It should be stated before proceeding that special arrangements for carrying the bonds might be made other than those described. One member might agree for some special advantage, or because of some special abil ity, to carry all the bonds and advance all the capital necessary. Or, if one member did not arrange to carry all the bonds, the sev eral members might carry them in amounts other than the amounts of their participa tions. It is safe to say, however, that only a very small minority of joint-accounts ar range for carrying the bonds in any other way than those described.
This seems a proper place to mention the profit or loss in interest. If the syndicate bought the bonds on a 5 per cent basis and is able to borrow at the banks at 4 per cent, obviously the carrying itself does not make an item of expense to the syndicate, but yields a profit to the account. If the bonds are bought on, say, a 4.5 per cent basis, how ever, and the syndicate must pay the banks 5.5 per cent interest on the loan, again obvi ously the carrying makes an item of expense to the account. The street picturesquely says of the situation, in which the rate of interest paid is greater than the rate of interest re ceived, that "the bonds are eating their heads off." We must return now to the question of the selling price. Let us assume that the syndi cate agreed to the purchase price of 95.50 because it believed the bonds could be sold at a price of 98.50, and that the bonds would be easy enough to sell to make the difference of three points cover the expense and give a fair profit.
Mention of the selling price raises the whole issue of division of profits and the bearing of losses. Unless otherwise stipulated the ac count will be entirely regular; that is, profits will be received and losses borne in propor tion to the respective participations. This is the ordinary unlimited liability account. More commonly the banking houses call it "undivided liability." The word "unlim ited" describes the situation more accu rately. in an unlimited liability account profits are received and losses borne in proportion to the participations, entirely irrespective of the amount of the securities the member of the syndicate may sell.
It is the regular understanding in these transactions that each member of the syndi cate will engage in selling the securities. When a banking house joins a syndicate the other members assume that it expects to sell an amount of bonds approximately equal to its participation. Unless a "selling commis
sion," which we will discuss a little later, is arranged for, it makes no difference in the distribution of profits or the bearing of losses whether the house sells bonds to several times the amount of its participation or does not sell any bonds at all. If a house which has been "taken aboard" does not sell any bonds, or does not sell bonds to an amount some what approaching its participation, then the house is said to have been "given a ride." A house which fails to do its share of the sell ing will suffer the penalty of being regarded as an undesirable associate in joint-account transactions and, on a frequent repetition of failure, will not again be invited to join.
Assume that this particular joint account is successful and results within a reasonable time in a sale of all the bonds at the agreed price of 98.50. Members of a syndicate nat urally do not sell the exact amount of their participations in any case. In the particular case we are discussing we will assume the several members sold these amounts: — Brown & Company $2,250,000 Jones & Company 1,000,000 Smith & Company 1,150,000 Robinson & Company 600,000 On this transaction in selling $5,000,000 of bonds the total of the difference of three points, between the price at which the bonds were bought and that at which they were sold, amounts to $150,000.
Of course this is not net profit any more than any difference between a purchase and a selling price. Actual expenses of the syn dicate itself amount to considerable sums. Such expenses must necessarily vary widely in different joint-account transactions. Any figures given here are not to be taken as typi cal or even as approximating the figures of any account that ever existed. Like all other figures on the matter, they are presented simply to illustrate the principle and meth ods of syndicate transactions. Expenses con nected with delivery of the securities from the issuing corporation to the syndicate and from the syndicate to the purchasers, legal expenses, telegrams and telephone calls, cir culars and advertising are a few of the many expenses of conducting the account. The sev eral members of the account themselves bear all the direct cost of the selling, salaries and traveling expenses of salesmen, and their own office overhead charges.