull or bear operations, up and down, as the case may be. I do not believe that we financiers who, I hope, have some training and some experience—I do not believe we are responsible for his doings. We do provide him with a market where Ms transactions can be consummated. Mr. PECORA. DO you not do more than that, Mr. Kahn ? Do not the bankers frequently, and to a very considerable extent in fact, provide him with the funds with which these tranactions are had? Mr. KAHN. If you say bankers, I would say, as a rule, no. If you say commercial banks, my answer would be that, with the law as it was before the Glass bill came into effect, necessarily yes, because Mr. PECORA. Well, when I said " bankers ", I meant not only private bankers but commercial banks. Mr. KAHN. But again not bankers in New York only. Banks and bankers all over the country. Mr. PECORA. I was not limiting the term " bankers " to any geographical district. I was applying it to the profession generally. Mr. KAHN. And I include, Mr. Pecora, the Federal Keserve bank. I include every instrumentality that deals with money and with currency and with credit. And I am not sure in my own mind that the time will not come when you gentlemen will determine that STOCK EXCHANGE PRACTICES 1213 all these instrumentalities should be in one way or another under the Mr. PECORA (interposing). Regulation? Mr. KAHN (continuing). Supervision Mr. PECORA. Eegulated? Mr. KAHN. I do not like the word " regulation." Mr. PECORA. Supervised ? Mr. KAHN. Yes. Under the supervision of some authority which, as I said yesterday, accomplishes functions analogous to the Governor of the Bank of England. The Governor of the Bank of England cannot impose his views, but it is very unhealthy to oppose him. The CHAIRMAN. What I was trying to get at, Mr. Kahn, was your views as to whether or not this spirit of speculation ought to be discouraged or regulated in some way, instead of being turned loose and promoted and assisted, because of its effect and its possible effect on the economic conditions of society generally. Mr. KAHN. If you can find the means of doing that, Senator, I believe you will have accomplished an exceedingly worth-while object. Mr. PECORA. Can you suggest any such means in the fullness of your experience, Mr. Kahn? Mr. KAHN. These last 4 weeks, Mr. Pecora, I have been so busy with going through every transaction of my firm for the last 5 or 6 or 7 years and trying to refresh my mind on it, that I am afraid I have not quite reached the point where I would venture to put any conclusions before you. Moreover, this has happened, Mr. Pecora Mr. PECORA. Before you pass on from that. You do recognize^ if I understand the answer you made to Senator Fletcher's question, that it would be desirable and in the public interest to have some sort of regulation or supervision or limitation—call it what you will—on the part of Government agencies to restrict the gambling in order to avoid the harmful social effects; is that correct ? Mr. KAHN. The harmful social and economic effects. Mr. PECORA. The harmful social and economic effects. You do recognize the desirability of that in the public interest? Mr. KAHN. I do recognize the desirability of that principle; yes. Mr. PECORA. Well, could you not tell this committee now out of the fullness of your experience in the financial world some wayf some method, some means by which that could be done? Mr. KAHN. Possibly 3 or 4 or 5 or 6 weeks ago I might have been presumptuous enough to do that, Mr. Pecora. But this thing has happened. I beg your pardon for spreading my philosophy before you Senators, but until you stop me I will go on. The CHAIRMAN. Proceed. Mr. KAHN. Experience has shown that about every 30 years this country determines that it will change its economic pattern. It did so the last time under Theodore Roosevelt. It has done so now within the last few months. When this economic pattern changes^ things which heretofore were orthodox become hexterodox, become wiped out. For instance, in 1893, before Mr. Roosevelt's time as President, and thereafter during Mr. Eoosevelt's second term, we all swore by the antitrust laws. We all wanted Mr. PECORA. Swore by them or at them ? 1214 STOCK EXCHANGE PRACTICES Mr. KAHN. And at, too. We believed that the benefit of the country required ruthless competition, however wasteful, and the devil take the hindmost. But that there must be competition, there must be survival of the fittest. We believed in that, and our law expressed that theory for 30 years. Now we are about to be converted to the opposite theory—rightly, in my opinion. We believed in the pioneer period, in the law of the jungle. I came here in 1893, and that was just the remnant of, the last 10 years of the industrial pioneer period of the country, and the law of the jungle prevailed, and things were done at that time which would never be thought of nowadays, not even by their perpetrators. And laws were made in the full light of day, with the approval of the community—at least with a knowledge of the community—and no one changed them, and no one had any particular observations to make, except that some of our western friends began to warn us that the thing wouldn't do. And ultimately Mr. Theodore Roosevelt came along and he held up a mirror to the community, and the community did not like the picture which it saw, and very important changes were made* But that was about 30 years ago. And that has happened about every 30 years in this country. Now, 30 years have come and gone since Mr. Theodore Roosevelt, and the " new deal " is now being made. I t is of the utmost consequence economically and socially. I do not believe any man is wise enough at this moment to express any views or conclusions until these new theories and laws have been tested. May be that some of the matters which we have inherited from the past were wise after all and ought to be preserved. May be that the " new deal" is wholly right and can stand as it is. May be—and that, in my opinion, is the more likely way—we will find by test and trial what is worth preserving and what must be changed. And I know a good deal must be changed. And I know the time is ripe to have it changed. Overripe in some ways. Now when such a 30-year period comes then we all must openmindedly adjust ourselves to the new day. Public opinion has spoken. It has expressed itself in legislation. All of us, whether we are reactionaries or whether we are progressives, must attempt to give this new legislation a fair deal. But I do not think any of us is capable to say now " This new legislation is wrong in such and such respects ", or "All of it is right in such and such respects." Some of the things of the past which are valuable ought not to have been chucked out of the window. I think you must give a little time to us who are trying to march along with the procession, you must give us a little time to test the thing out and to ascertain after perhaps 3 months or 4 or 5 months what suggestions we whom you do the honor to consult on this occasion—what suggestions we can make, without going off halfcocked. I do not believe any of us could conscientiously answer your question now until the new laws have had a fair chance to be tested and tried and possibly corrected. The CHAIRMAN. Would you as a kind of a starter, Mr. Kahn, favor the limiting of stock and bond issues to actual and full contribution to the capital of the enterprise? Ought there not to be by law some limitations as to the issuance of stocks and bonds by corporations so that we will know that when they are issued the STOCK EXCHANGE PRACTICES 1215 full and actual contribution to the capital of the enterprise has been made ? Mr. KAHN. By all means. The CHAIRMAN. That has not been the case in the past. Mr. KAHN. I know it has not been frequently the case. I fully agree with you that it ought to be the case. Mr. PECORA. YOU spoke the other day, the first day that you were on the stand, of the perfect mania—I believe I am literally quoting you now—which seized people in this country in 1927 and 1928 and 1929—that is, up to October 24, 1929—on the part of everybody to buy everybody else's business. Mr. KAHN. Yes. Mr. PECORA. And you think, do you not, that that mania made a very formidable contribution to the depression which followed? Mr. KAHN. Yes, Mr. Pecora. Mr. PECORA. What elements went to the encouragement or the development of that perfect mania? Mr. KAHN. What elements did not, Mr. Pecora? What elements did not? Mr. PECORA. Well, conceivably the tides, and so forth, did not. You can think of many things that did not. We want to know what the elements were that made a primary contribution to the development of that mania. Mr. KAHN. I fear I am trying your patience, because it will have to be a fairly complete answer. I think the first thing which developed the mania was the megalomania. We thought we were bigger than we actually are as yet. We thought that we could swing the whole world. We thought that this ought to be the money center of the world, this ought to be the industrial center of the world, this ought to be the greatest exporting country, this ought to be necessarily an importing country, this ought to be the greatest loaning country. There was nothing which at that time we did not believe was practicable in this country. Now, some of the things which we believed were practicable are self-contradictory. You cannot be a great exporting nation without being to a certain extent either an importing nation or a great loaning nation. We did not want to be a great importing nation; we wanted to be a great exporting nation. There was a time when we thought that we would like to be a great loaning nation, and then we did not like the fruit of that tree and we cut down that tree. We said, " We do not want to be a great loaning nation." We said, " We do not want those Europeans to get our bankers to sell us their securities and then find that we are losing our money, and find that we have built up competition besides." Mr. PECORA. When did we get that notion ? Mr. KAHN. After things proved that that was true. Mr. PECORA. That is, after billions of dollars of American capital had gone abroad in the past decade, or up to about 2 or 3 years ago ? Mr. KAHN. Well, billions of dollars is an enormous sum, Mr. Pecora, but many of those billions of dollars—I think a majority of them—came back with interest. Moreover, it has nothing to do with the case, but it does give perhaps an example. If the war had lasted till the spring of 1919, as 1216 STOCK EXCHANGE PRACTICES most of us believed it would, as General Foch believed, as General Pershing believed ,as most of us believed, those 6 months longer would have cost us a great deal more money, a vast deal more money than all the money which after the war we loaned to Europe and to South America, and the result would have been accumulated corpses and not a single economic advantage to this country whatsoever. At least we can say for our loans that we made abroad— and I am not by any means defending all of them, and I am not defending by any means all the methods of them—one can only plead that we were young and that we were learning, and all experience is a costly experience. We were trying to follow the example of England, who had been in that business for generations—and who have also, I might say, lost a great deal of money. I saw statistics the other day that the Council of Foreign Bondholders in England had registered with it 125 foreign bond issues in default. I think we have registered here about 130 foreign bond issues in default. Mr. PECORA. HOW many? Mr. KAHN. One hundred and thirty, I believe. So you see the difference is not very great. And we here! had thought that what was good for England would be good for us. But the economic conditions in England are altogether different, and the means by which England must make her economic living are altogether different from what we have here. However, I admit that we were not wise enough to see it. We had to learn it from experience, and I am sorry that the experience has come in part, in considerable part, out of the pockets of the American investor. It also came out of the pocket of the American banker. And I think all of us would^ be richer and that all of us would be a great deal happier if 1929 had never occurred, neither the beginning nor the ending, certainly not as to the ending. But in this whole period, during which we thought everything was possible, it was stated frequently that a new era had come. University professors proclaimed a new era. Newspapers spoke of a new era. That idea spread all over the country—that here was a chance to make money, a chance not only for the rich man but for all men to make money. The statement was made all over America that with our skill, determination, and organizing capacity, such as can only be found in America, there was a new era, a new opportunity offered to all men. Salesmen went all over America and trained the people in believing in good bonds first, in second-rate bonds afterward, and in bad bonds third, and in good stocks fourth, and in bad stocks fifth. It went all over the country that here was an opportunity the like of which the world had never seen and which would not end for years to come. I think, Mr. Pecora, when you ask me what produced this inania, I must say to you it was a combination of elements in which we bankers, and all the brokers, and many professors, and many teachers of public opinion hkd a fair share and as to which it is difficult to allocate the leading share to anyone. I recall that even so conservative and careful speaking a man as President Coolidge said that for a country of the size of ours our credit structure is not unduly strained. But it was unduly strained, and STOCK EXCHANGE PRACTICES 1217 Senator COSTIGAN (interposing). Mr. Kahn, you surprise me by your statement that the public was invited to invest in bad bonds. Mr. KAHN, Not knowingly so, you understand. Senator COSTIGAN. Can you give us such an illustration ? Mr. KAHN. Not knowingly so, I say, but the result has shown, hindsight has shown, that many bonds which at that time were believed to be justifiably offered to the public ought never to have been offered. I t is a case of hindsight. I cannot too strongly emphasize, Senator Costigan, that at that time there was hardly a sane person in America. We were all swept away by the belief that a tremendous era, spoken of as the new era, had come upon us, and that everything was going to be good. Mr. PECORA. Mr. Kahn Senator COSTIGAN (interposing). Mr. Kahn, were you at that time inviting investments in bonds which you regarded as without merit ? Mr. KAHN. Oh, no. We never did that. We have never done that, and never shall do it. As I stated on yesterday when you were not here, the only foreign bonds we have issued since the war that are in default are the bonds of the Mortgage Bank of Chile. None of our other foreign bonds issued since the war are in default. And we certainly would never have attempted to invite the public to subscribe for bonds that we did not believe to be good. And I believe that same thing is true of Senator COSTIGAN (interposing). What financial advisers suggested the desirability of any investments in bad bonds in preference to good stocks ? Mr. KAHN. NO one in my opinion suggested investing in bad bonds; that is, with the knowledge that they were bad. But the judgment of a good many people as of that time became swayed by their hope, by their belief that things would be different in that new era from what they had ever been before. Senator COSTIGAN. Perhaps I misunderstood the significance of your prior testimony. Mr. KAHN. Yes. And I am sorry if I gave you such a suggestion, and am very happy that you have brought the point out so that it might be cleared up. Mr. PECORA. NOW, Mr. Kahn, in line with the questions Senator Costigan just asked you, about instances where salesmen advised the investing public to buy bad bonds, I recall the testimony given before this committee last February to the effect that the National City Co. had brought out three issues, aggregating $90,000,000, of Peruvian bonds in the face of advice conveyed to them by their experts in Peru that the loans were bad moral, political, and economic risks. Are you familiar with that testimony ? Mr. KAHN. I did not read the testimony; no. I know that that particular loan was brought out; yes. Mr. PECORA. NOW, we probably will resume the discussion that has been engaged in during the past half hour or more, but suppose we now get back to these security sales that you made to your daughter on December 30,1930. Mr. KAHN. Will I be permitted, inasmuch as I now have the privilege of sitting opposite Senator Costigan, to read to him one very short line, and it won't take more than 2 minutes, which does not deal with the sales to my daughter ? 1218 STOCK EXCHANGE PRACTICES Senator COSTIGAN. Certainly. Mr. KAHN. I noticed, Senator Costigan, the other day, when Mr. Lamont was examined, you referred to the fact that the great bulk of the wealth of the country was in the hands of a trifling minority of the people. And Mr. Lamont, apparently, did not have the facts before him to answer. Senator COSTIGAN. Attention was drawn to certain findings of the Federal Trade Commission and of the United States Industrial Eelations Commission on that subject. Mr. KAHN. Might I be permitted to read one line on this subject which I looked up after I noticed that you had made that inquiry of Mr. Lamont: The prevailing apportionment of material award is by no means free from fault. The difficulty of the task of the wide improvement of that apportionment is one of the questions which should challenge the best thought of our statesmen. Still it may be appropriate to mention that the frequently heard assertion that the great bulk of the wealth of the Nation goes into the coffers of a small number of men is erroneous. A carefully compiled statement published last year from an authoritative source— And the source is a book called " National Income and Its Purchasing Power ", by Wilford Isobel King, published by the National Bureau of Economic Research. And Mr. King is to my knowledge a very capable man and thorough scholar. That statement shows that according to the latest official figures then available— And that means the latest year which he considers available in sufficient detail to enable him to base a judgment upon, was 1926— At that time it shows that more than 87 percent of the Nation's total annual income went to those with incomes of $5,000 or less, and that less than 13 percent went to those having incomes above $5,000. It also shows that those possessing annual realized income— He there uses the term " annual realized income " but I do not know what his differentiation of the term is— of $150,000 or more obtained altogether one sixtieth— And that means 1.6 percent— of the Nation's total annual realized income. The statement shows further that if the entire income of those having more than $5,000 a year should have it taken away from them and distributed proportionately among those having less than $5,000 a year, the income of the latter group would be increased by such distribution to the extent of only one seventh. And Mr. King adds: In fact, this change— Meaning the addition of one seventh— would be less than that which occurred from 1922 to 1926 by the general increase in the productiveness of American industry. Senator COSTIGAN. The statement you have read is interesting but does not impress me as being in conflict with the official estimates. Have you, Mr. Kahn, by any chance the figures before you showing the number of wage earners who were earning less in 1926 than sufficed to provide a decent level of subsistence ? Mr. KAHN. I have not, but I did read it and it makes very sad reading. STOCK EXCHANGE PRACTICES 1219 Senator COSTIGAN. Have you any estimate of the aggregate of such income? Mr. KAHN. I assume it would be very considerable. I have no such statistics, and I merely took the liberty of reading this because it seemed to be worthy of your knowledge. You probably did not have it in mind, and I happened to come across it shortly after I read your question to Mr. Lamont. Senator COSTIGAN. I think the facts are fairly well known. Mr. King, I know, is an authority of distinction. Mr. PECORA. NOW, to get back to your stock sales to your daughter, Mr. Kahn, of December 30, 1930. At that time you owned, didn't you, other shares of the same kind of securities as were involved in those sales? Mr. KAHN. SO I observe from my income-tax return; yes. Mr. PECORA. Was there any reason why, at the time you made these sales to your daughter, you did not sell all your holdings of those securities instead of only a part of them ? Mr. KAHN. I assume that my daughter did not have sufficient money to pay for any more than she did buy. Mr. PECORA. Are you now assuming, also, that your daughter actually exercised her independent judgment on the question of buying the securities' which you sold to her? Mr. KAHN. She exercised, Mr. Pecora, her independent judgment as soon as the matter was brought to her knowledge, to that extent that she naturally knew I had more knowledge of securities than she did, and unless she had a particular reason to believe that my judgment in this case was unsound she would very probably feel, she would undoubtedly feel this way: Well, if my father thinks it is a good thing for him to buy, I better buy it. And she would not ordinarily put her judgment against mine. She was entirely free to do so if she wished. Mr. PECORA. My recollection is that you have already testified that at the time of this sale your daughter was somewhere in Europe. Mr. KAHN. Yes. Mr. PECORA. Have you any recollection of the proposal that she should buy these securities from you having actually been submitted to her for determination or judgment? Mr. KAHN. I have no such recollection; but first of all, Mr. Pecora, she had men here who had her power of attorney and who were her authorized agents and who could act for her without consulting her, and consequently when she came here and when I did tell her, as you see, everything that was done, it was absolutely open to her to say: I didn't want that, and Mr. PECORA (interposing). But it had already been done. She had already purchased them. Mr. KAHN. Yes, sir. Mr. PECORA. Before she returned here in 1931. Mr. KAHN. Yes, sir. And it was absolutely open to her to say, if she wanted to say it: I don't want these securities. And, of course, without any doubt, the securities would have been taken back from her, if she had said that. But it was the most remote kind of possibility that she would say any such thing. And people here had the power to act for her, to act in her behalf. 