STATE OF VERMONT.

The moneys deposited in savings-banks, savings institutions, and trust companies, and the income derived therefrom, shall be invested only as follows

GOVERNMENT BONDS.

In the public funds of the United States, or public funds for the payment of principal and interest of which the faith of the United States is pledged.

STATE AND MUNICIPAL BONDS.

In the bonds or notes of the counties, cities, towns, villages, and school districts of the New England States, New York, Pennsylvania, Ohio, Michigan, Indiana, Illinois, and Iowa.

In the municipal bonds, not issued in aid of railroads, of counties, cities, and towns of five thousand or more inhabitants in the States of New Jersey. Wisconsin, Minnesota, and Missouri, and in the counties, cities, and towns of ten thousand or more inhabitants in the States of Kansas, Nebraska, North Dakota, South Dakota, Oregon, and Washington; but no investment shall be made in any of the counties, cities, or towns in the States above named, except in cities of fifty thousand or more inhabitants where the municipal indebtedness of such county, city, or town exceeds five per cent. of its assessed valuation, and when not issued in aid of railroads.

In school bonds and independent school district bonds of New Jersey, Wisconsin, Minnesota, and Missouri, and in the school bonds and independent school district bonds of school districts of two thousand or more inhabitants in the States of Kansas, Nebraska, North Dakota, South Dakota, Oregon, and Washington, where the amount of such bonds issued does not exceed five per cent. of the assessed valuation of the respective cities, towns, school districts, or in the public funds of any of the States named in this section. (Sec. 4101, Chap. 174, Vt. Stat.)

STATE OF WISCONSIN.

Any savings-bank authorized under this act may employ not exceeding one-half of its deposits * * *

GOVERNMENT BONDS.

In the purchase of the public stocks or bonds of the United States.

STATE AND MUNICIPAL BONDS.

The stocks or bonds of the Northwestern States, to wit: Ohio, Indiana, Michigan, Illinois, Iowa, Wisconsin, and Minnesota, of the authorized bonds of any incorporated city, village, town, or county in the aforesaid Northwestern States.

RAILROAD BONDS.

No such savings-bank shall invest any part of its deposits in the STOCK of any railroad company.

(Section 8, Chap. 384, L. of 1876.)

PART VII

Underwriting and Distributing Bonds

Underwriting.-In Alexander Hamilton's early reports as Secretary of the Treasury, says Alexander Dana Noyes, he refers_repeatedly to transactions in the new republic's bonds with Dutch bankers. So far as appears, they bought the bonds at a price. But the proceeds available for the American Treasury were somewhat lessened by the "bonifications" or "gratuities" which the bankers exacted in addition to a discount from the par of the bonds. At the time they bought them, perhaps, there was no ready market for the bonds, although the bankers doubtless believed there would be in time. Or, it may be, what buyers there were were scattered and unknown to the agents of the American fisc. Buyers may have been unwilling to invest in the new and untried securities unless emphatically so advised by persons in whom they had trust. Waiting for a market meant the taking of chances, while the possession of a clientele implied expense and exertion in building it up. the assumption of risks and the exertion of influence the bankers demanded and got a special reward.

For

Nowadays the "gratuity" is commonly called a commission, and bonification survives only as "bonus." But this class of special payment for bankers' services in supplying capital, quite aside from the payments of interest on money lent, is much larger and more varied than it was a hundred or even thirty years ago. Such payments, in fact, though sometimes they are only contingent payments, are the moving consideration in all the modern financial underwriting.

Financial underwriting and the underwriting synonymous with insurance are alike in so far as each involves the taking of risks. But the insurance company takes the risk of fire, death, or shipwreck; the financial underwriter assumes the chances of the markets. He agrees with the promisors upon certain bonds or the management of a company about to sell stock, to take at a previously fixed value all securities of a given issue to which the public generally or investors at large may not care to subscribe. In return for this undertaking he receives a commission upon the total amount sold to investors, and is generally permitted to buy the left-over securities at less than the price for which they were offered to the public. This is the process in its simpler form. Variations, however, are abundant. Those, for example, to whom the securities are offered first

may be the owners of various plants which are about to be united with a single consolidation. The underwriter in this case is the person who agrees himself to buy the stock and pay the money for it should the owners of the constituent concerns prefer to sell out for cash. Again, there may be question of acquiring a bankrupt railway against which large claims are outstanding, putting new money into the property, satisfying the claims of the creditors, and against the property as reorganized, issuing new types of securities.

Still a different variation is to be found in the operations lately undertaken in forming the United States Steel Corporation, the plan of exchanging a few new stocks for many and diverse old ones. Money was needed here, however, not only to provide working capital, but also to deal in the securities involved. In most respects the last three sorts of operation represent a higher development of underwriting than those mentioned first, but they also put the underwriter under somewhat greater risk. His reward comes from the difference between the securities received from the company in which he has taken an interest and the quantity of cash and securities disbursed. Sometimes the results in the final reckoning show the underwriter a heavy loss.

