Announcer:
Good evening, ladies and gentlemen, and
welcome to The Advocates, the PBS Fight of the Week. This program is made
possible by grants from The Arthur Vining Davis Foundations, Lilly
Endowment, Inc., the Amoco Foundation, and the Coast Community College
District.
Atkins:
Ladies and gentlemen, may I have your attention,
please.
Announcer:
Guest Moderator Thomas Atkins, Secretary of
Communities and Development for the Commonwealth of Massachusetts, has just
called tonight's meeting to order.
Atkins:
Good evening. Tonight The Advocates looks at an
issue concerning the health of the economy of the nation and the growing
power of banks. Specifically, the question is this: Should we limit the size
of investments by banks and other large institutions in the stock market?
Advocate Roy Schotland says yes.
Schotland:
The stock market is sick today, and it will not
be healthy as long as huge institutions can invest just as much as they
please in a few favorite issues. Here with me to argue for limits on the
size of those investments are Chris Welles, author and Contributing Editor
of Institutional Investor magazine, and Thomas Martin, President of the
Anchor Funds.
Atkins:
Advocate Ray Myers says no.
Myers:
This proposal would jeopardize the pension plans on
which many of you are dependent for your retirement. Moreover, it would do
nothing to help the stock market. With me to argue against this proposal are
Mr. Don Weeden, a securities dealer, and Mr. Roderick O'Neil, a New York
banker.
Atkins:
Thank you, gentlemen. Our program is originating
tonight from the floor of the Pacific Stock Exchange in Los Angeles. Tonight
we welcome two new advocates to the program. Supporting the proposal is Roy
Schotland. Mr. Schotland is a Professor of Law at the Georgetown University
Law Center in Washington and is former Chief Counsel of the Securities
Exchange Commission's Institutional Investor Study. Opposing him is Ray
Myers. Mr. Myers is the Executive Vice President of the Continental Illinois
National Bank and Trust Company of Chicago. I will return to you gentlemen
in just a moment for your cases, but first a word of background about
tonight's subject.
With slogans like "Own a share in America's future" the
stock market has always stood for what might be called participatory
capitalism. It is a means for ordinary people to participate in the
ownership and growth of even the biggest companies on the American financial
landscape. It provides the new capital needed to finance growth of
established companies as well as a creation of new ones. For years the
individual investor accounted for the bulk of the trading on stock
exchanges, but within the past few years that picture has been changing. The
small investor has been leaving the market at the rate of nearly a million a
year. Scores of investment houses have closed their doors, some going broke,
some merging with others, and hundreds of important American companies are
finding it difficult to raise new capital. Today trading on the stock
exchanges has come to be dominated by what are called institutional
investors, such as mutual funds, insurance companies, endowment funds, and
recently the big banks whose trust departments manage billions of dollars of
pension fund assets. Ten years ago such institutional investors accounted
for only 30% of the transactions on the New York Stock Exchange; the
individual investor making up the rest. Today those figures are just
reversed: 70% of all transactions involve institutional investors and only
30% the individual investor.
What is the impact of this growing dominance of the
institutional investors and the corresponding decline in the role of the
individual investor? According to Senator Lloyd Bentson of Texas, it isn't
good. He thinks the big institutions are wrecking Wall Street. Recently he
introduced a bill in the Senate designed to correct this problem by limiting
the investment freedom of banks and other managers of pension funds. This is
a proposal we debate tonight. Mr. Schotland, the floor is yours.
Schotland:
Well, the institutions are wrecking Wall Street,
and the wreckage falls on all of us. It means the stock market cannot do its
job, cannot help corporations get the money to buy machines, employ workers
and keep America productive and competitive. What has happened is that with
the dramatic growth of pension funds in the last ten years or so a few big
banks have had huge amounts of money to invest. The trouble is they put too
much of that money into stocks of the favorite few big companies which then
become even more attractive to other big institutions as places for their
big money. As a result, we get a two tier market. It means a handful of
institutional favorites getting richer while the vast majority of American
companies are in trouble, less able to raise additional capital for growth,
for expansion. That's not all: we get serious distortions of value. For
example, one cosmetics firm, Avon Products, last year had a greater value in
the stock market than the entire American steel industry. That's what
institutional investors can do, though the steel industry was booming and
Avon's growth rate was going down. This problem of concentration - of too
many investment dollars in too few hands—is not the market's only problem,
but it is one we can solve. Senator Bentson’s bill proposes to limit any one
pension manager to only 10% of the shares of any one company or only 5% of
that manager's funds. What we need is more diverse investment, more
competition, a market responding to new companies and new ideas. We need to
keep the market from becoming a place only for giants, to keep it one where
small investors can, if they wish, invest directly. To explain why our
proposal will do just that I call as the first witness Chris Welles.
Atkins:
Welcome to The Advocates, Mr. Welles.
Welles:
Thank you very much.
Schotland:
Mr. Welles is a leading author on finance and a
Contributing Editor of Institutional Investor Magazine. Mr. Welles, a funny
thing seems to be happening in the stock market: a few companies are selling
at very high prices, but most are very low. Now, if the market's only
problems were external ones like inflation, Watergate, would there be this
great disparity? What's going on?
Welles:
Well, there are really three problems involved, and
they all involve concentration. The first one is the institutionalization of
the market which Mr. Atkins referred to earlier. Institutions account for
73% of the trading on the New York Stock Exchange, they own about 45% of the
common stock, and these numbers are going up steadily and apparently
irrevocably. Secondly, the institutions themselves are very, very
concentrated; the top ten mutual funds, life insurance companies tend to own
more than half of all the stock in their industries, and, particularly
alarming, the top ten banks control about 54% of the pension fund assets
which are very, very important. And the third part of the concentration
problem is that these institutions concentrate their investments in a
relatively small number of usually large glamour stocks which are often
called the "Nifty Fifty."