1220 STOCK EXCHANGE PRACTICES Mr. PECORA. YOU mean by that that when she did return to this country, some time in 1931, she was made acquainted with the fact that this sale had been made to her, and she did not repudiate or disavow it ? Mr. KAHN. Oh, undoubtedly. Mr. PECORA. But does that give you any recollection as to whether or not at the time of the making of the sale she actually exercised and had every opportunity to exercise her independent judgment as to whether or not she should buy those securities? Mr. KAHN. Her agents and those having power to act for her did so. Mr. PECORA. They had the power, I presume you mean, under a power of attorney? Mr. KAHN. Yes, sir. Mr. PECORA. But the question I propounded to you had to do with the matter of whether or not your daughter herself, not through an attorney in fact or agent, exercised and was given the opportunity to exercise her individual independent judgment with regard to buying these securities from you December 30, 1930. Mr. KAHN. I could not say, Mr. Pecora; I do not recollect. It is 3 years back, more than 3 years back. I do not even know now where she was at that time. Mr. PECORA. NOW, when did you reacquire these five blocks of securities which you sold to your daughter as you have testified, on December 30, 1930? Mr. KAHN. My memory having been refreshed by my counsel this morning who arrived from New York, I find on this statement that on the 30th of March, 1931, I reacquired those securities. Mr. PECORA. And by what process did you reacquire them at that time? Mr. KAHN. I reacquired them by reason of my daughter turning over to me, executing an assignment by which she turned over to me, a number of securities belonging to her. Mr. PECORA. Including the securities in question? Mr. KAHN. AS to that I would not say. I do not know. Mr. PECORA. Well, you say your counsel has produced here this morning a document purporting to be the original instrument of assignment, which you have just referred to, and I have it before me now. Mr. KAHN. Yes; and that will doubtless show. Mr. PECORA. Will you be good enough to look at it and tell us if you can identify that as to the actual instrument of assignment under which you reacquired these securities, as you say, on March 80,1931? Mr. KAHN. There is attached schedule A, and if you will be good enough, and I haven't the paper before me any more, but if you will be good enough to ask me whether there is any particular security in it or not I will answer. Mr. PECORA. Well, among the securities which you sold to your daughter was one of 1,000 shares of Electric Power & Light. What about that? Mr. KAHN. They are still there. Mr. PECORA. That is, you mean you reacquired them under this assignment? STOCK EXCHANGE PRACTICES 1221 Mr. KAHN. Yes, sir. Mr. PECORA. YOU also sold to your daughter at that time 1,000 shares of International Nickel. Mr. KAHN. And I reacquired those. Mr. PECORA. Under that instrument? Mr. KAHN. Under that same instrument; yes. Mr. PECORA. And you also sold to your daughter 500 shares of Manhattan-Dearborn Co. ? Mr. KAHN. Yes. Mr. PECORA. And you Mr. KAHN. Yes, sir. Mr. PECORA. YOU also reacquired those under this assignment! sold to your daughter 250 shares of Keynolds Metals Co. ? Mr. KAHN. I do not find that here. Mr. PECORA. Look at page 4 of the schedule, a little below the middle of the page, I think. Mr. D E GERSDORFF. What is the name, again ? Mr. PECORA. Eeynolds Metals Co., 250 shares. Mr. KAHN. Yes. Mr. PECORA. And you also sold to your daughter 600 shares of Tubize Chattillon Co! Mr. KAHN. Yes. Here they are. Mr. PECORA. NOW, what were the circumstances, Mr. Kahn, under which your daughter executed this assignment to you ? Mr. KAHN. She executed the assignment to me upon the advice of her English solicitor, or rather upon the advice of her independent counsel, not my counsel, but her independent counsel in Americaf who communicated on the subject with her English solicitor upon her request, and she acted upon his direction. Mr. PECORA. Well, had you had any discussions or negotiations with your daughter at any time prior to her execution and delivery of this assignment to you, with respect to her transferring securities to you under this assignment ? Mr. KAHN. I do not recall that I personally had any such discussions, except, of course, I did discuss from time to time her financial affairs with her, and which was the best way of looking out for her and attending to the property that she had. But I dn not recall any particular conversation on this particular subject Mr. PECORA. Had you expected at that time that your daughter would transfer those securities that are scheduled in that assignment to you? Mr. KAHN. I am quite sure that at that time I had no such expectation. Mr. PECORA. Mr. Chairman, I offer the instrument of assignment in evidence and ask that it may be spread on the stenographic record of our hearings. The CHAIRMAN. Let it be admitted. (The instrument of assignment which was marked " Committee Exhibit No. IT, June 29, 1933 ", is as follows:) COMMITTEE EXHIBIT NO. 17 ASSIGNMENT, MAUD E. MARRIOTT TO OTTO H. KAHN Know all men by these presents, that I, the undersigned, Maud E. Marriott, herewith assign, convey, and transfer to my father, Otto H. Kahn, as of the 1222 STOCK EXCHANGE PRACTICES date of this instrument, all my right, title, and interest, if any, in and to all the securities and property specified in schedule A, annexed hereto and made part hereof; To have and to hold the same unto the said Otto H. Kahn, his executors, administrators, and assigns forever. In witness whereof I have hereunto set my hand and seal the 31st day of December in the year 1930. [SEAL] MAUD E. MARRIOTT. Signed, sealed, and delivered on March 30, 1931, in the presence of: I. B. LEVINB. STATE OF NEW YORK, County of New York, ss: On the 30th day of March 1931, before me personally came I. B. Levine, the subscribing witness to the foregoing instrument, with whom I am personally acquainted, who, being by me duly sworn, did depose and say thajb he'resides in the Borough of Manhattan, city of New York; that he knows Maud E. Marriott to be the individual described in and who executed the foregoing instrument; that he, said subscribing witness, was present and saw her execute the same; and that he, said witness, at the same time subscribed his name as witness thereto. ROSE C. FRIEDMAN, Notary Public. Kings County clerk's no. 499, register no. 1253; New York County clerk's no. 551, registered no. 1F379. Commission expires March 30, 1931. Schedule A Name of security Bethlehem Steel Corporation Canadian Pacific B y Southern Pacific Ry Chase National Bank of the City of New York.. Rudolph Karstadt A.G. common R.M Paramount Publix Corporation. Tide Water Associated Oil Co Bendix Aviation Corporation _ Briggs Manufacturing Co Deutsche Bank Und Disconto Gesellschaft Reynolds Metal Co 1 Electric Power & Light Co _ International Nickel Co Worthington Pump & Machinery Corporation, class A preferred Price Brothers & Co., Ltd __ Canadian Celanese, Ltd., preferred Monsanto Chemical Works _ Cables & Wireless, Ltd.: Cumulative preferred _ Aord. -_ Bord -_ National Dairy Products Corporation Reliance International Corporation: Preferred _ Class A Class B The A. C. Gilbert Co Public Utility Holding Corporation of America: Preferred Common __ Warrants _ Cities Service Co ,. --. Manhattan Railway, consolidated 4 percent 1990 Chemical National Bank, , Amalgamated Leather Co Central Oil Development Co Columbia Trust Co. (certificates of ben. i n t . ) . . D . W. Griffith, class A Poole Engineering & Machine Co.: Class A Class B Manhattan Dearborn Corporation Staked Plains Trust, Ltd Liquidation rights, certificates, class B Treed Eismann Radio Corporation Bonds or 333 800 333 1,344 71,000 950 5,500 125 1,000 500 250 1,000 1,000 150 250 250 Book value Market value $30,636. 00 38,000.00 39,627.00 87,738. 00 28,881. 67 42,714. 24 66,000.00 4,062.50 14,000.00 17,007.50 3,000.00 37,000.00 14,500. 00 $18,731 32, 200 31,759 129,696 10,138 40,493 37,125 2,578 19,750 13,000 4,000 50,500 17,125 2,000 1,998 5,376 2,027 3,800 3,300 125 1,750 714 500 1,000 600 7, 676.25 19,024.85 12,037. 50 16,281. 25 12, 075 9,500 16,500 7,172 1,050 500 1,750 381 6,856.45 611 513 187 13, 608 27 375% 20, 679.33 375 375 23,906.25 250 6,125.00 202^2 3373^ 472^ 271.29 23, 635.00 27,000 2,800 300 300 165 2,000 16,233.75 200 200 .500 875 250 500 Annual income 15,205.86 2,475.00 30.00 11, 250 1,734 93 1,813 1,561 532 4,951 14,141 120,000 600 1 2,330.00 None. 500 110.00 None. 8,750.00 112.00 7,750 4,375 10,000 2,037.50 None. 749 1,125 375 1,080 None. None. None. None. None. None. None. None. 1223 STOCK EXCHANGE PRACTICES Schedule Name of security United Stores Corporation class A voting trust certificates Florida Improvement Corporation E. M. Catts Corporation Russo Asiatic Corporation Mining Trust, L t d . _ National Bellas Hess Co Consolidated Automatic Merchandising Corporation _ Corstalk Product Co., Inc _ Punta Allegre Sugar Co. certificate of deposit-_ Burdines, Inc.: Preferred _ , Common Tubilize Chatillon Corporation (B) __ Ohio Copper Co. of Utah _ Quincy Mining Co _ Big Missouri Mining Co. Ltd. _ Chicago, Milwaukee, St. Paul & Pacific R.R. series A, 5 percent. Cheeka Corporation Mogmar Art Foundation Incorporated Little Cinema Theatres Incorporated _. Gallahad Corporation -. A—Continued Bonds or shares Book value Market value Annual income 87^ 7,500 312^ 450 56% 127.5 $15,594.65 225.00 962.50 116. 64 175. 33 11,249.88 $645 221 1 24 90 1,036 None. None. None. None. None. None. 1,312*6 1,000 1,000 10,001.11 20,500.00 30,025.00 246 1 1,500 None. None. None. 750 750 600 5,000 250 5,000 2,000 15,937. 50 2, 250.66 4,825.00 11, 727.19 7, 546. 50 9,416.98 6,750 750 4,800 1,875 2,000 2,400 5,000 None. None. None. None. None. 250 50 100 50 1,372,811.19 5,000.00 100.00 13, 500.00 1,352,866 649,063 None. 6,871 None. None. None. None. None. Mr. PECORA. Mr. Kahn, what was the consideration, if any, that you paid to your daughter for this assignment of securities ? Mr. KAHN. None, so far as I know. Mr. PECORA. None? Mr. KAHN. NO. Mr. PECORA. Were these securities transferred to you as a gift ? Mr. KAHN. There was no consideration as I understand it, but that is really a legal question. I canceled an existing trust, and upon the advice of her lawyers the thing was rearranged. Mr. PECORA. Well, did you actually pay her anything for the securities which she transferred to you by this assignment, which has been identified by being marked " Committee Exhibit No. 17 " as of this date? Mr. KAHN. YOU are going into legal matters as to which I am very unfamiliar, and especially after this length of time; but my recollection is that these securities were used for the purpose of setting up trusts for her benefit. Mr. PECORA. Well, now, the instrument of assignment, which is very brief, reads as follows: (And counsel read the assignment as shown above.) And there is a certificate of acknowledgment attached thereto by a notary public indicating that on the 30th day of March 1931, I. B. Levine, the subscribing witness, appeared before such notary and deposed that Maud E. Marriott executed the instrument ; but does not set forth the date in the certificate of the acknowledgment when the subscribing witness acknowledged that Maud E. Marriott had executed it. Mr. KAHN. TO the best of my knowledge, it was executed on the 30th of March. Mr. PECORA. Why was it dated on December 31, 1930? Mr. KAHN. To the best of my recollection, it was so dated on the advice of her lawyer, and I believe this statement which was handed in this morning so sets forth; but there were really two lawyers dealing with one another who prearranged certain matters which 1224 STOCK EXCHANGE PRACTICES only concerned my daughter and myself and, to the best of my knowledge, concerned nobody else; and I accepted their advice exactly as she accepted their advice. One lawyer was acting for me; another lawyer was acting for her. But to the best of my knowledge neither of us derived any benefit from the transaction except a different legal set-up for her. Mr. PECORA. DO you know personally of any reason why this instrument, which you say was not signed by your daughter until March 30, 1931, was dated and made effective the 31st of December 1930? Mr. KAHN. The only reason that I know of was that she was so advised by her lawyer. What, precisely, actuated him and his English correspondent I could not possibly tell you. Mr. PECORA. Were you such a stranger to this transaction that you do not know any reason why an instrument which actually was executed and signed on March 30,1931, should have in terms been dated and made effective December 31, 1930? Mr. KAHN. Yes, Mr. Pecora, I was such a stranger to that transaction. I had nothing to gain from it and nothing to lose by it, as far as I knew. I did what the respective lawyers advised, and as far as I knew it involved no one but my daughter and myself.. Mr. PECORA. Did it not involve the Government of the United States in connection with its rights to collect income taxes from you? Mr. KAHN. Not to my knowledge, because the securities which I sold were sold on the 30th of December, in fact. This was1 signed late in March 1931, in fact. I understand, also, from my lawyer, that this very point which you raise, whether the Government of the United States was in any way detrimented by this, was brought up at the time, was argued before the authorities in Washington, and was decided in my favor. I did not even sign the protest myself. It was signed, in my absence in Europe, by some people who were my attorneys in fact. It was done on the advice of my lawyer. I certainly had no intention of doing anything, and had not the remotest knowledge that it involved doing anything, which could be a detriment to the United States Government. Mr. PECORA. NOW, the instrument, exhibit 17, which I shall call the assignment by your daughter to you, specifically says: " Know all men by these presents, that I, the undersigned ", and so forth, " herewith assign, convey and transfer to my father as of the date of this instrument"—and the date of the instrument is December 31, 1930. Why was this instrument executed on March 30, 1931, by specific language made effective as of December 31, 1930? Mr. KAHN. TO the best of my knowledge, it was under the advice of her English and American, lawyers. Mr. PECORA. DO you know when the instrument itself was drafted? Mr. KAHN. I do not. Mr. PECORA. DO you know who drafted it ? Mr. KAHN. I presume it must have been draftee!