The Washington herald., 1914-03-19
BANKERS Resent
BRANDEIS idea
Analysis Of Argument Con-
cerning Profits on Sale
of Securities.
WHAT GOVERNS PROFITS
Function of Fiinanciers in Marketing.
Ethics of Business Is
Defended.
WHAT GOVERNS PROFITS

In the current number OF the Outlook
the Investment Bankers Association OF
America. through Lawrence Chamberlain.
calls L D. Brandeis to account for GER
tain statements about the bond business
in mis- recent magazine articles. In these
Mr.. Brandeis conveyed the impression
that profits made by bankers in the sale
Of securities for corporations were so
great that they burdened the community.
Specifically. the association asserts that
the following paragraph is typical of the
manner in which Mr.. B-andeis has mis-
represented the facts:
The bankers compensation should, of
course, vary according to the risk he as
sumes. Where there is a large risk that
the bonds or stock will not be promptly
sold at the issue price, the underwriting
commission Cthat is, the insurance pre-
mium) should be correspondingly large.
But the banker ought not to be paid more
for getting investors to assume a larger
risk. In practice the banker gets the
higher commission for underwriting the
weaker security. on the ground that his
own risk is greater. And the weaker the
security, the greater is the bankers in
centive to induce his customers to relieve
him.
Reply of Chamberlain.
Mr.. Chamberlain replies to this on be-
half of>She association. in part as fol-
lows:
More than any other merchant the in
vestmsAt dealer assumes a moral respon-
sibility for the goods he sells, irrespec-
tive of their grade. A dealer in mer-
chandise is not expected to guarantee the
wear of his goods, unless he represents
them TO be of the best class. mer-
chant in investment securities does not
represent everything that he sells to be
as safe as government bonds. and yet
those who buy from him are disposed to
hold him responsible If the investment
proves Improbable. and the interest and
principal are not paid promptly. A de-
fault is a severe blow to his prestige
and the confidence in his judgment by
virtue of which he holds his clientele.
These facts justify the 2IE per cent
profits that the investment merchant is
accused of making, although a net profit
so large is not often realized. 1t may be
held. however. that they do not justify
a larger profit. II larger profits are real
lied, they are consideration for the diff
fculties of the business. The credit Of
corporations varies widely, as does the
market for their obligations. Thousands
OF people know the value of the Penn
sylvania Railroads promise to pay, and
need no persuasion to buy its securities
Few people know the value of a similar
obligation made by an electric light COM
pany in some small city of a remote
State. Though the security may seem
safe to these who are experts, the larger
public has to be convinced of it.
Capital Is Tied Up.
Each investor to whom such securities
are offered must be persuaded to be-
lieve in them. 1t may take a year of
negotiation to induce him to buy. Bond
statesmen have often found it necessary
to wait that long to sell good but slow
paper.
Meanwhile the dealers capital is tied
up in the bonds he has bought and his
r,oney is being spent to convince the in
weston. The purchase and resale of Sc
curities that, though good, are but little
known. involves more capital, time. labor,
and risk than are required for the pur-
chase of standard securities that always
command a market, and it is altogether
reasonable that such operations should