Competitive Arguing

Last week SEC wound up the first "public conference" it has ever held Through its Washington offices had trooped some 125 investment bankers big and little. Every SECommissioner except defense-busy Leon Henderson was there; so were a few insurance men. For two weeks on and off they traded verbal and statistical blows on one vital subject-should the security issues of utility holding companies be subjected to compulsory competitive bidding?

SEC got regulatory control of utility financing in the Holding Company Act of 1935. Same year, the New Deal's National Power Policy Committee reported to the President that "fundamentally the holding-company problem ... is as much a problem of regulating investment bankers as ... of regulating the power industry." SEC never forgot that. By its own reading of the Act, it has been obliged to maintain "competitive conditions" in all utility underwriting deals subject to its jurisdiction. Its famous (to utility bankers) Rule U-12F-2 provides that any underwriter who does not bargain at arm's length must limit himself to less than a 5% participation, or receive no fee for his work.

If there is one point on which Wall Street and SEC agree, it is that U-12F-2 has not worked. In questionable cases, bankers have sometimes done the underwriting, impounded their fees until SEC should determine whether the deal was arm's length or not (so far, only one such determination has been made). To SEC's Public Utility Division, the logical answer to this dilemma was compulsory competitive bidding on all utility securities, whether banker domination was suspected or not. Two months ago, it so recommended to Chairman Jerome Frank.

The bankers at once gave tongue. Such a rule would strip them of all professional attributes, make them mere bidders at a public auction. They urged the classic argument--that such a rule would exceed SEC's authority--and the neo-classic--that it would hinder national defense. But when Chairman Frank invited them to his Town Meeting of Competitive Bidding, they got together some stronger arguments. They also brought a surprise.

One of the arguments on which SEC's P. U. D. staff had based its recommendation was that the present underwriting system concentrates the business in a few big houses in Manhattan. The out-of-town house was a mere vassal of the Manhattan originator, dependent on his favors for participation. Competitive bidding, argued P. U. D., would put all underwriters on an equal basis, and end Wall Street's tyranny over the little man.

The bankers' surprise was to produce the little man. From all over the country he came: from Denver's Engle, Adams & Co., from Topeka's Estes, Snyder & Co.. from Washington's own Folger, Nolan. To a man, he raised his voice against competitive bidding, in favor of the present system.

The little men were much better at reading prepared statements than at answering searching questions from SEC men. It was fair to suspect that their arguments had been partly prepared by the Wall Street tyrants they were supposed to fear. Nevertheless they exemplified the best argument against competitive bidding that I. B. A. had ever advanced: whatever the little man's difficulties may be now, they would be worse under P. U. D.'s proposed artificial-jungle conditions.

No. 1 U. S. underwriter of top-grade utility bonds is Morgan, Stanley & Co., which distributes its issues through little men throughout the country. When Harold Stanley hinted that under competitive bidding, he might have to get "a selling organization"--i.e., by-pass the local distributor--Joseph M. Scribner of Singer, Deane & Scribner (Pittsburgh) put a protesting finger on the point. "Where does that leave us?" he asked. "I don't welcome Mr. Stanley's competition in Pittsburgh."

The small fry, in fact, were more unanimously opposed to competitive bidding than the big. Chicago's big Halsey, Stuart & Co., competitive bidders from wayback injected its familiar anti-Wall Street note. Snorted Harry Stuart, "I never knew that a great love existed between the big houses and the small dealers," and he accused the latter of concealing one of their real reasons for opposing SEC: fear of being "shut off by the New York firms." He also named the big bankers' most lurid fear: private placement. Competitive bidding, he argued, would put the bankers back in competition with the insurance companies; if it didn't, his profession deserved to be left at the post.

Results of the meeting: SEC decided to make a factual determination of whether competitive bidding would put the New Yorkers into retailing, crowd out the local fry. Then it would promulgate a rule. Dopesters said it would probably accept the P. U. D.'s recommendations with considerable modifications, possibly limiting the competition to seasoned bonds, and possibly prorating their distribution in order to keep the little man in business.

Busy on machine-tool defense orders, Springfield. Vt. (pop. 7,720) watched its WPA rolls decline from 300 to 10. Last week the town dropped the last ten men decided to hire laborers to finish a sidewalk and retaining wall project, wrote finis to its WPA history.

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