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do right and to sell the right kind of bonds, and to have an honorable reputation. My house for many, many years was more jealous of its reputation always than it was interested in making profits, because we knew that without a fine reputation we could not command the confidence necessary to run a profitable business. It is good business to be honest in the investment banking business. It is good business to be perfectly fair with your customers, and to protect them to the fullest extent of your ability. If you do not do that you soon will drop down to a second-grade house, or a third-grade house, and then go out of the business. And I know what I am talking about. Senator ADAMs. Now that you speak of a second-grade house let me ask: A lot of things that a first-grade house does in order to insure the validity of an issue are not done by a second- or a third-grade house, are they? Mr. HARVEY. No. And they cannot afford to do it in many cases, because they cannot maintain the necessary highly specialized organiZation. Senator ADAMs. They also work for longer profits, isn’t that so? Mr. HARVEY. Ordinarily that would be so. And of course the smaller houses depend a great deal on the larger houses for accuracy of information, and for careful consideration of issues, and for good faith in the purchase of them. Senator ADAMs. There are issues that are originated by secondand third-grade—and, I take it, using the term “third-grade” would be complimentary to some of them. Mr. HARVEY. Yes, sir. Senator ADAMs. They originate issues and put them out that are actually—well, I was going to use the word “fraudulent”, but perhaps the word “fraudulent” is not quite fair. Mr. HARVEY. Let us say, careless issues. Senator ADAMs. Well, they come out in that way at least. Mr. HARVEY. Yes, sir. You will find the majority of that kind of business is what we call local issues, issues that are not known outside of a comparatively small radius from where the company is. Senator ADAMs. When you get away from the big investment centers quite a large proportion of the so-called bond investments, security investments, is made in that kind of securities. Mr. HARVEY. Yes, sir; in local issues. b ionotor CouzFNs. But that does not mean that they are always 8,01. Mr. HARVEY. No, sir; not at all. Senator CouzFNs. Just because a house may be a small house and takes a local issue, it does not mean that it is any more dishonorable or disreputable than some big house. Mr. HARVEY. No, sir. There are some very excellent local issues put out by small houses that are all right. Senator CouzFNs. Well, we do not want this to become a selfadulation meeting. I want the fact to go on our record that there small institutions that are all right. Mr. HARVEY. Certainly. And I should like very much to say that I know a great many very reputable small houses in New Orleans, in Birmingham, in Atlanta, and elsewhere, that have handled and been most careful to handle good securities, and where they afforded every necessary function in making it possible for a small corporation with

perfectly good credit to do financing. Oh, yes, that has been done, sir. But when you came in the Senator from Colorado was asking me a little different question. Senator ADAMs. I did not mean to imply size in my question. I was talking about grade and not size. Mr. HARVEY. Yes. And I certainly do not want to put forth the idea that the big houses are the only righteous ones. There are plenty of others just as righteous and in my opinion just as good. But because of the fact that they cannot have trained experts, and cannot afford to keep an engineering staff, and all that kind of thing, they are not equipped to go into these matters in the way that some others do. Senator ADAMs. Senator Couzens knows that some of the big houses have the machinery to persuade us that some issues are good when they have not proven so, while some of the smaller issues may have been better. Senator CouzENs. I did not want to permit to go unchallenged on our record that just because a house was small it was not good. Mr. HARVEY. Oh, no. And I assure you that I had no such intention. Senator KEAN. Your house not only originates issues but also distributes them. Mr. HARVEY. Yes, sir. Senator KEAN. And you have, I take it, 60, 70, or 80 salesmen. Mr. HARVEY. Yes, sir; we have more than that. We have had about 120 salesmen. Senator KEAN. You have had 120 salesmen? Mr. HARVEY. Yes, sir. Senator KEAN. Now, those salesmen get a