Evening star., 1933-06-21

SENATOR
developed in the marketing Of securi-
ties was an unwholesome one for COM
mercial banks. It resulted in an over
production of securities as well as ar
| improper interest on the part of COM
mercial banks in maintaining a ia
vorable market for new dotations anC
in turn this interest in maintaining q
favorable market had an unwholesome
influence on loan policies of the banks
Loans on Securities.
The vast development of loans on
collateral security may fairly be at
tributed at least in part to the interest
Of banks engaged in securities busi-
ness in keeping up market conditions
| capable of absorbing capital issues
Whether this motive was deliberate or
subconscious, the fact remains that
banks generally were involved in it,
and If they should be permitted to con-
tinue in the investment security bust
ness the same motive would be pro-
vided for repetition Of the same
unfortunate developments which are
now SO much regretted. If, on the
and underwriting investment securi-
ties is confined to houses not engaged
in deposit banking, then the desira-
| bility Of new issues OF securities will
| be subject to an independent and I'M
partial check.
| Furthermore, the investment security
business Is attended with certain risks,
since market conditions may change
| after the making Of an underwriting
| commitment in such o way as to cause
considerable loss to the underwater.
This risk Is one which ought not to
| be undertaken by institutions RESPONSE
bic for the safety of depositors money.
| If depositors believe that such risks
| are being taken it is natural that their
| confidence should be impaired. And
| If investors are subject to losses
through depreciation Of securities which
they have purchased from bankers, the
reputation of the banks must suffer,
| and their usefulness in their legiti-
mate field must be impaired.
Disinterested Advice Needed.
The banker ought to be the disin-
| terested adviser Of his customers, and
when the banker has no securities to
sell to his depoStors on which the
bank makes a profit he is much better
| to give diligent regard to the safety
Of his customer. The long established
rule of law that trustee is not per-
| mitted to profit by dealing with his
trust estate does not imply any reflec-
ton upon the honesty of trustees as
class. It is but the recognition of that
frailty Of human nature that makes 1t
questionable for any man to represent
the buyer when he Is himself the seller.
No one would think of suggesting an
alteration Of the old rule about trus-
tees.
1t is q good rule also with respect
to bankers The bankers advice to his
depositor seeking an investment, or to
his country correspondent bank. is
tainted when he makes profit by
selling investment securities. If We
want banking service to be real bank
ing service, without any expectation OF
additional profits through selling some
thing to bank customers, we must keep
the banks out Of the investment secur-
ity business.
Take the other side of the picture:
A corporation, having carried its ac-
count with a bank, having borrowed
from that bank for its ordinary COM
mercial requirements, is confronted
with the question of raising longtime
funds by the issuance Of securities. II
1t is to have the advice Of its banker
untainted by the prospect OF obtain
ing an originating or underwriting
profit, we must keep the banks out OF
the investment security business. II
we are to relieve the banker Of the
tmptation to put pressure upon his
commercial borrower to put out Sc
curity issues on which the banker viii
make either an originating or an un-
fy,C ra6 VIZ
banks out of the security business.
Curb on Bad Loans.
II the public is to be protected
against the possibility Of bad bank
loans being set up into bond issues to
| be sold to savings depositors of the
same banks, or even to trust accounts
administered by the banks, without
the exacting scrutiny OF an independ-
ent underwater, interested primarily
| in the soundneSs of the securities he
| is about to sell, we must prohibit the
! banks from engaging in the security
| business. If we are to Keep banks from
being tempted to make security loans
! in order to help make market, or to
finance the purchase of securities on
which the lending bank is making all
originating or underwriting commts-
| sion, we must keep banks out OF the
| investment security business. And II
we are to save banks from the en-
barrassment of having to appraise, as
collateral security offered by prospec-
tive borrowers. the very securities which
their own af1liates have sold to those
customers, we must keep the banks out
| OF the investment security business.
1t is not, Of course, contended that
the abuses here intimated are never
avoided by the good conscience of the
bankers. On the contrary, I believe
they are avoided generally by good
bankers. Certainly they are avaided
much more often than they occur. Yet
the danger is always there, and must
be there as long as human nature re-
mains what it is And just as we be-
lieye In the strictest rules for the
conduct of trusts, just as we believe in
examination and audits of institutions
whose oflcers are worthy of the high
est confidence as to honor and ability
we must surround the banking business
with sound rules which recognize the
imperfection of human nature, that
our bankers may not be led into temp
tation, the evil effect of which is some.
times SO subtle as not to be easily
recognized by the most honorable man
Confidence Seen Returning.
The fact that this bill absolutely
completes the separation of CONNER
cial banking from the investment Sc
! curities business will have great ef-
. feet toward accomplishing the much
needed restoration of public confidence
In banking institutions. The other out
standing provision of this bill looking
TO that much-desired result is that 70.
: the insurance of bank deposits.
: Because OF the limit Of time shal
. not undertake to discuss the tempo
s rary insurance which begins next JAN
e uary /. or at an earlier date II flxec
, by proclamation of the President anc
I ] which covers only the FIRST $500 ol