Instead of having the syndicate distribute the unsold bonds, let us assume that, after holding them for a considerable time, it de cided to reduce the price to one at which the bonds will "move" in the existing market.
The members of the syndicate decide that the bonds will sell at 94. On offering them at that price the syndicate succeeds in their disposal. A marked advance in interest rates undoubtedly accompanied so sharp a decline in the market. We have assumed, too, that the syndicate carried the bonds a consider able period before it determined on the re duction in price. So we can fairly assume a loss in the interest account, which we will place at an average of one per cent for four months on an average loan of $3,000,000. This would make a loss in interest of $10,000. The syndicate has sold $3,000,000 of bonds at one point and a half below the purchase price, a loss of $45,000. We will assume that the holding of the bonds for the joint ac count has increased the total of syndicate expenses to $45,000. So the account has total costs and losses of $100,000 against which it can offset only the $60,000 advan tage of selling price over purchase price made on the first $2,000,000 of bonds. Syn dicate members would have to bear the loss of $40,000 in this way: — We should keep in mind that the syndi cate apportions the losses in this way in the face of the fact that Robinson & Company sold more than their total participation at the full advantage of three points above the purchase price. It does not make any differ ence in the result, either, how many each member sells of the $3,000,000 of bonds which the syndicate sells at the price of 94. Even if the members sell these bonds in amounts as disproportionate to their par ticipations as the $2,000,000 they sold at 98.50, the losses would be distributed as indi cated. If it is objected that this is obviously an unfair situation, we may answer that the parties knew the kind of a transaction in which they engaged and its liabilities. A group of people, who probably know each other exceptionally well, are willing to ac cept the hazards of fortune and take the chances of loss for the sake of the chances of gain in the cooperation. To keep this fact
absolutely clear we can hardly too often reiterate that each member of the syndicate must add to his share of the account loss the large direct cost of selling.
Sometimes a group of investment bankers wish to cooperate without running the risk of this unlimited liability of the regular joint account, "undivided," as the word is, as to liability. They may in that case agree to an account limited or " divided " as to liability. Such an account would naturally also be divided as to carrying. Each member of the syndicate would take up and carry an amount of the bonds equal to its participation and would proceed to sell the bonds as if on its own account, except that it cannot vary from the syndicate price so long as the ac count continues. Each member would be responsible for the expenses of the syndicate in proportion to its participation. Other wise each member, subject to the syndicate price, deals with its share of the bonds as if they were its own, is responsible for selling, and enjoys the profits and suffers the losses of its own participation. At the close of the syndicate each member must take for its own account that part of its participation which it has not succeeded in selling. If the houses of Brown, Jones, Smith, and Robin son, in the transaction just sketched through, had formed an account divided both as to carrying and as to liability (limited liability), and, instead of the amounts before indicated, Brown & Company had sold $300,000 and Robinson & Company had sold $500,000, the transaction would have worked out as follows: — Obviously this makes a very different show ing from the regular unlimited liability trans action.
Occasionally some variations are made in the general form of the joint-account trans action as described here. People entering into a syndicate sometimes make stipula tions which modify the full unlimited lia bility without narrowing the account to the strictly limited liability form. Such syndi cates present possibilities of modification far beyond anything yet attempted in prac tice. If such modifications are desirable we may well leave them to recommend them selves.