/ either by Messrs. Stroock & Stroock or by her lawyer; I do not know which. _Mr. PECORA. Her lawyer, you say, was an English solicitor ? Mr. KAHN. Her principal lawyer was an English solicitor with whom she conferred oh the other side. STOCK EXCHANGE PRACTICES 1225 Mr. PECORA. Was her English solicitor in this country at the time this instrument was signed? Mr. KAHN. I do not believe so. Mr. PECORA. Does that suggest to you that the instrument was drawn by counsel here in this country or in New York, instead of by the English counsel or solicitor ? Mr. KAHIST. I believe so. Mr. PECORA. Who was the counsel in New York ? Mr. KAHN. Her counsel here was Mr. Mcllvane, of the firm of Parsons, Parsons & Mcllvane, who had been her grandfather's attorneys many years ago. Mr. PECORA. I notice on the title page of the exhibit, which is the assignment, the printed name of Stroock & Stroock, counselors at law, 141 Broadway, New York City. Does that suggest that this instrument was drawn in that office? Mr. KAHN. Mr. Levine tells me it was drawn in their office. Mr. PECORA. By Stroock & Stroock or one of their attorneys ? Mr. KAHN. He told me before that it was drawn in pursuance of telephonic conversation between him and Mr. Mclivane. Mr. PECORA. Stroock & Stroock are your personal attorneys in many matters, are they not ? Mr. KAHN. In tax matters; yes. May I say—I do not wish to give the impression of diminishing my relations with Stroock & Stroock, who are not only my counsel but my personal friends. In personal matters and in tax matters they are my lawyers. Mr. PECORA. YOU have said something about the Internal Eevenue Department having overruled the field agent who sought to assess a tax upon you by disallowing the deduction of the loss you claim, amounting to $117,584, from your taxable income for the year 1930, because of this sale to your daughter. Have you ever seen the decision that the Internal Revenue Bureau rendered on its review ? Mr. KAHN. Not to the best of my knowledge. Mr. PECORA. Well, do you know when it was rendered ? Mr. KAHN. I am afraid I do not. Mr. PECORA. I understand it was rendered on April 28, 1933, which was just about 2 months ago. Mr. KAHN. Mr. Levine says he has the record and the letter. Mr. PECORA. What was the name of the Internal Eevenue Department's agent in this matter? Mr. KAHN. I do not know, Mr. Pecora. Mr. PECORA. Perhaps your counsel can tell you. Mr. LEVINE. R. T. Mott. Mr. PECORA. Was it not N. C. Shields? Mr. LEVINE, He was in it, too. Shields was the field agent. Mr. PECORA. The field agent, N. C. Shields, sought to assess an income tax upon you for the year 1930 of $16,000 or more, did he not, upon the belief expressed by him that this sale of December 30, 1930, to your daughter was a wash sale? Mr. KAHN. SO I was informed this morning. Mr. PECORA. DO you know that Mr. Shields in a report submitted by him under date of April 28, 1933, to the internal-revenue agent in charge of the second New York division said as follows: Relative to loss sustained by the above-named taxpayer of $117,584, it can be stated that this loss resulted from an ordinary sale on the New York Stock 175541—33—PT 3 18 1226 STOCK EXCHANGE PRACTICES Exchange of securities owned by taxpayer. Taxpayer's daughter, Maud Merriott, also had a substantial sum invested in securities which for personal reasons she gave to her father, Mr. Kahn, by assignment dated March 31, 1930— That should be 1931— which included shares of stocks in four companies of which companies Mr. Kahn had sold his holdings on December 31, 1930. From the above it will be noted that there were no direct dealings between the taxpayer and his daughter with the exception of a mere transfer by gift of the securities owned by the daughter to the father. Are you familiar with that report or memorandum ? Mr. KAHN. NO ; I am not. Mr. PECORA. Was not the field agent in error when he said that the loss resulted from an ordinary sale made by you on the New York Stock Exchange ? Mr. KAHN. I really do not know. Mr. PECORA. Have you not testified here this morning that you made the sale not through the medium of the exchange, but directly to your daughter ? Mr. KAHN. SO I was informed by Mr. Levine. Mr. PECORA. What was the fact ? Mr. KAHN. I do not know the fact. I presume that he knows it, because he was in my office yesterday. Mr. PECORA. His information to you was that the sale was made not through the stock exchange, but directly between you and your daughter ? Mr. KAHN. SO I understood. Mr. PECORA. Have you any reason to doubt the accuracy of that information ? Mr. KAHN. His or the agent's ? Mr. PECORA. The accuracy of the information which your counsel gave to you. Mr. KAHN. Oh, I have complete confidence in my counsel's information. Mr. PECORA. DO you know also that the field agent states in this memorandum or report by him of April 28, 1933— There were no direct dealings between the taxpayer and his daughter with the exception of a mere transfer by gift of the securities owned by the daughter to the father. Does it now seem that that also was an erroneous statement of fact made by the field agent? Mr. KAHN. It was an erroneous statement, evidently, either by the field agent, or it was an error on the part of my counsel. I am inclined to give my counsel the benefit of the doubt. Mr. PECORA. YOU are inclined to feel that your counsel's information to you was accurate? Mr. KAHN. SO I would feel, unless evidence was produced to me to the contrary. Mr. PECORA. Can you suggest any means by which the field agent acquired this misinformation concerning the transaction in question ? Mr. KAHN. I have no knowledge; but inasmuch as I am informed that all my books and all my family's books and records were open to the inspection of the field agent and that he spent days and days STOCK EXCHANGE PRACTICES 1227 in my office going over them, I have not any suggestion to make why any such error, if it was an error, occurred. Mr. PECORA. NOW, when your attorneys protested to the Internal Revenue Department against the original action of this same field agent seeking to assess an income tax of over $16,000 upon you, is it not a fact that the primary basis of the protest was that you were a dealer in securities rather than an investor ? Mr. KAHN. That is a technical matter on which I am utterly devoid of knowledge. Mr. PECORA. The protest was made in your behalf, was it not ? Mr. KAHN. In my absence. Mr. PECORA. In your absence and without communication beforehand with you ? Mr. KAHN. Yes. Mr. PECORA. YOU mean to say that your attorneys would assume a factual basis concerning a transaction involving yourself without first getting in touch with you ? Mr. KAHN. Oh, they would know it better than I did. Mr. PECORA. YOU mean, your attorneys, from the inception, knew more about this sale by you to your daughter than you did ? Mr. KAHN. They knew about this transaction between my daughter and myself much better than I did, and presumably they posted themselves fully as to all the facts before they sent in this protest of which I know nothing and as to the details of which I am to this day without knowledge. Mr. PECORA. YOU said something in the course of your testimony earlier in this session about the sale of this stock by you to your daughter having been entered on somebody's books. Whose books was the sale entered on ? Mr. KAHN. That would presumably, if my counsel is correct, be the books of Kuhn, Loeb & Co.; likewise, of course, my books and her books. Mr. PECORA. AS of what date was this transfer of the securities Tinder this instrument of assignment by your daughter to you entered? Mr. KAHN. That, again, would be a technical matter between the two lawyers that I would not know. Mr. PECOBA. In this typewritten statement which you read into the record this morning in the early part of your testimony on this .subject, I observe the following statement: Counsel reports to me that in December 1930 these securities were sold by myself for cash at the regular market price on that day and the amount Teceived therefor duly credited to me. Were they actually sold for cash, Mr. Kahn ? Mr. KAHN. TO the extent that I understand " cash "; yes. Mr. PECORA. That is, did you actually receive any cash or payment of any kind, or token of payment from your daughter on the occasion of this sale ? Mr. KAHN. If by cash you understand greenbacks or yellowbacks; no. If by cash you understand what everybody in New York does understand, a transfer of value from one party to another party through a book entry or through a check, I did actually receive cash; 1228 STOCK EXCHANGE PRACTICES Mr. PECORA. YOU mean you received a credit on a book account? Mr. KAHN. I'received a credit on a book account; yes. Mr. PEOORA. DO you call that a cash transaction ? Mr. KAHN. I call that 95 percent of the cash transactions which are consummated in this country. Mr. PECORA. That was the kind of cash transaction referred to by you, was it ? Mr. KAHN. Yes. Mr. PECORA. Your statement further proceeds in this fashion: In March 1931 my daughter arrived in this country, and about that time I discussed her affairs with counsel acquainted with English law who called in English solicitors in order to devise and carry out a plan by which trusts could be set up for her and my son-in-law, Major Merriott. What was that plan ? Mr. KAHN. That was the plan which was worked out between Mr. Mcllvane and Mr. Levine under the instructions of the English counsel. Mr. PECORA. What was the plan ? You told us they worked it out; but what was the substance of it? Mr. KAHN. The substance of it was various trusts set up for my daughter; and I suppose that is all that I can state on the subject with any accuracy. Mr. PECORA. What property went into the trust ? Mr. KAHN. The property which she turned over to me. Mr. PECORA. That is, the property consisting of the securities that are set forth in the schedule attached to the assignment, exhibit no. 17? Mr. KAHN. Not necessarily all of them; presumably the bulk of it. Mr. PECORA. Did your daughter have the sole beneficial title to these securities that are enumerated in this assignment ? Mr. KAHN. Yes. Mr. PECORA. And your daughter was turning over a very considerable amount of property to you for the purpose of your setting up a trust for her benefit; that is, property that she already owned? Mr. KAHN. I beg your pardon? Mr. PECORA. DO you want us to understand that your daughter turned over to you property consisting of these securities as set forth in this assignment, which she already owned, in order that you might set up a trust for her benefit ? Mr. KAHN. That question presupposes legal knowledge and detailed knowledge which I do not possess. I hate to tax your patience, Mr. Pecora, by repeating that, as to the details, they were left to the respective lawyers, Mr. Mcllvane, primarily; and whatever I might say would be a guess as to those details with which I certainly am not familiar. The CHAIRMAN. Were those securities actually delivered to you in trust for your daughter ? Mr. KAHN. They were delivered to me to be dealt with as my daughter, under the instructions of her lawyer, would advise me and as I saw fit. Of course, I saw fit to deal with her and with those securities in the way that I thought was best, under legal advice, for her interests. Mr. PECORA. I observe in going over this instrument of assignment and hurriedly scanning the schedule of securities attached to it, or STOCK EXCHANGE PRACTICES 1229 shown upon it, rather, that there is one block of securities shown to have a value of $1,352,866, the security in question being designated as Oheka Corporation. Did your daughter have actual beneficial title and ownership of that block of securities which she turned over to you? Mr. KAHN. She did, Mr. Pecora; but the figure is, again, one of those things to which I have referred before, where optimism and reality clash. They were worth nothing like that. They consisted mainly of real estate; and some of that real estate, you know, even at that time—real estate was not worth the price that our hopes dictated. Mr. PECORA. In addition to this schedule indicating a market value of $1,352,866 for that security, the schedule indicates a book value for that security of $1,372,811.19. So, apparently, the fact that there was a difference between market value and book value was recognized in this instrument of assignment? Mr. KAHN. The book value was equally under the influence of that conflict between optimism and reality. Mr. PECORA. Who arrived at those estimates of market value? Mr. KAHN. They were no doubt got up from the figures in which they appeared in the books. Who determined those figures I do not really know. They did not have any significance to speak of. Mr. PECORA. Had you previously to the making of this assignment delivered to your daughter all of the securities that are listed in schedule A attached to the assignment ? Mr. DE GERSDORFF. That whole thing, you mean? Mr. PECORA. Yes. Mr. KAHN (after conferring with associates). I have been trying to get information all around and have been unsuccessful. Mr. PECORA. What is your best recollection ? Mr. KAHN. Her books would show—in England, presumably. Mr. PECORA. But what is your own best recollection ? Mr. KAHN. Oh, my recollection is simply that over a term of years I used to make gifts to her, and sometimes she would buy things, and presumably that is the explanation. I do not know it of my own knowledge, but her books would show. Mr. PECORA. DO you recognize on the schedule of securities attached to this assignment, exhibit no. 17, any securities that you had previously delivered to your daughter, either as a gift or by virtue of any sale ? Mr. KAHN. NO, Mr. Pecora. I recognize, of course, the five which were sold to her in December; but as to the rest I would be guessing, and I can do nothing better than guess. I refer you to the fact that her books would show. Mr. PECORA. Mr. Kahn, can you supply the committee with a list of names of the securities that you sold to your daughter at the end of any other tax year? Mr. DE GERSDORFF. We will look it up. We cannot get it today, Mr. Pecora. Mr. PECORA. Mr. Kahn, did you for any of the years 1930, 1931, or 1932 pay any income tax to any other jurisdiction than the United States—to any foreign jurisdiction? Mr. KAHN. What years are those? Mr. PECORA. 1930, 1931, and 1932. 1230 STOCK EXCHANGE PRACTICES Mr. MOORE. I will read it from the return, Mr. Pecora. In 1930 he paid $4,480.26, item 54, income tax paid to a foreign country or United States possession. Mr. PECORA. What country was that? Mr. KAHN. I assume it must have been England, because I assume that these items are income deducted at the source on English securities which I own. I cannot imagine wjiat else they could be. They must be that. Senator TOWNSEND. It was not a property tax ? Mr. KAKN. NO. Mr. PECORA. Was there any other tax paid to any other foreign jurisdiction ? Mr. MOORE. In 1931 there is no such tax entered here. In 1932 there is apparently no such item. The CHAIRMAN. We will take a recess now until 2 o'clock. (Whereupon, at 12:30 p.m., a recess was taken until 2 p.m.) AFTERNOON SESSION Upon the expiration of the noon recess the hearing was resumed at 2 o'clock p.m. The CHAIRMAN. The committee will come to order, and you may proceed, Mr. Pecora. TESTIMONY OF OTTO H. KAHN, A PAETNEE OF KTHDT, LOEB & CO.—Resumed Mr. PECORA. Mr. Kahn, before we pass on from the subject of the sales of securities on December 30, 1930, which was the subject of your examination this morning, let me ask if you have any further statement on that subject you wish to make to the committee without the necessity of being asked any questions concerning it. Mr. KAHN. None that I know of, Mr. Pecora. Mr. PECORA. In the questionnaire that was submitted to your firm by counsel for the committee several weeks ago you were asked to give us the names of all other participants and the extent of their respective participation in syndicates handling issues which your firm managed. Mr. KAHN. I believe we have done so, haven't we ? Mr. PECORA. Yes; you have. And in response to that request your firm furnished us with various lists, which we have caused to be consolidated into one list, which I will now show you, which I believe has been already examined by your firm and checked by them and found to be a correct consolidation of such lists. Will you look at it and tell us if you can identify it as such ? Mr. STEWART. We have never seen it in this form, Mr. Pecora, but I presume it is correct, because I gave them the facts. Mr. KAHN. We have not seen it in this form, but I have no doubt of its correctness. Mr. PECORA. Then, subject to any correction that you might want to make on it, I offer it in evidence and ask that it be spread on the record. The CHAIRMAN. Let it be admitted and put in the record. (Consolidated list of participations was thereupon marked " Committee Exhibit 18, June 29, 1933." See p. 1262.) STOCK EXCHANGE PRACTICES 1231 Mr. STEWART. I have no doubt it is all right, Mr. Pecora, because I gave them the facts. Mr. PECORA. The lists which we obtained from you in answer to that request in pur questionnaire did not include all of the affiliations of the various individuals shown on the lists. The consolidated list just received in evidence purports to give those corporate affiliations ? Mr. STEWART. That is right. Mr. PECORA. They were prepared from authorized lists of boards of directors and other authentic information. You may check against them in any way you want to and advise us of any correction you wish to make. Mr. STEWART. Surely. Mr. PECORA. Mr. Kahn, who selected the gentlemen whose names appear on exhibit 18 as persons who were invited or were to be invited to participate in these various syndicate operations of your firm? Mr. KAHN. That would be a conglomerate invitation, Mr. Pecora. In the first instance the name would be set down by the gentleman who manages our syndicates, which is Mr. Bovenizer, Mr. George Bovenizer. Then my partners and I would go over it and see whether we wanted anything added or taken away. Mr. PECORA. I S it the fact that various gentlemen whose names appear on this list were invited and permitted to participate in these various syndicate operations under circumstances which did not require them to actually put up any money ? Mr. KAHN. I do not think that is a fact, Mr. Pecora. They were treated exactly like any other syndicate participant was treated. Ordinarily, I am glad to say, our batting average is that we succeeded ^ in selling our bonds fairly quickly, and there was usually no need to call for money to be put up. Sometimes there is, I am sorry to say. Mr. PEOORA. Those instances where there is such need are very, very few, aren't they? Mr. KAHN. Perhaps not as few as for peace of my nights I would like them to be, but they are few, and these people whom you refer to are treated exactly as every syndicate participant is treated. It does happen that some bonds or securities remain and that we are willing in their case, as we would be willing in other cases if we have available cash, to carry them under security of the particular bond to which that syndicate relates, but ordinarily that is not the case. Ordinarily it is not the case. Many of them when there are amounts to be taken up because the syndicate has not been wholly successful, take up those amounts and pay for them. I should say a majority of them, a great majority of them. Mr. PECORA. A great majority of them did what? Mr. KAHN. A great majority of them, I should say, of those whom you mentioned on that list, if there are bonds to be taken up because the syndicate has not been wholly successful, the majority of them would take them up and pay for them. Some of them would say, "Are you willing to carry them ? " And if we have the money available, why, we are quite willing to accommodate them, just as we would accommodate any other syndicate participant. Mr. PECORA. Would it be possible for you, Mr. Kahn, in going over this list with reference to the various issues in the syndicates in which these gentlemen were invited to participate to tell this com 1232 STOCK EXCHANGE PKACTICES mittee in which issues the need arose for calling upon any of these participants to actually put up any of their money ? Mr. KAHN. I think I can. Perhaps I can abbreviate my answer by saying a considerable number of those participants were relatives who kept their account in our office and about whose financial standing we are constantly advised. Mr. Stewart says they are not on that list. I thought they were. I beg your pardon. Mr. PEOORA. I would say in casually glancing over this list that a large number if not a majority of the names appearing thereon are the names of men who were executive officers of various railroad corporations. Mr. KAHN. Railroad and other corporations; yes. Mr. PECORA. And most of the railroad corporations with which these men were affiliated are railroad corporations for which your firm did financing, are they not? Mr. KAHN. Yes. Mr. PECORA. Did your firm handle issues that found their way into the portfolio of large insurance companies ? Mr. KAHN. Yes, sir. Mr. PECORA. I notice among the names on this list that of Mr. F. H. Ecker, president and director of the Metropolitan Life Insurance Co. Mr. KAHN. Yes. Mr. PECORA. That is one of the largest insurance companies in the country, isn't it? Mr. KAHN. I t is; yes. Mr. PECORA. If not in the world ? Mr. KAHN. Yes. •Mr. PECORA. And has perhaps the largest cash resources of the entire country ? Mr. KAHN. I think so. Mr. PECORA. And hence is the largest potential buyer of railroad bonds ? Mr. KAHN. I think so. Mr. PECORA. NOW, there are instances where the Metropolitan Life Insurance Co. purchased an entire issue of bonds put out by your firm? (Mr. Kahn conferred with Mr. Stewart and Mr. de Gersdorff.) Mr. PECORA. By that I meant the participation of your firm in such issues. Mr. KAHN. There may be one or two very small issues not amounting to anything; no large issue. And possibly, Mr. Pecora, before we leave Mr. Ecker I should say in justice to him that he never had a syndicate participation in any bond issue which his corporation would legally be permitted to invest in, and that the total profit realized on his participations in the course of 5 years amounted to less than $7,000. That is, he got altogether an average in his participations