OTHER PEOPLES MONEY PDF
OTHER PEOPLE. ' S MONEY. AND HOW THE BANKERS USE IT .. need money, and selling to those seeking invest ments. The banker performs, in this. Other People's Money, and How the Bankers Use It by Louis Dembitz Brandeis. Book Cover. Download; Bibrec. This is the greatest question of all; and to this, states- 2 OTHER PEOPLE'S MONEY men must address themselves with an earnest determination to serve the.
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Other Peoples Money - wildlifeprotection.info - Ebook download as PDF File .pdf), Text File .txt) or read book online. Editorial Reviews. Review. "Thanks for writing this book. Only [John Kay] could have done it. This is going to be a classic." --Frank Partnoy, Professor of Law and . Other People's Money. By John Kay. (PublicAffairs, pages, $) rom to , the finance sector of the American economy grew to.
The Pujo schedule corporations which the Morgan associates in actually appear includes only the by name as directors. But these shown their humility many such. It is clear. That sum represents the bond and stock capital of the New Haven Railroad. National City. It has been buttressed on every side by joint ownerships and mutual stockholdings. Morgan and his partners acquired onesixth of the stock of the First National Bank. Baker acquired together. IMorgan of the National City Bank.
Davison and Mr. Stillman and or their dominant officers. They became trustees in great railroad systems. Boston and Chicago. New York. In Boston there are two large international banking houses Lee.
But centers P. Thus of 42 banking institutions. The Shawmut Bank. There are in Boston now also 23 trust companies. They are so still in some small. Once Lee. Boston's banking concentration is not limited Around Boston to the legal confines of the city. Kinnicut or distributors of securities. And similar relations would doubtless be found to exist with the leading bankers of the other important financial centers of America.
Somewhat between the and Chicago's great financial institutions its First National Bank. The underwriting commissions on this inner issues made by group are usually easily earned and do. It was impossible to learn the identity of these corporations. As bankers frequently get huge commissions without themselves distributing any of the bonds. Bankers and brokers are so anxious to be permitted to participate in these transactions under the lead the inner group that as a rule they join of when invited to do so.
Morgan Mr. Pujo Committee reports] estimated that there were from to such underwriters who were apparently glad to agree that Messrs. Long ago monarchs invented. Their attitude reminds one of the "spheres of influence" with ample " hinterlands by which rapacious nations are adjusting differ- Important banking concerns. The Pujo Committee reports that they are ''quaUfied aUies of the inner group".
Other People's Money
But even Kuhn. Can full are potent among the anthraMorgan associates them? And with like competition exist when cite coal railroads in all of conditions prevailing. But far more serious even than the suppression of competition industrial which this liberty. The intimidation which it effects extends far beyond "the banks. Its blighting and benumbing effect extends as well to the small and seemingly independent business man.
Nearly every enterprising business man and a large part of our professional men have something to sell to. Nearly every needs bank credit. But America. Break the control so by the investment bankers over railand industrial corporations. In either event it tends to inefficiency. IMorgan Co.
The objection extends alike to contracts of a corporation whether with with a firm one of which he is a member. Morgan the bonds to the of a director. New Morgan York. Life Insurance or a partner sell Company. Morgan or a partner is a director. The New Haven spends the proceeds of the bonds in purchasing. Morgan or a partner supplies of a director. The Reading. The Steel Corporation. Morgan to the Western subsidiary or the of a partner Company is The Telegraph a director.
The Reading buys its passenger cars from the Morgan Pullman or a Company. The Baldwin. The chain is Manu- indeed end-. This specific illustration tious. Each and every one of the companies last named markets its securities through J.
Through all these alliances and the huge traffic it controls. The aggregate ent corporations — through exert their influence United States assets of these differ- which these few men over the business of the —exceeds sixteen billion dollars. These same are also directors in twelve steel-using street railway systems. The prohibition will not be an in- It will merely give full legal sanction fundamental law of morals and of human nature: For no rule of law has. Courts held that even where a comthis.
Courts held valid contracts between a corporation and a director. For trustees. The first limitation ignored the rule of law that a beneficiary is entitled to disinterested advice and not merely from some. Every one knows that the most effective work is done before any vote is taken.
