Some people who come to the street for money, without especially knowing the bank er's ethics of the situation, have themselves an ethics of business which prevents them from taking their proposal to more than one banker at a time. Others, who chafe under the restriction, nevertheless know the un wisdom of trying to avoid it. Frequently, however, men come to the street whose own ideas of business include making as many proposals as possible and closing with the first one who will come to terms. When the fact that they are dealing with several peo ple comes to the attention of one of the sev eral, as it probably will, that one is likely to decline further negotiations, and so with the others as they find out the situation. So the man who is seeking the funds gets an idea of monopoly, that a money trust exists.
Let us assume that our banking house has made an agreement with corporation to supply it with funds on the delivery of the issue of securities which the corporation has authorized. If the amount involved is so great that the banking house does not care to assume the entire risk of the transaction, it will have distributed the risk by getting one or more other houses to join it in the transaction. To use the language of the street, it will have formed a "joint account," and the other houses will have taken a "par ticipation" in the account. Later the bank ing house which initiated the joint account, or the several members of the account act ing together, may still further distribute the risk by arranging an underwriting syndicate.
This, however, will not be formed until after the securities are purchased, or until at least a binding agreement to purchase them has been made. One banking house may form the joint account in anticipation of commit ting itself to the purchase. Though simple enough in the idea of distribution of risk, in details these joint accounts are somewhat complicated transactions. We will take a fuller discussion of them for our next topic.
As soon as the banking house has defin itely contracted to purchase an issue of se curities, it will begin to plan for its sale. It is not an investment institution like an in surance company or a savings bank, but em ploys its capital and organization simply as a means of assuming the risk of the trans action and of establishing the direct connec tion between the corporation and the body of capitalists who will ultimately be supply ing its fixed capital requirements. In pursu ance of this end the banking house may make a formal public offering inviting capitalists to subscribe to the issue, or it may under take to sell the bonds without a formal pub lic offering. This statement does not mean
that in either case the banking house will not publicly advertise the securities, but rather distinguishes between the manner of advertising. If the banking house, or syndi cate, extends a formal invitation to sub scribe, it will say in so many words that it is offering the securities for sale and will re , ceive subscriptions at the price named up to the stated hour of the stated day.
Such an advertisement does not mean that the banking house is relying upon it to inter est enough capitalists to take up the entire issue. It does not even mean that it has an expectation, or hope, that it will interest a large enough number of capitalists to place the entire issue. More probably the house, or the syndicate of several houses, has been hard at work creating an interest in the issue for a considerable time before the ad vertisement appears. The house may have informed its clients by personal interview or by letter that such an issue would be brought out. Its salesmen may have quietly, but rather busily, talked it up for a number of weeks. Just before the house inserted the advertisement in the newspapers it probably sent circulars to all its clients containing the information about the issue and inviting subscriptions. The advertisement appear ing in the newspapers, in all probability, simply focuses this anticipatory work. The banking house or syndicate does hope that the issue will prove sufficiently popular to attract enough people, other than regular clients, to make a demand that will take up the issue or materially diminish the amount that will remain unsold. If the issue is highly successful, the house may stop taking sub scriptions even before the day and hour an nounced in its advertisement. In that event it will announce that the issue was oversub scribed and the books closed at the time stated. Such a procedure gives the regular clients of the house an opportunity to get the full amount they have subscribed for, or near to it, and leaves unsatisfied a demand on the part of many, who may seek to purchase the bonds in the open market at a price higher than the subscription price; thus giving the regular clients an opportunity to make something immediately on a resale, if they wish to do so, or to feel that they have made a highly advantageous purchase. Closing the books before the announced time may also be taken by the investing public to be a better indication that an issue actually has been oversubscribed, than an announcement to that effect when the books have been kept open for the full time advertised.