over the 5 years of $1,400 a year. He was never in any syndicate in which his company bought bonds. Mr. PECORA. Then his participation, I assume from your statement, in these issues was on a very small scale ? Mr. KAHN. On a very small scale; yes. STOCK EXCHANGE PRACTICES 1233 Mr. PECORA. Was his participation invited as a courtesy to him or because you felt that you needed his financial assistance in any way with respect to those issues in which he was invited to participate? Mr. KAHN. Perhaps once more, all saving your time, I can answer to the viewpoint which actuated us in offering this kind of participation to a very small list o,f men. By no means are those all with whom we did business or with whose company we did business. These men, all of them, are men known for their outstanding ability and for their wide information on particular fields, either a field of life insurance and investment, field of railroading, field of industry. I t was of very great value to us—they are all old friends of ours—to be able to go to them and get their judgment. We would not hesitate, for instance^ in the case of Mr. Ecker, to telephone him and say, " In your opinion do you think that this is a useful and favorable time for bringing out a large bond issue, or do you think that the market in general is not now favorably disposed toward it? " He would give us the benefit of his opinion. We would not hesitate in going to every other one on that small list and say, " Please give us the benefit of your opinion. What do things in the country look like?" For instance, let us say it is Newcomb Carlton, of the Western Union. We would go and we would say to him, " Now, you get information all over the country as to how industrial conditions are. It would be very helpful if you would give us the benefit of your view of what things are looking like." They would be good enough to permit us to get that opinion. In return for that the only thing we could do to show our gratitude and our appreciation and our recognition, and not to feel that we are absolutely sponging upon them, is to give them a little token of courtesy and good will when the opportunity presented itself, amounting to insignificant sums; not with the idea that these sums could possibly have any effect upon them, but with the idea that we felt if we could we ought to make a gesture of courtesy and good will. That was really in all cases the actuating motive why we offered these men these small participations, and that was true of Mr. Ecker, and it held good of everybody else on that list. Mr. PECORA. Most of the corporations with which many of the men whose names appear on this list were affiliated and are affiliated are corporation clients of your firm, are they not ? Mr. KAHN. A client of our firm ? Yes, sir. Mr. PECORA. In other words, they are corporations who maintain deposit accounts with you, as well as corporations that engage your firms to do financing for them ? Mr. KAHN. Yes, sir. Mr. PECORA. Were these participations which were accorded to them by your firm in the nature of reciprocity by your firm to these gentlemen for any service they rendered or any usefulness that they were to your firm ? Mr. KAHN. In the way, if I understand the implication of the question, of inducing them to do business with us, most positively not. You must realize that those men, being in important positions, if we had wanted to induce them, could not possibly be induced by relatively trifling participations. They were, as I have said before, tokens of good will and an attempt to give some little recognition 1234 STOCK EXCHANGE PRACTICES for the liberty which we took in asking their opinions on important matters. We haven't very many close affiliations, as some other bankers have. We largely depend upon our own judgment. And it is of great value to us to be permitted to go and ask other people who have a country-wide knowledge of things. Mr. PECORA. Well now, along that line, the National City Co. was an investment or security selling company which competed to a certain extent with your firm, wasn't it? Mr. KAHN. Yes; except that we were not a retail organization and they were. Mr. PECORA. But in bringing out issues they competed with your firm? Mr. KAHN. Yes, sir. Mr. PECORA. In addition to issuing securities they also sold them through a selling force that they maintained ? Mr. KAHN. Yes. Mr. PECORA. I notice the name of a gentleman who was the chairman of that company appears on this list. Mr. KAHN. Yes. Mr. PECORA. A man named Charles E. Mitchell. Mr. KAHN. Yes. Mr. PECORA. Was he permitted to participate—or rather invited to participate—in these various syndicate operations of yours because from time to time you found it necessary to seek his opinion or advice on whether or not a given time was a good time to bring out an issue of bonds ? Mr. KAHN. The participation profits of Mr. Mitchell in those 5 years aggregate about $2,600 a year. Mr. PECORA. Whatever it was, was the invitation to him to participate in your syndicate operations extended as a token of your appreciation for any assistance you got from him by way of advice as to whether or not a given time was a propitious time to bring out an issue ? Mr. KAHN. Decidedly so. We would not hesitate to go to Mr. Mitchell and compare views with him. Mr. PECORA. Would you go to a competitor for such advice and opinions ? Mr. KAHN. Yes. Yes; because the case where we would go to him would not be a case where he and we would be in direct and immediate competition. It would be a case where we were considering certain business, and we would say, "Mr. Mitchell, what do you think of the present situation ? " We might even tell him what it was about. He would not hesitate to give us his opinion. That would not prevent him from competing with us if he felt like it. Mr. PECORA. That leads me to the observation that the competition between banking houses was rather of a friendly nature. Is that observation an unsound or an unwarranted one? Mr. KAHN. I hope that competition is of a friendly nature, and ought to be. I have said before that I know of nothing more damaging than cutthroat, ruthless competition. Mr. PECORA. In view of the fact that you testified that these invitations to participate in your syndicates were extended in appreciation of aid or assistance that you got from these various gentlemen, or to establish or maintain good will and friendly relations, would STOCK EXCHANGE PRACTICES 1235 that further lead to the observation that the competition is of a character which was founded upon mutual good will? Mr. KAHN. May I be allowed to slightly amend the query ? I did not say appreciation. I said we felt it incumbent upon us, having taken the liberty of inviting the opinion of these gentlemen from time to time, as it seemed valuable to us—we felt it incumbent upon us, not as a reciprocity, not as a token of appreciation, but as a matter of ordinary courtesy and good will, to invite them to small syndicate participations if the occasion arose on exactly the same terms as everybody else, at exactly the same risks that everybody else took. Mr. PECORA. Did other competing firms or other banking houses extend similar invitations to your firm? Mr. KAHN. Yes. Mr. PECORA. Is this a sort of a common occurrence? Mr. KAHN. Yes; quite a common occurrence. Mr. PECORA. NOW, the Chase Securities Corporation, which is the investment affiliate of the Chase National Bank, is also a competitor of your house in the issuance and promotion of securities ? Mr. KAHN. The First National Bank? Mr. PECORA. The Chase. Mr. KAHN. The Chase, yes. Mr. PECORA. I notice the name of Mr. Wiggin, the former head of that company, also on these lists. I assume from your testimony that he was invited to participate on these various occasions from the same motive you have already given expression to? Mr. KAHN. Yes. Senator BARKLEY. Where in a given case you would call on Mr. Mitchell or anybody else for his suggestions or advice about the condition of the market, or the propriety of the occasion with reference to one of these issues, and his advice was negative, or his suggestion was that it was not a good time, in the event that you went ahead with it anyway would you take him in in the investment, regardless of his advice? Mr. KAHN. Oh, quite regardless of his advice. We would take him in, as I say, annually a couple of times, over a period of 5 years. Quite irrespective of whether his advice was good, bad, or indifferent. We felt it was no more than reasonable to Senator BARKLEY. Your invitation was not based on their advice in any particular case then? Mr. KAHN. NO. Senator BARKLEY. But just as a sort of a continuing courtesy? Mr. KAHN. A continuing courtesy; yes. Mr. PECORA. And to maintain this spirit of good-will that you referred to; is that right? Mr. KAHN. Right. Senator BARKLEY. The amount of profit so far named here was apparently not sufficient to warp anybody's judgment as to the wisdom or unwisdom of any issue? Mr. KAHN. I am quite sure, Senator, knowing the salaries, compensations, and opportunities of these men, that $1,500 or $2,000 or $2,500 a year could not possibly tempt them one way or another. But they would say: " Well, these people are trying to be decent when the opportunity arises. They have not got much to give which is very 1236 STOCK EXCHANGE PRACTICES profitable." Because our business was mainly in bonds, and bonds usually do not permit of large profits. Mr. PECORA. Would one be guilty of giving expression to a violent or wild imagination if he were to assume from these acts of courtesy and mutual goodwill that an effort was made to obtain some Utopian state of business ? Mr. KAHN. I do not believe that we will ever come any nearer to that, Mr. Pecora, than we are with the present attempt of the industries bill. I hope very much it will lead to something quite different from what existed in the past. Senator BARKLEY. YOU are in sympathy with the Industrial Eecovery Act then, I gather ? Mr. KAHN. Yes; I am in sympathy with the purpose of it entirely. Senator BARKLEY. That is what I mean. Mr. KAHN. Entirely. As I said this morning, I believe we will have to find by test and trial what, if any, changes are required. I am wholly in sympathy equally with the purpose of the securities bill. In fact, I made what I tried to render an eloquent speech 15 years ago on this very subject, urging this very thing. But if you ask me whether I believe that as it is now drawn it will not require certain modifications, not in the interest of bankers but in the interest of those services which bankers ought to render to industry and to the economy of the country, then I am afraid I will have to say I think there are a few points in there which experience will show will need to be changed. Senator BARKLEY. That was true of the Federal Reserve Act and is true of practically every new great step in legislation? Mr. KAHN. Yes; I agree. I just wanted to make my answer plain. Senator ADAMS. That is rather a compliment to the law, that you think it needs only a few corrections. Mr. KAHN. I think it needs a few corrections; yes. Mr. PECORA. NOW, Mr. Kahn, you have already testified in substance to the effect that most of the corporation financing done by your firm throughout its history has been for railroad corporations? Mr. KAHN. Yes. Mr. PECORA. NOW, in undertaking financing operations involving the issuance of bonds for and on behalf of a railroad corporation whose interests particularly do you deem it proper for your firm to serve ? Mr. KAHN. We attempt to the best of our ability and our conscience to serve equally the public and the corporation. Not, as I said yesterday, because we are more altruistic than others, but from enlightened self-interest. We know if we sell at an unjustifiable price to the public the public will leave us. We know if we buy at too low a price from the railroads, the railroads will go to somebody else, or the Interstate Commerce Commission will turn us down, which is always a black mark. So, not because we are virtuous but because I hope we have a correct appreciation of enlightened selfinterest, we try to put them on an equal footing and agree with the railroads at a price that we feel we can justly defend both toward the public and toward the railroad. Mr. PECORA. In your testimony previously at these hearings you have likened the relationship of the banker to the railroad corpora STOCK EXCHANGE PRACTICES 1237 tions to the relationship existing between an attorney and client, as well as to the relationship existing between a doctor and a patient. Mr. KAHN. Yes. Mr. PECORA. NOW, in the case of the attorney, he, of course, recognizes that the interests that he is charged with serving, assuming a relationship for the client, are the interests of the client. And in the case of the doctor, he naturally assumes that the interests he is to serve are the interests of his patient. Now, in the case of the banker for the railroad corporation, the banker regards the railroad corporation essentially as his client, whose interest he should serve, does he not? Mr. KAHN. If he is a stupid banker; yes. If he has got sense he will realize that for his purposes the interests of the public are just as important as the interests of the railroad, and that neither of the two will thank him ultimately except if he serves both of them well. And when I compared our method of doing business with that of a lawyer or of a doctor, it did not mean—and if I conveyed that impression I expressed myself badly—it did not mean to go right through from beginning to end. I t meant only that I said that we stand on our reputation. Our asset is our reputation. We do not go out and seek clients any more than a lawyer or a doctor does. But we hope we have established a reputation for integrity and thoroughness and good treatment comparable to what a doctor or a lawyer does. But it did not mean to go any further than that. Mr. PECORA. NOW there is also another interest to be served or which arises in the relationship between the banker and the railroad corporation, and that is the interest of the banker himself, is there not? Mr. KAHN. I consider that identical with the other two interests I have mentioned. Mr. PECORA. Are they all merged? Mr. KAHN. I consider that all three are merged in rendering service which is acceptable both to the railroads or the industrial corporations and to the public, and which is reasonably profitable to the banker. Mr. PECORA. The banker, you feel, is justified in having some regard for his own interests, do you not ? Mr. KAHN. Yes; I do. Mr. PECORA. And you feel that the circumstances warrant his giving some special consideration to the peculiar interests of the client, which is the railroad corporation, do you not ? Mr. KAHN. I am afraid in this general sense I cannot vary my answers that I believe the interests of the public and of the railroad corporation, of the buyer and of the seller, are precisely identical. Mr. PECORA. Well, is it not to the interest of the railroad corporation tb get as big a price for its bonds as it can ? Mr. KAHN. In my judgment, no. I think it is to the interest of the railroads to build up a regular investment clientele through the bankers, which investment clientele feels that they are being fairly dealt with by the railroad, and if the railroad in any one particular instance attempts to gouge the public and gets more out of it than its securities are worth in my opinion it is a very short-sighted policy. 1238 STOCK EXCHANGE PRACTICES Mr. PECORA. DO you not recognize that there is a distinction between the interests of the investor who buys the bond and the interests of the issuer who sells them ? Mr. KAHN. In my opinion they ought to be, and by any enlightened conception of the matter they are identical. Mr. PECORA. YOU recognize no distinction between them ? Mr. KAHN. I do not; no. I think they are identical interests. The one wants to offer at a fair price and the other wants to buy at a fair price. And if either of them is unfair it reacts against him ultimately. The CHAIRMAN. YOU cannot usually get both sides to see that, can you ? Mr. KAHN. Well, we have been fairly successful, Senator, in persuading our clients equally to the effect which I have just tried to express to Mr. Pecora. We frequently argue that very point. We have not always succeeded, but we are always endeavoring to succeed. Mr. PECORA. In the general method by which bankers bring out issues for railroad corporations and sell them to the public the price at which the bonds are purchased by the banker is one that is determined in negotiations between the banker and his client, the railroad corporation, is it not? Mr. KAHN. Between himself and his client, the railroad corporation; yes. Mr. PECORA. Yes. The investor has nothing to do with those negotiations and has no participation therein, has he ? Mr. KAHN. The investor directly, no; except to the extent that he looks to the banker to have a decent regard for his interests. Mr. PECORA. But anyway, the investor is not consulted and has no part in the negotiations leading to the fixation of the price at which the issue is taken over by the banker ? Mr. KAHN. He is not, except in the case of the railroads to the extent that the Interstate Commerce Commission represents the investor inasmuch as it represents the community as a whole. It is a Government body which has no favors to give and no favors to ask. Mr. PECORA. But the fact is the investor has no part in those negotiations which result in the fixation of the price at which the banker takes over the issue from the railroad corporation? Mr. KAHN. Yes. Mr. PECORA. Has the investor any participation in the conferences or negotiations which result in the fixation of the price at which the banker offers those bonds to the investing public ? Mr. KAHN. None. No. Senator BARKLEY. IS the same true of the municipal and county and State and Government bonds, too ? Mr. KAHN. That is true of all bonds. The market fixes the price. Mr. PECORA. Well, is it not a fact that in the issuance of municipal bonds, bonds falling within that classification, the public offering is frequently on a competitive bidding basis ? Mr. KAHN. Competitive bidding basis Mr. PECORA. SO that the investor is free to bid at whatever price his judgment dictated ? Mr. KAHN. But he does not, Mr. Pecora. Experience has shown that the investor does not bid, and you cannot make him do it. He STOCK EXCHANGE PRACTICES 1239 will not com© out of his shell and say, " Here is a chance to buy something cheap. I will put in a bid." He will not do it. He will leave it to a group, and then he buys from that group a point or two points higher. He is built that way. Mr. PECORA. DO you not know of many instances where municipal issues have been offered to the public on a competitive bidding basis and the public has responded by subscribing for the whole issue? Do you not know of many instances of that sort ? Mr. KAHN. I do not know of any such instances, but I know of many instances where the public offerings have resulted in a dismal failure, and where the municipalities have come to the banks or the bankers and said, " Please help us out of a hole. We did not get the money we counted on, and we need it. We need it to pay our school teachers and our employees, and the public did not give it to us. Please give it to us as a patriotic duty, as a community service." And it has always been done. But I know very few instances where the public absorbed an issue offered for public subscription. Mr. PECORA. My recollection may be at fault, but I recall, I think, having read sometime ago a book called " Other People's Money ", written by an eminent jurist, in which are recorded instances of the kind that I referred to. Mr. KAHN. I know the eminent jurist, and have the utmost respect for him, and admiration. I would like to write a book in reply, if I had the time for it. In any event, I am