Schotland:
Why do you say it's institutional concentration
as if that's clearly bad? Isn't it just that these are the best investors
picking the best corporations?
Welles:
A stock like IBM which is probably the biggest
institutional favorite everybody agrees that that is a very, very good
company. The problem is that if enough people agree or think that it's a big
company, as is done, the stock tends to get higher than it otherwise would;
it sells too high, and meanwhile, other companies which are small, which are
less glamorous, tend to sell too low, and this thing tends to feed on itself
over a period of time. The bigger ones get more popular and the less popular
continue to get even more less popular.
Schotland:
Could you explain why that matters? Why does it
matter what is a company's stock price?
Welles:
Well, I think we have to really decide and point
out what price really means on the New York Stock Exchange, what importance
it has. One of the biggest importances that price has has to do with the
ability of a company to raise money. A company which has a relatively low
price has a very difficult time raising money, and it tends to also, because
of its low stock price, it tends to be very vulnerable to takeover by larger
companies. Its competitive situation tends to deteriorate.
Schotland:
But even if some companies are being hurt, what
about that favorite fifty? Aren't they being helped?
Welles:
Yes, they tend to do well, but that's the trouble.
They tend to do even better than they otherwise would. They have an easy
time raising money for expansion, they can use their stock to go and take
over other companies, and this is the really big problem. As a matter of
fact, if you look at what could really be the most popular bank trust
department stock, it would be a monopoly.
Schotland:
Would you explain why would a bank trust
department like best a monopoly corporation?
Welles:
Because the monopoly would be able to raise its
prices, it would be able to get more and more profits, it would be able to
push out its competitors, it would be able to manipulate consumers, and it
would continue to just run over the rest of the people. For example, four
out of the six stocks that are the most popular at the Continental Illinois
Bank have been the subject of recent anti-trust action. Now, look at it on
the other hand: a stock which is having a very difficult time competing in
its industry, which is just really battling competitors and trying to put
out new products and having a relatively difficult time, really this is the
essence of our free enterprise system - this is just the kind of stock which
bank trust departments would tend to shun. So what you have . . .
Schotland:
So you say that institutional investor
concentration leads to operating company concentration. Well, can we do
anything about concentration in institutional investors?
Welles:
I think there's a very good first step that could
be taken. I think the limitations in the Bentson bill tend to be the sorts
of things which could be a realizable, politically feasible step that could
be taken. This won't be the final necessity; there could be further things
radically along that may be necessary in the future, but at the present time
this could be a kind of a signal by the people and by Congress that we do
not intend to stand for further movement in this dangerous trend of
concentration.
Schotland:
Thank you, Mr. Welles, I have no further
questions.
Atkins:
Thank you very much, Mr. Schotland. Your
witness.
Myers:
Mr. Welles, in proposing this legislation Senator
Benson made the statement that he was concerned that some 800,000
individual investors had left the market in 1973. Are you suggesting—do you
believe, as apparently he does—that if this bill is passed, those individual
investors will come back into the market?
Welles:
I think that unfortunately there's a long-term
trend in favor of institutionalization. I do not think that in a large sense
it's irrevocable, but I do feel that if possible the kinds of
multi-diversified decision-making that can be represented by small investors
could be reinstituted by more small investors coming back because this
legislation would tend to restore their confidence.
Myers:
But you don't really believe that this would be
accomplished by this bill from what you've just said to me.
Welles:
I don't believe that the institutionalization will
be reversed by this bill; that is a massive social change, and nothing could
really do that, I don't think.
Myers:
All right. One of the purposes of this bill is to
force institutions to invest in companies which previous to this they have
felt less investment-worthy. Do you really think that they investment
managers, faced with this bill, are going to invest in companies which they
did not feel they should have before?
Welles:
I think that it would tend to make them look a
little further than the small number of "Nifty Fifty" stocks that they seem
to be so much in love with.
Myers:
But isn't it a fact that it may push them in another
direction? Is it not possible that they might move toward the bond market or
some other alternative investments which are attractive today?
Welles:
I can't see why they would move necessarily toward
the bond market.
Myers:
You can't see that those interest rates might
attract them in today's market?
Welles:
Well, I don't see why if they aren't attracted by
them now, they would necessarily be more attracted by them if the
legislation was passed.
Myers:
But you're forcing them out of some stocks which
they wanted to hold and now you're saying to them, "You can buy this tier or
you can take some other alternatives." It's possible they could move away
from the market, and if they did so, that would destroy one of the purposes
of passing this bill, would it not?
Welles:
I think the idea that they could move away from the
market towards the bond market in a massive way is a ridiculous assumption.
It would just force them to broaden their horizons and force them to fall
out of love with the stocks that they seem to be so taken by.
Myers:
But you're forcing them to fall out of love with
those stocks by what you're doing here. How far would you go in submitting
the regulation? Would you permit the government, for example - would you
sanction the government saying to the investors that they can only hold so
much of these stocks, but you've got also to hold so much of more risky
stocks? Would you agree to that?
Welles:
I wouldn't want the government ever to dictate the
specific stocks that any institution could buy or sell.
Myers:
But aren't they doing that in effect by what we're
doing here in this proposed legislation?
Welles:
No, they're putting the same kind of percentage
limitations that the mutual fund industry and most life insurance companies
have lived with for decades without problems or clamor or criticism. It's
just that the banks are exempt from this, and it's the banks that are the
largest investors that deserve to have this kind of limitation on
them.
Myers:
Let me suppose that the proposal does work and that
the investors then do turn to other securities which before they had been
unable or unwilling to invest in. Is that really going to help the pensioner
whose pension plans are being invested?
