Evening star., 1931-12-31
j. s. TO CONSIDER
BANKS SECURITIES
ON INTRINSIC VALUE
Bond Market Hereafter to Be
Disregarded to Placing
Worth on Holdings.
BY DAVID LAWRENCE.

The Government of the United States
in its relations with banks supervised
by the controller of the currency has
determined to ignore the quotations on
the New York Bond Market and regard
intrinsic value as the true basis for
judging the worth of the securities held
by such banks.
This policy, which represents a fur
ther development of rulings made sew
eral weeks ago, has been conveyed in
informal instructions to national bank
examiners during the past 10 days and
is expected to strengthen materially the
banking institutions of the country from
unWarranted attack.
Solvency First Interest.
The new step does not mean any
bank can take advantage of the ruling.
For if an institution is in an unsound
condition and should be closed, the
bank examiners are instructed to do so
irrespective of what the valuations
placed on its securities.
What we are always interested in"
said Controller Pole today, lis the
solvency of banks and not necessarily
their liquidity. There are many fine
companies which have issued bonds,
and there is every reason to believe
they will meet their interest charges
and pay their principal at maturity.
Why should we ignore those facts
and take quotations from a blackboard
in market where there are all sellers
and no buyers? We wish to protect
banks that have bought good bonds
from any such situation, and while
every case will have to stand on it's own
merits, it is our plan to regard intrinsic
value as the real basis for valuing the
securities held by banks"
Government officials have been
wrestling with this problem for many
months in fact ever since the depres-
sion began The first ruling was to
! permit intrinsic value to apply only in
the case of rated bonds-that is. ma
| tionally known securities listed by four
different statistical organizationS-and
to allow for depreciation of 25 per
| cent.
But it was found this worked hard
ships on many banks which had
bought securities issued locally and
which were in many respects even
better investments than the rated
bonds. Also, with changing conditions
from day to day, trying to rate bonds
by statistical records of the present
years was found a difficult task.
Selling Affects All Bonds.
To get at intrinsic value. it was
thought better to apply the rules of
| common sense about the Solvency and
stability of companies that are going
concerns. A company that has rad a
| good record of earnings and is engaged
in a business which is essentially
sound would, as rule, have had thor
ough investigation when its bonds we're
| 1oated and usually banks have bought
only the bonds of companies that could
earn their interest charges from two
| TO four times over every year.
But with distress selling one bond is
affected by the price paid for another
Thus railroad bonds, which normally
are gilt-edge investments, are depressed
because Of the drop in current earn
ings. When railroad bonds go down
it affects bonds Of other concerns that
really have not been injured in the
matter of earnings
The controllers Office feels intrinsic
value is the only real guide. and hence
when banks make up their quarterly
statements they can truly insert WITH
| the authority of the Government the
intrinsic value of the securities they
have bought.
(Copyright, 1917