The second in the making participates of — by which contracts. Every one should know that the denial of minority repre- sentation on boards of directors has resulted in the domination of most corporations by one or two men. Indeed the Pujo Committee reports: Directors and even an appealing party.
It is the directors corporate action. Appeals from Philip drunk to Philip sober are not of frequent But here we lack occurrence. And membership are radical changes rare. Harvard Law Review. Max Pam proposed in the April. But to be effective.
Pam's directorates are As counsel promi- nently identified with the organization of trusts. In the case of railroads and public-service corporations industrial manded. For even more important than efficiency are industrial and political liberty. For contracts are But the compelling reason interlocking directorates is prohibiting for neither the protection of stockholders.
And this is particularly true in railroading. They are almost as essential a factor in commerce as our railways. Receiving deposits and making loans therefrom should be treated by the law not as a private part of our currency business.
It carrier to use its up or specifically to businesses. The granting to powers destroy other or withholding of a loan should be determined. But bank resources are. Nearly threeloans of safely be allowed to grant or to their own money to fourths of the aggregate resources of the thirty-. Senator Owen. Chairman of the Committee on Banking and Currency. The beyond escape. All banks in the United States. Mere honesty to the stockholders demands that the interests to be considered the interests of of the part of ors.
The a stricter duty. And we should bear this in mind: If privately. But that difficulty merely emphasizes the im- portance of making absolute the rule that banks make any loan nor engage in which a director has a private interest. But that honestly discretion should be exercised. The statement of Mr. An Interstate Commerce Commissioner is prohibited from owning any bonds or stocks in any corpora-. On the contrary we are of opinion that it may go on from regulation to prohibition except upon such conditions as it may prescribe.
It might make a bank in director dispose of some of his investments and from making others. A judge is disqualified from sitting in any case in which he has even the smallest financial and most judges. And the directors of our great banking in- bank stitutions. Shall it be applied to all banks? Shall locking the principle directorates in of prohibiting potentially inter- competing corporations be applied to state banking institutions.
Shall the principle be applied so as to prohibit transactions with another corporation in which one of its directors is interested merely as a stockholder? Their diagnosis discloses intense financial concentra- and the means by which tion Combination. With a view to freeing inis to dustry. Provided further. That a I. The Committee recognizes that a corporation should not make a contract in which one of the management has a private interest.
The objection to com- directors. The prohibition of corporate contracts in which one of the management has a private interest should apply to du-ectors. The Money Trust snake The scotched. Let us examine this further: When we find. The Bank National of England.
In order that the banks may not be controlled by a few financiers. That statute was passed in These banks are separate and distinct. Massachusetts attempted thus to curb the power of the individual financier.
A few years ago it was supplemented by providing that none of the executive officers of a savings bank could hold a similar office in any national bank. The Committee's recommendation is also in harmony with laws enacted by the Commonwealth of Massachusetts more than a generation ago designed to curb financial concentration through the savings banks. York City there are 37 trust companies only 15 are New which the clearing house. State reason for common prohibiting The directors in banking institutions applies equally to national banks and to state banks including those trust companies which are essentially banks.
Trust In Company with 2. Banks and Trust Companies. Thirty-seven of the 38 directors might each become a director of a different New York trust company: The proposed concession opens the door to grave dangers.
In the first place the provision would permit the interlocking of national bank not with one trust but with as company any only. There are 37 trust companies in the City of New York. The Pujo Committee has failed to apply the prohibition tentially of common directorships po- in competing banking institutions rigor- ously even to national banks.
It permits the same man to be a director in one national bank and one trust company doing business in the same place. But even if the were amended so as to bill limit the possible interlocking of a bank to a company. A private banker may also transact some business of a character different from that properly conclasses of elements in ducted by a bank. Other Corporations. It is true. The Morgan associates are the nexus between such supposedly competing railroads as the Northern Pacific and the Great Northern.
And the prohibi- tion of interlocking directorates should be ex- tended to railroads banking competing corporations potentially whatever the class. The interlocking of other corporations has been an equally important element. All other corporations are to be permitted to continue the practice.
The Money Trust would not be disturbed by a Under a law of prohibition limited to officers. Bank officers are appointees of the directors.