Welles:
In a way it could help the pensioner because
insofar as they in - this may come up later but insofar as they get - into
stocks of the "nifty fifty" which potentially because their prices are bid
up so high could also suddenly drop in a hurry as many of them have; by
forcing them out of these stocks you could help pensioners by subjecting
them to less risk.
Myers:
It could also hurt those pensioners, could it not,
by forcing investments in companies which might be more risky and could
jeopardize their pension plans?
Welles:
Not at all. I just think it would widen their
horizons and let them put their stocks in - probably, if their horizons were
widened, would be equal to or increasingly beneficial to the
pensioners.
Myers:
We will touch that point later when we have on the
stand a man who is actually investing pension funds, Do you feel there's any
obligation on the part of the pension funds to subsidize this market of
emerging companies?
Welles:
I would think there should be a duty by all
institutional investors to do their best to try to avoid excessive
concentration in our society.
Myers:
But I don't think you answered my question. Should
they also be responsible for subsidizing these small, emerging companies? Is
that what our pension fund should be doing?
Welles:
I think that any public spirited investment manager
should look, if possible, to smaller, emerging companies insofar as that
could be achieved without jeopardizing the risks and the benefits that they
are required to have for the pensioners.
Myers:
You would agree with me, would you not, that the
institutional investors have not been a major factor in those emerging
companies in the past, that it has been the individual investor that has
done that investing, correct?
Welles:
Relatively speaking.
Myers:
And you'd also agree, I presume, that many of them
got burned and that's the reason they got out of that market.
Welles:
I also know that Morgan Guaranty which is the
largest bank and many consider to be having one of the best performance
records, has made an effort, and I think it's a very small one, but it's
nevertheless much larger than other banks, to invest in small companies, and
I think that other banks—even if they went as far as the Morgan did—could go
a long way towards readdressing the concentration problem.
Atkins:
The time is running short, Mr. Myers.
Myers:
What's so sacred about a 10% holding as versus 7% or
some other figure?
Welles:
I'm not willing to say it's necessarily 10%,
although it's interesting that most of the large banks tend to voluntarily
limit themselves to a 10% holding.
Myers:
But you are willing to force a manager into
investing in stocks about which he has some doubt.
Atkins:
Short answer, please, to that question.
Welles:
Not at all. I'm just wanting to expand his horizons
and not be so in love with a very small group of stocks.
Atkins:
Thank you very much, Mr. Myers, and thank you very
much, Mr. Welles.
Atkins:
Your next witness. Advocate.
Schotland:
As our second witness I call Thomas Martin. Mr.
Martin is President of the Anchor Corporation, one of the nation's largest
non-bank investment advisors.
Atkins:
Mr. Martin, it's good to have you with The
Advocates.
Schotland:
Mr. Martin, why do you, as an investment
manager, support the Bent son legislation?
Martin:
Well, I agree with everything that Mr. Welles
pointed out. In addition, I'd like to point out that as someone who has run
large amounts of money for quite a number of years, I've seen the adverse
effects of concentration time and time again, and I'm greatly concerned that
the hundreds of thousands of people who are looking to these pension assets
in the years to come to support them in retirement may not be getting the
most prudent investment policy as a result of the concentration that we see
going on today.
Schotland:
Do you mean if we don't have percentage limits
it may be imprudent? Why?
Martin:
Well, the imprudence I'm referring to here is the
concentration on a few stocks and a few stocks of similar characteristics.
You've seen this tried before fifty years ago on the railroads, in the
1960’s we saw it in the chemicals, or in the fifties rather, in the sixties
we saw it in the airlines, and it's always had to be unwound because it got
overdone. Now we're just overdoing it much more so than we have in the past,
and I think that it's fundamentally unsound.
Schotland:
Is it a new idea - to borrow Mr. Myers's words -
to come up with a sacred 5% or 10% holding limit?
Martin:
Nothing new about it at all. We, for example, have
lived with it for thirty-four years, every insurance company is
regulated...
Schotland:
You say we: you mean your own firm?
Martin:
The mutual fund industry.
Martin:
By law, the Investment Company Act of 1940. Most
states regulate the investments of insurance companies in a similar
way.
Schotland:
And they impose percentage limits.
Schotland:
Now, have these limits for you or for others
like you in the investment companies, or maybe you know about insurance
companies, have you had problems living with these kinds of limits?
Martin:
Absolutely not. On the contrary, I think that they
have helped us in many ways. They have enabled us to avoid the human
potential to fall in love with small groups of stocks, get excessive
concentration . . .
Schotland:
You mean professionals can be like other human
beings.
Martin:
Absolutely. I've seen it happen time and time
again.
Schotland:
Professionalism keeps you in the human race. But
how is this going to help? How is the holding limit going to help solve any
of these problems?
Martin:
Well, I think it will help by compelling the bank
trust departments to look beyond these limited horizons that they seem to be
looking at the moment and which they themselves have had to change
repeatedly over the years because fad investing never works. The fads always
change, and by looking at many of the other equally sound companies of the
United States I think they'll develop a broader diversification which is
fundamentally more prudent.
Schotland:
Do you think the limits would help restore
public confidence at all?
Martin:
It's entirely possible that it would have an effect
upon that, and I think it would, and I think it would be very healthy if it
did. The public today...
Schotland:
Is that a problem?
Martin:
Well, I think it's a very serious problem. The
public has been leaving the market steadily, as has been pointed out
earlier, and one of the things that various surveys have indicated is that
the public, they don't feel -- these are investors and non-investors— that
they have an equal chance against the institutional investors, and I think
anything which tended to restrict in a sensible way institutional investors
would likewise tend to reinstill the very needed confidence on the part of
the public and induce them to re-enter the market.
Schotland:
That is, you say the holding limits would make
investments more prudent and also make people feel the market is fairer. But
do we need law to get to this? Why won't just letting market forces operate
get rid of some of these problems and promote what the market often
does?
