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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 ?
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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.
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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
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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.
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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
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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
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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
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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
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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.
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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
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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
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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
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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
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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
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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
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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 ?
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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 ?
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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.
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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.
@FedFRASER