No prohibition limited to officers will materially change The this condition. A prohibition limited to officers would not affect the Morgan operations with these banking institu- were minority representation on bank boards which the Pujo Committee wisely advocates.
The most potent single source of J.
And Before the these relations all Money must be they cannot be severed unless corporations of each of these several classes are prevented from dealing with their and with corporations are interested. Trust can be broken. Whether they resigned from the one or the other ness would be And whether they rethe Morgan power would obviously be class of corporations. One of the annoying petty monopolies.
Morgan firm is free to The proposed proliibition. Morgan power. Among the largest stockholders was Mr. As tending to explain this extraordinary monopoly. No member but there was Morgan Company. The Pujo Committee. The per cent. Certainly a stockholding in- terest of a single director. The drastic Stanley bill. The Mutual Life and the Equitable did so in part. The Armstrong investigation showed that life-insurance companies were in the most potent Their power factor in financial concentration.
The Armstrong legislation directed life-insurance companies to sell their stocks. Certain exceptions agement has a private interest. The prohibition could also be limited so as not to apply to any. The number of corporations in the United States Dec. And the prohibition of transactions in which the management has a private interest should.
This would exclude some local jobbers retail concerns and and manufacturers not otherwise excluded from the operation of the act. An exception should also be made. Like- wise banks and trust companies located in cities of less than Congress has ample power to impose such prohibitions upon practically all corporations.
Has Congress upon the the power to impose these limitations conduct of any business other than national banks? And if the power of Congress is so limited. While Congress has not been granted power to panies. Practically no business in the United States can.
The answer to both questions is clear. Congress manufacture of the. The taxing power has been resorted to gress for like purposes: Congress has no power directly to suppress teries. But mark it paid- has thus regulated the press. Such a law would involve a great change in the relation of the leading banks and bankers to other businesses.
As such been exercise of congressional common for. Con- now to urgently needed. Congress cannot ordinarily provide compensation for accidents to employees or undertake directly to suppress prostitution.
The power of Congress over interstate commerce has been similarly utilized. It is it will must be supplemented by other remedial measures. The hostile forces have been located. That potent force must. That was a necessary first step and a long one towards relief.
The Pujo Committee the disclosure of the facts concerning against the financial concentration. The Freedom. But there should be a further call upon publicity for service. His direct income from this investment was limited by law to less eighth of one per cent.
It was wealth which enabled the Morgan associates to buy from it the Equitable and the Mutual Life Insurance Company the stocks in the several banking in- stitutions. These are the main factors in the development of the Money Trust. It in par value of the stock of the Equitable Life Insurance Society. Then power breeds wealth power. It would be well worth while now to re- open the Money Trust investigation merely to collect these data. But earlier investigations have disclosed some illuminating.
Some of it is due mulated? Nothing could have demonstrated so clearly the power exercised by the bankers.
The syndicate which jH'omoted the Steel Trust. But a main cause of is the huge tolls taken as wealth by those who control the avenues to capital and to investors.
Some of it is due to special opportunities for investment wisely availed of. Nor have these heavy charges been confined to industrial concerns.
Nor were monster More commissions limited to trust promotions. On bonds of high-class industrial concerns. Even railroad securities. Company bonds. The aggregate commissions or profits so taken by leading banking houses can only be conjectured.
But the Pujo Committee has supplied some interesting data bearing upon the subject: Counting the issues of only. It is to exactions of the investment And such as these that the wealth banker is in large part due.
It does not include any government. The Pujo Committee recommends. Some of the state public-service commissions now exercise such power.
Is it knew also. Corpora- in the first instance bear the charges for capital. Their submission is un- doubtedly due.
Money was "tight. Mail presented an explanation: The public. British experience In a brief period supports this last spring nine differ- ent issues.
They indirect. If the consider-. Let every circular letter. It another practical pro- is the existence of the against middleman. That is knowledge to which both the existing security holder and the or advertisement of a prospective purchaser is bankers' compensation fairly entitled. If it is not the investor will ''strike.
It judging of the safety of In the marketing of securities there are two classes of risks: One is the risk whether the banker or the corporation will find ready purchasers for the bonds or stock at the issue price.
