Evening star., 1938-06-29

underwriting Of David Lawrence.
large bond issues,
but the small business has had avail
able no such machinery.
Up to now the bank regulations
have permitted banks to buy only
marketable securities, which means
the bonds or notes of companies big
enough to get their capital through
investment banking processes. Now
however, banks can buy for their
own account the bonds or note issues
Of small businesses.
Heretofore investment bankers con-
sidered any bond issue less than ST.
000, 900 as too small to be distributed
prof1tably through retail outlets. Now
the banks Of the country will. In
effect, provide an investment banking
machinery for any sum for the smaller
businesses Of the country.
For many years the need of an
intermediate" credit system in bust
ness has been pointed out by this
correspondent and many other people
who have studied the capital processes
Va VIC NouAeAy. Va VIC lIldlly pAdAAo
brought forward none, however. has
been possible without legislation.
Chairman Eccles of the Federal Re-
serve Board ingeniously discovered
way of doing the same thing in
much simpler fashion and without
legislation.
Encouraging Sign.
NJ hot In lo
handled by a change in bank regula-
tions is an encouraging sign that the
Federal agencies concerned with bank
loans have at last come to recognize
that 1t is inconsistent for the Govern
ment on the one hand to urge banks
to be liberal with loans and at the
same time to put obstacles in the way
Of granting such loans.
The new regulations are by no means
. relaxation Of sound banking prac-
tice, for heretofore banks could buy
the bonds or notes of large companies
and these securities often showed a
big depreciation due to market condi-
tions. The notes and bonds Of smaller
companies were barred from purchase
' BY banks simply because they did not
have market on the national or local
exchanges, which in some instances
might mean that the securities were
just as good as the marketable securi-
ties but were far too small to be traded
IN on any exchange.
The new regulations which permit
. bank to purchase certain securities
for Its own account do not afford a
means Of getting capital for new and
untried enterprises. These still re-
main q field for the sale Of stock
among those who want to take risks
and expect to be repaid in dividends
commensurate with their risks. Nor
do the new regulations intimate that
shaky businesses already in existence,
or which cannot show signs Of paying
of the securities they might issue are
to be given capital
Purchasing Securities.
The regulations in exact text say
that banks can purchase securities
(which are issued by established COM
mercial or industrial businesses or en-
terprises, that can demonstrate the
ability to service such securities, the
debt evidenced thereby must mature
not later than 10 years after the date
Of issuance Of the security and must
be of such sound value or so secured
as reasonably to assure its payment;
and such securities must, by their
terms, provide for the amortization Of
the debt evidenced thereby, so that at
least IS per cent of the principal will
. be extinguished by the maturity date
by substantial periodic payments; pro-
vided that no amortization need be
required for the period Of the first
year after date Of issuance of the
securities"
Paraphrased, the foregoing means
that, first Of all, company must be
able to demonstrate by facts and fig
ures and records of earnings and
trend of past sales that the business
In question can earn enough over a
period Of 10 years to pay of three
fourths Of the sum borrowed. This
implies that at the end Of the 10
years there will be renewal of the
unpaid balance with an arrangement
to pay 1t of by installments mutually
to be agreed upon, but again permit
ting up to 10 years so far as the bank
examiners are concerned.
Regular Payments.
When the clause demonstrate the
ability to service such securities" Is
used, 1t means ability of the company
, to pay not only interest regularly but
something on the principal in regular
periods. Inasmuch as seasonal fac
tors enter into 50 many businesses, the
installments might be three or four
times year or twice year accord
ing ~ it may appear that a business
takes in the bulk Of its money for
goods or products sold.
Naturally no bank Is going to buy
notes or bonds unless they appear
to b 'of sound value" but the new
regulations certainly take care Of the
many situations wherein the notes or
bonds would surely seem to be Of
, sossnd value, but where the bank reg
ulataons did not permit purchase Of
tt1ese unless marketable or unless they
were Of . shorter duration than nine