STOCKS AND BONDS AS COLLATERAL 133 the par value of the U. S. bonds which are deposited as security. The emergency currency of 1914 was issued upon various securities. (1) State, municipal, and county bonds were accepted at 85% of the market value. (2) Miscellaneous securities including industrial bonds, and other securities, mainly the notes and warrants of cities and towns, were accepted at 75% of their market value. (3) Commercial paper was accepted at 75% of its face value. (4) Notes secured by warehouse receipts for cotton, tobacco, and naval stores were taken at 75% of their face value. The amount of margin depends on the marketability and stability of the property. A bond upon which 10% margin would be asked in New York might require 20% in the interior. Issues having a wide market are more readily sold. The forced sale of the stocks of a company that is not well known would break its market and cause them to sell at a bargain. Stocks held entirely within one family may be hard to sell and local stocks may have little sale anywhere else. On such issues 50% margin might be asked. Stocks sold on the exchanges are commonly hypothecated to 80% of their value, unless the values fluctuate rapidly (the 80% may be calculated on the five-cent point next under). In 1915 when the prices of war issues soared, the banks cut their loans to 60% of their market value. Kirkbride and Sterrett give two tests of a New York collateral loan, "the first requiring that the value of the securities must have a margin equal to 20% above the amount of the loan, and the second, that the loan must have ten points margin, that is, that the amount loaned must be $10.00 a share less than the market price of the stock. This is reckoned by dividing the number of shares of stock (or if bonds, $10,000 are equivalent to 1 The Modern Trust Co., p. 81. (Macmillan Co., New York, 100 shares of stock) into the margin." This method discriminates against speculative, non-dividend paying stock which is selling for less than par. A national bank is prohibited from lending on its own stock. Many states prohibit state banks from lending on their own stock. - 103. Notes receivable as collateral. In automobile, farm machinery, wagons, tools, and other lines, promissory notes are given by the consumer in part payment. A business house rather than discount a hundred separate notes of its customers running from $50 to $1000 each, necessitating in the first place a great deal of clerical work for itself and the bank, and in the second place the making good by it as indorser of each separate note that is not paid by the maker at maturity, which would be a reflection on the sort of paper it offered, usually prefers to make a single note for $50,000 and pledge its notes receivable as collateral security. As some of the notes which have been pledged fall due, they are withdrawn and new ones substituted. The borrower having indorsed all his pledged notes puts the lender in a position to collect them, or sell them, and apply the proceeds to the loan, if it is not paid. Any surplus is to be returned to the borrower and any deficiency is to be made good by him. A good note receivable does not shrink in value. The security is especially good where there are many notes from different people. Sometimes a small borrower uses the single note of a known maker as collateral, the amount loaned varying from 50% to 100% according to the personal credit of the borrower and the character of the note offered as collateral. 104. Warehouse receipts and bills of lading. The public warehouse receipt is much used as security. Manufacturers and merchants sell their notes or give acceptances, for purchases of materials, or merchandise, and pay WAREHOUSE RECEIPTS 135 them off as the goods are withdrawn from the warehouse. If the market is glutted, farmers store their products and borrow to pay back after they are sold. Notes, or acceptances based on staple non-perishable commodities like wool, cotton, grain, and sugar, are the most liquid of paper. They are almost certain to pay for themselves. The market is universal, because people must eat and wear clothes. Other commodities may require greater margins. MULTIPLE BALE RECEIPT [THE DOE WAREHOUSE CO.] RECEIPT No....... INCORPORATED UNDER THE LAWS OF [ STATE ] PAID IN CAPITAL STOCK $[ AMOUNT } LICENSE No. [NUMBER] EXPIRES ISTAMP DATE] Received for storage from. ..of. ORIGINAL BALE... OF COTTON [Town State] [ Stamp date ] .....on [ Stamp date ] ...bale.. of cotton, described below, stored in the [Doc Warehouse] in [Town State], for which this receipt is issued, subject to the United States warehouse Act, the regulations for cotton warehouses thereunder, and the terms of this contract. Marks Weight Grade" Staple Tag No. Marka Weight Grade Staple Condition Tag No. Condition Rald classification and weight were determined by a classifier and weigher licensed under said Act. Bald cotton is fully insured by (The Doe Warehouse Col against loss or damage by fire and lightning unless expressly stated otherwise on the face of this receipt. receipt issued, at the option of [The Doe Wr (one year) only from the date of this receipt, but, upon surrender of this receipt, sald period may be extended, or a w se Co.) as provided in said regulations. The Doe Warehouse Co] claims a lien on said cotton for charges, advances made, and liabilities incurred, as follows: Storage from date of receipt of cotton at the rate........ per balo. per month or fractional part thereof............ Insurance from date of receipt of cotton at the rate of........e per bale. per month or fractional part thereof.. Weighing.. Classing. Stapling.. Freight charges.. Upon the return of this receipt properly indorsed and the per Licensed warehouseman Grade according to the official cotton standards of the United States. Multiple bale cotton warehouse receipt recommended by U. S. Bureau of Markets. Pig iron, timber, yarn, seed, butter, eggs, cotton seed cake, raisins, beans, peanuts, hay, hops, flax, tobacco, naval stores, and merchandise, are other examples of commodities that have been so used. In every case the lender must make sure that the goods are insured. The principal feature of such security is that the goods are held by a third party who is responsible. That also is what enables loans to be secured upon the surrender to the lender of order bills of lading, issued by transportation companies (see 143). The buyer cannot get the goods until he pays for them, or arranges to pay for them, and gets the bill of lading from the lender. In the meantime the seller has received payment on the security that the bill of lading gives that the buyer will repay the advance. 105. The assignment of accounts. To illustrate howalmost anything that is salable can be given as security for loans, it is interesting how the accounts receivable of a firm may be thus used. Some trust companies will lend on accounts as security and there are credit companies that make a specialty of such lending. The borrower assigns all or part of his accounts to the lender and gives him duplicate statements. If the accounts meet the requirements of the lender, the borrower gets 70% to 80% of their value. They must not have become doubtful. They must be the accounts of firms which have some capital and a first, or second, credit rating. Even then the total of an individual account must not exceed 10% or 15% of the lowest credit rating, say $750, if the rating is $6000 to $8000, to allow for debts which may be due other firms. The accounts may be turned over to the lender for collection, or the lender may allow the borrower to collect them as agent of the lender, each collection to be paid to the lender as a reduction of the loan. The borrower guarantees every account and must make good any bad ones. The usual contract makes the accounts the absolute property of the lender. When the debt is extinguished, the margin whether in unpaid accounts, or cash, is given to the borrower. The borrower pays 1/2% a month as commission and 6% a year interest as long as the loan runs. M. C. Elliott, counsel for the Federal Reserve Board, has ruled that the valid assignment of an open book account is not rediscountable by a Federal reserve bank.2 106. Real estate as security. Some lenders will not lend upon property that is not yielding an income, be 2 Federal Reserve Bulletin, May 1916, p. 227. REAL ESTATE AS SECURITY 137 cause profit or loss furnishes an index to value. Conditions determine whether it is a good index or not. Deduction is made for taxes, repairs, depreciation, and the net rental income is capitalized at the proper basis for that business. Suppose it is 6%. If the gross income is $4200, the approximate value suggested is $42,000, provided 4% is sufficient for deductions. Loans are often made upon non-producing property, but the lender must be a shrewder judge of values. The assessment value is a clue for the owner seldom submits to a valuation in excess of its known worth. The owner may want to borrow as much as possible, or as little as he can manage with in financing his enterprise. In any case the lender demands a wide margin. He may lend 40%, 50%, or in unusual cases, 60% of the property value. An interesting case of shrinkage in value is the former property of the defunct Fort Pitt National Bank on Fourth Avenue, Pittsburgh, on a lot 22x171 feet. It is said to have cost the bank $225,000. For remodeling and furnishing it, $36,000 was spent. The bank failed. In 1916 after several years of effort to sell the property, it brought $73,500 at the receiver's auction. It had been assessed by the city at $163,000 and by the county at $180,000. The lender has his own representative investigate the property and check the values which the borrower claims in his application. Fifteen farm loans made recently by an investment company show a scaling by the lender of the valuations of the farmer of from 3% to 40%, the loans in no case exceeding 50% of the lender's valuation. The title is searched and probably insured. The borrower secures his notes, or bonds, by the execution of a mortgage, or deed of trust. A mortgage is a conditional conveyance of the property to the lender, or to his trustee, so that if the principal, or any interest is not paid, the mortgage can be foreclosed for the benefit of the lender. |