quite sure that I can bring forth many more instances to the contrary than he has brought forth in the affirmative. Mr. PECORA. Would you say that the bankers, either consciously or unconsciously, have helped to educate the public to believe that the public cannot formulate its own judgment and make its own bids for securities, but should rely upon the judgment of the banker? Mr. KAHN. I am quite sure that the bankers have not; and if they attempted it with the reputation that now adheres to bankers, and has long adhered to them, it would be quite futile. The public would not listen to them. If the public believed that it wanted to invest upon its own direct judgment, it would do so. The public does not. The public is a queer animal, and it has got certain traits, and one of the traits is that it will not come out of its shell and submit a direct individual bid. Mr. PECORA. The public has adopted the habit of just buying bonds at the offering price that has been fixed by bankers or the issuer, is that what you mean to say ? Mr. KAHN. Not necessarily. Sometimes they do not. Sometimes they do. Sometimes they think the price is too high, and they will stay away, and they think, " We will get them better and cheaper if we wait longer." But the public has learned that it is a convenience to it to utilize the. services of a banker, and purely of its own accord it sticks to that habit. Mr. PECORA. DO you know a corporation called the Pennroad Cor. poration ? Mr. KAHN. I beg your pardon ? Mr. PECORA. DO you know a corporation called the Pennroad poratibn ? Mr. KAHN. Very well. 1240 STOCK EXCHANGE PRACTICES Mr. PECORA. Did your firm have anything to do with the organization of that corporation ? Mr. KAHN. Yes, sir. Mr. PECORA. When was it incorporated? Mr. KAHN. If you will permit me I will refer to a few notes which I have here. Mr. PECORA. Surely. Mr. KAHN. I know it in a general way. It was incorporated in April, 1929. Mr. PECORA. At whose instance was it incorporated? Mr. KAHN. I referred yesterday to the reason why the Pennsylvania Railroad felt it incumbent to attempt to create an instrument of defense against the threatened and apprehended aggressions on the part of competing railroads in its own territory, an instrument which could be used swiftly and which could act as the necessity arose. Genera] Atterbury, the president of the Pennsylvania Railroad, in the circular which was issued when the first issue of Pennroad stock was offered to the public, went into that quite at length and, I think, set forth the reasons which justified that action much more forcefully than I could. I do not know whether you have that circular, but if not I would like to submit it. I believe you have it, Mr. Pecora. Mr. PECORA. NO. Mr. KAHN. The only reason why I am not setting it forth is I do not want to take your time unnecessarily. Mr. PECORA. Well, if you have it I would like to offer it for the record. Mr. KAHN. Yes. Here is the typewritten copy. Mr. PECORA. Thank you, sir. The CHAIRMAN. It may be received in evidence and spread upon the record. (Circular dated Philadelphia, Pa., April 24, 1929, of the Pennsylvania Railroad Co., by W. W. Atterbury, president, containing also circular of the Pennroad Corporation, dated Wilmington, Del., April 24,1929, signed by Henry H. Lee, president, was received in evidence, marked " Committee Exhibit 19 " of June 29, 1933, and is here printed in the record in full, as follows:) COMMITTEE EXHIBIT 19 OF JUNE 29, 1933 (Please read carefully and retain for future reference) THEI PENNSYLVANIA RAILROAD CO., Philadelphia, Pa., April 2Jf, 1929. To the stockholders: Your directors have given earnest consideration to recent developments in the field of transportation, and have reached the conclusion that it will be of material advantage to this company and its stockholders for the stockholders to unite in establishing a corporation so organized that it may make investments and take advantage of opportunities on a much broader basi^ than is possible under the limited powers of a railroad company. Your directors are of the opinion that such an independent instrumentality is needed to protect your interests and those of your company. Accordingly there has been incorporated under the laws of the State of Delaware the Pennroad Corporation (hereinafter called the corporation), with broad powers, among others, to invest its funds in securities of any corporation STOCK EXCHANGE PRACTICES 1241 or other agency, including those engaged in transportation of any description on land or water or by air, but without power to operate railroads. In order that the stockholders of the Pennsylvania Railroad Co. should have the first opportunity to purchase the stock of the corporation, arrangements have been made that there be offered to said stockholders at $15 per share the 5,800,000 shares of common stock, without par value, of the corporation presently to be issued. The outstanding capital stock of your company, including stock allotted to employees on the installment plan, consists of 11,583,479 shares of the par value of $50 each, a total of $579,173,950 par value. There are approximately 157,000 registered holders of stock of your company, of whom over 80 percent own 100 shares or less, and in addition there are close to 100,000 employee subscribers. The wide diversification of the ownership of your company's stock, not only in this country but abroad, indicates that there will be a correspondingly wide distribution of the stock of the new corporation. Accordingly, in furtherance of the purpose for which the corporation has been organized and in order to insure continuity of management, all the stock now being issued will be placed in a voting trust under which Messrs. W. W. Atterbury, Effingham B. Morris, and Jay Cooke have consented to act as voting trustees. The voting trust will be for a period of 10 years and will vest in the voting trustee the entire voting power in respect of the stock deposited thereunder. Voting-trust certificates will be delivered in respect of all stock purchased pursuant to the present offering. Reference is made to the accompanying circular of the Pennroad Corporation for further and full details of the offer. T H E PENNSYLVANIA RAILROAD COL, By W. W. ATTEKBTJEY, President. T H B PBNNEOAD CORPORATION, Wilminffton, Del., April 24, 1929. To the stockholders of the Pennsylvania Railroad Co.: The Pennroad Corporation hereby offers to the stockholders of the Pennsylvania Railroad Co., including employees now subscribing to its stock, the opportunity to purchase,, at $15 per share, voting trust certificates for 5,800,000 shares of common stock of the corporation, without par value. The detailed terms of the offering are set out below. The corporation reserves the right to sell to others, at such times and at such prices as the board of directors may determine, any of such stock not purchased by stockholders of the Pennsylvania Railroad Co., or their assigns, and to sell the stock purchased pursuant to said offering irrespective of the aggregate amount thus sold. The certificate of incorporation provides for an authorized issue of 10,000,000 shares of common stock without par value, of which, as above stated, 5,800,000 are now being offered. The balance is reserved for future issue, including shares reserved against options which have been granted, in connection with the organization of the corporation, to purchase additional common stock of the corporation on or before July 1, 1932, as follows: 125,000' shares at $16 per share, 125,000 shares at $17 per share, 125,000 shares at $18 per share, and 125,000 shares at $19 per share. No officers or directors of the Pennsylvania Railroad Co. participate in such options. Holders of common stock will have the right to subscribe pro rata to future additional issues of common stock sold for cash, except stock issued upon exercise of options or option warrants as more fully set out in the certificate of incorporation, copies of which may be obtained from the corporation on request. The common stock has no other preemptive right, except as may be granted by the board of directors, in respect of any particular issue of stock or securities. Of the proceeds of the common stock to be issued as herein provided, $10 per share is to be capital and the remainder paid-in surplus not available for dividends on the common stock. The first board of directors of the corporation consists of W. W. Atterbury, Effingham B. Morris, Charles E. Ingersoll, Levi L. Rue, Jay Cooke, R. B. Mellon, and A. J. County, all of whom are members of the board of directors of the Pennsylvania Railroad Co., and Henry H. Lee, the president of the corporation. 175541—33—PT 3 19 1242 STOCK EXCHANGE PRACTICES TERMS OF OFFERING Stockholders of the Pennsylvania Railroad Co. are hereby offered the privilege of purchasing at $15 per share, upon the terms and conditions hereinafter stated, on or before June 14, 1929, a number of shares of the common stock of the corporation equal to one half of the number of shares of stock of the Pennsylvania Railroad Co., registered in their respective names on its books at the close of business on May 10, 1929. Full share and fractional warrants, specifying the amount of stock which may be purchased, will be issued by the corporation and mailed to each stockholder. These warrants will be mailed as soon as possible after May 10, 1929, to the addresses for dividends recorded on the books of the Pennsylvania Railroad Co., unless other instructions are received prior to that date. In order to purchase stock the purchase form on the back of the warrant should be signed by the stockholders, but holders of fractional warrants desiring to purchase stock must present such warrants in amounts calling in the aggregate for one or more full shares, as no payments will be accepted for a fraction of a share. Fractional warrants desired by stockholders to complete full shares or fractional warrants which the stockholders desire to dispose of must be bought or sold in the market, as such fractions will not be sold or purchased by the corporation. The corporation will, however, on request, endeavor to aid stockholders to purchase or sell fractional warrants. Payment for stock purchased must be made in full at the time of surrender of the warrants on or before June 14, 1929. Checks or drafts should be drawn in favor of the Pennroad Corporation for the exact amount of the payment required. Unless the warrants, accompanied by payment in full for the stock purchased, are returned to one of the offices named below on or before June 14, 1929, the right to purchase will be void and the warrants of no value. For the convenience of stockholders of the Pennsylvania Railroad Co., payment will be accepted by the corporation at any of the following offices: Room 169 Broad Street Station, Philadelphia, Pa.; no. 380 Seventh Avenue, New York City, N.Y.; Wilmington Trust Co., Wilmington, Del.; Midland Bank, Ltd., London, England. The purchase privilege may be sold and transferred by assignment of the full share warrant, or by delivery of the fractional warrant in bearer form. On the back of the full-share warrant will be found an assignment to be filled in and signed by the registered holder and witnessed, if it is desired to transfer or dispose of the purchase right. Signatures to assignment of stockholders must be satisfactorily guaranteed. If fractional warrants representing in the aggregate the right to purchase one full share are surrendered at any of the above-named offices before June 14, 1929, a full share warrant for one share will be issued in exchange. Stockholders who may wish to purchase a portion of the stock covered by a warrant and dispose of the balance, or who may wish to dispose of a portion to one person and the balance to another, should return their warrants before June 14, 1929, to one of the offices named herein to be exchanged for other warrants, specifying the number of warrants desired in exchange and the number of shares to be covered by such warrants. No stockholder shall be entitled to purchase any stock under this offer unless the terms of purchase are fully complied with and payments made as herein specified, and no purchase or assignment of the right to purchase will be recognized unless made on the forms furnished by the corporation. In furtherance of the purposes of the corporation, all its common stock isbeing placed in a voting trust, remaining in effect for 10 years, under which Messrs. W. W. Atterbury, Effingham B. Morris, and Jay Cooke have consented to act as voting trustees. Voting trust certificates representing common stock of the corporation will be delivered in respect of all stock purchased pursuant to this offering. Suchvoting trust certificates will be sent to the purchasers thereof by registered mail as soon as possible after June 14, 1929. All references to stock herein shall be deemed to mean and to include voting trust certificates therefor. All communications in relation to the foregoing should be addressed to the Pennroad Corporation, room 169, Broad Street Station, Philadelphia, Pa. THE PENNROAD CORPORATION, By HENRY H. LEE, President. STOCK EXCHANGE PRACTICES 1243 FOREIGN STOCKHOLDERS Warrants for stockholders of the Pennsylvania Railroad Co. residing in Great Britain or on the Continent of Europe will be sent to the recorded addresses for dividends as promptly as possible. The warrants, accompanied by payment in full of the purchase price, may be sent to the Midland Bank, Ltd., Poultry, London, E.C. 2, provided they are received by that bank on or before June 14, 1929. Payment of such purchase price may be made in sterling by check drawn to the order of the Midland Bank, Ltd., at the rate of 4 9 ^ pence sterling for each dollar. Mr. KAHN. My attention is called to the fact that I said "when the stock was offered to the public." It was not offered tothe public. It was offered to the stockholders of the Pennsylvania Eailroad. Mr. PECORA. I t was offered to that section of the public that constitutes the stockholders of the Pennsylvania Eailroad, was it not \ Mr. KAHN. Yes. Mr. PECORA. NOW, is it fair to say, then, from your answer that the Penriroad Corporation was organized in April 1929 at the instance of the Pennsylvania Eailroad ? Mr. KAHN. At the instance of the Pennsylvania Eailroad; yes. Mr. PECORA. And was your firm the bankers of the Pennsylvania at that time? Mr. KAHN. We were. Mr. PECORA. And had been for a great many years prior thereto ? Mr. KAHN. Yes, sir. Mr. PECORA. NOW, you said in the course of your testimony day before yesterday that railroad corporations for which you do the financing are also advised by your firm on financial matters. Mr. KAHN. Yes, sir. Mr. PECORA. And on no other matters specifically? Mr. KAHN. Generally speaking, I should say on no other matters, except if they choose of their own accord to ask our opinion on another matter. But while I have more than once been asked about matters of railroad strategy, I have no very high opinion as to the value of my own advice on railroad strategy or on running any othex business than my own. I know my own business, but I do not know railroad strategy or any other business. Mr. PECORA. Well, what are the instances or occasions in which railroad corporations seek advice on financial matters from their bankers ? Mr. KAHN. Constantly, Mr. Pecora, when they feel that a transaction of a certain magnitude is impending. They would particularly seek advice on two subjects. What kind of a security is the best to sell under the prevailing circumstances ? What should be in fairness to the railroad and in fairness to the salability of the bond— what should be the provisions of the mortgage or the indenture or the trust deed ? And above all things, what is the best time for making the sale? Shall we hurry? Is this a good time? Or had we better wait ? Had we better finance this thing temporarily through short term loans from the banks, or had we better come out at once ? In other words, to the extent that our advice as bankers, as observers of the financial trend is of any use, to the extent that our experience in drawing mortgages—or rather, we do not draw them ourselves, but in judging of the provisions which ought to go into mortgages 1244 STOCK EXCHANGE PRACTICES is of any use, to the extent that we know what the public likes and does not like, what maturity, what kind of bond, they come to us. Mr. PECOEA. HOW frequently does the average railroad require advice or service of that kind from its banker ? It certainly does not require it every day or every week or every month or every year ? Mr. KAHN. Oh, certainly, I should say more nearly every couple of weeks than every year, because they do not necessarily wait until the emergency is upon them. The man in their organization, in the railroad organization, or in the industrial organization, who is particularly charged with looking after its financial affairs, wants to be intelligently advised by people in whom he has confidence. Matters of that nature may come up at any time in his board of directors or in the business meetings. It is perfectly natural that he should say, " I want the best advice that I can get and I want to get it constantly. Things may change. I may be a week too late, but no harm if I am a week too early. But there will be a great deal of harm if I am a week too late." Mr. PECORA. In the light of your extensive experience as a banker for railroad corporations, how frequently does the average railroad corporation, would you say, bring out issues through its bankers ? Mr. KAHN. I can give you a schedule, Mr. Pecora, which probably would be more useful than a mere guess. It depends upon the times. At the present, and ever since 1929,1 am sorry to say, that they have starved their bankers completely, they have brought out practically nothing. It depends upon Mr. PECORA (interposing). Of course they themselves have been starved. Mr. KAHN. Yes; they themselves have been starved. It depends upon how active they are, and how active they are depends upon their judgment of prevailing conditions. It depends upon how well they keep up their property. It depends upon their plans, their ambitions; and it is very difficult to give you an accurate answer. But I could easily get up a statement showing how many issues have been made, in the course of the last 10 years if you like, by the railroads whose regular financial advisers we are. Mr. PECORA. Would you say that the average railroad company whose financial advisers you are—and of course when I say " you " I mean your firm—brings out as many as one issue a year ? Mr. KAHN. I should think at an average that would be true, or more. You have a schedule, I believe, which shows what transactions were made with railroads; and that, I believe, will show you how many transactions were made over the last 5 years. Mr. PECORA. NOW, do you know a corporation called the Pennsylvania Co.? Mr..KAHN. Yes, sir. Mr. PECORA. Was that a subsidiary or affiliate of the Pennsylvania Kailroad Co. ? Mr. KAHN. I do not know whether affiliate is the correct term or not. What is the correct term, Mr. de Gersdorff ? Mr. DE GERSDORFF. I would say it is a subsidiary. The Pennsylvania Kailroad Co. owns all of its stock, I believe. Mr. KAHN. I am told that the correct legal term is subsidiary. STOCK EXCHANGE PRACTICES 1245. Mr. DE GERSDORFF. Mr. Pecora knows whether that is the correct term or not. The Pennsylvania Railroad Co. owns all of the stock of the Pennsylvania Co. Mr. PECORA. I am a neophyte, Mr. de Gersdorff. Mr. DE GERSDORFF. Maybe so. Mr. PECORA. When was the Pennsylvania Co. organized, Mr. Kahn ? Mr. KAHN. Oh, it was organized years ago, and I could not tell you the exact time. Mr. PECORA. What was the purpose of its incorporation? Mr. KAHN. I was told only recently, but again my repetition of what is being said and what I understand to be the case is in no way binding upon the Pennsylvania Railroad Co. or the Pennsylvania Co.