Martin:
Well, they haven't. The free market forces, which I
normally am very much in favor of, have given us this what I consider
fundamentally unsound concentration and therefore when we're confronted with
that, then we've got to tamper, if you will, with the free market forces and
cause people to do what logic suggests they should be doing anyway.
Schotland:
You mean the more concentration, the less free
market.
Schotland:
Thank you. I have no further questions.
Atkins:
Let me just raise one question on your position,
Mr. Martin. Is it your position that passage of this bill or something like
it would serve to re-attract the small investor back into the market?
Martin:
I don't think that's the primary purpose of it,
sir, but I think it would tend to also have that very desirable
effect.
Atkins:
Thank you very much. Your witness, Mr. Myers.
Myers:
Mr. Martin, when these regulations were imposed on
the mutual fund industry, did that attract individual investors to come into
the market, because you had these regulations?
Martin:
Well, I can't say that it did, but also during the
ensuing years they did come in, so it may have had some effect, yes.
Myers:
But it might have been because of other economic
factors, mightn't it?
Martin:
Oh, undoubtedly it did. The others had some effect
too.
Myers:
You said a minute ago that you thought this had had
a desirable effect on you. Were you saying to us that it was necessary for
you to be regulated, that you had to be guarded against yourself in
investing in these securities?
Martin:
Well, the government of the United States in its
infinite wisdom felt that this was a highly desirable thing at the time that
they did it, 1940. We've found in the subsequent thirty-four years that it
certainly has not had any adverse impact, and we think today we would
support it wholeheartedly.
Myers:
Do you think it has improved your investment
performance, even though you have been blocked from investing the funds you
might want to invest in high growth securities, the best securities?
Martin:
We've never been blocked from investing in
securities we wanted to invest in. We've been restrained from excessive
concentration which we might not otherwise have done, but you never
know.
Myers:
You know it's interesting. I looked at the list of
securities you have in one of your funds today and I was amazed to see how
much concentration you had, and in fact in the same securities that the
institutional investors are being criticized for.
Martin:
Well, you realize, I'm sure, sir, that if we
appreciate through our legal limits, we're permitted to maintain that, but
we are not permitted to add any money to those investments.
Atkins:
Let me just ask you: what do you mean by
appreciating through your legal limits?
Martin:
Well, in other words, at some earlier point in
time we put something below the legal limits in these securities and
fortunately they have done very, very well and have grown in value in the
marketplace where today they may exceed that limit.
Myers:
And you selected those securities, did you not,
because of their quality?
Myers:
That being the case, do you think this legislation
is going to have any impact on the problem of the popular versus the
unpopular securities?
Martin:
I don't think it's a question of the popular
versus the unpopular, the good versus the bad, or the riskless versus the
risky. There certainly are many more attractive investments in the United
States than the very narrow list of fifty companies being so heavily
concentrated in at the moment.
Myers:
Do you consider that you, therefore, have an
obligation to support these emerging companies, the new companies, for
example?
Martin:
We have no obligation whatsoever to support any
company that we don't feel is fundamentally sound.
Myers:
And shouldn't that judgment . . .
Martin:
Neither do we have any obligation to concentrate
in companies because that in itself is unsound.
Myers:
But in each case you're making an investment
decision, or should be, is that not true?
Martin:
I think that's true.
Myers:
If you at this point for some reason had to unload
some of the securities you have because you had reached the 10% limitation,
what would you do with that money today?
Martin:
What would we do? We would reinvest in another
security.
Myers:
Other securities of lesser quality.
Myers:
What would be your alternative?
Martin:
Other securities of comparable quality. The
markets are constantly changing. Today's favorites are not tomorrow's
favorites, and last year's favorites are not today's favorites. The economy
is changing as you know, the market valuations are changing, and there are
constantly emerging new, very attractive investment opportunities.
Myers:
You've expressed some concern that the few stocks
are selling at very high prices. I presume that when you are selecting
securities you look for quality, you look for good management, you look for
growth, the usual tests of an investment. And if you and I were both capable
analysts, we're likely to select the same companies, are we not?
Myers:
And if we did so, there is going to be demand
created which in turn will shove up price, is that not a fact?
Martin:
That's right. However, if it does so to a point
where risk is built into the price—not risk in the fundamental enterprise,
but risk in the price itself— then I would be inclined to back away from
that because you can have price risk just as well as business risk.
Myers:
But there's nothing sinister about having high
price stocks simply because there is a demand for those stocks, is
there?
Martin:
Unless that's carried to an extreme.
Myers:
I would agree with you, we should not carry it to
an extreme.
Martin:
And last year we saw it carried to a considerable
extreme.
Myers:
Since you are an investor in this market, do you
agree with me that there are some economic reasons that the market has been
able in the past to survive depressions and inflations and other economic
crises without the government interfering?
Martin:
Well, the government has interfered regularly and
for many years in our marketplace. The 1934 Act, the 1940 Act, the 1933 Act,
the limitations on the mutual funds, the state limitations on insurance
companies, and I think all those things have helped. We're just suggesting
that this one new massive pool of capital submit to the same kind of
regulations that other large pools of capital have submitted to.
Atkins:
You have time for about one more question and one
answer.
Myers:
Are these regulations the same? Isn't there a
distinction between these and those that you have on the mutual fund
industry?
Martin:
Well, but I think that they're minor differences
because of the structural differences, but the fundamental impact is the
same.
Myers:
The major difference, is it not, is that you are
limited on your single fund, whereas the institutions are going to be
limited on all of their holdings.
Atkins:
Short answer, Mr. Martin.
Martin:
Well, that's true, except we voluntarily impose
the same limits on the aggregate fund that we manage.
Atkins:
Mr. Martin, thank you very much for being with US
on The Advocates.
