Backwater

Before Depression the volume of new capital that poured into industry was a torrent. Then it dwindled to a trickle. The figures on the prolonged drought in new financing:

1929 $8,639,000,000

1932 325,000,000

1933 161,000,000

1934 178,000,000

1935 403,000,000

1936 1,217,000,000

1937 (8 mos.). . . 918,000,000

Why the trickle has not yet returned to a torrent is explained in part by the kind of backwater which last week became apparent in Wall Street.

Underwriters now are strictly regulated by the Securities & Exchange Commission. To the public this may have meant, as recently claimed by onetime SEChairman James M. Landis, a $1,000,000,000 saving from stock swindles. But last week underwriters found themselves in a genuine jam as the result of the past two months' stock tumble [first real smash of the Roosevelt Bull Market of the past two years] which this week set new lows for the year.

Under SEC regulation it often takes: six months to launch a new capital issue, for the plan must be registered with the SEC to get approval for sale. This caused little trouble so long as stock prices were going up. Since prices have been falling there has been utmost confusion. Perfect example was an issue of $44,000,000 offered by Pure Oil Co. and underwritten by 42 firms headed by Edward B. Smith & Co. The new $100 preferred stock was made convertible into four and one-half shares of authorized common, thus evaluating the common at $22.22 per share. But while the prospectus was brewing, Pure Oil tumbled from $20 to $14 a share. So stockholders took only about $800,000 of the new issue and the underwriters had to absorb the rest.

Similar was the fate of $48,000,000 of Bethlehem Steel debentures. In the month beginning Sept. 8 when they were offered, Bethlehem stockholders bought but $2,000,000 worth. Last week, therefore, the underwriters had to take over the remainder of the issue and offer it to the public. The 25 underwriting firms, headed by Kuhn, Loeb & Co., bought the debentures at $98, intending to sell them at $100, thus getting a 2% commission minus expenses. But during the month they were obliged to wait for company stockholders to buy, the market fell so far that last week Bethlehem's debentures had to be offered at $95.50. The price promptly fell to $93, and still the public did not buy many. Result was at least a $1,725,000 loss to the underwriters.

Certain other issues had a better fate last week, notably that of Continental Can Co. whose $20,000,000 of preferred stock, offered at $100 a share, went at a premium of $102, to the vast delight of Goldman, Sachs & Co. Similarly, a new firm named Lane-Wells Co. (which owns a unique process of "blowing in" oil wells with something called a "gun-perforator") successfully sold 40,000 shares at $15 each in its first public financing to the joy of Hartley Rogers & Co. But Continental Can is unusually strong and Lane-Wells enjoys unusual earnings. Other companies, less well fattened, have an understandable reluctance to enter the market at present. Last week, according to Investment Dealers' Digest, no less than 135 new capital issues were being held up by the underwriters in hopes of better market conditions. Total backwater: at least $100,000,000.

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