Decision Removes Confusion and Uncertainty

The decision in the Missouri Pacific-Iron Mountain case will unquestionably assist in doing away with a great deal of the uncertainty and confusion which was introduced in reorganizations by the Monon and Boyd cases. The cloud which was cast over all reorganizations by these cases very materially affected the opportunities of stockholders to participate in reorganizations controlled by mortgage bondholders for the reason that the only way for a committee of mortgage bondholders to avoid the dangers and uncertainties of the Monon and Boyd cases was simply to completely exclude the stockholders and thus obtain the right to exclude unsecured creditors.

This, however, was very unsatisfactory, because stockholders usually are very anxious to participate in such reorganizations, and committees representing bondholders usually prefer to have them participate. In fact, it is necessary oftentimes that they should participate in order to secure new capital by appealing to the desire of the stockholders to retain their interest in the property by paying an assessment upon their stockholdings and thus obtaining more favorable terms upon which to participate in the new company than are obtainable by the investing public who have no interest in the old company. Bondholders committees are not only unwilling, but are often unable, to admit stockholders upon terms which require the payment of unsecured claims in cash. Since the Monon and Boyd cases bankers and lawyers having to do with reorganizations have proceeded upon the prinIciple that some offer of securities meeting the requirements of these cases must be made.

The uncertainty caused by the Monon case is shown by the following sentence of Mr. Justice Lurton, which is contained in his dissenting opinion in that case:

"The consequences which may result from the decision to the numerous reorganizations of railroad companies which occurred about the time of this reorganization or since, are to my mind alarming."—(Louisville Trust Company vs. Louisville Railway Company, 174 U. S. 674-The Monon case.)

A very distinguished member of the Bar who perhaps had more to do with railroad reorganizations than any other lawyer of his time at least, in referring to the opinion of Mr. Justice Brewer in the Monon case characterized it as

"A dangerous weapon in the hands of guerillas who hang about the outskirts of reorganizations and endeavor to levy tribute as a condition of abating the nuisance of their presence, and that even to this day, reorganizers stand in more or less terror of the Monon case, and it looms up as a perpetual spectre in their path."

It has been earnestly hoped by reorganization managers and their counsel that the Supreme Court would hand down a decision which would not only dispel the various views held as to the dictum in the Boyd case, but would also supplement the Boyd case to the extent of establishing some fixed principles which shall be the basis for making provision for unsecured debt in reorganization plans and reorganizations brought about by the foreclosure of mortgages, which plans offer participation to stockholders. Although the Missouri Pacific-Iron Mountain case does not accomplish this, it, nevertheless, represents an endeavor to create the proper machinery to be contained in a final decree of sale under which machinery there may be determined the fairness of the offer made under the reorganization plan.

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UNION TRUST CO. OF PITTSBURGH Impressive totals are shown in the June 30th statement of the Union Trust Company of Pittsburgh. Resources aggregate $143,293,000; U. S. Government securities, $21,970,000; cash on hand and in bank, $13,077,000; real estate and vault, $6,680,000; deposits are $93,688,000. The capital is $1,500,000; surplus, $37,500,000 and undivided profits, $1,561,454. The trust department reports trust and estate funds of $154,776,000. The company acts as trustee under corporate mortgages aggregating in value, $388,663,000; holds securities thereunder amounting to $66,536,000 and acts as transfer agent and registrar for securities at par value of $655,225,000.

NATIONAL BANK OF COMMERCE IN ST. LOUIS

Total resources of $79,741,000 are shown in the June 30th statement of the National Bank of Commerce in St. Louis inclusive of cash and exchange of $16,082,000; U. S. bonds and certificates, $9,709,000; bonds, stocks, etc., $5,952,000; loans and discounts, $44,338,000; bank building, $2,900,000. Deposits total $59,202,000; capital is $10,000,000; surplus and undivided profits, $5,119,511.

Those charged with the responsibility of investing funds will readily admit that supervision with this end in view is essential, nevertheless, it is evident from any several lists selected at random that many do not revise them to the full extent demanded. That they do not take advantage of opportunities to improve their investment position is usually due to lack of time or facilities and because they hesitate to act on opinions they believe likely to be biased. As a result, except for securities replacing matured items, many lists remain unchanged year after year. Since few investments can be safely dismissed from mind indefinitely, owing to the many changes in economic conditions and intrinsic values, the cost of inability or neglect to act is inestimable.

Practically all securities, other than those sufficiently short to command money rates or influenced by some unusual features or condition, fluctuate on equivalent basis values according to the respective classes, or divisions of the classes, in which they are commonly placed. Since a comparison of the schedules contained in any table of "bond values" shows that the market on long life

securities, over an equivalent change in basis levels, fluctuates several times the number of points that it does on short life issues, it is evident that an investment list should be arranged in anticipation of these movements if its earning power is to be fully maintained.

Major Movements of the Market

The major movements of the market are as inevitable as the tides and, unlike the day to day fluctuations, can be predicted quite accurately by the proper consideration of fundamental conditions. Expansion of credit leads to stringent money conditions and high interest rates, with consequent decreasing security values and high yields. Such conditions eventually reach a point beyond which it is impossible to continue without a period of panic. Universal restriction of credit and adjustment of business endeavor along more conservative lines subsequently result in falling interest rates, with appreciating security values and corresponding low yields. There are many indications when the approximate limit of a major movement caused by these changing conditions has been reached. If current financing is at the extremes of rate and time, in counter combination, i.e., exceptionally high rates for short terms or low rates for long terms, it is evident that conditions must change. Capital will not be advanced indefinitely at decreasing rates nor can business prosper for long with continually advancing rates.