—but to rehearse, as I have had occasion recently to go over the growth of the Pennsylvania system, I will say that I was told some years ago it became manifest that for the Pennsylvania Railroad to become a cohesive and effective system it was necessary for it to take in certain other properties. The CHAIRMAN. Was the Pennsylvania Co. a holding company? Mr. KAHN. Yes, Senator Fletcher. Mr. PECORA. GO ahead with your answer, Mr. Kahn. Mr. KAHN. On April 7, 1870, the Pennsylvania Co. was formed. And it was, as I understood it, a very effective instrument for the purpose of drawing the Pennsylvania system together into the powerful and far-flung system which it now is. Mr. PECORA. And that company was functioning in April of 1929, when the Pennroad Corporation was formed, was it not? Mr. KAHN. Yes, sir. Mr. PECORA. What was the special purpose of the formation or incorporation of the Pennroad Corporation in 1929 ? Mr. KAHN. The circular sets it forth fairly fully. Mr. PECORA. Well, the circular sets it forth in this language, in part, and I am reading from the circular, a copy of which you have handed to me, and which is entitled or captioned [readingJ: PENNSYLVANIA RAILROAD CO., Philadelphia, Pa., April 24, 1929. And it is addressed to the stockholders and is as follows: Your directors have given earnest consideration to recent developments in the field of transportation, and have reached the conclusion that it will be of material advantage to this company and its stockholders for the stockholders to unite in establishing a corporation so organized that it may make investments and take advantage of opportunities on a much broader basis than is possible under the limited powers of a railroad company. Were you a director of the Pennsylvania Eailroad Co., Mr. Kahn? Mr. KAHN. NO. Mr. PECORA. Were any of your partners a director of that company ? Mr. KAHN. Never. Mr. PECORA. Weil, your firm were the financial advisers and bankers of the Pennsylvania Eailroad Co. ? Mr. KAHN. Yes. Mr. PECORA. And was its opinion sought by the directors of the Pennsylvania Eailroad Co. on the subject of organizing a new company, which subsequently was organized and called the Pennroad Corporation? 1246 STOCK EXCHANGE PRACTICES Mr. KAHN. Yes, sir; it formed the subject of many conversations, of many discussions. Mr. PECORA. NOW, the statement of this circular, which is signed by W. W. Atterbury, president of the Pennsylvania Railroad Co., and which I have just read, is that the directors of that railroad company reached the conclusion that it would be of material advantage " to this company and its stockholders toi unite in establishing a corporation so organized that it may make investments and take advantage of opportunities on a much broader basis than is possible under the limited powers of a railroad company." What was the material advantage that was sought to be served by the incorporation of the Pennroad Corporation? Mr. KAHN. AS a separate company? Mr. PECORA. Whatever it was. Mr. KAHN. Well, whatever it was is a matter of railroad strategy on which my opinion isn't of much value, except, as I have stated before, that they were apprehensive that their territory was being threatened by other corporations, who found it perhaps a little easier to act than the Pennsylvania Railroad Co., having no large combined stockholders such as some other railroads have, could have acted. They felt very strongly that at that time, when everybody thought whatever he bought was going to be worth more tomorrow and was certainly worth buying, that they should not permit invading forces to come in and buy up properties that they believed to be of strategic need for their own purposes and the purpose of serving their great system for the benefit of their 100,000 or more stockholders. Mr. PECORA. Which were those invading forces that they had in mind? Mr. KAHN. All the forces in the territory. Primarily I should say the Alleghany. Mr. PECORA. DO you mean the Alleghany Corporation ? Mr. KAHN. Primarily the Alleghany Corporation. But there were others. The Baltimore & Ohio went in and bought certain things. The Erie Railroad went in and bought certain things. And they were apprehensive that certain properties which they believed essential to them would be snatched away from them. An additional reason why the Pennroad Corporation was formed rather than have the Pennsylvania Co. act, was that we urgently advised our Pennsylvania Railroad friends that when they came to raise that money which they needed for their acquisitions, that not one dollar of fixed charges should be created. We stated that we did not believe that for this purpose they should create fixed charges, or that any subsidiary of theirs should create fixed charges. We told them that we did not then believe that they should create a preferred-stock charge. We told them: We believe you should go to your own stockholders and tell them frankly what the facts are, what you propose, what is being done, and say to them: Now, here will be formed a separate company, which will be owned by you as stockholders. If you choose to take any stock, take it. If you do not choose to take any stock, why, we will have to try to find some other means of raising the money. But we urged as strongly as we could on them that there should be no fixed charges, no preferred stock. We also urged upon them STOCK EXCHANGE PRACTICES 1247 that they should pay no underwriting fee. It is very much against our general habit to make such a recommendation, because we generally believe that if you issue a very large amount of new stock it must be underwritten for the protection of the issue, otherwise it is a standing invitation for bear raids, a standing invitation for short selling, or even for legitimate selling by persons who think they better get out, that there is a lot of stock coming on the market. But in this case we told them: No fixed charge, no preferred stock, no underwriting. And we also stated: Usually we would not give you the latter advice, but we do give you that advice now—and that was in April of 1929—and in our opinion you can and you ought to take the risk of disposing of that security to your stockholders without having it underwritten. We can not take the responsibility of advising you to incur a heavy charge for underwriting when we are convinced that your issue will succeed without an underwriting. It was in April of 1929 and we felt convinced that they could go ahead along that line. The CHAIRMAN. The primary purpose was to raise more capital, wasn't it? Mr. KAHN. Yes; to raise more capital and to raise it without incurring either an underwriting expense or a fixed charge. The CHAIRMAN. I understand. But what amount of capital did they contemplate raising at that time ? Mr. KAHN. They offered in round figures 6,000,000 shares of stock, or to be exact, 5,800,000 shares of stock at $15 a share, which would be, roughly speaking, $85,000,000, or to be more nearly correct, I would say $87,000,000. Senator TOWNSEND. That stock was sold and the money was raised for an express purpose, was it not ? Mr. KAHN. The stock was sold for purposes some of which they had definitely in mind at that time, and some of which they believed would arise in the early future and for which they wanted to be prepared. The CHAIRMAN. YOU say they had how many stockholders ? Mr. KAHN. They had over 100,000 stockholders. The CHAIRMAN. And the stock of the Pennroad Corporation was to be offered first to their stockholders ? Mr. KAHN. Yes, sir. Mr. PECORA. TO the stockholders of the Pennsylvania Kailroad Co.? Mr. KAHN. Yes, sir. Senator TOWNSEND. DO you know what percent of the stock the stockholders took up themselves ? Mr. KAHN. About 97 percent. Senator TOWNSEND. Ninety-seven percent of this stock was sold to the stockholders of the Pennsylvania Kailroad Co. ? Mr. KAHN. Yes, sir. Mr. PECORA. I want to offer for the record and ask to have spread on the record a copy of the circular which the witness has produced. The CHAIRMAN. Let it be admitted and made a part of the record. I believe this is another copy of the paper which Mr. Pecora already had and perhaps had offered. Mr. PECORA. Wasn't the Pennsylvania Co., as distinguished from the Pennsylvania Railroad Co., empowered to function in the way 1248 STOCK EXCHANGE PRACTICES that it was proposed to have this new corporation, subsequently called the Pennroad Corporation, function ? Mr. KAHN. It was; but that would have required the issuance— well, my friend sitting here at my side asks me, "How do you know ? " Well, I think I know or I wouldn't take an oath to it. I believe that the Pennsylvania Co. could have functioned for that purpose, but it would have made heavy inroads upon the capital structure of the Pennsylvania Co., and would have probably necessitated the Pennsylvania Railroad giving up a part of its stock control of the Pennsylvania Co., which it did not want to do. It wanted to keep the Pennsylvania Co. as a separate unit, all the stock of which it owned. It did not want any part of the stock offered around in the market. It wanted to continue to own it. Mr. PECORA. The Pennsylvania Co. could have, under proper authority, increased its capital stock for the purpose of raising additional capital that was deemed to be necessary in order to carry out the purposes which the Pennsylvania Eailroad Co. then had in mind, couldn't it? Mr. KAHN. Yes. But it could only have sold that capital stock in the market. Otherwise where should they have got the $87,000,000 which they needed? Mr. PECORA. Well, where did the Pennroad Corporation get it ? Mr. KAHN. From the Pennsylvania Eailroad stockholders in exchange for the offer of its own stock. Now, the Pennsylvania Eailroad, as I understood, was not willing that the Pennsylvania Co.'s stock should get out of its possession. It was perfectly willing that the stock of the Pennroad Corporation should be owned widely, but it wanted to keep permanently, as I understood it, the control and not merely the control but the actual ownership of the Pennsylvania Co., which had been formed nearly 50 years ago and which had come to be looked upon as an integral part of the railroad company. Mr. PECORA. YOU mentioned before the Alleghany Corporation, which as I recall was organized in January or February of 1929. Mr. KAHN. Yes, sir; I think so. Mr. PECORA. I S it fair to say that the Pennroad Corporation was organized by the Pennsylvania Eailroad interest in order to combat the Alleghany Corporation? Mr. KAHN. YOU are asking me to pass upon the motives of the Pennsylvania Eailroad. Mr. PECORA. Well,. I assumed that you know something of its motives in view of the fact that you sat around the council table of the Pennsylvania Eailroad Co. in its deliberations that resulted in a decision to organize the Pennroad Corporation. Mr. KAHN. Well, the motives, as I understood them, were of a general character. They did not envisage merely the Alleghany Corporation. They envisaged what they believed, rightly or wrongly, a menace to the integrity and the effectiveness and the necessary expansion of the whole Pennsylvania Eailroad system. Mr. PECORA. HOW was the integrity of the Pennsylvania Eailroad system threatened or menaced at that time, and by what interests? Mr. KAHN. Well, perhaps the best answer to that is to show you a list of some of the securities which the Pennroad Corporation bought, a great majority of them being properties which they believed to be of essential value to the Pennsylvania Eailroad system. STOCK EXCHANGE PRACTICES 1249 Senator TOWNSEND. Have you such a list of stocks or properties that the Pennroad Corporation purchased? Mr. KAHN. Yes. Senator TOWNSEND. May I see it? Mr. KAHN. Here it is. Senator TOWNSEND. Were these stocks or bonds purchased on the stock exchange? Mr. STEWART. They were purchased at various places, some on the stock exchange and some direct. Senator TOWNSEND. Through private sale? Mr. STEWART. Yes, sir. Mr. PECORA. NOW, Mr. Kahn, if I understand you correctly, one of the purposes of organizing and incorporating the Pennroad Corporation was to protect the integrity of the Pennsylvania Railroad system from aggression by other and combating railroad interests. Mr. KAHN. Yes. Mr. PECORA. Can you tell the committee the railroad lines that the Pennsylvania Railroad Co. sought to acquire, or to acquire a substantial interest in, through the medium of the Pennroad Corporation? Mr. KAHN. If Senator Townsend will let me have that paper back for a minute. I am not sure that you have a copy of this, Mr. Pecora. I can tell you some of the principal acquisitions which they made and which at that time they considered of essential value to them. The first which they had in mind and which the Pennroad Corporation bought, not the Pennsylvania Railroad, of course, was the Detroit, Toledo &> Ironton Railroad stock, 245,327 shares, which I believe, if my memory serves me right, were owned by Mr. Henry Ford, at a total cost of $23,917,017. Senator TOWNSEND. Owned by whom? Mr. KAHN. By Mr. Henry Ford. Mr. PECORA. GO ahead. Mr. KAHN. They then acquired 99 percent of the Canton Co. of Baltimore common stock. Mr. PECORA. Ninety-nine percent of the common stock of what company ? Mr. KAHN. Of the C-a-n-t-o-n Co. of Baltimore common stock, which was a great and a very valuable terminal company in Baltimore and its neighborhood. For that they paid $13,432,817. Senator TOWNSEND. Through whom did they purchase that stock? Mr. KAHN. That is the one concern, the one company which they bought, not from us but through us. That is, we brought the opportunity, my firm brought the opportunity to acquire that property to their attention. And that is the oniy thing which they did buy through my firm except minor or trifling things. Senator TOWNSEND. Who was the owner of the Canton Co.? Mr. KAHN. The principal owner, as far as I can recall, was Mr. Colgate, You have his initials. It was an old family holding, mainly in the hands of Baltimore people. There were other railroads that wanted it. We had the opportunity of getting the first chance of offering it to the Pennroad Corporation, and they were very glad to buy it, and they are very glad to have it now. Senator TOWNSEND. YOU purchased it and in turn turned it over to the Pennroad Corporation? 1250 STOCK EXCHANGE PRACTICES Mr. KAHN. Oh, no. They purchased it direct. Senator TOWNSEND. Through your firm ? Mr. KAHN. They purchased it direct but purchased it through our good offices. We acted as brokers in making the purchase. Mr. PECORA. GO ahead. Mr. KAHN. Then the Pennroad Corporation bought—and in saying " then " I am merely mentioning the large purchases as they come along—223,230 shares of the Pittsburgh & West Virginia Kailroad Co. common stock, for which they paid $37,910,145. They bought that direct from the owner. Senator TOWNSEND. And who was the owner? Mr. KAHN. Taplin. Mr. PECORA. Was that Frank E. Taplin? Mr. KAHN. I do not recall his initials. I suppose that is the gentleman. Senator TOWNSEND. It was purchased from Mr. Taplin? Mr. DE GERSDORFF. Yes; and associates of theirs. Mr. PECORA. GO ahead, Mr. Kahn, and complete your answer. Mr. KAHN. Then they bought—and when I say " then ", of course, I do not mean the precise order in which they made the purchases but am merely going down the list in a general way—then they bought simultaneously with having purchased the Detroit, Toledo & Ironton common stock, $2,918,000 of Detroit, Toledo & Ironton first mortgage bonds, for which they paid $2,693,171; and they bought $10,626,000 of Detroit, Toledo & Ironton Eailroad Co. first and refunding mortgage 5-percent bonds, for which they paid $9,983,820. And they bought a very small issue of equipment notes and notes secured by collateral, for which they paid a few hundred thousand dollars. Senator TOWNSEND. Have you any knowledge of what the stocks were worth on the stock exchange that were purchased from Mr. Taplin at the time when they were purchased ? Mr. KAHN. I do not know. They were very closely held. I do not know the stock-exchange quotations on them. Senator TOWNSEND. Were they listed? Mr. KAHN. I believe they were listed. Weren't they? [Inquiring of an associate.] Yes; they were listed. Mr. PECORA. This purchase from Taplin was at the rate of $170 a share, wasn't it. Mr. KAHN. Well, this statement would show it. Mr. PECORA. Does that appear in that statement, that the purchase from Taplin was at the rate of $170 per share ? Mr. KAHN. I am trying to figure it out. That must be about right. As I stated before—and my associate wonders if I made that answer—that was bought direct, and we had nothing to do with it. Mr. PECORA. That transaction was made in October of 1929, wasn't it, or, to be more specific, on October 16, 1929, or thereabouts. Mr. KAHN. I do not really know, except as the records may show. The CHAIRMAN. Was it all purchased at one time ? Mr. KAHN. They are all matters which the Pennroad Corporation did, and we have no record, except to the extent that anything that was purchased through us we would know about, and" this was not purchased through us. STOCK EXCHANGE PRACTICES 1251 Mr. PECORA. I S it your recollection that the public market quotations for the stock of this Pittsburgh & West Virginia Railroad Co. in the month of September 1929 ran from a low of 135 to a high of 142%, and that in the month of October of that year the range was from a low of 110 to a high of 145% ? Mr. KAHN. I have no recollection, Mr. Pecora. Mr. PECORA. Wasn't your advice as the banker of the railroad company sought with regard to this particular transaction with Mr. Taplin? Mr. KAHN. Our advice would not be sought in matters involving railroad strategy and the decision of the officers as to what they wanted to do. Our advice would be sought on financial matters. Mr. PECORA. Wasn't this a financial transaction, this purchase of two hundred and twenty-two thousand nine hundred and odd shares of the Pittsburgh & West Virginia Railroad Co. from Mr. Taplin? Mr. KAHN. NO ; because they had the money on hand. They did not need our services. Senator TOWNSEND. Weren't they obliged to borrow some money in connection with all of these purchases? Mr. KAHN. They had $87,000,000 on hand from their first issue of stock. Senator TOWNSEND. And these purchases amount to about what ? Mr. PECORA. This Taplin transaction amounted to $37,898,100. Mr. KAHN. Yes; I realize that. Mr. PECORA. Did you as the banker for the railroad company have any voice at all in the determination of the question of what price the Pennroad Corporation should pay for these railroad stocks? Mr. KAHN. We were not consulted and we should have been very much embarrassed if we had been consulted, because to the extent Mr. PECORA (interposing). Well, was your advice that they sought as their banker limited only to such matters as to what kind of security to issue at a given time? Mr. KAHN. Oh, no. In this case I think the most valuable piece of advice we ever gave almost was that they should—shall I go on with my answer? Mr. PECORA. Yes; go ahead. Mr. KAHN. That almost the most valuable piece of advice we ever gave them was that we urged upon them to provide for these acquisitions, as to the value of which, as to the permanent desirability of which we could not possibly form a judgment of our own—we urged upon them not to create a fixed charge, not to create any preferred stock, not to create anything which could cause them embarrassment, not to pay an underwriting commission, but to go to their own stockholders and get the money. And I say now that if we ever gave good advice that was good advice. The CHAIRMAN. What did they sell the stock at; do you know ? Mr. KAHN. $15 a share, to their own stockholders; $15 a share net. They did not pay a dollar commission to anybody. The CHAIRMAN. DO you know what it was at that time ? Mr. KAHN. I knew what it was when I left New York—about 3% or 3 % ; but1 it of course had been very much higher. Senator TOWNSEND. It had been lower, too, had it not? Mr. KAHN. Yes; it had been lower. 