From one view the underwriter could be called a middleman between the borrower and the lender-the issuer of securities and those who finally buy them to keep. He exacts a toll from those who come to him, but, as a rule, he renders a service in return. The payment may be merely for his possession of large funds which he is willing to risk for a season in what his judgment approves. It may be a reward for looking up otherwise active capital during a fixed term, an indemnity for the expense of gradually recovering the cost of bonds on which the promisor desires to realize at once, a repayment for the work of past years in establishing connection with clients who will buy stocks on his advice, a price charged by him for the assurance that the venture will have his good will, or, finally, a gain filched by sharp practice from other persons whose interests the underwriting operation has touched.

For all the larger transactions, and for many of the smaller ones of the last two years, the underwriting has been taken by syndicates. The industrial consolidations, railway reorganization, issue of bonds or stock generally calls for too much capital to bring the matter within the power of a single individual or firm. And if not the amount of money, then the character of the risk or the promise of profits usually dictates a wider participation in the scheme. The underwriting syndicate is thus both a form of co-operation among bankers and a device,

through judicious distribution of favors to cement alliances, allay hostilities, and strengthen financial cliques.

The initiative in their formation may be taken either by those who want capital or by those who have it. Sometimes it is the promoter of an industrial consolidation who starts the ball rolling, but quite as often the banking interests with whom he is allied. In the latter case the banker himself assumes many of the characteristics of the promoter. Once the scheme is fixed, the character of the securities to be issued determined, and the terms of the agreement between borrowers and underwriters settled, those in charge of the operation invite participation. This consists in furnishing a part of the capital needed to carry out the plan. Those first asked to join are usually the firms and capitalists most closely related to the banking house first approached. If the project seems likely to yield large gains, the circle of participants is kept as small as may be. Often, however, as in a reorganization, there are elements to be conciliated: the principal holders, for example, of the prior liens against a railway which has become involved. These are not infrequently given a chance to take a stipulated share. Where the cash requirements were particularly large, and the project of first-rate importance, banking firms have not seldom sought to insure the benevolent neutrality of their principal rivals by offering them an opportunity to subscribe. Another type of participants is to be found among the clients of large banking firms, for whom and at whose risk the latter apply for a share. And in a number of the industrial promotions the owners of the plants merged have been drawn into the game. Only in the case of the least successful plans has a share in the underwriting been available for any one who asked for it.

The profits of underwriting have been as varied as the fortunes of the ventures it has been used to promote. Measured by the legal or market norm of interest rates, these returns would often seem extraordinarily high. And from one view, it must be owned, the distinction between the profits derived from such advances of capital and interest on more or less hazardous loans seems rather faint. In another aspect the difference is marked. Many syndicates buy the securities outright and sell them again. They take the risks of the Konjunktur. They play the chance that the general market and economic conditions will be favorable at the time their plans are to mature, as well as the chance that the enterprise they are backing will prove to be well conceived and rightly carried out. Then, too, the underwriter may engage in a promising venture, but one of which the gains are not for him. Time was when to be a member of such a syndicate was thought the same as "getting

in on the ground floor." Since then it has been proved by the operations of certain syndicates that underneath the ground floor there may be a basement, and besides that, a sub-cellar which is deeper yet. How badly many underwritings turned out is proverbial with those who recall the summer of 1899; how profitable some are esteemed is shown by the fact that participations in certain syndicates have sold before allotment at premiums of 20 to 50 per cent.

Underwriters, Distributio of Bonds by.—The National City Bank, the Bank of Commerce, the First National Bank, and half a dozen private banking houses in New York are quite generally spoken of in New York as "The Underwriters." They are practically the wholesale bond dealers.

The machinery that distributes over the world the steady stream of bonds created by American corporations is little understood outside of Wall Street itself. Only the result is noted-namely, that some companies can distribute these securities broadcast with apparent ease, while other companies, apparently of equal strength, appear unable to accomplish the same result without a long period of "digestion."

Roughly, there are three methods whereby a company can sell its bonds. One is to sell direct to the public through the Stock Exchange, or by actual canvas. Only new companies use the latter means, and bonds hawked around the country in this way are generally of low repute. The sale through the Stock Exchange is now generally carried out by the fiscal agents of the company, and is unusual except for the sale of small lots of well-known and active bonds.

A variation of this method is found in the case of Rock Island, for instance. The old stockholders of the railway company were offered $100 in 4 per cent. bonds, $70 in preferred stock, and $100 in Rock Island common. The result is well known. The new bonds went into the hands of a stockholding public, which had them at no stated price, and which sold them freely when the decline came. This method is now generally regarded as dangerous. It avoids the payment of commissions, and thereby makes enemies of the kind who can do most harm. This first method of distribution is less popular year by year. It has come to be recognized that commissions must be paid to the bankers. In return, the bankers loan their credit to the bonds, placing them with their own public following. The commission is, to all intents, the price of the banker's credit. The commission, therefore, varies. If the company is weak and the banker strong, the commission is very heavy. If the company is strong and the banker weak, the latter is glad to take the bonds at a very slight profit.