personal security. The loans of stock savings banks are principally secured by real estate, while those of mutual savings banks are almost all based upon real estate.

100. Judging security. This is the chief art in lending money and credit. A bank may have its officials specialize in certain lines as steel manufacture, or dry goods. Loan companies are organized to deal in a single line of security. A land mortgage company lends on real estate and resells the notes, or its own mortgage certificates secured by the original mortgages. Another company lends on notes secured by live stock (a chattel mortgage) and resells the paper. Such companies are expert judges of values and risks. Since they resell practically all their loans they are lenders of skill and credit.

Mistakes are often made as to the value of both personal and collateral security. The inexperienced are always losing. Even banking experts sometimes slip up. One bank in New York in 1900 lost $700,000. In 1911 the U. S. Comptroller of the Currency required a national bank to write off $1,000,000 of bad loans. In 1922 one of the country's greatest financial institutions lost heavily upon the bankruptcy of a prominent speculator. Some men will pay only what the law compels and take advantage of every loophole to escape even those things for which they are morally responsible; therefore, those who lend their property for the use of others try to protect themselves by ironclad contracts which leave little chance for the debtor to get away with what he pledges as security.

101. Elements of collateral security. Collateral is used to secure permanent as well as temporary loans. Land, if the title is perfect, stocks, bonds, warehouse certificates, and bills of lading, known to be genuine, are free from the dishonesty and mismanagement of the borrower, when they are being held in trust for, or by the lender. Such security can stand alone, if there is a sufficiently

ELEMENTS OF COLLATERAL

SECURITY

129

wide margin of value, but it must be kept in mind that property as a basis of credit is worth only what it will bring at a forced sale. Appraisals must be conservative. Land value nearly always has in it value for a particular person, or business, or the expectation of enhancement. Sold today it might bring 25% less. About five years is allowed to realize a fair price for land. Furniture and

$50000

Misraty days.

after date the UNDERSIGNED, for value received, hereby

promises to pay to the order of the Mellon National Bouk, at the MELLON NATIONAL BANK, Five thousand.

DOLLARS,

in CURRENT FUNDS, without defalcation,

and PLEDGES herewith, as collateral security for the payment of this note, as well as for the payment of all other INDEBTEDNESS or LIABILITY of the undersigned to the holder hereof, whether absolute or contingent, as maker or endorser, drawer, acceptor or guarantor, now existing, or which may hereafter be contracted or incurred, the following described property, viz.: 100 American Woolen

of the market value of $8425 ................. and should either said market or the actual value decline, the undersigned further agrees, without notice or demand, to maintain at all times an equivalent margin by partial payment hereon, or in lieu thereof, at the option of the holder, by the pledge of additional securities satisfactory to the holder, and also hereby gives a lien for the amount of all liability, absolute or contingent of the undersigned to the holder upon all the securities and funds of the undersigned, now or hereafter in the hands of or under the control of the holder.

Upon the failure of payment, or performance of the covenant for maintenance of margin, as herein agreed, or upon non-payment of any liability hereby secured, or in the event of the insolvency, bankruptcy or failure in business of the undersigned, this note and all other liabilities of the undersigned to the holder shall forthwith become and be due and payable without demand or notice, and the undersigned hereby grants to the holder full power and authority to sell, assign and deliver, at any time and from time to time, without advertisement, notice or demand, the property hereby pledged or in the hands of or under control of the holder or any of it or any additions thereto or substitutions therefor, at any Board of Brokers or Stock Exchange or at public or private sale, also the right to bid or purchase at any sale thereof (except private sale) and to become the and clear of any trust or claim or right of redemption of the undersigned or

the

absolute owner of said Palar any of it,

assigns. In the event of a of said securities or any of them, the undersigned grants to the holder the right to apply the proceeds thereof (after deducting all cost or expenses of any kind, for collection, sale and delivery) on account of this note and interest, or on account of any of the liabilities of the undersigned, to the holder, whether the same be then due or not due, provided proper rebate be made for interest on liabilities not then due. Any surplus of sale over and above amount of all liabilities, absolute and contingent, of the undersigned to the holder, with interest and all expenses, shall be paid to the undersigned or assigns.

It is further agreed that the holder may, at any time, without notice to the undersigned, sell or transfer this note and deliver same together with said collaterals, to the purchaser or transferee, and shall thereby be forever released and discharged from liability or responsibility for said collaterals.

Due..

Address..

C-28 A-3M-5-22

Specimen Collateral Note

A collateral note.

fixtures on sale bring a very low price. Patents may have small value. Patterns may be worthless. Specialized machinery for any other purpose might be scrap iron. A railroad cannot be used for anything else. To move it would be like relocating a well. It is worth only its capitalized net earning power. It might not pay a creditor to force a sale. To realize value one must sometimes wait. The value of almost anything shrinks if the purchaser knows it must be sold.

Although collateral security is largely impersonal, it is not always so. If the margin of safety on any collateral is wiped out, the character and integrity of the borrower affects the lender's position. If the name of the borrower as well as the collateral has value, it is also true that the risk due to the certificates of ownership being stolen, or forged, is small. If goods are pledged by chattel mortgage, or held under trust receipt, the personal element is a large factor, for in such cases the property pledged remains in the hands of the borrower.

