I.B.A.

The Investment Bankers Association of America convened at White Sulphur Springs, W. Va., last week and simultaneously Wall Street witnessed one of the tightest squeezes in market history due to a unique set of circumstances which perfectly illustrate the unhappy state of investment banking.

In September, Edward B. Smith & Co. and other investment houses underwrote an issue of 442,443 shares of Pure Oil Co. 5% preferred stock convertible into Pure Oil common at $22.22 per share. But the coincidence of the market smash with the slow period of gestation which the Securities & Exchange Commission requires before permitting new stock issues threw the conversion plan askew. When the offering was finally made, Pure Oil common had fallen to $17 per share. As a result stockholders who had first rights to the stock took only 8,040 shares. The underwriters then took over the balance, impounded the stock to wait for a better market. Before this move was announced, however, a number of speculators sold the stock short, planning to even up when the balance of the stock was issued. Now that the stock has been impounded, it is impossible for shorts to cover since only 8,040 shares are available. Scratching its head in perplexity, the Stock Exchange last week began an investigation.

At White Sulphur, meanwhile, in the cool halls of the rambling Greenbrier Hotel, 565 I.B.A. members began many a ponderous investigation into the fundamental causes for such fiascos as the Pure Oil issuance. Since 1929, when new capital issues reached a staggering $8,639,000,000, investment banking has been but a shadow of its former self, refusing to revive along with business recovery. Only refunding has been on the rise. In 1929 refunding amounted to $1,387,000,000. Last year new financing was a paltry $1,190,000,000 and refunding was all of $3,300,000,000. Behind this change of emphasis are the exceptionally easy money rates which have prevailed all during the New Deal. It is now more profitable for concerns to refund old debts than to issue new securities. It is also more profitable to borrow for short-term than issue long-term securities, as is shown by the fact that bank loans for commercial purposes have risen steadily all year, though industry has been receding and new security issues have been virtually frozen. Until very recently this has been worrisome only to investment bankers forced to scratch for commissions. But the market crash has made the matter headline news by damming up some $150,000,000 in new security offerings which underwriters dare not release for fear of getting stung like Edward B. Smith & Co.

As retiring I.B.A. President Edward B. Hall declared last week, "the immediate outlook for new capital financing is discouraging." To make it less so, the I.B.A. decided, is up to the Government. Though SECommissioner George C. Mathews cordially asked for co-operation and Chairman Frank R. McNinch of the Federal Communications Commission emphasized the orthodox New Deal point of view that business regulation is inevitable, the assembled bankers unanimously agreed with President Hall when he accused the undistributed profits tax and the capital gains tax of being the major hurdles in the path of future financing volume. Said he: "Something could be done by Congress about these two unsound methods of taxation which in effect offer immediate cash prizes for the conduct of one's business and personal affairs in a manner which otherwise would be contrary to all rules of prudence and common sense."

Others pointed out that the utility industry had a $3,200,000,000 expansion program, ready to uncork if only the Government would rescind its "death sentence."* Affectionately cheered was white-fringed old Alex Dow, president of Detroit Edison Co., when he pleaded: "To what end is business being guided, anyway? Is investment of their moneys or speculation for profit to be made safe for the stupid and for those overwise in their own conceits-- by policing every traveler on that road? Are we to mark the way of the Lord through business laws and ethics according to the specifications of the Prophet Isaiah --so that wayfaring men, though fools, shall not err therein? Maybe so. But I have not yet had a release to announce that Isaiah's way of the saints is to be staked out through the New York Stock Exchange as a Federal project. . . . Let us patrol well our 20th-century business highway! Let us crucify the thieves, as Pontius Pilate would have done had he been attending to his job. But do not ordain that everyone moving along on his lawful occasions shall conform his pace to that of the slowest and worst-equipped blunderer. ..."

Aside from speeches, resolutions and fun, major business of most conventions is electing new officers. Last week, I. B. A. chose to succeed President Hall a distinguished, white-haired Bostonian with a gentle voice named Francis Edward Frothingham, vice president of Coffin & Burr, Inc. since 1916. Born in Brooklyn in 1871, President Frothingham investigated utilities for years for Stone & Webster, was head of the public utilities division of War Finance Corp. An ardent yachtsman and traveler, he lives quietly in Cambridge, Mass, with his wife and daughter, enjoys riding, being vice president of the Boy Scouts of Boston. Said he of the utilities industry last week: "Shall the Government compete with its own citizens in this industry and so drive it out of business one way or another, as such competition can and will, or shall it cooperate with the private and public systems in equitable ways? If the former course is persisted in, the holders of electric light and power securities will suffer unnecessarily and grievously; if the latter course is adopted a great private industry will be stimulated and its soundly issued securities validated, with advantage to the public interests. No one disputes that evils need correction, but exactly what remain and how they should be corrected is a matter for debate and not arbitrary determination by anyone.

-Most prominent test case challenging the utility death sentence is that brought by Electric Bond & Share Co. which has refused to register with the SEC as required by the Public Utility Act of 1935. This week E. B. & S. and every other utility holding company was dealt a severe blow when the U. S. Circuit Court of Appeals upheld the decision of Federal Judge Julian W. Mack which restrained E. B. & S. from using the mails or other means of interstate commerce unless it signed up with SEC.

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