Corporations, when issuing securities, are governed by principles contrary to those that should govern the investor. The former plan to pay the least for the use of money borrowed, while the latter wish to obtain the most for the money loaned. Does not consis

tent reasoning then suggest the advantage of making short life investments during pe riods of high prices for securities and conversely of long life investments during pe riods of low prices? Does it not also follow that, in the absence of funds for investment, short life securities should be substituted for long life bonds and vice versa in conformance with the probable future trend of investment levels?

Illustration of Maintaining Earning Power

With the above facts in mind, a single illustration of maintaining earning power at its highest point will demonstrate the principle. Assume that in the municipal division of the "legal class," a 4.75 per cent. level rules, that this level is decided to be about the low point of the downward movement, and that the upward movement carries to a 4 per cent. level in a year and one-half. Following is a schedule covering fifty year and five year 4 per cent. bonds on from a 4 per cent. to a 4.75 per cent. basis, and a similar schedule 11⁄2 years later when the bonds have 48% and 31⁄2 years life respectively.

(*Fluctuation between 4% and 4.75% basis levels.)

In view of the probable future trend of the market the policy to follow should be to place the list in position to take advantage of increased values, without sacrificing security of course.

If $100,000 five year 4s (cost 100) are held they could be disposed of on about a 4.75% basis (96.70), a temporary loss of $3,300 being taken. The proceeds will buy 112 fifty year 4s on a 4.75% basis (85.72) which, when the market has reached a 4% level 11⁄2 years later, would have a value of $112.000. The earning power is then shown as follows:

Value 112M 48% yr. 4s @ 100.
Value 100M 32 yr. 4s @ 100.

12 yr. interest on 112M 4s..

.$112,000 100,000

$12,000 6,720

arned in 12 yrs. on original investment of $100,000.....12.48%..... $18,720

Thus, instead of holding the original investment with an income yield of only 4 per cent., the earning power has been developed to a rate of nearly 12.50 per cent. for 12 years.

Conserving Resources by Limiting
Depreciations

When the market has reached a point that is considered to be the approximate top of the upward movement, possibly a 4 per cent. level, the procedure followed above should be reversed-short bonds substituted for long. This is the policy of placing the list in position to conserve resources by limiting depreciation. Reference to the basis schedule above shows that from a 4 per cent. to a 4.75 per cent. basis, in 11⁄2 years, the long 4s would decline 14.17 points as against 2.40 points on the short 4s, a difference of 11.77 points in favor of the latter. Substitution of the short bonds in the high market would therefore conserve resources to the extent of $11,770 in the event of such a decline, at the end of which movement the list must be revised again. Although the illustration is based on 11⁄2 years, it is not intended that any particular period of time shall be anticipated.

It is evident, of course, that the measure of success attained when changing a list in the manner suggested depends on accuracy of judgment as to the approximate top and bottom levels of market cycles. No scheme or system is infallible, nor can one be devised for securities which will operate automatically. Interest rates are subject to many uncertainties and sound judgment must be used in forecasting their course. Ordinary precedents may well be misleading in the present abnormal state of world affairs.

The principle demonstrated-investing and revising in accordance with the probable future trend of the market-is applicable to any investment list. It has the merit of definite procedure requiring alertness and will prove valuable if followed carefully.

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CHASE NATIONAL BANK Substantial gains are shown in the June 30th statement of the Chase National Bank of New York. Resources total $487,308,000, with cash resources of $208,676,000; bills discounted, $94,555,000; time loans, $109,264,000; U. S. Government securities, $34,087,000; other securities, $24,299,000; acceptances, $11,511,000; deposits total $425,689,000; capital is $20,000,000; surplus, $15,000,000, and undivided profits, $6,503,000.

A change in policy has recently been inaugurated by the Trust Company of Cuba in Havana which was the first institution of the kind established in that island republic. It has been decided to retire from the field as a bank of deposit and discount and in future to concentrate efforts on the further development of trust business proper, paying special attention to trusteeships, executorships, administration of estates and various other services of a fiduciary nature. The Real Estate and Insurance Departments will be conducted as heretofore.

In determining upon this policy the management of the Trust Company of Cuba is actuated by the exceptional opportunities in Cuba for greater expansion of trust business and the enhanced prestige which is derived from the refinement of trust service. Since the Trust Company of Cuba was organized in 1905 the idea of confiding estates and trusts to a corporation instead of individuals has steadily gained ground because of the record established by this institution. The company already has on its books a

large volume of individual and corporate trusts. With the change,in policy a more systematic and intensive development of trust. business will be conducted.

Coincident with this change of policy is the announcement of the retirement of Mr. O. A. Hornsby, who had been an officer of the Trust Company of Cuba for the past sixteen years, becoming its president in 1916. Mr. Hornsby will shortly take up his new duties as a joint agent of the Royal Bank of Canada, New York City.

Mr. R. G. Muirhead, the new president of the trust company, is a Canadian by birth, and an old Royal Bank man, but during the greater part of the past ten years, and prior to going overseas during the war, was connected with several well known financial firms in Montreal. Previous to his arrival in Havana, a few weeks ago, Mr. Muirhead was manager of the office of the Royal Bank of Canada, in Paris.

The Trust Company of Cuba affords an example of the adaptability of the principle of corporate trusteeship to all lands and