The houses which buy first hand the largest blocks of securities are relatively few in number and strong financially, with central offices in New York, Philadelphia, Boston, or Chicago. There are, of course, in these and other cities many houses which are competent to handle somewhat smaller blocks of securities. Institutions which buy securities on a large scale must command large resources, occupy a position of financial influence, and have a record of successes which will assure the company issuing the securities of the success of the flotation. Such houses determine the direction of industrial and commercial development and the selection of the personnel of business enterprises worthy of financial support. They may act either independently or in conjunction with others.
The promoter brings his proposition to one of the financial houses at a time; if his negotiations fail he approaches another; but he will not find the financial houses actively competing with one another, nor do they actively bid for his proposition. Active competition by bond houses might result in reckless extensions of credit and overfinancing; the bankers prefer to act in a more professional capacity and to select their clients with an eye to an intimate, confident, and permanent relationship.
A few years ago the cry arose that the financial houses constituted a "money trust," denying financial assistance to warrantable business undertakings mainly because the latter interfered or competed with the vested interests. The extensive investigations of the Pujo Committee failed to make out a conclusive case for these allegations.
In purchasing a block of municipal securities a preliminary investigation, unless it is the issue of a well-known municipality, is made by an agent who inquires into the physical and financial condition of the city to determine its ability and willingness to meet its present and prospective obligations.
The securities issued by business corporations are usually submitted to the bond houses by a representative of the company or by a promoter. The bond houses, except under very favorable conditions, refuse to handle securities of a business with which they are unfamiliar. They reject issues in excess of the physical value of the mortgaged property and they likewise refuse securities of corporations with narrow margins of net earnings above fixed charges, and of corporations owned or operated by men of low business morality.
If a favorable price can be agreed upon, accountants, engineers, and investigators are sent to make a thorough examination of the conditions, and after the proposition is finally accepted the bond house may insist upon having representation upon the board of directors until the securities are disposed of. Some houses finally handle only securities of well-established earning power. This insistence upon high quality reacts favorably upon corporate finance in general.