Atkins:
For those of you who may have joined us late, The
Advocates is being brought to you tonight from the Pacific Stock Exchange in
Los Angeles, and Mr. Roy Schotland and his witnesses have just presented the
case in favor of limiting the size of investments by banks and other large
institutions on the stock market. And now for the case against, Mr. Ray
Myers, the floor is yours.
Myers:
Professor Schotland and his witnesses have argued
that we must maintain a healthy stock market to support the corporations and
supply them with new capital, and to that we would readily agree. But the
question is how can we best accomplish this and we believe that Professor
Schotland has missed a mark here because he has failed to find the real
causes for the problem. They point to the fact that the smaller investor is
less active in the market today, blaming institutions and banks for that
problem, but you and I know what the fact is: you as an individual investor
are out of the market today simply because you have found a more attractive
alternative for your savings and investments. The proponents point to the
two tier effect in the markets, and by that I mean the fact that there are
some very popular stocks that are high priced and others which are lower
priced, and they say again that this is a result of what the institutional
investors have done. In the words of one banker, that's like blaming a
rainstorm on people who put up their umbrellas. They point to the problems
faced by companies wishing to sell new issues and blame again the
institutions for not buying these stocks, but their argument ignores the
risks involved in these investments, a bitter lesson that many of you
learned in the late sixties, and despite that, they're wanting these pension
funds to assume that risk and to supply that capital to these emerging
companies. Pension funds are now being invested by banks and other
responsible money managers with freedom to select prudent investments, to
carefully select those well-managed companies in which they're going to
invest. The proponents are now asking Congress to impose artificial rules on
us, loose standards which could very easily hurt investment performance.
With me tonight to show the fallacy of these arguments is Mr. Donald
Weeden.
Atkins:
Mr. Weeden, it's good to have you with us.
Myers:
Mr. Weeden is Chairman of the Board of Weeden and
Company, a major dealer in securities on the New York Stock Exchange. Mr.
Weeden, the issue here is whether regulation of institutional investors will
cure the problems of the stock market. In your experience, why do you think
the individuals are less active in the market today?
Weeden:
Well, let me talk from the standpoint of being one
of those small investors who has about eighteen years experience on Wall
Street. I'm out of the market because I've lost money in the market in the
last six to eight years. I look at all of those growth stocks that were
recommended to me and they haven't grown; there has been no market
appreciation on balance in most of the stocks. I find that the alternative
investment opportunities are much better today. Corporate bonds, even
savings banks, are giving yields that are much higher than the average
growth stock or even the average yield stock which supposedly is a much
higher risk for me. So it has nothing to do with institutions and domination
of the market and their buying and selling. It's the fact that today stocks
don't look very attractive, and what we see in the future - the uncertainty,
the inflation, the lack of corporate earning growth - those are the reasons
that most of us little people have decided not to invest in the market and
to get out of it.
Myers:
It follows, therefore, that if you did not abandon
the market because of the institutional domination, so-called, that you and
other investors are not going to come back into the market simply because
this legislation is passed. Would you agree?
Weeden:
Absolutely. I think it's a red herring, it's a
false issue that was created by we on Wall Street who were looking around
for reasons why the market was down and institutions were a good excuse,
good reason for it.
Myers:
And now we know who to blame. We've heard a lot of
discussion today about two tier stocks, the popular versus the unpopular
stocks and so on. Why do you think this is happening?
Weeden:
Well, the little guy has the flexibility when he
sees that he's losing money to get out of the market. There's less
flexibility in institutional accounts; they're slower to move, they've got
monies coming in every day that they have to invest and they're essentially
committed generally to the stock market. They're looking around for those
remaining stocks that seem to still have those - that type of management,
that type of quality, the type of earnings growth that they can prudently
invest in for the benefit of those pensioners that they're handling the
monies for, and that group of stocks, as this economy and the future of it
becomes more uncertain, narrows, and it has narrowed down to what you call
the popular stocks. Now, what's happening is that the price differential
between those popular stocks and the unpopular ones became exaggerated for a
while, and the market forces have taken over and they've adjusted that, and
you'll find that there's less disparity now today than six or eight months
ago between those high-priced, popular, institutional stocks and the
low-priced yield stocks that the institutions had lost interest in.
Myers:
So the market has cured itself without anybody
imposing regulations on it.
Weeden:
Absolutely. Let's not tamper with that.
Myers:
Do you see any way in which this proposed
regulation might hurt the stock market?
Weeden:
Well, yes, I do. I would say that if legislation
passed that either discouraged the institutions from buying certain stocks
or to even require them to get rid of some of those stocks, I certainly, as
a small investor, wouldn't want to invest in those stocks. Now, the argument
is that that money is going to be placed into other stocks, and I think that
it's clear that the institutions don't want to buy those other stocks. They
don't think it’s a prudent investment at this point in the economy to do
that. That's why they are not investing in them, and I think that those
monies, rather than going into what they have already told you are
considered to be imprudent for their pensioners, that they would more than
likely go into AAA General Electric thirty year bonds, yielding 8 and a half
percent.
Myers:
Certainly a possibility, is it not?
Myers:
Sitting in our audience are millions of people who
are dependent on pensions, looking forward to retiring on pensions. Do you
see that this regulations might have any impact on those people?
Atkins:
I'm going to have to ask that to be a relatively
short answer.
Weeden:
I think that the pensioners and everybody in this
economy want to guard against the government getting involved and dictating
to anybody what kind of investment they ought to be going into. As one of
the witnesses said, this legislation is the first step down the line of
getting the government more and more involved in making decisions, and I
don't think anybody in Washington is professional or has the ability or the
experience to make better judgments than our fiduciaries - our banks,
insurance companies, other institutions.
Weeden:
Thank you very much.
