good-will, a business reputation which brings trade and increases profits. All of these assetsphysical property, business organization, goodwill-together represent the earning power of the company, its ability to produce a profit. In these profits, not only because the company has promised to pay him money, but because that promise to pay is backed up by a conveyance of all the physical property of the company, the bondholder, after the claim of the State for taxes, has the first right to share.

This

The mortgage bond-holder is more than a creditor of the company. His rights do not depend merely upon his ability to sue the company in case of default in principal or interest, and collect from it by the ordinary process of law. right to sue and collect is a valuable one, but the mortgage bond-holder can go much further than this. He is also an owner, through his trustee, of the property of the company. He has an interest in that property. Although that interest is held in trust for him, yet should need arise, the powers of the trust can be asserted, and the property can be seized and sold for his benefit.

It is this feature of ownership which so sharply distinguishes the position of the stock-holder from

that of the mortgage bond-holder. The stockholder has merely an interest in the company. He owns no property. He and his fellow stockholders, it is true, own the company, and the company owns the property subject to the ownership of the bond-holder. This is a very different thing from the direct ownership of the property, which is enjoyed by the bond-holder. Through his trustee, the bond-holder actually owns the property. The claim of the stock-holder for dividends is contingent not merely upon these dividends being earned, but upon the decision of the directors to distribute the earnings to the owners of the company. With the bond-holder's rights, however, the directors can take no liberties. He bears a more direct relation to the trust estate than do the stock-holders. They are continued in possession only so long as they perform the covenants of the mortgage. The bond-holders are the owners of the property, and they will assert their title through the trustee if the company does not faithfully and regularly pay them their interest.

IV

THE BANKING HOUSE AS AN AID TO INVESTORS

THE plan followed by the conservative investment-banker in offering bonds to his customers is, first, to purchase the bonds himself, and thus to evidence his faith in their soundness. The expression "We own and offer" is frequently met with in bankers' literature. Before purchasing any bond from a banking house, the investor should be careful to ascertain that the house is not acting as the agent or representative of the actual owners.

The risk which the banker takes is not so great as that assumed by his customer, since an enterprise may be entirely sound in its early stages, when its bonds are sold to the investor, and may be afterwards wrecked by bad management. This risk the banker passes on to his customer. The customer must rely upon the banker's anxiety to maintain the good-will of his business, to protect him from purchasing unsound securities.

Notwithstanding this transference of the risk, the banker must assume it in the first instance, and

cases are not lacking where large issues of bonds have been purchased with the idea of reselling them to the investor, but which, by reason of some miscalculation on the banker's part, could not be sold at a profit and were left on his hands.

Before purchasing any issue of bonds, therefore, the conservative investment-banker will provide for a careful investigation of every feature of the proposition upon the basis of which the bonds are issued.

The countless disappointments in the development of new enterprises are mainly due to faulty investigation as to the possibilities of the project, which leads to wrong conclusions as to the profits which will be earned. It is the business of the banker to guard against these mistakes. The consideration of a few typical cases will show how serious is the risk of the investor who purchases securities the soundness of which has not been determined by an exhaustive preliminary investigation.

In the neighborhood of a large Eastern city, there is a suburban electric railroad, running out about twelve miles from a terminal station at the end of a city transportation line, through a number of fashionable suburban towns, parallelling

throughout this entire distance the main line of a large and well managed steam-railway company, particularly distinguished for the excellence of its suburban passenger service. The syndicate which promoted this enterprise, and which completed it with its own money-no securities being offered to the public-employed engineers of high reputation and sound attainments to examine into the cost and anticipated traffic of the enterprise. The line was surveyed, estimates were made of the cost of obtaining ground for a right-of-way, and arrangements were made to purchase a large amount of real estate for the development of suburban towns which would furnish traffic to the line. The engineers then addressed themselves to the possibilities of traffic for the new line. engineers had obtained their experience in the West where the interurban electric railway has developed in competition with the steam roads, and where experience has shown that the electric line will almost invariably draw a certain percentage of the traffic of the steam line, which will be attracted by the lower rates and more frequent service. The method followed in the West in figuring the traffic of a proposed electric line, is carefully to estimate the traffic of the steam line

These