The sun. [volume] (New York [N.Y.]) 1833-1916, 1878-01-02
The Risks of Collateral Security.

The Risks of Collateral Security.
Two considerable banking houses havo
| failcd in New York during the past wook
| under circumstances which ought to cause
some anxiety in the business community.
| The number Of persons who hahltually bOr-
row and loan money upon collateral sccdr-
ity must bc very large II IL essential To
their true interests that tho practice of rc-
| hypo'hcNtiun revealed by these failures
should at oncc bc abandoned, II, indeed, it
prevails 10 any great extent
When tho firm Of METER x Co went to
pieces, the day after Christmas II appeared
that they had borrowed large amounts OF
money from various banks and bankers ON
| negotiable stocks and honda which thcy did
not own. Tut which they had themselves re-
ccivcd ns collateral eccurity for smaller
loans made by them IA the rNal owncrs
Thus. for example, if they had loaned fifty
thousand dollars ON certain bonds, they
would take these very game bonds To some
bank that was willing Ia advance more
money on them, and pletgo them for a loan
OF s,ly sevcnty-uvc thousand dollars. In
this way the firm obtained twenty-five thou
sand dollars more than it parted with. We
do not say that just this transaction took
| Place, but it correctly illustrates the method
which was pursued. II the bonds were
worth more than the ecVcnty-iivc Thousand
dollars innoenntly loaned upon them 10y the
bank, 1t would be- to the advantage OF the
real owner to pay that amount tO the bank,
and 80 regain possession OF his securities
| II IL plain, however, that he would thus be-
twenty-five thousand dollars out of pocket,
with lio recourse except against IA bankrupt
| concern.
Now, this is exactly the sort Of liability TO
which borrowers OF money ON collateral
securities must expose themselves il the
practice OF rchypothccating such securities
Is 70 prevail. In other words, if IL man who
has loaned you tfty thousand dollars ON
certain stocks liz at liberty, without your
knowledge or consent, 10 take those stocks
and obtain FOR himself on them, II he can,
from some ono else "a loan OF soVenty-nve
thousand dollars, or any other sum in excess
Of that loanesi you, he is not unlikely to do
! It; and il he fails, he wilt be apt to leave
your stocks where, in order to get them
you must repay not only the fifty thousand
dollars which you borrowed, and are there
fore quito willing to pay, but also the adj
| ditiOnal sum which he has borrowed, but
which you have never seen, and are there
fore quite unwilling to pay.
On the other hand this practice Of ~
| plodgng collateral securities Is dangerous
10 loaners as we'll as to borrowers man
who has made u loan on collatcrals to a re-
spectacle firm. such as was that Of JoHS
BONNER 4 Co. until Monday, suddenly finds,
upon their suspension. that the colaterals
in his hands are really owned by third per-
sons. who have already obtained smaller
| loans upon them from the very firm in Qucs-
ton. II may be that these owners are UNI
willing to pay the additional amount innO-
Gently advanced by the present holder upon
tho security of their property. The holder
must then proceed to realize upon the col
latcrals that il, sell them and apply the
proc~Nls to the payment Of the loan he
madel according TO law; and it IL plain that
this process will Ice delayed and rendered
! difficult by the complicated claims and r.la-
! tiOns OF til" different parties. POSSIBLY in
| Guiding the assignee Of the insolNent firm.
We understand il to bc the ordinary duty
Of a plcdgoe Of personal property to keep
that property always under his absolute
control. or course, this obligation is Niu-
| lated by rcplcdgng It, as did METER 4 co.
and JOHN BONNER 4 Co, ia 50 many in
stances. But II is surprising 10 iind that a
different view obtains IL somerNt tent in Wall
street, and that brokers can be found who
defend the transactions which have de-
str1ycd these two firms. 1t ought to be
| plain enough by this time, however that
more trouble than profit must result from
continuance Of such methods, even il they
were defensible IN law. The Stock Exchange
| itsclf can do much TO rcpress the evil II
should provide for the prompt and final eX-
puleion of any member who ropl,~lgos col
lateral security without the written consent
OF the original rledgor produced 10 the per
son from whom IA second loan is sought.
| Until some measure Of this KIND is adopted
and indeed whether it j. adopted OF not
! pcopl" cannot be too careful To whom they
| intrust their collateral securities and upon
what and whose collateral securities they
loan their money These late failures indi-
cate that many Of our bankers and brokers
might by little investigation develop facts
ia regard Ia their outstanding loans which
would be more surprising than pleasant.
But perhap the sooner they make these in
vestgatons the better.
Authority in Matters of Finance.