The call loan, as its name implies, is much more temporary. Consequently the broker must use much good judgment in his borrowing. If he takes on a number of time loans at say 5 per cent when call money is at 2 per cent he may seem to use poor judgment, but if call money suddenly rushes up to 10 per cent his foresight is obviously rewarded. If money rates promise to advance in the future a broker does well to rely on time loans, whereas if money gives indication of remaining stationary it is evident that he does well to take on call loans. The rate on time money re mains the same thruout the life of the loan, whereas the rate of most call loans is "renewed" from day to day. Many brokers regard 65 per cent in time loans and 35 per cent on call as a wise division of their bor rowing.
4. Call or demand loans are theoretic ally callable at any time. In the New York market, however, certain customs have developed governing the conditions under which the banks may call loans. The call is usually made in the morning and the money must be repaid, not during the same day but the fol lowing day by 2.15 p.m., when the broker receives back the collateral he gave in support of his loan.
It has also become an unwritten rule that if a loan made today is to be called on the following day it must be called at or before 1 p.m. If not called by that time the understanding is that the loan will run until at least the second day following. Theoretically, as already stated, call loans are made subject to payment on demand. In practice, they are at least one day loans, but may run on for many weeks or months. There are instances on record where banks have al lowed call loans on gilt edge securities to run for years. Indeed, in one case a call loan ran for forty years.
5. How brokers' loans are made.—The business of making loans by the bank is carried on in two ways. The first is by direct connections with the stock brok ers, and the second by the use of middle men or money brokers who act as intermediaries between the lenders and the borrowers. Most of the loans are made by so-called money brokers, who are to be found at a regular place in the board room where loans are made. The rate for call money varies from day to day. Sometimes it is very low, while again it soars to al most prohibitive heights. The charge which is made, however, is definitely established on the Stock Ex change and is quoted upon the ticker tape just as are the security quotations.
The bank officer as soon as he ascertains at the be ginning of the day how much money he has at his disposal for loaning, will call in one of the money brokers whom he regularly employs, and ask him to find a market for it. In most cases the broker serves the banker gratuitously because it gives him a stand ing with the banks and makes it easier for him to get time loans, thereby making him of greater use to his customers and consequently increasing his profits. The money broker then takes his place on the floor of the Exchange and offers his cash for sale. All that he really does is to find some one who desires to bor row money and then to agree with the customer upon the rates which shall be charged in the same way as we saw was done with the of securities.
When the transaction is closed the money broker hands to the stockbroker a slip containing the name of the bank for whose account the loans are made. The money broker's connection with the transaction now ceases and all further negotiations are made with the bank.
6. Collateral for the call loan is nego tiated upon the security of collateral which is fur nished. In the transactions between the stock broker and the money broker nothing is said about the char acter of the collateral which is to be furnished. This is a matter, however, which is of the utmost impor tance to the bank. When the broker comes to make his loan he offers collateral as security. The banker will carefully scrutinize this collateral. All the securi ties deposited must be satisfactory and must be "good delivery" according to the rules of the Stock Ex change—that is to say, they must be in good form, and there must be nothing which would cloud or raise a question concerning this title or the ability of the holder to transfer them to subsequent buyers.
As collateral, the banks look with disfavor upon stocks and bonds which seldom change hands because it is difficult to find a buyer quickly for such securities when they are offered for sale. Active securities are preferred to those which are inactive because in a panicky market, when stocks are rapidly declining, all banks are forced to drop huge quantities of collateral upon the market in order to protect themselves. Their contracts with the brokers are such that at any time they can either demand immediate repayment for the loan or an increase in the amount of collateral which is furnished for its security; but, in case neither request is honored, the bank will immediately sell the securi ties thru some broker upon the Exchange in order to dispose of them before a fall in price will carry their value below the amount which the bank has loaned upon them. It is of the utmost importance, therefore, that the bank make sure to find a ready market for the collateral which it holds, not only in good financial weather, but also when the stress and storm of a panic is at hand. The rule deciding the value of a security in the minds of the banker, therefore, is not what it will sell for under good conditions, but what it will bring under adverse conditions. Bankers also usually discriminate against the stock of manufacturing com panies at least to the extent that they will not make a loan on collateral which consists of industrial stocks alone. If they make a loan upon this kind of col lateral they will frequently charge a much higher rate of interest, or they will ask a much larger margin than the customary 10 or 20 per cent. In many cases, however, the brokers give collateral which consists of both railroad securities and industrial securities. In the case of United States Government bonds, which are considered so secure and their market so uninter rupted, bankers as a rule require little or no margin.