Atkins:
Mr. Myers, I think that Mr. Schotland wants to get
at your witness. Your witness, Mr. Schotland.
Schotland:
Mr. Weeden, you just said that this legislation
would be the first step. I take it you don't believe in virtually all the
state laws limiting the holdings of insurance companies or you just choose
to ignore the 1940 Act which is the Magna Carta of the mutual funds.
Weeden:
Mr. Schotland, the reasons for those limitations
were entirely different than the reason for this. Mr. Benson wants to
encourage institutions to buy other securities than what they want to buy,
and consequently, I think that is a bad concept to start out with. That is
not the...
Schotland:
Do you think there can be such a thing as too
large a holding?
Weeden:
I haven't seen any too large a holding that has
affected the market today. I think that the market is more affected by the
smaller institutions that don't get anywhere near 5% or 10%, who are
irresponsibly dumping stock onto the market, trying to get rid of small
blocks in a very short period of time, but the large . . .
Schotland:
You mean some professionals aren't very
professional.
Schotland:
So we need more of the bigger ones because
they're more professional?
Weeden:
My experience - and we do a lot of business with
institutions - is that the large banks have probably acted as responsibly or
more responsibly than anyone in handling the large positions that they are
responsible for.
Schotland:
Just one point of fact we ought to make sure we
are agreed on: I take it you understand this legislation would not require
any institution to sell, to divest itself of any present holdings.
Weeden:
I use the words of your first witness who said
this is the first step towards government dictating to institutions and
maybe its private investors in the next go-round or the fifth go-round as to
what they should be putting their money in.
Schotland:
I think we have a different recollection of
what that witness said. Let's see if we can get something we agree on.
Wouldn't you agree that it's a better stock market if there are many
participants rather than only a few?
Schotland:
And I take it that would be better for your
business too. You don't do much business with anybody other than
institutions and broker dealers, isn't that right?
Weeden:
We do a lot of small business. Thirty percent is
less than a hundred shares of our transactions. Thirty percent of our
business is with broker dealers who are acting for the small investor. We
are just as concerned about the small investor as we are about the
institutional.
Schotland:
But it is keeping him out of the market. It's
letting him come in indirectly. Let me ask this, sir: if a few banks were so
big that they accounted for a very large portion of all volume, would that
trouble you? You said you think it's better to have a lot of participants.
Wouldn't this undercut diversity?
Weeden:
No, I just disagree with the basic concept that
the public is out of the market. You go back ten years ago and the public
was doing half the amount of business on a daily basis that they are
today.
Schotland:
Well, last week the head of the Securities
Association said they're now down to 27%. But I'm asking this…
Weeden:
But don't take percentages, take it on an absolute
scale, Mr. Schotland.
Atkins:
Gentlemen, gentlemen. Mr. Weeden, I'm going to
have to ask you to answer his question. His question was a proper question
and you did not respond to it.
Schotland:
Mr. Weeden, I'll let that question go. Forget
about how much of the ever-shrinking individual investor activity there is.
Isn't it bad if a few banks are so big that they account for a very large
portion of the volume?
Weeden:
If you go to the ultimate, yes, I think at some
point that will correct itself in the marketplace.
Schotland:
Now, we have laws limiting the amount that a
controlling stockholder can sell in one year to a ceiling of about 2% of all
volume. Would it trouble you if one big bank which the law doesn't limit yet
in any way were selling say 5% or 10% of all volume in a stock?
Weeden:
Mr. Schotland, I beg to differ that large
investors can sell as much as they want if they go through certain
procedures to do it.
Schotland:
So you wouldn't be troubled if let's say one
bank were selling more than 5% of all the volume just by itself?
Weeden:
I think that would be a tremendous opportunity to
buy because I think that he would have to sell at a very significant
discount if that's what he chose to do. And that would be...
Schotland:
And you think it would be even better if one
bank were selling more than 10% of the volume?
Weeden:
I think if I were a buyer, that small investor who
got out when the stock was higher and now I can get in when that institution
wants to sell, it would be a tremendous opportunity.
Schotland:
Let's talk some simple facts. Last year the
Morgan Bank alone accounted for more than 5% of the volume in 44 New York
Stock Exchange stocks, fully half of their big moves. They accounted for
over 10% in 28 stocks. They accounted for 21% of the volume by selling Los
Angeles Times-Mirror, 38% of all the volume in Ralston Purina. Does any of
that bother you?
Weeden:
The New York Stock Exchange and the Institutional
Investors Study have both come out with studies indicating that
institutional effect on the volatility of the market hasn't deteriorated in
the last year, and so I think that just refutes that point . . .
Schotland:
So until more people are hurt more, we
shouldn't do anything.
Weeden:
So far nobody has been hurt.
Atkins:
I'm going to have to ask the witness not to
expound on that.
Schotland:
Thank you, Mr. Weeden. Thank you,
Moderator.
Atkins:
Your time is up. Thank you very much, Mr. Weeden,
for being with us tonight. Mr. Myers, your next witness, please.
Myers:
I call my next witness, Mr. O'Neil.
Atkins:
Mr. O'Neil, good to have you with us.
Myers:
Mr. O'Neil is Executive Vice-President in charge of
the Trust Division of the Manufacturers Hanover Trust Company in New York,
and I take it therefore you're an institutional investor and that makes you
one of the bad guys wearing a black hat.
O'Neil:
Saves the best for last.
Myers:
Let's see if we can get at some of the facts. I was
a little concerned from some of Mr. Schotland's questions that he may not
understand just how institutions make their investments or in what ways they
may be regulated. Would you explain to us how that's done?
