Besides differing in the kinds of corpora tion financing they undertake, these houses differ in other respects. Some take deposits from clients who purchase securities from them and from corporations for which they supply the funds for the capital account. Ordinarily these deposits, from the nature of the business, are individually of consid erable size, and the banking house is other wise not taking the place of a commercial bank or a savings bank. A few of the bank ing houses have foreign exchange depart ments and, with respect to foreign trade transactions, conduct a banking business concerned only with the financing of com modities in the course of consumption.
Banking houses differ in the way they conduct their business as well as in the kinds of corporations they finance. Some do essen tially a wholesale business. They assume the responsibility to the corporation, but, to a considerable extent, reach the ultimate consumer through some intermediary bank ing house. We will discuss the general man ner in which they do this in a subsequent chapter on the syndicate operations of joint accounts and underwritings. Some houses take a larger part in the active trading on the street than other houses, to some extent speculate in bonds, and generally pay special attention to the needs of capitalists and financial institutions. To whatever extent these houses may act as distributors to the final consumer, the capitalists who ulti mately supply the funds to the corporations, they usually initiate some of the business they do: that is, they are the only interme diary between the borrower and the lender. Though sometimes the only business they initiate is municipal, usually, if they really enter the field of corporation finance at all, they finance directly the issues of the rela tively smaller corporations and come in with the wholesalers on syndicate operations in the issues of the larger corporations.
From time to time some one expresses an unfavorable criticism of the profits made by investment bankers. Before proceeding to discuss this directly, let us consider the gen eral nature of the business. Banking houses should be differentiated from brokerage houses. To use the language of the street, an investment banker deals on his own ac count, a broker deals only as agent. That is to say, an investment banker assumes the position of a merchant and buys and owns the securities he sells. In this respect he
conducts his business like any merchant who keeps a stock of goods and 'counts on mak ing a profit on the turnover. London offi cially classifies investment bankers as mer chants and not as bankers. Though it is easy to make the analogy of the investment banker with a merchant carrying a stock of goods of securities, the analogy is not closely accurate. Though securities in their mar keting possess many of the characteristics of goods in the process of consumption, they are not, of course, commodities in the same sense as are wheat and cotton. As a mer chant, the investment banker is more strictly like a buyer who goes round among many sheep-growers and buys wool in relatively small quantities, which in turn he sells to a few manufacturing concerns. So the invest ment banker buys capital from the grower, the capitalist who has accumulated savings, and sells the capital to the corporation. But the investment banker sells "short." He has already sold capital to the corporation in return for the corporation's credit, and has borrowed most of the capital to put with a little of his own to make delivery. He then proceeds to cover on his short sale of capital by buying from the capitalist with the credit with which the corporation paid for the capital from the banker. In using the word here, we do not confine it to its strict meaning of promise or obligation of the corporation, but include an interest in the corporation which may be represented by stock. From whatever angle we choose to view the business, the essential and im portant fact is that the investment banker assumes the risk of the transaction. Since the business is one of credit, which probably is more sensitive and fluctuates more widely and more quickly than any commodity prices, the assumption of risk in selling and buying capital, or buying and selling credit, whichever way one chooses to look at the matter, means the assumption of a greater burden than that of the merchandising of ordinary commodities. A little later, when we are considering the amount of bankers' profits, we must keep in mind this fact of the assumption of risk. A broker, on the other hand, simply acts as intermediary be tween the buyer and seller for a commission and does not assume any risk of the market.