The national banks, also, with the sanction, or at least without the disapproval, of the federal government, have invested freely in municipal bonds; and recently the list of securities which may be deposited by national banks as security for postal savings deposits and United States deposits has been lengthened to in clude railroad, public utility, municipal, and other approved bonds.
Powers of National Banks with Respect to Securities The law and court interpretations thereof with respect to dealings and ownership of securities by national banks may, therefore, be roughly summarized as follows: I. It is illegal to purchase stocks of other corporations, includ ing banks, with certain exceptions noted.
2. It is permissible to accept stocks or bonds from a debtor if this is the only or the most appropriate way to save the amount of the debt; such ownership must be soon terminated; and such transactions must be free from speculation.
3. Bonds may be purchased as "evidences of debt"; the government has directly and indirectly encouraged transactions by national banks in government securities, and, to a less degree, municipal securities.
4. A national bank is not by its charter, or by its statutory or its incidental powers, authorized to act as broker or agent in the purchase of bonds or stocks.
5. While it is lawful to buy bonds in order to secure national bank note circulation, or as an investment for surplus funds, and to sell bonds if need be to save a debt for which they are security, a national bank has no right to traffic or speculate in them, buying them at a certain time with a view to selling them at an advanced price shortly thereafter.
It is obvious that the intent of the law and courts is to inhibit speculative dealings and at the same time permit the purchase and owning of bonds and their acceptation as collateral for loans. But, as in the case of every attempt by the government to regulate speculation and to distinguish between speculative and non speculative dealings, no clear-cut definition as to what are and arc not speculative transactions has been made. To determine, for example, whether a bank's motive in buying a particular bond is to invest its surplus funds for a long time or to profit from an expected rise in value of the bond within a short time is difficult if not impossible. In most cases the motive is probably a mix
ture of the two; such bonds are bought as provide a safe invest ment and are expected to increase in value; and the intention and practice may be to sell the bond if the market turns favorably. It is contrary to the rules of the office of the Comptroller of the Currency to express an opinion as to what are speculative and non-speculative transactions except as they are met with in the supervision of a particular national bank.
Powers of State Banks with Respect to Securities The powers of state banks to deal in and own stocks and bonds vary in different states. In New York, for example: [Such banks are permitted to discount and negotiate] promis sory notes, drafts, bills of exchange, and other evidences of debt; . . . to purchase and hold any stocks or bonds or interest-bear ing obligations of the United States or of the State of New York or of any city, county, town, or village of this State, the interest of which is not in arrears; . . . to purchase and hold, for the purpose of becoming a member of a Federal reserve bank, so much of the capital stock thereof as will qualify it for membership in such reserve bank; . . . and to purchase and hold the stock of any safe deposit company or organization existing under the laws of the State of New York and doing business on premises owned or leased by the bank.
The New York courts have held that New York State banks cannot purchase stocks of other corporations for the purpose of selling at a profit. Nor can they purchase state stocks to sell at a profit, except when taken as security for a loan or in payment of a debt. Nor can they become shareholders in railroad corporations.
Transactions in Bonds—Stock Exchange Procedure Bonds are traded in both on the stock exchange and in what is known as the "over-the-counter" market. Some bonds, for seemingly no particular reason, are traded in almost exclusively on the exchange, whereas others can be more readily bought or sold by canvassing houses which specialize in them, either by telephone or by employing a "street broker," who goes from house to house until he either buys the bonds desired or disposes of them, as the case may be. This last method is, as a rule, the more satisfactory of the two when the transaction covers a large amount.