The popularity and regard in which certain securities are held vary materially, and the star performers of today may become, in Wall Street parlance, the "cats and dogs" of tomorrow. For a long time bankers scorned curb stocks as collateral, owing to wide fluctuations in price, inaccuracy of quotations, and irre sponsibility of persons in charge of new flotations. With less secrecy in the management of some of the industrials, and with better ticker facilities, closer supervision of trading, and a broadening and more stable market for such stocks, the rules of banks with respect to such collateral have been somewhat modified. Some of the most highly regarded stocks now dealt in on the stock exchange were first marketed on the curb; and as securities cannot be traded in at both places there has been when commissions were scarce, during lean years, quite a struggle between the two bodies of traders. The curb tries to keep its popular favorites, and the stock exchange tries to take them over as an attraction that will help to offset a dwindling business. Both the Metropolitan Street Railroad and the New Haven were until recently regarded as gilt-edged investments, selling well above zoo, and the permanency of their dividends was unques tioned. At present, however, they are scorned. Other stocks have risen in popular esteem, such as Union and Southern Pacific. The formation of railroad or industrial combinations may remove a stock from the market, and a court order dissolving the com bination may restore the stock. The control of a road may be obtained by daring speculators of untried managerial ability, whose policy may reflect on the value of its stock as collateral.
These illustrations are sufficient to bring out the fact that, next to the actual making of a loan, the most important work in the loan department is the supervision of changes in collateral securing it. A loan of the highest type may be riddled in one day, and it is extremely necessary that its original character be preserved; that the desirability and marketability of the different items comprising its security be not allowed to vary; that in mixed loans the ratio of rails and industrials be maintained; and that the total number of shares be not allowed to multiply too fast. Some loans are changed daily, others on rare occasions, and a few are not disturbed at all during their period; the active loans, of course, require most attention.
Substitution tickets must be signed by a member of the brokerage firm making the substitution or by an accredited representative, after the form shown on page 85o.
The signatures on the backs of the certificates of stock tendered must be known to the bank or be guaranteed by a mem ber of the stock exchange; and all offerings must conform to the "Rules for Deliveries" of the exchange.
After the substitution has been made the ticket is handed to clerks who make the changes on the card showing the col lateral to each loan and who record it in the loan ledger. The substitution tickets are not returnedto the broker, but are kept for reference for a reasonable length of time.
The complexion of a loan sometimes undergoes swift changes, but usually the borrower, intentionally or otherwise, brings about the change slowly and in a less noticeable manner. For with a long line of borrowers before the window the windowman cannot stop to examine the records on each substitution; so the borrower, if so inclined, may add ioo shares of undesirable stocks here and there, from day to day, until his loan has deteriorated.
To guard against this the loan cards should be gone over at intervals, and loans in an unsatisfactory condition be speedily brought to the attention of the makers.
Rates of Interest on Stock Brokers' Loans The rate of interest on brokers' loans must be watched as carefully as are the collateral and margins. The rates are deter mined by the brokers in the money crowd in the boardroom, and not directly by the banks. There are two important rates on call loans: the "renewal rate," and the rate on new loans. The volume of new loans made on the board is never more than a small percentage of the total stock market loans, so that the renewal rate is the real rate of the day. Assuming that the amount of loans subject to the renewal rate of 20 per cent on a certain day is a billion dollars, the cost of carrying this loan for one day is approximately $55o,000; and any broker who had borrowed, say, $20,000 to carry roo shares of stock would have to pay more than $11 interest for the overnight loan. The impor tance of this rate is, therefore, quite evident.
Method of Determining Call Loan Renewal Rate The call money market opens about r i o'clock in the morning, by which time the banks have completed their clearing house transactions and have determined their position with regard to the day's business and the amount of call money they have to lend. Before this hour the bids for funds from stock brokers have been coming to the "money table" and been entered in the order in which they were received. By this time, too, the stock brokers have been operating on the exchange more than an hour and can gauge the general activity of the market. The proportion of the demand for mixed and all-industrial loans is observed. The demand for call loan funds is therefore quite definitely known before the supply appears. The closing rate and the amount of funds left unloaned on the previous day are kept in mind, as well as the general banking position and money movements. With these and other factors before them, the brokers make bids and offers for funds. It is on the number and strength of these bids and offers that the renewal rate depends. For example, money may be bid at 3 per cent, offered at 3/ per cent, and $1 oo,000 loaned at 3/ per cent; or bid at 3X per cent offered at per cent, and $50,000 loaned at 3X per cent; or offered in $1 oo,000 lots at per cent, and several loans made at per cent. With this same condition prevailing at :3o o'clock, the expert in charge of the money table, the president of the exchange, and one or more of its governors, and three or four of the big money-lenders get together, on the floor of the exchange or by telephone, and decide what shall be the proper renewal rate for the day. In the instance supposed they would probably fix upon 3,' a per cent. As soon as the rate is determined it is posted on the floor of the exchange. This rate is then quoted over the news ticker, and its publication is anxiously awaited by the bank loan clerks, because in case of a change from the preceding day's rate these clerks hasten to get out the "rate notices" and "calls" by 12 o'clock, if possible.