under examination, are employed. The engineer's examination goes into the condition of the property, the character of the management, the adequacy of the rates charged to the customers, the relations between the company and its employees, the physical value of the corporation's property, and the chances of growth in the community in which it operates.

Next comes the audit of the corporation's accounts. Many banking houses employ their own auditors for this purpose. In the absence of such a skilled employee, they rely upon the advice of outside accountants of standing and experience. The object of the audit is to see, first, that the accounts are so kept that they show the actual condition of the company, and second, to determine whether, for example, such items as the cost of power or the cost of maintenance are abnormally high.

The banking house also insists upon a careful legal investigation. This relates primarily to the franchises under which the company is given the right, for a term of years, to use public property for its own purposes. The banker's attorney will make sure that these franchises are sufficiently broad for the purposes of the company; that they

do not impose burdensome restrictions; that they run for a sufficient time to enable the business to be properly developed; and that they contain satisfactory provisions for renewal at their expiration.

The attorney also gives much thought to the preparation of the mortgage under which the property of the company is conveyed to the trustee for the securing of its bonds. The mortgage will set forth, in great detail, the property which is transferred. It will bind the company by stringent provisions to maintain the value of this security intact, and it will carefully limit and safeguard the future issues of bonds secured by the same mortgage, so that a large margin of security in the cost of the property will be assured to the bond-holders.

If, after this investigation, the banker is convinced that the bonds are safe, and that their safety will so increase that any one buying these bonds will be assured of a fixed income for a term of years, and the return of his principal at the end of the term, the banker will purchase the bonds, and will then offer them to his customers.

The investor has none of the equipment for

making an investigation of this kind. If he relies upon the representations of the promoters of any scheme, he is almost certain to be misled. If he attempts to investigate the proposition for himself, his failure is likely to be both ludicrous and lamentable. If, however, he relies upon the recommendations of a banking house of standing, there is little chance of his losing his money.

V

THE BUSINESS OF THE INVESTMENTBANKER

In the field of security investments, the buyer should seek information on three points: (1) Shall I purchase stocks or bonds? (2) From whom shall I purchase my securities? (3) In what industries shall I invest? The first question was answered in the last chapter. We have now to take up the second question: From whom shall I purchase my bonds?

The security business, in its organization, resembles any other business. There are the manufacturers, the companies which issue the bonds; the distributors-investment-bankers, investment or finance companies, savings-bank and insurance companies, which purchase bonds from the producers, and, directly or indirectly, place them in the hands of the consumer; and finally the consumer, the investor, the policy-holder, or the savings-bank depositor. In the field of merchandise distribution, there are some producers who deal directly with the consumer, but these are the

exceptions. Generally speaking, the producers of shoes, hats, groceries, and drygoods have found it economical, and in all other ways satisfactory, to deal with the wholesaler. The jobber will buy in round lots from the manufacturer, taking his entire season's output of a certain line, assuring him his money without risk or trouble of collection, and enabling him to make his financial and industrial plans on a basis of assured receipts.

It is even more advantageous for the manufacturer of bonds, the borrowing company, to deal with the bond-jobber, the investment-banker. The investment-banker is in most cases a partnership. If of the first rank, the concern will have a large capital, and a credit with banks and trust companies several times the amount of its capital. The investment-banker will also have associations with other houses of the same kind, which will place at his disposal large sums of cash whenever he requires. The business of the investment-banker is the purchase and sale of securities. He sometimes adds to this other functions similar to those performed by a commercial bank, such as receiving deposits subject to check, and the purchase and sale of bills of foreign exchange. His main business, however, is dealing in investment securities.