Where there is a large risk that the bonds or stock will not be promptly sold at the issue price. The small investor relies almost exclusively upon the banker for his knowledge and judgment as to the quality chiefly in of the security. The sold at the issue price. Such disclosures profits is of bankers' demanded will aid the investor in the investment. The bankers' compensation should. The archaic doctrine of caveat emptor is vanishing. Now the law should not undertake except incidentally in connection with railroads and public-service corporations to fix bankers' profits.
But it is now recognized in the simplest mer- chandising. And it should not seek to prevent investors from making bad bargains. The Federal Pure Food Law does not guarantee quality or prices. The law has begun to require publicity in aid of fair dealing. Among the most important facts to be learned for determining the real value of a seciu-ity And any for is the amount of water it contains.
That would be almost as ineffective as if the Pure Food Law required a manufactm-er merely to deposit with the Department a statement of ingredients. Exform of unjustly ac- will in large part cease. For the whole public is interested in putting an end to the lar. And it must be a disclosure to the investor. It will not suffice to require merely the filing of a statement of facts with the Commissioner of Corporations or with a score of other officials.
But if entirely consistent with the the facts are disclosure should include a made known. This price maintenance is. In other words. It may be general welfare. It is a common incident member of the syndicate of underwriting that shall sell at less no than the syndicate price for a definite period. And waive the provision.
There were fiftyseven participants. We had to divide up a large part. Investment Bankers We have today secured substantial control of the successful machinery business heretofore. Chicago C. New York E. Were such notices common..
This cash and stock commission we are to divide in various stock. Philadelphia I. As we have a large clientele of confiding customers. Boston L. But they used their strong position There are. But the investment banker has. Publicity and particularly by commissions.
Many curbing undue exactions. Ehminate the banker-middleman where he is superfluous. Even where the new issues of the corporations.
The middleman. And those states or municipalities an established reputation among which must seek more distant markets. There a legitimate is field for dealers in state and municipal bonds. But there are many states and cities which have which lack investors. Investors already owning such bonds must have a medium through which they can sell their holdings. The two are often combined. These should sell their bonds direct to investors without the intervention of a And middleman.
He merely negotiates a purchase or sale as agent for another under specific orders. He exercises no except in the method of bringing together. The broker He has properly nothing to do with the original issue of securities. Specifically as expert. On purchases of government.
The compensation for his part in the transaction is in received many cases more accurately described as profit than as comSo far as concerns new issues of government. On the merchant's profits. And good- possession of the confidence of regu- —enables him to of the security effect sales might utterly where fail to find a market. Specifically as jobber or retailer. The merchants. Specifically as distributor. And even where there is not immediate payment. For few investors have the time.
The banker performs an all-important service in providing an outlet for him will —that lar customers the His connections enable securities. Philadelphia or Baltimore and of scores of lesser The American cities.
Whenever makers of securities require all or any of these three investment banker is the payment Where there proper. Bankers often. Neither should an investment banker be needed to find investors walling to take up.
Philadelphia or Baltimore. States and the makers of the securities. A state or municipality seeking to market direct to the investor its own bonds would ence. Investors in a are apt and they have been trained to be conservative. And a great demand could. Entrance upon a market.
But banker-fed in time. Why should not cities get the temporary use of other people's money as well? Bankers have the preferential use of the deposits in the banks. Large issues of bonds for any other purpose are usually require large. Such need of large sums does not arise except from time to time where maturing loans are to be met.
Bankers carry the bonds with other people's money. But ordinarily cities do not. Free these institutions from banker-control. Then the banks get back. For the for other double operations. And then it loses interest on the money raised before it is needed. Municipalities were unwilling to pay the high rates de- manded ited of them. But money had to be raised.
And many cities were prohib- by law or ordinance from paying more than 4 per cent. Bankers were loth to take new bond issues. In Baltimore. Fred G. The experience of Utica. About this time the 'popular sales' of Baltimore my and Philadelphia attracted laws in effect in those officials as does our law and methods. In for awarding the bonds I gave preference to residents of Utica and I had no difficulty in apportioning the various maturities in a satisfactory way. Then I succeeded in getting the local papers to print editorials and local notices upon the subject of municipal bonds.
