Evening star. [volume] (Washington, D.C.) 1854-1972, 1929-11-13
NEW BASIS URGED
| FOR STOCK LOANS
Bank President Would Adopt
Actual Earnings Policy in
Security Valuations.
special pispateh 70 The scar.

Special Dispatch 70 The Star.
NEW YORK, November ia plan
to curb stock market speculation on
borrowed capital by enlisting the banks
of the country in a uniform policy of
limiting collateral loans to rs per cent
of security valuations as determined by
actual earnings instead of inflated stock
market prices was put forward today by
NJ. H. Cahill, president of the Plaza
Trust Co. and former president of the
New York State Bankers Association.
He suggested the American Bankers
Association as the logical medium for
sponsoring such move.
IF the banks of the country, acting
as a unit, would adopt a definite, uni
form loaning policy under which they
would not extend collateral loan in
excess Of IS or 80 per cent of the value
of a security offered, as determined by
appraisal based on the previous quar-
terly statement of earnings, the APP
praisal not to exceed 20 times the net
earnings, it would ipso facto stabilize
the market level of securities and pre-
vent the purchase of speculative values
on credit" MIR. Cahill's proposal set
forth.
Would Check Speculation.
"Such a policy on the part of the
banks would stabilize security values
on q basis where their purchase price
bears q direct relation to net earnings,
and it would regulate credits to n
point where rs per cent margin woulu
be sufficient because based on actual
and not on fictitious values. While 1t
might not do away with speculation
entirely, it would very definitely prevent
rash speculation with borrowed funds.
while there were number of con-
tributing factors leading up to the
recent break, the major cause OF tho
collapse was the rash and reckless pur-
chasing of fictitious values on credit.
It was not merely that securities were
purchased at levels far beyond their
sound investment values, as measured
by earnings, but the fact that sucn
purchases were made on borrowed cap
ital.
"Unified bank action as suggested
would preyent unWarranted speculation
through the medium of brokers' mar
ginal accounts, because 1t would limit
the ability of brokerage firms and In
vestment bankers to borrow funds TO
finance their customers accounts on
any but a sound investment basis. The
man of small means would be protected
because he would be unable to specu-
late with borrowed funds. A stock mar
ket collapse of any magnitude would be
impossible, because security values
would be stabilized to point Wnere
they would never reach dangerous
imitation value. A policy of this kind
would also tremendously strengthen our
entire credit situation. as it would place
every bank loan in the country on
basis where they would be backed by
securities that were sound from an in
vestment standpoint, and therefore
liquid.
Drastic Legislation Possible.
"The American Bankers Association
would seem to be the logical medium
to organize the banks of the country
on q unified policy of this kind and
secure their cooperation. If the banks
of New York City alone, through the
Clearing House Association, were TO
adopt such a policy the rest of the
banks through the country would I'M
doubtedly follow.
The bankers of the country should
take the initiative to prevent the ever
| threatening stock market panic or We
may find ourselves facing drastic amt
perhaps radical legislation to eliminate
the evil Remedial legislation to cure
the speculation evil has been threaten
ing for some time in Washington, and
some Of the bills suggested have bselI
arbitrary in character and far from
constructive"