Those who underwrite the securities of large cor porations must necessarily command great capital in order to carry and to market large issues. Consider able risk is involved, for if they underwrite more securities than the public will absorb, as happened in the so-called Rich Man's Panic of 1903, or at a higher price than the public is willing to pay, they may sus tain very heavy losses. For this reason, such con cerns cooperate closely, and divide the proceeds of the underwriting with one another thru syndicates, each member of the syndicate participating in the under writing and taking his share of the risk and profits.
Altho syndicates and underwriting are not modern devices, the underwriting of large issues of corporate securities is a modern development. The modern underwriting bankers are scarcely underwriters at all, since they usually purchase their securities outright instead of merely insuring their sale. They are able to do this because they possess great financial power, broad experience, skill in analyzing securities, and a wide clientele to which they may look with some cer tainty for a market.
5. Types of underwriting.—The modern under writer is a jobber in securities. Five types of under writing syndicates may be discerned: (a) The old original type, in which the corpora tion sold the securities and the syndicate merely agreed to take, at a stated price, any portion of the issue which the corporation failed to sell. For this insur-, ance they received a commission upon the securities sold by the corporation in addition to obtaining the remaining securities at a low price. This illustrates a pure underwriting, which is no longer customary, because the syndicate has so much better facilities than the corporation for selling securities.
(b) The following type can hardly be called an un derwriting at all, since the syndicate takes little or no risk. It consists in turning over to the syndicate at a fixed price the securities to be sold, the syndicate paying the corporation as fast as the securities are sold and turning back to it any unsold portion of the issue. Naturally under this form the commissions are light because the corporation takes the risk, and for the same reason this type is not much favored.
(c) A different type of syndicate arises when one house which has underwritten, or is about to under write an issue of securities calls upon other houses to take portions of the issue at attractive prices. In
this type, the original underwriter makes the contract with the corporation and perhaps manages the early marketing operations for the syndicate, but is pro tected in its contract by the participation of the other members, who share in the profits and losses of the operation and take up their shares of any portion of the securities remaining unsold. The underwriting managers usually get a stated commission in addition to the profits upon their share of the underwriting.
(d) A further type differs from that just described in that the syndicate as a whole joins in the contract with the corporation whose securities are being under written and therefore the members share among them selves the special profits which would otherwise go to the principal underwriter. An individual of wide ex perience is always chosen as manager of the syndicate to act on behalf of all the members in making con tracts and marketing securities.
(e) In the most modern type, the syndicate may be organized as in (c) and (d) above, but the market ing of the security, instead of being concentrated in one house, or in the hands of the manager, is appor tioned among all the members of the syndicate, and perhaps by them to still other outside houses, in order to take advantage of the wide powers of distribution which the combined clientele of the syndicate mem bers affords. In this form, however, it is customary to retain certain restrictions upon the sale, in the dis cretion of the syndicate manager, to secure harmony of action and avoid flooding the market.
The distinguishing features of modern syndicate operations are the remarkable accuracy with which they judge the market and the value of the new se curity, the great cooperation which exists between the leading houses, and the control which these houses exert over the management of the corporations whose securities they underwrite.
6. Syndicate operations.—Having taken over the securities of the corporation at a stated price, it is now the duty of the syndicate, under the direction of its manager , to market them to the best advantage. Cash may have been paid out of the capital of the syndicate for the issue, or partly obtained by bank loans, secured by the stocks or bonds as collateral. Or the corporation may be paid gradually, thus-giving the syndicate opportunity to sell the securities with out tying up much capital.