O'Neil:
Well, Mr. Myers, our responsibility under law is
to the people who receive the pensions from the pension funds that we do
manage. We feel that our objective in managing these assets is to maximize
the return on the assets at a minimum of risk. The decision making process
that we go through in selecting stocks, as stocks represent a part of the
portfolio, is very heavily oriented to the fundamental well-being of the
companies involved. We feel - and we feel we could prove statistically -
that the major motivating force behind the price of a stock and the major
force that results in good return on the money we manage is the ability of a
company to prosper and to grow, so that our research and our investment
decision-making is very heavily oriented towards selecting companies that
have the combination of management, financial resources and proper industry
economics to grow. We follow the earnings wherever they take us. We are not
oriented to one industry or one group of stocks or one special concept; we
are very pleased to find growing companies of many different industries and
our objective is to own as many different stocks as we feel will meet our
objectives.
Myers:
I think our listeners would agree that that's sound
investment philosophy. We've heard discussion today about the fact that
institutional investors are all concentrated in a few stocks. Does your
information bear that out?
O'Neil:
Well, it is interesting. The inference, of course,
is that the banks and mutual funds and insurance companies are taking the
money that they do receive from their customers and buying the same group of
stocks and yet any studies that we have seen prove exactly the opposite. The
Pension and Welfare News, which is a leading publication, did a study based
on 1972 year end figures: 95 banks running approximately 122 different pool
funds for pension funds - in other words, accounts that have quite
comparable objectives - to see how many stocks were owned in common. There
was no stock owned by all 122 funds or even by all 95 banks. One stock was
owned by 92 of the 95 banks; the next largest ownership was a stock that was
owned by 57, and there were exactly four stocks that were owned by as many
as half of the funds that were studied. In total, these funds owned over 900
different stocks. We did a study ourselves just looking at the very large
banks, 10 pooled funds run by 10 different banks across the country. We
found one stock that was owned by all ten, we found twelve stocks that were
owned by as many as half of these funds, and we found greater than fifty
stocks, we found 259 different stocks held by these funds.
Myers:
So that Senator Benson's concern about
concentration isn't valid. That's not a reason for this legislation. Many of
the major banks have been releasing or disclosing the holdings that they
have - their major holdings - and I was looking the other day at the
holdings of Morgan Guaranty, which is the largest of these institutional
investors. I was interested to know that in its major holdings not a single
one of those do they have in excess of 10%. What's the experience in your
organization?
O'Neil:
I think you'd find a very similar pattern. We have
an operating rule that we don't care to own more than 10% of the
outstanding shares of a company. Now, in looking at our very largest
holdings we own 1% or 2% or 3% of the outstanding shares. The only time that
this 10% limitation becomes at all apparent is when we're dealing with
smaller and medium sized companies because in order to establish a
reasonable position for our portfolios, we then do wind up owning quite a
large number of shares. In other words, if we were to be limited by law, the
impact would fall on exactly the kind of stocks that it seems that the
legislation is aimed at helping.
Myers:
Do you feel that this legislation would handicap
you in your job of managing pension funds?
O'Neil:
Well, our first responsibility is to our pension
fund customers. We are managing pension funds that are presently or will pay
pensions to a million and a half people. More than twenty million people are
covered by the private, non-insured pension industry. Any non-investment
constraint, any time that you would impose an additional limitation over and
above the selection of the most proper investment clearly would hurt the
performance of these funds and in the long run would then hurt the best
interests of the customer.
Atkins:
Thank you, Mr. Myers, your time is up. Mr.
Schotland, your witness.
Schotland:
Mr. O'Neil, your statistics from the American
Bankers Association about all banks - I think it's 3,800 - are interesting,
but if we look, for example, as a random sample, at your bank and Mr.
Myers's bank, just the top twenty holdings, you have twelve in common. Are
big banks and little banks any different in this regard?
O'Neil:
Well, Mr. Schotland, you must understand: the very
largest holdings of any portfolio, as Mr. Martin had mentioned, are assets
that were purchased probably a good number of years ago. One of our jobs is
to not sell the companies that are doing the best, so that you will see some
commonality of holding among the very largest holdings. That is not a very
good way to evaluate what we are doing with money today, which is, after
all, the subject of this inquiry.
Schotland:
Well, let's see if we can just get some facts.
You agree that there are 3,800 trust banks in America . . .
O'Neil:
3,800 banks have trust departments.
Schotland:
Right. And I believe they're managing just over
$400 billion. I take it you don't dispute that only six banks of the 3,800
are managing 30% of all that money. Is that correct?
O'Neil:
Well, I don't have that figure in mind. I would .
. .
Schotland:
Well, it's $117.6 billion. Aren't those six
banks, of which yours is one, all in New York City?
Schotland:
The first six. And is it a fact that the big
six, all in New York City, manage 40% of all the pension money in the 3,800
trust operations?
O'Neil:
That is possible.
Schotland:
It is indeed a fact that $60.3 billion of $150
billion - I'm interested you don't know just how big you are.
O'Neil:
Well, I know how big we are, but we . . . that's
not any concern . . .
Schotland:
Well, you're big. The six of you together are
much bigger than all of the mutual funds combined. Mr. O'Neil, tell me: it's
been said I don't understand. This is one I don't understand. If all that
money is run in New York City by the big six, doesn't that make it harder
for less nationally known local. West coast, or Missouri companies, sound up
and coming companies, to get the attention of pension managers?
O'Neil:
Well, I wish you would tell the pension managers
that because we're competing with them all over the country and finding it
difficult to compete.
Schotland:
You say you find it difficult to compete. And
you also say that you already follow a kind of percentage limitation; then
what would be the harm in having the law say that all banks should follow
what Mr. Weeden tells us are the best—that is, the biggest?
O'Neil:
Well, Mr. Schotland, these are day to day
judgments. I think that's the important thing. Our judgment is based on
conditions as we find it today. I think it would be very dangerous to freeze
our judgment today into some kind of a law. We should be free to make
different judgments and we should be free also to compete with people who
have different frames of reference. There is no magic answer to making money
in the stock market; these are day to day events and changing events that
must be met on a day to day basis.
