Sometimes when the market is strong and a new issue catches the attention of the in come-buying public as a particularly attrac tive investment, many people will surmise that the issue will be largely oversubscribed, with a consequent scaling down in the allot ments; and in order to get as large an amount as they really want, they will subscribe for a much larger amount of the security than they want, in order to get, if possible, approxi mately the amount they actually do want. Such applications, representing an anticipa tion of scaled allotments, account for most of the very large oversubscriptions on the pub lic offering of securities. If the syndicate fails on the public offering to sell all the bonds, the business takes the usual course already described. Some time necessarily intervenes between the agreement to pur chase, when the price is agreed to on existing market conditions, and the offering of the bonds to the public. Even if the purchasing bankers correctly estimated market condi tions at the time of the purchase, conditions sometimes change rapidly, and on the offering the public may take only a small percentage of the issue. An attempt to sell the bonds at the syndicate price may result unsuccessfully, and the subscribers to the underwriting may have to take up nearly all .the bonds and ultimately sell them at heavy losses.
Sometimes the issuing corporation appears as offering the securities on the public sale, or perhaps the syndicate managers on behalf of the corporation. In such a case the sub scribers to the underwriting, instead of being in the position of owners of the issue, and sell ing it on their own account, are in the position of guarantors who are insuring the success of the sale. If the public does not buy all the
bonds the subscribers to the underwriting must take up the unsold balance as pur chasers. The term " underwriting " accords more strictly, perhaps, with the position of a guarantor syndicate insuring the success of the sale. The street uses it, however, without any discrimination between the two methods of handling the transaction. Both methods come to the same results.
Our discussion of syndicate transactions has assumed some specific figures for the sake of clearness. One must not suppose, however, that amounts alone govern the adoption of the method of handling the transaction and determine whether only one banking house shall be concerned, or more than one, or whether there shall be one or two syndicates between the corporation and the investor. The size of the issue in relation to the capital, selling power, and other commitments of the banking house or houses does determine. An amount of $100,000 of securities or less might well afford the basis of a joint-account transaction. With only a little more than that amount an underwriting syndicate might take the securities over from an original joint account. Sometimes a banking house which has subscribed to an underwriting may pro ceed to form a joint account of its own to handle its allotment of the issue. Any dis cussion can give only a general idea of these joint undertakings for the sale of securities. They shade into each other in a way that eludes precise description. Their purpose, the one thing common to all, is to join finan cial resources and selling power sufficient to provide the amounts of capital required from time to time by the magnitude of economic enterprises.