MARKETS: New Tri

Considering that he is a New Dealer, SEC Chairman William O. Douglas now has fairly good repute in Wall Street. Year and a half ago, however, he could justly claim to be the Street’s pet aversion—invited to speak before the Bond Club of New York, he produced a caustic tirade which suggested the entire reshaping of investment banking and left his hearers speechless with fury. Among tart Bill Douglas’ minor suggestions was that investment trusts take a larger role in underwriting.

Last week such was Wall Street’s mollification toward Chairman Douglas that two of its leading firms finally acted upon this advice. Tri-Continental Corp. and Selected Industries Inc., investment trusts on behalf of whose sponsoring bankers, J. & W. Seligman & Co., the Bawl Street Journal once advertised, “Tri Continental. Tri Chesapeake Corp. Tri Anything Once,” decided to tri underwriting. For the purpose they formed a new concern— Union Securities Corp., with $1,000,000 in cash, $4,000,000 more subscribed.

Heretofore, U. S. investment trusts have barely dabbled in underwriting. Tri-Continental and Selected Industries have occasionally participated in the underwritings of new issues in a very small way; Atlas Corp. has done the same. Paradoxically, last week when Tri-Continental and Selected Industries finally went whole hog into underwriting, they declared that Union Securities Corp. would shun the practice that has been the No. 1 argument for investment trusts going into underwriting—that they can absorb on behalf of their stockholders the remainder of any issue that the public refuses to buy.

In England this has been standard practice for 20 years and has been generally successful, since well-chosen issues become “sticky” not because they are unsound investments but only because of sudden market upsets. A good U. S. example was last fall’s Pure Oil issue, a sound enough investment which failed to sell because of a market crash. If its underwriters had been an investment trust they could have added the unsold bonds to their portfolio, thus saving their own skins and not impairing the investment trust.

Ignoring this argument and the obvious fact that if an issue becomes sticky and causes a loss to Union Securities Corp. the loss will inevitably be passed on to its investment trust backers, Tri-Continental and Selected Industries last week preferred to lay their new venture to two lesser reasons: 1) they have large chunks of capital they are eager to use; 2) since banks were divorced from underwriting, and death or depression has slashed the ranks of underwriters, there is an acknowledged lack of underwriting capital.

Chairman of the new firm is Tri-Continental’s longtime head, handsome, suave, bright-eyed Earle Bailie. Born in Milwaukee, this 48-year-old banker began as a lawyer, in 1919 joined J. & W. Seligman & Co., became a partner in four year. He enjoyed a brief moment of national prominence in 1934 as right-hand man to Secretary of the Treasury Henry Morgenthau Jr., was forced out by Senatorial objections to his Wall Street background.

As the war-scare paralysis waned last week, underwriting and security markets revived hand in hand. On the New York Stock Exchange heavy buying volume shot the Dow-Jones industrial average to a new 1938 high of 149.75, which was “confirmed” by a new peak since January of 30.91 for the railroad averages. Underwriters were heartened by the successful sale of a $37,500,000 refunding by Virginia Electric & Power Co. and a $42,000,000 refunding by MichiganConsolidated Gas Co.

Meanwhile, SEC, pondering ways to regulate private security flotations, was last week told by Vice President Charles W. Kellogg of Virginia Electric & Power that private selling is short-sighted even though it does avoid underwriting costs and the irks of registration. Said he: “The buyers for the large life insurance companies are very canny gentlemen. They know just about what it costs to get an issue registered. They know just about what the spread that the company will pay to an investment banking group to sell their bonds will be. And they insist on getting both these things themselves in the price they offer for the bonds. So that, in the end, the company not only loses its broad distribution and what value to it that represents, but, also, it has no real net gain in the net price and, finally, the effect of a private sale is that the company can never, during the 30-year life of these bonds, take advantage, as it otherwise could, of lower bond prices in future years in purchasing bonds for the sinking fund, for it is safe to say that none of this small group of private buyers would sell their bonds for less than the call price.”