small salary and a commission? Mr. HARVEY. Yes, sir. Senator KEAN. And pressure is on you all the time to feed that number of salesmen? Mr. HARVEY. Well, I do not think a salesmen has any particular weight in what we must buy. In other words, our buying department is not going to listen to a salesman. They should be and are, I would say, in the main influenced by something else than a salesman's wishes to have more securities to sell. Senator KEAN. But the pressure is there all the time from your salesmen, who say: Give us something to sell? Mr. HARVEY. Yes, sir. Senator KEAN. That is correct, I take it? Mr. HARVEY. It is quite correct. But I do not believe that that has influenced a great deal bad financing. That is my personal opinion. The CHAIRMAN. Those 125 salesmen that you have, do they engage other salesmen to help them? Mr. HARVEY. No. They do not do anything but sell securities. The CHAIRMAN. Who is it that engages ex-school teachers, and ex-ministers sometimes, and other people of good reputation, to go about telling people: You sell your Liberty bonds; they only pay you 4 percent, and this security will pay you 8 percent? I know of instances where people have been persuaded to give up their Liberty bonds, and all that they had was invested in good bonds, and to take other securities from some agent going about over the country. Mr. HARVEY. There is no question about that. There has been a great deal too much of high-pressure salesmanship in the investment business, and I should like to see an end put to it. The CHAIRMAN. Who employs such fellows? I mean these retailers of securities who become house-to-house canvassers? Mr. HARVEY. Shall I answer that for my own organization? The CHAIRMAN. Yes. Mr. HARVEY. I happen to have been particularly interested in that phase of our business. I have been one of five of the officers, and partners before that, whose duty it has been to interview all applicants for positions in the sales force. I have done that for several years. At least five of us must interview any prospective salesman before we will employ him. We speak to him separately. We try to find out what manner of man he is, how honest he is, how much he knows, how well he will conduct himself, how carefully he will conduct himself. If we all five agree that he is a high-grade young fellow, and that we can trust him after training him, why, we will then make an investigation of him through references, finding out from his home town, and his college; and we always ask him for his minister's name, and find out about his character in every way that we can. Senator CouzENs. That is the worst thing to ask him about; his minister's name. Mr. HARVEY. Well, we do that, and sometimes we get some valuable information. We do our best to select good young men, and then we put them through a course of about three months’ training in our office, when 40 or 50 of the senior men of our office meet with them for an hour at different times, and discuss different phases of the business. We endeavor to train those young fellows, and we do not give them very much responsibility at first. We endeavor to teach them to be careful and to be prudent. But I realize that you cannot do it with all people. If you have a large organization it is harder to control them than with a smaller one; what I mean is that it is more possible than to have one who is not up to standard in the case of a large organization than it is in the case of a quite small organization. If I might add this information: We have made it a special point, and this has come down from the tradition in our business, from Mr. Norman W. Harris, who was testified about by Mr. MacLean on yesterday, his son-in-law, and one of his great traditions was to be very careful about every man you employ, to empoly him on the basis that he will some day become one of the partners in the business, and not to select anybody who does not measure up to such a standard. The CHAIRMAN. Then do they go out and engage other agents to sell the securities? Mr. HARVEY. No, sir. This group of four or five executives in the office are the only ones who can employ salesmen. Now, I am afraid I am keeping you gentlemen. ... I will be glad to talk all the afternoon if you will permit me, and I love to talk, but I do not want to tire any of you gentlemen. Senator KEAN. You have had a large experience in this business, and I want to get that on the record. The Chase National Bank is separating you, or getting rid of its affiliate, the Chase Securities Corporation?

