RAISING FUNDS THROUGH THE BANKING HOUSES "Raising Funds for the Capital Account through an Appeal to the Stockholder," were mentioned two reasons why corporations, if they can, gen erally resort to the banking houses to raise new funds for the capital account. It pointed out that corporations are not equipped to do this work, which is never more than occa sional in character, and that they ought not to take the risk of failure to raise the required amount of funds, if they can avoid it. We should add as a further and important rea son the professional character of the banker and his ability to give expert advice in finan cial matters. It is the business of the banker to know the market, to know what kind of securities will be most acceptable to it at a given time. Are capitalists at the moment speculatively inclined? H so the time may be opportune for an issue of stock rather than for an underlying security. Or do capitalists show a conservative tendency and a prefer ence for the promise of interest rather than for a hope or expectation of dividends? Are interest rates high or low? If the corporation is to finance on an underlying security, should it run for a short or for a long term? On all these matters, discussed in the first volume in the chapter on "The Market and the Price," the banker is an expert, and if the corporation were to undertake the work of raising funds directly it would find it highly advantageous to seek the banker for profes sional advice. On all such matters as those discussed in the chapter on "Form of Securi ties," the corporation needs the advice of the banker.
Just how does the corporation establish its relations with the banker? It is difficult ) generalize. Sometimes the banking house was interested in the enterprise at the time of its promotion. The chapter in the first volume which discusses " Watered Stock" indicates something of the nature of this relationship. Some banking houses refuse, any circumstances, to be interested in nterprises in the promotion stage. Others will, very rarely, concern themselves with a promotion. Some organizations, partly banking and partly engineering in charac ter, are rather frequently interested either in the promotion of a new enterprise or in such a reconstruction as amounts essentially to a promotion.
A banking house which takes the position of a promoter does not appear publicly in its banking house capacity as a promoter, or as in any way interested in an enterprise in its promotion stage. When the enter prise has demonstrated an earning power through actual operation, the banker may appear publicly as identified with the under taking. We are interested at this point,
however, in the banker as promoter only as showing one of the ways in which the re lationship of banker to a corporation may originate.
If the corporation went through its pro motion period without any banker, and its organizers raised the necessary capital as best they could among themselves and their friends and such capitalists as they might reach, later, when it needed to make an addi tion to the capital account from funds raised from sources outside itself, presumably the officers sought a banking house that would undertake to provide the funds. Usually bankers have a number of such opportuni ties pressing on their attention all the time, and the officers of the corporation may have to visit a number of bankers before they find one ready to undertake the financing re quired. A rejection of the proposal may not in the least indicate an unfavorable criti cism of the financing. Commitments of the banking house already made may sufficiently tie up the capital of the house and require the entire attention of the bankers: Though people are familiar with the term "banker," as applied to these organizations for arranging long-time or relatively long time commitments of capital, people are not generally familiar with the working of these banking houses. Bankers of the kind we are speaking of are termed "investment bankers" to distinguish them from commer cial banks and bankers. Such investment bankers are engaged in financing relatively fixed capital; commercial bankers properly finance only circulating capital or capital in the course of consumption. People sometimes designate "investment bankers" as "private bankers," partly because they are not dealing with the public as generally as are the com mercial banks, and partly because they more frequently do not incorporate, but do busi ness as individuals and firms. Since in many of our States individuals and firms engaging in a commercial banking business, without tak ing out charters as national or state banks, are termed "private bankers," the term "pri vate bankers," as applied to those people who finance relatively permanent capital, is not exclusive, besides not being as descriptive as the term "investment banker." We use the term "banking house" in speaking of in vestment bankers rather than the term "bank," which we limit in our use to an organization acting under a charter, or at least to an organization which takes deposits.