Schotland:
And yet a moment ago you said that the reason
you have a lot of these huge stock holdings in common is that they were
purchased a long time ago and your objective is not to sell them. That is,
you don't make day to day decisions there.
O'Neil:
Well, every day that you don't sell a stock is as
much of a decision as the day that you bought it.
Schotland:
Well, do you think . . .
O'Neil:
Please don't accuse us of not managing our
assets.
Schotland:
No, I didn't mean to accuse that. Rather, I
mean to ask this: would you have us believe that this proposal, as suggested
by you, by Mr. Myers and Mr. Weeden, would really force you to manage your
assets less well by lowering your standards or going into bonds. Surely,
sir, America has more than fifty nifty companies, or even more than the 250
on your acknowledged, approved list—or is it 285?
O'Neil:
Well, our process is to review as many companies
as we possibly can. We have 150 people in our investment department . .
.
Schotland:
And about how many companies can you
review?
O'Neil:
We're following closely at this point about
600.
Schotland:
And the rest of the companies in America just
sort of fall away.
O'Neil:
We review companies constantly to see if we want
to add them to our list of close coverage, so that you cannot say that we
are ignoring companies. We are very anxious and very motivated to find
companies that we think will do the job for us and our customers.
Schotland:
Your colleagues at City Bank, Mr. Lingua, and
at the biggest Morgan, Mr. Calloway, said that percentage limits by law
would make it harder to take new business or force the bank to get rid of
stock in which it's bought up, so to speak. Now, isn't that the real reason
that you and the other big six are opposed to this? It would make it tougher
for you to gobble yet more of the institutional assets?
Atkins:
Time is running out, gentlemen.
O'Neil:
What do you mean by gobble up? We manage money for
15,000 different accounts. It is not our money. None of the money that you
have referred to now is owned by these banks. It is all owned by millions
and millions.
Schotland:
I understand that, sir, but your colleague at
the First Pennsylvania was recently asked by Barrons "Is it possible to have
too much money to manage?" and he said yes. If the assets of Morgan and the
other New York behemoths were divided more equitably across the country, it
would be very healthy for the market and the industry. I'm troubled by the
concentration of assets in a small number of institutions.
O'Neil:
Well, I think . . .
Schotland:
That's a big banker. Do you disagree?
Atkins:
Mr. Schotland, I'm going to have to interrupt and
tell both of you that the time is up and thank our witness for being with us
tonight.
Schotland:
Thank you, Mr. O'Neil. Thank you, Moderator.
O'Neil:
Thank you very much.
Atkins:
Gentlemen, that completes the cases, and now it's
time for each of you to present your closing arguments. Mr. Myers, please
present your summary now.
Myers:
Professor Schotland's solution to the problems of
the stock market, that of regulating the amounts of investments that
institutions and banks may have, clearly fails to solve the problems of the
market. It's clear that it will not attract new investors—the individual
investors—back into the market. In fact, it could compound those problems by
diverting some of the pension funds which are now invested in securities
into other kinds of alternative investments, such as bonds and so on. But
the thing that really concerns us about this proposal is that you and some
20 million other people around the country are looking forward to retiring
on a pension, and this proposal could jeopardize your pension funds by
preventing the investment managers of those funds from investing in
companies which, in their judgment, are the best managed companies that have
the greatest potential for growth. To make a whipping boy out of the pension
fund managers is irresponsible; to impose an element of greater risk on the
way in which those pension funds are invested is unconscionable. We
therefore urge you to vote no.
Atkins:
Thank you very much, Mr. Myers. Mr. Schotland, may
we have your summary, please.
Schotland:
A little bit ago Mr. Myers said that blaming
the big banks for the market's problems is like blaming an umbrella for the
rain, but even though many people have been rained on, it's going to rain
again, and we're being told that we don't need any umbrella. Ladies and
gentlemen, the stock market must be restored as a place which helps sound
businesses, all of them, secure the capital they need, restore it as a place
for all investors, professionals and little ones, to invest funds with
confidence that the prices aren't distorted and that the market is fair. If
we allow the market to become exclusive playground of very large banks and
other institutions dealing in the stocks of a favorite few large
corporations, it won't be just investors and businessmen who will suffer, it
will be consumers as the institutional favoritism for lipstick and hamburger
and fried chicken stand companies sweeps. The economy of the country is
being hurt; it is the American consumer who ends up paying the price. We can
do something about it by limiting the size of investments by giant
institutions. Vote yes on tonight's proposal.
Atkins:
And now that you've heard the advocates, it's time
for you in our audience to get into the act. What do you think about
tonight's question? Should we limit the size of investments by banks and
other large institutions in the stock market? Send us your "yes" or "no"
vote on a letter or postcard to The Advocates, Box 1974, Boston 02134. The
maintenance of a strong and viable capital market or strong and viable
capital markets has been seen as essential to the economic well-being of the
nation and of every single American. This issue is now being extensively
debated in Congress. How do you want your Congressman to act? Send us your
vote, and we will tabulate the results and make them known to the members of
the House Ways and Means Committee and other members of the Congress.
Remember that address: it's The Advocates, Box 1974, Boston 02134.
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Recently The Advocates debated the question "Should
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This concludes our regular series of Advocate debates for
this season. Next month, however, The Advocates will be returning to Faneuil
Hall in Boston for a special two hour forum on the Law of the Sea. Let's
look ahead to that program.
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Atkins:
And now, with thanks to our advocates and their able and
distinguished witnesses, and special thanks to the people of the Pacific
Stock Exchange in Los Angeles for allowing us the use of this room, we
conclude tonight's debate.
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