Mr. HARVEY. Might I describe that a little differently? Senator KEAN. Yes. Mr. HARVEY. They are dissolving the corporation and liquidating the business. It is that rather than the matter of separation. Senator KEAN. Now, the most of the banks in New York City, and the most of the banks in other places, at least in the larger cities, have had securities affiliates or distributing organizations, and they have done a distributing business. The United States has 11 billion dollars of bonds they have got to sell in the course of a year or two. If we destroy all those affiliates do you think it is going to interfere with their distribution, or not? Mr. HARVEY. Well, as I have read the bill there is nothing in it to prevent banks from handling United States Government securities, and I therefore assume they will continue to go on, and I think it will be advisable for them to do so. Senator KEAN. Well, I am not talking about this bill, but about another bill that is to come. How far do you think destruction of affiliates in all these banks is going to affect the marketing of securities? That is what I want to get on the record from you, if I can. Mr. HARVEY. I think you have raised one of the very serious problems to be considered. I do not see, when you are going to destroy the machinery that the country has built up, or a part of that machinery, for the distribution of securities, how it can result other than to require a little time before you can reconstruct an adequate machine to handle the ordinary volume of securities of this country. Now, with the market as dull as it is now, and with men who, like myself, are very anxious to get back into this business, and I will be out of it very shortly so far as my present connection is concerned, and we are anxious to establish a business, to be operated along proper lines, under laws that make it possible for us to do business, and whereby we can build up our organization as fast as the general market improves so that we will be able to handle business—well, as I was going to say, with the market as dull as it is now, probably you will not be greatly unconvenienced. But I will say to you that if we were to have a great big bond market right after the bill is enacted into law, I think you would find some congestion as a result of lack of machinery to handle it. Does that answer your question? Senator KEAN. Yes. The only question in my mind was, and I wanted to get you as an expert to tell me, whether you thought in these times, with conditions as they are, whether this is a good time to get rid of all of these securities affiliates? Mr. HARVEY. Well, I think any radical and sudden change in a vital part of our economic machinery might be expected to bring bad results until the new machine has adjusted itself to the changes. Senator KEAN. And that would take some time. Mr. HARVEY. It might. Senator BULKLEY. Assuming that we are going to get rid of these securities affiliates of the banks, what could be a better time than now? Mr. HARVEY. There could be no better time. Senator KEAN. Then you think this is a good time to do it? Mr. HARVEY. Well, we will at least have a better opportunity to adjust ourselves than in the case of an active bond market. Senator KEAN. The only question is this: Here is a large issue of United States Government bonds coming along, and should we get

rid of these affiliates now or give them four or five years in which to do it? In your judgment what would be the best time to do it? Mr. HARVEY. I have seen no better time since 1914, because the market has never been so dull since then. You do not need any machinery at the moment, except trading machinery. Senator KEAN. Do you think it would be better to get rid of the tourities affiliates at once rather than to give 5 years in which to do it? Mr. HARVEY. Expressing only my own personal opinion, if it is going to be done, yes. I think there would be no better time to do it than now. The sooner you throw open to the machinery that is left, and to that which will be building, the burden of carrying on, the better, because they will gradually build up and be ready to meet the situation. And I hope I will be a part of that building-up machinery in this country, which I think is an extremely necessary machinery for the welfare of the country and of the whole securities business. I hope we will have reconstructed our machine so that it can carry the burden for the benefit of the whole country, by the time we are needed. And I see no better time to put that burden on us than right now. Senator KEAN. You think it is all right to simply cancel this whole thing at the present time and let them take their wrecking? Mr. HARVEY. It would seem so. The CHAIRMAN. You have sold securities, I presume, that have since defaulted? Mr. HARVEY. I have, very much to my regret. But they are a small, a very small part of the securities that we have sold. To be perfectly fair, I think Senator Couzens got the idea that I was indulging in self-adulation. I should like to say that I was actually out selling securities from 1916 to 1926; that during that time I sold three issues of securities that have gotten into trouble, and two of them came out all right, but one did not. That was the Fruit-of-the-Loom Co., up in New England. That was the only one. But, if I had stayed out as a salesman during the succeeding 5 years my record would not have been nearly so good, because that was when the greatouble came, with issues that came out during that particular period. The CHAIRMAN. I am speaking of whether your house had not sold securities that have defaulted. Mr. HARVEY. Oh, yes; we have., The CHAIRMAN. To what do you attribute that default? Mr. HARVEY. Well, let us take, for example, a real estate project that we handled, a hotel in New York, the Hotel Governor Clinton, a little below the Pennsylvania Hotel. I will mention that because probably you are familiar with the property itself. That issue was brought to us as a construction proposition. The land had been purchased, and I have not the definite figures in mind, and therefore will have to speak in approximate terms, but do not hold me to accuracy; but the whole project, the real estate and the building, cost something like 5% million dollars, as I remember. And we were asked if we would handle a first mortgage of 3 million dollars on that property. Now, I think you will all agree that that was in an extremely fine location, almost at the Pennsylvania Station. It was a hotel which

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