When the borrower signs the usual collateral note, he(1) Promises to pay the lender the amount of the loan. (2) Pledges certain property, which he deposits, as security for the payment not only of this loan, but of any other liabilities due, or to become due, or which may hereafter be contracted, or existing.

(3) Agrees to deposit such additional collateral as the lender may from time to time demand, and gives the lender a lien upon all cash, or other property, which may come into the possession of the lender.

(4) Agrees that upon the non-payment of the note, or the failure to furnish additional collateral, that it and any other liability, at the option of the lender, becomes due.

(5) Authorizes the lender in the event of the borrower's failure to pay, or to furnish additional collateral, to sell immediately all the collateral and any substitutes, or additions, and apply it to the satisfaction of the debt, and all expenses connected therewith; the surplus, if any, to be returned to the borrower, the deficit, if any, to be made good by the borrower.

The borrower is required to indorse all notes, drafts, and bonds, and assign contracts, leases, etc. In the case of stocks and registered bonds the borrower must do something more to complete delivery. These cannot be sold until they are transferred by the owner on the books

ELEMENTS OF COLLATERAL SECURITY 131

know all Men by these Presents, That the

undersigned, in consideration of financial accommodations given, or to be given, or continued to the undersigned by THE MELLON NATIONAL BANK OF PITTSBURGH, hereinafter designated the "said Bank," hereby agree with the said Bank that whenever the undersigned shall become or remain, directly or contingently indebted to the said Bank for money lent, or for money paid for the use or account of the undersigned, or for any overdraft or upon any endorsement, draft, guarantee, or in any other manner whatsoever, or upon any other claim, the said Bank shall then and thereafter have the following rights, in addition to those created by the circumstances from which such indebtedness may arise against the undersigned, or his, or their executors, administrators or assigns, namely.

1. All securities deposited by the undersigned with said Bank, as collateral to any such loan or indebtedness of the undersigned to said Bank. shall also be held by said Bank as security for any other liability of the undersigned to said Bank, whether then existing or thereafter contracted; and said Bank shall also have a lien upon any balance of the deposit account of the undersigned with said Bank existing from time to time, and upon all property of the undersigned of every description left with said Bank for safe keeping or otherwise, or coming to the hands of said Bank in any way, as security for any liability of the undersigned to said Bank now existing or hereafter contracted.

2. Said Bank shall at all times have the right to require from the undersigned that there shall be lodged with said Bank as security for all existing liabilities of the undersigned to said Bank, approved collateral securities to an amount satisfactory to said Bank, and upon the failure of the undersigned at all times to keep a margin of securities with Bank for such liabilities of the undersigned, satisfactory to said Bank, or upon any failure in business or making of an insolvent assignment by the undersigned, then and in either event all liabilities of the undersigned to said Bank shall at the option of said Bank become immediately due and pavable, notwithstanding any credit or time allowed to the undersigned by any instrument evidencing any of the said liabilities.

3. Upon failure of the undersigned either to pay any indebtedness to said Bank when becoming or made due, or to keep up the margin of collateral securities above provided for, then and in either event said Bank may immediately without advertisement, and without notice to the undersigned, sell any of the securities held by it as against any or all of the liabilities of the undersigned, at private sale or Broker's Board or otherwise and apply the proceeds of such sale as far as needed toward the payment of any or all of such liabilities together with interest and expenses of sale, holding the undersigned responsible for any deficiency remaining unpaid after such application. If any such sale be at Broker's Board or at public auction, said Bank may themselves be purchasers at such sale free from any right or equity of redemption of the undersigned, such right and equity being hereby expressly waived and released. Upon default as aforesaid, said Bank may also apply toward the payment of the said liabilities all balances of any deposit account of the undersigned with said Bank then existing.

It is further agreed that these presents constitute a continuing agreement, applying to any and all future as well as to existing transactions between the undersigned and said Bank.

Address,

CANCELED

Dated, Pittsburgh, the.

day of

Collateral loan agreement.

190.

of the issuing corporation. To make possible a quick sale and transfer, the borrower is required to sign not only an assignment in blank, but a blank power of attorney which gives any person whose name may be filled in the power to make the transfer. The certificates are thus made as negotiable as a check indorsed in blank.

102. Stocks and bonds as collateral. Any one who owns good stocks and bonds has no trouble in making loans with them as collateral. Individuals sometimes deposit general collateral with a bank not only for safekeeping, but under a contract that they may make against it loans on short notice by telegraph. A great mass of collateral loans secured by stocks and bonds are made to brokers enabling them to borrow many times their capital. As the broker sells one lot of securities, he withdraws them from the bank, giving his receipt and substitutes others. The ones substituted must be known to be just as good. If while bonds are being held as security, coupons fall due, the bank delivers the coupons and obtains a receipt. The risk on collateral is lessened by asking, under penalty of a higher rate, that the securities be mixed according to some standard. The former standard for call loans on the stock exchange was 65% railroad and 35% industrial securities. During the Great War and after, industrials became such a feature of market activity that they constituted an increasingly larger proportion of collateral securities. Loans based on securities which were all industrial became frequent. The tendency now is toward a mixture that is half railroad and half industrial. Several good industrials, or several good railroads, are considered less risky than for all to be of one corporation. Government bonds and some public utility, railroad, and industrial bonds are almost free from short-time fluctuations. Upon these only a small margin is asked. The United States allows the national banks to issue notes to