1252 STOCK EXCHANGE PRACTICES The CHAIRMAN. HOW high did it go; do you remember? Mr. KAHN. It went close to 30. It may even have touched 30; I do not know; but I know it went close to 30. Mr. PECORA. What other large blocks of stock of other railroad companies were purchased by the Pennroad Corporation in pursuance of this plan to protect the Pennsylvania Railroad Co. from aggression on the part of competing lines ? Mr. KAHN. Mr. Pecora, the other large blocks which they bought were Boston & Maine Railroad—I will give to you or to the reporter a list, so that I will not have to take your time to read them all. They bought a large block of Boston & Maine Eailroad; they bought a large block of New York, New Haven & Hartford Railroad common and a small block of preferred; they bought 402,119 shares of Seaboard Air Line Railway common stock. Mr. PECORA. Have you a printed pamphlet or list of its acquisitions ? Mr. KAHN. Yes. Mr. PECORA. Will you kindly produce it for the record ? (The witness handed a paper to Mr. Pecora.) I offer it in evidence and ask that it be spread on the record. The CHAIRMAN. It may be received and spread on the record. (The pamphlet referred to, entitled " The Pennroad Corporation, Statement for Year Ended December 31, 1932," was received in evidence, marked " Committee's Exhibit No. 20 "5 see p. 1268.) Mr. PECORA. Was the New York, New Haven & Hartford Railroad Co. a line competing with the Pennsylvania Railroad? Mr. KAHN. I hesitate to speak on their behalf, because, of course, they are infinitely more competent to answer that than I am; but they believed that in the general shuffling in the entire trunk line situation which was then under consideration and which was being prepared for—they believed that a substantial holding on their part, if not an important holding of the leading New England lines, was of great importance to them from the traffic point of view. Mr. PECORA. The Pennsylvania Railroad did not have any line operating through New England, did it? Mr. KAHN. Not direct; no. Mr. PECORA. Did it consider the Boston & Maine Railroad as a competing line? Mr. KAHN. The Boston & Maine Railroad, I assume, became of importance when they reached the conclusion that the New Haven was of importance; but all these questions you are asking of a rather ignorant man. The CHAIRMAN. Were those purchases made before October 1929, do you think, or most of them ? Mr. KAHN. The record we have does not show it, Senator. The CHAIRMAN. I did not know whether you knew that they bought these stocks before the collapse in October. Mr. KAHN. Our record does not show; but no doubt they bought a number of them, a large proportion of them, before the collapse. I make this deduction because after the first transaction by which they raised $87,000,000 a second transaction was undertaken to raise additional money; -so they must have needed additional money. Mr. PECORA. In your answer a few moments back you made some reference to a shuffle. What was the shuffle that you had reference to ? STOCK EXCHANGE PRACTICES 1253 Mr. KAHN. Again I speak as an outsider and I speak from hearsay and I speak with no competence. The Alleghany people, the Pennsylvania Kailroad people, the New York Central people, the Erie people, the Baltimore & Ohio people can tell you of that without any if s or but's. I can only speak with great reservations and subject to correction. But at that time, as you will recall, the question was a very active one, and, in my opinion, a very immediate one, as to how many trunkline systems there should be. The Interstate Commerce Commission had provided for four. The systems as set up originally by the Interstate Commerce Commission were not in all respects satisfactory to the great railroads concerned, and there ensued something like a Mr. PECORA. A scramble? Mr. KAHN. Yes; which I call a shuffle, but " scramble " is a much better word—a scramble to put themselves in a position where possession was nine points of the law, and they tried, each one of them, that kind of competition which I have referred to as unwise and detrimental competition. They tried to put themselves in a position where, if anything was determined unsatisfactory to them, they could as nearly as possible bedevil it, or they could say, "We own that. You can't take that away from us; we have already bought it." And it was, as you rightly term it, a scramble preparatory to a decision which was going to be made ultimately by the Interstate Commerce Commission. The CHAIRMAN. In reference to possible mergers? Mr. KAHN. Yes; in reference to possible more or less enforced mergers. Mr. PECORA. Or groupings of railroad lines in a system ? Mr. KAHN. Yes. Mr. PECORA. The Interstate Commerce Commission, as you probably know, has no jurisdiction or control over holding companies ? Mr. KAHN. NO. Mr. PECORA. Was the Pennroad Corporation organized as a holding company in order to enable the Pennsylvania Eailroad Co. to avoid the jurisdiction of the Interstate Commerce Commission? Mr. KAHN. That I cannot possibly answer except to the extent that General Atterbury's circular may throw light upon the subject. Mr. PECORA. General Atterbury's circular on that point merely says that— Your directors have given earnest consideration to recent developments in the field of transportation and have reached the conclusion that it will be of material advantage to this company and its stockholders for the stockholders to unite in establishing a corporation so organized that it may make investments and take advantage of opportunities on a much broader basis than is possible under the limited powers of a railroad company. Would you say that is a polite way of saying, " We want to do something that the Interstate Commerce Commission can't tell us not to do"? Mr, KAHN. Nothing is more difficult than for a man to say what thoughts were behind other people at the time they committed an act, praiseworthy or otherwise. I may possibly help in answering your question if I give you a statement here which says for what purpose the Pennroad Corporation was incorporated. I do not know whether it answers your question, but if it is any help to you I offer it to you. 1254 STOCK EXCHANGE PRACTICES Mr. PECORA. What are you reading from—from the Splawn financial report? Mr. KAHN. Yes. Mr. PECORA. If you want to read a portion of that which has caught your eye, I think it would be enlightening. Mr. KAHN. This particular portion? Mr. PECORA. The portion that you were about to call my attention to. Mr. KAHN. It starts— The Pennroad Corporation was incorporated on April 24, 1929, under the laws of the State of Delaware, to have perpetual existence and with powers to engage in business as follows: First, to acquire without restriction all kinds of securities issued by corporations or other agencies engaged in transportation of persons or property on land or water or by air, or in any other business, to exercise all rights of such ownership, to aid by loan, subsidy, guarantee, or otherwise, those issuing such securities, and to underwrite or subscribe for such securities with a view to investment or for resale Mr. PECORA, I do not think }rou need to read all that follows after that, because it is largely repetitious matter. Now, Mr. Kahn, you have already said that at its inception the Pennroad Corporation issued and sold 5,800,000 shares of common stock. Mr. KAHN. Yes. Mr. PECORA. That Mr. KAHN. Yes. Mr. PECORA. And was stock of no par value, was it not? that stock was offered first to stockholders of the Pennsylvania Eailroad Co. at $15 a share ? Mr. KAHN. Yes. Mr. PECORA. In the ratio of 1 share of Pennroad Corporation stock for every 2 shares of Pennsylvania Eailroad Co.'s stock? Mr. KAHN. Yes. Mr. PECORA. AS a matter of fact, Mr. Kahn, did the Pennroad Corporation issue to the subscribers certificates of stock, or were they voting trust certificates? Mr. KAHN. A voting trust certificate was created. Mr. PECORA. And under those voting-trust certificates the voting power was placed in a board of three trustees ? Mr. KAHN. Yes, sir. Mr. PECORA. Who were those three trustees at the outset ? Mr. KAHN. I have got them here—Gen. W. W. Atterbury, Mr. Effingham B. Morris, and Mr. Jay Cooke. Mr. PECORA. They were, of course, trustees that were selected with an eye to the interests of the Pennsylvania Eailroad Co., were they not? Mr. KAHN. I S there not a provision of law, Mr. Counsellor, that people must be presumed to know the natural consequences of their actions ? Mr. PECORA. There is such a principle of equity; yes. Mr. KAHN. I S not that my best answer, that in selecting .these people Mr. PECORA. That is giving us an answer in legal circumlocution. You are not very familiar with legal terms, so far as I have been able to understand your testimony heretofore; so I suggest that perhaps you might give us an answer in your own language and let legal verbiage alone. STOCK EXCHANGE PRACTICES 1255 Mr. KAHN. After this rather unfortunate attempt to act as a lawyer or to use legal parlance, I will read to you, with your permission, exactly what General Atterbury says on that subject in a circular addressed to the stockholders of the Pennsylvania Railroad. He says: Accordingly, in furtherance of the purpose for which the corporation has been organized, and in order to insure continuity of management, all of the stock issued will be placed in a voting trust under which Messrs. W. W. Atterbury, Eflingham B. Morris, and Jay Cooke have consented to act as voting trustees. That seems to set forth very plainly what was in their minds in taking the action they did. Mr. PECORA. What rights did the purchasers of these voting trust certificates of the Pennroad Corporation have in the operation or management of the Pennroad Corporation? Did they have any at all? Mr. KAHN. Having given their consent to the election of voting trustees, I presume that by that very act they conferred the rights of management, direct or indirect, upon those voting trustees. Mr. PECORA. YOU say that the stockholders " having given their consent." As a matter of fact, did the stockholders give their consent to the establishment of this voting trust? Mr. KAHN. Oh, yes. Otherwise they would not have bought the stock. The very fact that they bought the stock proved that they were in accord with the method of setting it up. Mr. PECORA. YOU do not mean to say that they affirmatively gave their consent at the outset to the creation of this voting trust, do you ? Mr. KAHN. Affirmatively, no; by implication, yes. Mr. PECORA. The implication flowing from the fact that they purchased the stock that was subject to this voting trust, more or less? Mr. KAHN. Yes, sir. Mr. PECORA. NOW, as a matter of fact, the purchasers of these voting-trust certificates paid something like $130,000,000 in the aggregate, did they not, for those certificates ? Mr. KAHN. They did; yes. Mr. PECORA. And they bought them under circumstances, terms, and conditions which deprived them of any voice even in the election of officers or directors, did they not? Mr. KAHN. It would seem so; yes. Mr. PECORA. On principle do you approve of that method of financing a corporation ? Mr. KAHN. On principle, Mr. Pecora, I have the utmost faith in the working of public opinion. I have relatively little faith in super-" vision, and I do not generally approve any paternalistic attitude on the part of corporation managers or anybody else. I do think, speaking now as a principle, that when you ask people to go into a concern with you and you take their money, I do generally think as a principle that nothing ought to be done to interfere with the right to exercise their vote, and I also say that occasions may arise where the continuity of management is of such importance that for the time being, and with the knowledge of the people who put up their money, a voting trust is justifiable. When you get into a situation having a definite, well-defined purpose, requiring continuity of management, 1256 STOCK EXCHANGE PRACTICES it may be right to have a voting trust. Ordinarily speaking, I do not believe in depriving people of the right to have their say. Mr. PECORA. Am I correct in my understanding that the directors and voting trustees of the Pennroad Corporation were not even required to be stockholders in order to qualify them ? Mr. KAHN. I could not tell you, but I should not be at all surprised if it were so. I do not know it. Mr. PECORA. SO this was a case where a corporation was set up under forms that enabled it to get over $130,000,000 from the investing public for the purposes of the corporation, without giving to the investing public who contributed that large sum of money any voice whatsoever in the management or operation of the business of the company or in the selection of its officers ? Mr. KAHN (after conferring with associates). I am getting advice. Mr. PECORA. AS to how to answer that question ? Mr. KAHN. I am getting advice which I shall probably disregard. Mr. BITTTENWIESER. That is what he thinks of his mentors. Mr. KAHN. My answer to your question, of course, is that I would like to point out that this was done in 1929; and I think anything that was done in 1929 should be judged by a different standard from that which prevailed before, which is prevailing now, and which I hope will always prevail after our experience. But the instances, the things for which 1929 and the spirit of 1929 were responsible are legion; and in the light of hindsight they are simply inexplicable. Mr. PECORA. Would you go so far as to say, in the light of this hindsight, that such things should be made impossible by law, if necessary ? Mr. KAHN. Unless there is a really good, sound, legitimate, and generally useful reason why a certain transaction should be carried to its destined and logical end by a continuity of management— unless that is so I think all things of that kind ought to be eliminated. I think affiliates, investment trusts—by which common voting power is given to a small class of stock—are inventions of the devil and ought to be done away with. Mr. PECORA. Those devils have come from around the vicinity of Wall Street, have they not? Mr. KAHN. All over the country. They are not only created in 'Wall Street. I have got quite some painful experience of the same kind of thing that was done outside of Wall Street. But I do think,, and I think it is one of the things which I venture the hope will scome from the deliberations of your committee, that all these things will be eliminated and not be permitted to occur again, unless good reason can be shown to you why in specific instances the continuity of management should be secured. Mr. PECORA. NOW, Mr. Kahn, reference has been made in your examination this afternoon to the scramble that was engaged in by the Alleghany Corporation, and railroad interests which it represented or for which it acted, and the Pennroad Corporation, and the railroad interests for which it acted, to acquire an ownership interest through the purchase of stock in various railroad lines that might have been tributary to the main system. Mr. KAHN. Yes, sir. STOCK EXCHANGE PRACTICES 1257 Mr. PECORA. And reference has also been made to the fact that that scramble was induced more or less by desire to circumvent the decisions and the judgment of the Interstate Commerce Commission. Mr. KAHN. IS not that perhaps putting it rather more strongly than I made it? Mr. PECORA. IS it too strong a statement? Mr. KAHN. I think it is too strong a statement. Mr. PECORA. In view of the facts ? Mr. KAHN. I venture to think it is too strong a statement, because I said that possession is nine points of the law. But there is a tenth point; and the Interstate Commerce Commission is a pretty potent body, and so are the courts, and even if I have nine points of the law and the Interstate Commerce Commission and the courts of the country will not let me have the tenth point, my nine points do not do me much good. Mr. PECORA. I did not know that I was using too strong a characterization. I doubt whether it is any stronger than your own term of " bedevilment", but perhaps it is. The fact is that the Interstate Commerce Commission prior to 1929, shortly prior to it had publicly indicated in a general fashion its opinion as to how the railroad systems of the country should be grouped, had it not ? Mr. KAHN. Yes. Mr. PECORA. And the Interstate Commerce Commission has no authority over a holding company, has it ? Mr. KAHN. I understand, no. Mr. PECORA. YOU understand that the Alleghany Corporation is a holding company for certain railroad lines ? Mr. KAHN. I do; yes. Mr. PECORA. And the Pennroad Corporation was organized in the form of a holding company to act for the Pennsylvania Railroad Co.'s interests? Mr. KAHN. Yes. Mr. PECORA. YOU have referred to a scramble participated in by those competing railroad systems to acquire a measure of control or influence, if you please, over tributary lines that might not be given to them or might be given to a competing system under the indicated groupings of the Interstate Commerce Commission? Mr. KAHN. But may I say that as I understand it, or understood at the time, without being formally consulted, that the purpose was not merely a defensive or acquisitive one, perhaps. To what extent that was the purpose I am not competent to say. But the purpose was also very largely that of legitimate expansion. Getting systems that had not yet been allocated, for the expansion of the railroad concerned, was considered to be of great value. So it was not merely a scramble; it was not merely bedevilment; it was not merely acquisitiveness or defense. It was to a large extent—to what extent I cannot define—a purpose to acquire properties which were eminently desirable in the judgment of the officers for the purpose of expanding the system in desirable directions. Mr. PECORA. Let us see if General Atterbury in his circular marked " Exhibit 19 " in evidence does not very strongly suggest the implication of the question that you thought was phrased in language that was a bit too strong, where he said: 175541_33_PT 3 20 1258 STOCK EXCHANGE PRACTICES The directors of the Pennsylvania Railroad have reached the conclusion that it would be of material advantage to this company and its stockholders for the stockholders to unite in establishing a corporation so organized that it may make investments and take advantage of opportunities on a much broader basis than is possible under the limited powers of a railroad company. Does he not disguise in those words that the purpose of the organization of the Pennroad Corporation was, among other things, to enable the Pennsylvania Railroad Co. to circumvent the position taken or announced by the Interstate Commerce Commission with regard to its groupings of railroad lines ? Mr. KAHN. Mr. Pecora, am I the man who can and should answer the questio'n of what was the purpose behind another man's mental processes ? Mr. PECORA. The purpose of the incorporation is supposed to be set forth in this circular, is it not? Mr. KAHN. But what this circular means is set forth in, I believe, very clear language, which I hesitate to further define or interpret. I think it says very plainly what it was meant to do. If in the opinion of yourself or of the legislature or your committee any such statement of purpose ought in future to be supplemented, that is a different chapter as to which in a general way I have expressed my opinion. Unless there is good reason—I have known cases where there was a really good reason for .a voting trust to be created, lest the property which depended for its welfare upon continuity of management should fall into evil hands; and I have known of my own knowledge of a case years ago when my firm believed, in pursuance of what we thought was our duty toward security