All the prospective purchaser do was to fill in the amount desired. In arranging for the 'popular sales' I announced in the papers that. Estimate and Apporcompetitive bids. Under the present we have it. The upon each issue should be graded according office to prices to the different values of different maturities.
Syracuse and the neighboring village of Ilion. The fact that municipal bonds redeemable practically. Think of a bank providing a baker with enough capital to open up his own bakery.
The rampant trading activity and massive growth in the finance sector is called financialization. Financialization started in the s, when large institutions started trading more and more securities, which are financial assets such as stocks, bonds and mutual funds. But what really pushed financialization over the edge was the emergence of a new market based on derivative securities.
Derivatives are like contracts that base their value on how well other assets perform. One kind of derivative is known as a credit default swap CDS , which allows a bank to protect itself against a borrower defaulting, or failing to make payments, on their loan or mortgage. In a way, it functions like insurance: the institution investing in the CDS is promising to pay the bank in the event of a default, while the bank is promising to eventually reimburse them, with interest. This is how we ended up in the recent financial crisis of too many banks were giving out loans to people who were in no position to honor them.
Then, too many people defaulted on their loans, and suddenly all the institutions needed money from each other. The system collapsed upon itself.
This crisis was further impacted by technology that made it easier than ever for people to trade securities and derivatives, leading to massive artificial inflation of the financial sector.
In the years before financialization, the economy was relatively stable due to a financial sector that promoted a culture of caution and planning. By contrast, today the finance sector acts as though it has little to lose, so we end up with a far more volatile economy.
Prior to financialization, executives were expected to invest their own money into their banks, which gave them a great incentive not to fail — and to avoid taking too many risks. So, when it came to providing mortgage loans, it was in their best interests to grant these to reliable people who were likely to hold up their end of the bargain and make regular payments. Back then, being a bank manager was also a lifelong job, so they would be around long enough to face the long-term consequences of their actions.
In the years leading up to , countless mortgages were being granted to people who were clearly unlikely to be able to pay them off, which was a major contributing factor to the crisis that followed. Another conflict of interest can be found in the new breed of broker-dealers. Brokers were traditionally agents who helped bring two like-minded dealers, or traders, together.
But during the time of financialization, brokers began making their own deals. They were no longer just making money on commissions from their clients, they were also making profits from their own deals. Naturally, this meant it was no longer in their best interests to steer clients toward the best deals.
A broker-dealer is now more likely to steer clients toward a less lucrative trade and save the best deals for themselves. In reality, what happened was the logical culmination of decades of dangerous and selfish decision making.
Other Peoples Money - Brandeis.pdf
This mentality can be directly connected to the transition banks made from being largely private or family-owned businesses to being run by corporations. You pay for it each month while the car provides no income and in fact depreciates the minute you drive it off the lot.
Good debt, by contrast, would be a loan for an investment property where the rental income pays for the expense of the property, including the debt service, while also providing monthly income.
In keeping with our real estate example, that is generally around 70 to 80 percent of the purchase price. The rest of the money must be made up of equity from another source. These, of course, are just small numbers for example.
In the real world of investment, you can do this at scale and make massive returns and also, as in this example, infinite returns. But it takes high financial intelligence.
Other people's money
Would anyone really give you their money like this? Instead, they rely on people with the proper financial education, skill set, and drive to bring deals to them. His company, MC Companies , buys apartment buildings. He does all the hard work of finding deals, doing the due diligence, negotiating with owners and lenders, and handling management.
In return, people line up hoping to invest their money with him.And a long step will have been taken toward attainment of the New Freedom.
Besides the power developed and under construction water-power concerns included in the General Electric group own in the States shown undeveloped. Neither should an investment banker be needed to find investors walling to take up. It has an important banking depai'tment. The changes that occurred in the structure of financial services firms are described in more detail below, but within these firms the dominant ethos changed radically. It permits the same man to be a director in one national bank and one trust company doing business in the same place.
They had The world of finance today is dominated by trading, and trading is a principal source of revenue and remuneration. The Economist Kay's insistence on stepping back, on judging finance by the humdrum standards of any other industry, with its self-serving mystique and aura of inevitability stripped away, makes Other People's Money one of the best two or three books I've read on the crash.