holders, that there should be substituted a different management in place of the George Gould management of the Missouri Pacific Railroad, because we were afraid of what would happen to that property unless new management came in. We went to the stockholders and told them, just as General Atterbury says here, plainly why we believed that a new management, a new deal, was required, and we asked for their mandate to give us a sufficient length of stable management to protect the property, not in our hands, but in the hands of people wThom they trusted. There was good reason for doing that, because if we had not done it, that property very likely might have gone back, and we did not believe it should go back, into the same hands from which it had been rescued. In that way I can conceive of good reasons for doing that. I do not know whether public policy should or will permit a continuance of similar practices, but I can conceive of very good reasons, in a few instances, not in very many, why it should be done and why the public good is served by having it done. Under what restraints, under what restrictions, under what supervision, I am not now prepared to say. I believe I said before that I have much more faith in the power of public opinion than in the power of supervision. The CHAIRMAN. These trustees were all quite large stockholders of the Pennsylvania Railroad Co. ? Mr. KAHN. I have assumed so, Senator. I know so. I know that Jay Cooke was. In fact, I know all three gentlemen were; yes. I know they all were. STOCK EXCHANGE PRACTICES 1259 Mr. PECORA. Mr. Kahn, was the advice or judgment of your firm as the bankers for the Pennsylvania Eailroad Co. sought as to the form of security, the kind of security that the Pennroad Corporation should issue ? Mr. KAHN. AS to the form of security; yes, no doubt. Mr. PECORA. Then was it your judgment that voting-trust certificates, instead of common-stock certificates, should be issued ? Mr. KAHN. At that time very probably it was. I cannot say of my own knowledge. I do not know which member of my firm I placed that particular faith in. We are a family affair, and one speaks for all and all speak for one. I cannot say whether my particular advice was sought on that subject, but I have very little doubt that our firm, to the extent that its opinion was sought, approved that set-up. Mr. PECORA. Was your personal approval given to that set-up ? Mr. KAHN. That I do not really recall. In fact, I recall no—no; it was not. I do not mean to say that it would not have been given. I am not throwing that on other people, but it so happened that at that time I was not in America. Mr. PECORA. NOW, these voting trust certificates of the Pennroad Corporation eventually became listed on public exchanges? Mr. KAHN. Yes. Mr. PECORA. Which exchange? Mr. KAHN. On the New York Curb and on the Philadelphia Stock Exchange. Mr. PECORA. And they were purchased freely by the investing public who were not stockholders of the Pennsylvania Kailroad Co., weren't they, after they became listed? Mr. KAHN. I do not know who bought them. I know they were purchased very freely. Mr. PECORA. At least their sale was not listed or restricted merely to stockholders in the Pennsylvania Eailroad Co. ? Mr. KAHN. NO. The original offer was restricted, but anybody was free to sell. Mr. PECORA. And to buy in the open market ? Mr. KAHN. Yes. Mr. PECORA. NOW the purpose of this incorporation, that is, the Pennroad Co., was to serve the interests of the Pennsylvania Eailroad Co. and its stockholders, wasn't it ? Mr. KAHN. I would rather put it the other way around; to serve the purpose of the stockholders and the Pennroad, which was owned by those stockholders of the Pennsylvania Eailroad. Mr. PECORA. Yes. Mr. KAHN. I know how much importance was attached by the Pennsylvania Eailroad people and how frequently they emphasized the fact that they have no large stockholders; they cannot go to any one or half a dozen very large stockholders, as the New York Central can do, as the Alleghany people can do, as the Erie people can do> as the Delaware, Lackawanna & Western can do. They have got over a hundred thousand little people to protect, and they felt that responsibility very keenly, and very frequently in discussions with us referred to it. 1260 STOCK EXCHANGE PKACTICES Mr. PECORA. NOW the purchasers of the stock or voting trust certificates of the Pennroad Co. who were not stockholders of the Pennsylvania Eailroad Co. were placed in the position of having their moneys used primarily for the benefit not of themselves but of the stockholders of the Pennsylvania Eailroad Co., weren't they? Mr. KAHN. Well, isn't that implied, without giving a yesor no answer as yet; but isn't that implied in the fact that with their eyes open they bought voting-trust certificates? They did not buy stock; they bought voting-trust certificates, which voting trust was in the name of three of the Pennsylvania officials. Mr. PECORA. Well, it is the fact equally, isn't it, that every person who buys securities in the open market does so with his eyes open if he wants to have open eyes ? Mr. KAHN. That is correct; but here Mr. PECORA (interposing). You would not say that all transactions in which persons buy securities in the open or public market involve purchases by persons who have intelligent judgment ? Mr. KAHN. Not as yet. I hope that will be by and by. I hope they will be educated to it. Mr. PECORA. SO that when you say that these voting-trust certificates were bought with their eyes open you are using a phrase rather than stating a fact, aren't you? Mr. KAHN. Not quite, Mr. Pecora, because here was plain warning—plain warning printed on the face of the certificates and printed on the curb quotation lists, " Pennroad stock V.T.C." Anyone who bought them had plain warning that he was buying, a warning which he could hardly disregard or overlook, that he was buying voting-trust certificates. Mr. PECORA. DO you mean to say that the general body of the public that bought these certificates realized or knew, even at the time they bought them, that they were buying or making investments in a corporation under circumstances which deprived them of any voice whatsoever in the management, control, or operation of that corporation? Mr. KAHN. Any even halfway careful man would know it; yes. It was made very plain. Mr. PECORA. DO you really think, Mr. Kahn, that persons who bought these certificates, in the main, actually were aware of the fact that they were making their investment in a company that denied them any voice whatsoever in the management or operation of the company or even the selection of its officers? Mr. KAHN. Not in 1929, Mr. Pecora. Mr. PECORA. And that is when these certificates were issued, in 1929? Mr. KAHN. I believe so. But at that time they bought any quantity of so-called "investment-trust stocks" which deliberately deprived them of any kind of voting power. STOCK EXCHANGE PRACTICES 1261 Senator BARKLEY. Would it be a fair assumption that those who purchased these voting trust certificates on the curb were not so much interested in control, or having a voice in control of the company, as they were in getting a profit out of the purchases of that stock ? Mr. KAHN. That is quite true, Senator, quite true. The CHAIRMAN. I think it would probably be best that we discontinue now and be in recess until 10 o'clock tomorrow morning. (Accordingly, at 4:14 o'clock p.m. a recess was taken until 10 o'clock a.m. of the next day, Friday, June 30, 1933.) EXHIBIT N O . 18 to to QUESTION 16.—Syndicate list {consolidated) Kuhn, Loeb & Co. Issue Missouri Pacific R.R. Co. 5V1977 Pennsylvania, Ohio& Detroit R.R. 4K's-1977 Illinois Central R.R. & Chicago, St. Louis & New Orleans R.R. 43^'s-1963 Union Pacific R.R. 4HV1967 North German Lloyd 6's-1947 Southern Pacific Co. Oregon Lines 4K's-1977 Hudson Coal Co. 5's-1962 Baltimore Paramount & Ohio Famous R.R. Lasky Corcommon poration stock 6's-1947 o Q W Cost price Selling price - _ J. S. Alexander, former president National Bank of Commerce (deceased) Newcomb Carlton, president and director Western Union Telegraph Co Cosmopolis Securities Corporation A. J. County, vice president in charge of finance and corporate relations and director the Pennsylvania B.R. Co_ Henry W. De Forest, member of the executive committee and director Guaranty Trust Co., chairman of Board Southern Pacific R R G. H. Ecker, president and director, Metropolitan Life Insurance Co C. W. Galloway, vice president in charge of operations and maintenance, Baltimore & Ohio R R Co Hanstra Corporation Henry H. Lee, president, Pennroad Corporation Jas Loeb & Co L. F. Loree, president member of board of managers and chairman ' of executive committee, Delaware & Hudson Co. R. S. Lovett, former, Union Pacific R.R. (deceased)-- _ .__ Chas. E. Mitchell, former chairman of the board National City Bank Chas. A. Peabody, former, Illinois Central (deceased) __ _ Samuel Rea,*former president, Pennsylvania R.R. Co. (deceased)__ Percy A. Rockefeller, member of executive committee and director, New York Edison Co., Consolidated Gas Co Percent 98M 99 Percent 93^ 94 $50,000 $50,000 25,000 25,000 Percent 96 96% Percent 95% 96^ $50,000 100,000 Percent 92M Percent 99 99M Percent 96K 97M $106.25 107. 50 $50,000 $50,000 Shares 500 25,000 25,000 100,000 250 100,000 100,000 100,000 75,000 1,000 750 500 1,000 25, 000 50, 000 50,000 50,000 50,000 50, 000 500 50, 000 50,000 50,000 50,000 50, 000 50, 000 50,000 50,000 500 500 50,000 50,000 50, 000 2,000 1,000 500 150, 000 2,500 50,000 250,000 X a o 50,000 100,000 Percent 96H 973^ 250,000 150,000 § Total _ 2,000 50,000 pop Mrs. A. G. Schifl (deceased) C. B. Seger, chairman of the executive committee and director, Union Pacific R.R. Co Henry Tatnall, director Philadelphia, Baltimore & Washington Railway _ _ __ Guy E. Tripp, former, Westinghouse Electric (deceased) Paul M Warburg (deceased) Paul M. Warburg, president (deceased) K Jas. Paul Warburg, president and director of International Acceptance Bank, Inc Wellington Finance Corporation Albert E. Wiggin, chairman of governing board" the Chase National Bank W. H. Williams (deceased), formerly with Wabash R.R. Co Sir Wm. Wiseman, firm of Kuhn, Loeb & Co Miscellaneous foreign banks and companies 50, 000 50, 000 50, 000 100, 000 50, 000 50,000 500 50, 000 50,000 50, 000 50, 000 500 500 100, 000 100, 000 100,000 100,000 1,150,000 2,250,000 75,000 50,000 100,000 1,000,000 50, 000 225,000 75, 000 50, 000 50,000 450, 000 375,000 1,350, 000 1,000 1, 550, 000 75, 000 50,000 75, 000 600, 000 1, 550,000 1, 325, 000 1, 000, 000 50, 000 600, 000 1,000 500 750 52,750 100, 000 575, 000 1,450, 000 71,000 1, 675, 000 75,000 O a a W > s a o to CO QUESTION 16.—Syndicate list (consolidated) Kuhn, Loeb & Co.—Continued Issue YoungsInland town Sheet Steel Co. & Tube Co. 43^s-1978 5's-1978 Cost price Selling price __ _ _ __ __ J. S. Alexander, former president National Bank of Commerce (deceased) Jas. C. Bennett, vice president of Westinghouse Electric & Manu facturing Co Newcomb Carlton, president and director Western Union Telegraph Co Cosmopolis Securities Corporation Henry W. De Forest, member of the executive committee and director Guaranty Trust Co., chairman of board—Southern Pacific R. R F . H Ecker, president and director Metropolitan Life Insurance Co Hanstra Corporation Mrs. A. Hellman—J. J. Hanauer for a/c of Mrs. A. W. Kahn, wife of Otto Kahn Jas. Loeb & Co __ _ L. F . Loree, president, member of board of managers, and chairman of executive committee Delaware & Hudson Co R. S. Lovett, former Union Pacific R.R. (deceased) Chas. E. Mitchell, former chairman of the board, National City Bank Chas. A. Peabody, former Illinois Central (deceased) Samuel Rea, former president, Pennsylvania R.R. Co. (deceased). Percy A. Rockefeller, member of executive committee and director, New York Edison Co , Consolidated Gas Co Mrs A. G. Schiff (deceased) C. B. Seger, chairman of the executive committee and director Union Pacific R.R. C o . . . Henry Tatnall, director Philadelphia, Baltimore & Washington Paul F. Warburg Do Percent 99 $50,000 Percent 93 $50,000 Pennsylvania Co. Percent 97*6 97M $50,000 Mid Continent U.S. RubPetroleum ber Co. common Corporation common stock stock Westinghouse Elec- Southern Southern tric Manu- Pacific Co. Pacific Co. facturing 43^'s-1968 Co. common stock Missouri Pacific R.R. Co. $29. 50 31.00 $103.50 105. 00 Percent 92^ 94 Shares 500 Shares 500 $50,000 $50,000 500 1,000 500 1,000 500 1,000 50,000 100, 000 50,000 100,000 1,500 1,000 1,000 1,000 1,000 1,000 1,000 $33.00 35.00 Shares Percent 99 4 Percent 96 2,500 50,000 100,000 50,000 100,000 50,000 100,000 100,000 100,000 50,000 50,000 50,000 2,500 500 500 50,000 50,000 50,000 50,000 50,000 50,000 100,000 100,000 1,000 1,000 1,000 500 1,000 500 100, 000 100,000 100,000 100,000 50,000 100,000 50,000 100,000 2,000 1,000 500 1,000 1,000 500 1,000 1,000 500 100, 000 100, 000 100,000 100,000 2,500 5,000 2,500 2,000 250,000 250,000 1,000 100,000 100,000 50,000 50,000 50,000 100, 000 50,000 50,000 2,500 100,000 166,666 500 250 M O W 1,500 2,000 500 300, 000 O o W 250 Frederick M. Warburg, firm of Kuhn-Loeb & Co Edw. M. M. Warburg ___ Gerald F. Warburg Albert H. Wiggin, chairman of governing board, the Chase National Bank . _ 100,000 W. H. Williams (deceased), formerly with Wabash R.R. Co 50,000 A. Wolff, estate of _ > 1,150,000 Miscellaneous foreign banks and companies Total _ _ 2,200,000 250 250 250 100, 000 100, 000 250 250 250 2,000 1,000 1,000 1,000 475,000 1,150,000 39,000 1,275,000 2,100, 000 67,000 50,000 100,000 100,000 100,000 28,600 1,000 1,250 15, 500 3,800,000 875,000 2,700,000 48,600 29, 250 5,050,000 875,000 3,950,000 o Q w X Q w i QUESTION 16.—Syndicate list (consolidated) Kuhn, Loeb & Co.—Continued to o Issue Chicago & Pennroad North CorporaWestern tion Ry. Co. mon comstock 4M's, 1949 Cost price Selling price _ _ __ _ Percent 98H 100 $15.50 16.50 Southern Paramount PennsylSouthern Baltimore Western Pacific Publix Cor- vania R.R. Pacific & Ohio Union Tele- PennsylR.R. R.R. Co. R.R. R.R. Co. graph Co. vania poration 43^'s, 1960 5's, 1960 4H's, 1970 43^'s, 1977 5M's, 1950 4^'s, 1981 4H% 1981 Percent 93H 95 Percent 98H 99 Percent 93 93H Percent 96 96H Percent 91H 92H Percent 95 95K Percent 95H 95% Q J. S. Alexander former president National Bank of Commerce (deceased) Lewis W. Baldwin, president and director Missouri Pacific Newcomb Carlton, president and director Western Union Telegraph Co Cosmopolis Securities Corporation Henry W. De Forest, member of the executive committee and director Guaranty Trust Co.; chairman of board, Southern Pacific R.R _._ Henry H. Lee, president Pennroad Corporation Jas Loeb & Co L. F. Loree, president, member of board of managers and chairman of executive committee, Delaware & Hudson Co R.S. Lovett, former Union Pacific R.R. (deceased) Chas. E. Mitchell, former chairman of the board, National City Bank Chas A Peabody, former Illinois Central (deceased) A. W. Robertson, chairman of the board, Westinghouse Electric & Manufacturing Co and subsidiaries Percy A. Rockefeller, member of executive committee and director New York Edison Co., Consolidated Gas Co Fred W. Sargent, president and director Chicago Northwestern R R Mrs. J. H. Schiff _ _ Mrs. A. G. Schiff (deceased) $50,000 100,000 Shares 2,000 $50,000 100, 000 $50,000 100,000 w $50,000 100,000 $100,000 50, 000 100,000 2,000 5,000 50,000 50,000 100,000 50,000 100,000 100, 000 150,000 50, 000 5,000 100,000 150, 000 50, 000 150,000 50,000 100, 000 75,000 50, 000 150, 000 50,000 100,000 50,000 100, 000 100,000 100,000 100, 000 100,000 100, 000 100, 000 100, 000 100,000 100,000 100, 000 100, 000 100, 000 100,000 100,000 100, 000 2,000 100, 000 100,000 100, 000 250,000 200,000 200,000 5,000 10,000 X a H g a H j—i 250,000 100,000 Q C. R. Seger, chairman of the executive committee and director Union Pacific R R Co Henry Tatnall, director, Philadelphia, Baltimore & Washington Ry Jas. Paul Warburg, president and director of International Acceptance Bank, Inc Albert H. Wiggin, chairman of governing board the Chase National bank W. H. Williams (deceased) formerly with Wabash R.R. Co A. Wolff, estate of Miscellaneous foreign banks and companies Total _ __ .__ 100,000 50,000 100,000 100,000 50 000 50, 000 50,000 50, 000 100,000 100, 000 100, 000 100,000 100,000 100, 000 100, 000 100,000 100,000 100,000 100,000 200,000 3,025,000 112, 000 3, 850,000 825,000 1, 250, 000 5,125,000 153,000 5, 450, 000 1, 775, 000 2, 625,000 5,000 5,000 1, 300, 000 1,050, 000 100,000 675, 000 1,050,000 100,000 675,000 O o W fed X o 1 02 1268 STOCK EXCHANGE PRACTICES COMMITTEE EXHIBIT NO. THE 20 PENNROAD CORPORATION STATEMENT FOR YEAR ENDED DECEMBER 31, 1932 Directors: W. W. Atterbury, George W. Bovenizer, A. J. County, William M. Elkins, Rodman E. Griscom, R. B. Mellon, Effingham B. Morris, A. H. S. Post, Joseph Wayne, Jr., and H. H. Lee, president. Voting trustees under voting trust agreement of May 1, 1929: Effingham B. Morris, Joseph Wayne, Jr., and. William M. Potts. Agent and depositary of voting trustees: The Philadelphia National Bank. Registrars of voting trust certificates: Chemical Bank & Trust Co., New York, and Girard Trust Co., Philadelphia. THE PENNROAD CORPORATION, Philadelphia, Pa., March 1%, 1933. To the Stockholders of The Pennroad Corporation: There is submitted herewith an income statement of the corporation for the calendar year 1932, together with statement of earned surplus and general balance sheet as of December 31, 1932. There is also appended a list of the securities owned by the corporation with their cost and approximate market value as of December 31, 1932, where listed on stock exchanges and where the corporation owns less than a majority of such securities. In the case of stocks, bonds, notes, and advances having no stock exchange quotations or where this corporation owns at least a majority of such securities, no attempt is made to estimate their value or the value of the control represented thereby. The net income for the year 1932 was $793,897.65, a decrease of $3,701,148.46 as compared with that for the year 1931. The decrease in net income is due primarily to reductions in dividends received. It indicates the greatly reduced gross and net earnings of enterprises in which this corporation is interested in a year of business curtailment. Any improvement in general business will be reflected in increased earnings of the companies in which this corporation has stock holdings, although the prospect of increased dividend receipts by reason thereof is not encouraging for the near future. Notes payable were reduced by $1,125,000 during the year to $400,000. There was no change in the stock of the corporation during the year 1932, voting trust certificates for which are in the hands of 156,418 holders. During the year 1932 the corporation suffered a loss through the death of two members of the board of directors, James S. Alexander and Jay Cooke. George W. Bovenizer, of New York City, was elected to fill the vacancy in the board caused by the death of Mr. Alexander, and William M. Potts, of Philadelphia, succeeded him as a voting trustee. By order of the board of directors. HENRY H. LEE, President. Income statement for period Jan. 1 to Bee. 31, 1932 Income: Dividends Interest from bonds Interest from other accounts Total income Increase (+) or decrease (—) compared with 1931 $226, 438. 80 - $ 3 , 327, 186. 67 688, 461. 00 —391, 261. 66 93, 342. 22 —12, 526. 86 1, 008, 242. 02 —3, 730, 975. 19 Deductions: Interest paid Taxes General expenses.. 45, 374. 99 25, 244. 38 143, 725. 00 + 1 2 , 595. 75 + 2 0 . 66 —42, 443. 14 Total deductions 214, 344. 37 —29, 826. 73 Net income credited to earned surplus._ 793, 897. 65 —3, 701, 148. 46 1269 STOCK EXCHANGE PRACTICES Statement of earned surplus Credit balance Dec. 31, 1931 $8, 266, 213. 59 Net income for 1932 793, 897. 65 Credit balance Dec. 31, 1932 9, 060, 111. 24 General balance sheet Dec.