12. Guarantees

Another feature is attached to some of these mortgages. In some cases the companies guarantee the payment of the principal and interest. Invest-ors have often been deluded, for as no company has a very large capital, the guarantee fund is not adequate Of Course the greater the amount of mortgages sold and guaranteed, the less valuable is the guaranty; for the amount of capital to respond to losses diminishes compara-tively as the mortgages issued increase in amount A company possessing a million of capital, even supposing it is well invested, does not have a large guarantee fund for $10,000,000 of mortgages which it may have guaranteed and sold. Of course it is not presumed that any company, however reckless, will issue all its mortgages on an inadequate security, but experience has shown that in some cases enormous losses have occurred from reckless lending on too slight examination of the property sold and wrong estimates of its value; and in other cases wherein the companies, with the best intention to lend conservatively, have miscalculated on the worth of the security and lost heavily. The losses of the latter kind have been the most frequent in western cities of rapid growth followed by sudden and heavy reactions.

13. Reorganizing Companies

Passing from loans to corporations and individuals, another branch of financing is in reorganizing companies that have failed and require new capital and relief from their liabilities. This is a new branch in private finance and one requiring constructive ability of the highest order. The great companies reorganized by banks and bankers of late years have been chiefly railroads, and occasionally mining and manufacturing companies. Let us explain briefly what is clone. A railroad company fails to meet its obligations. Besides failing to pay its stockholders dividends on their capital, it can not pay interest on all of its bonds and other obligations. The owners demand payment and insist that, if they are not paid in accordance with the terms agreed, they will foreclose the property by legal proceedings and take it away from the stockholders. It may be that there are several classes of bondholders, and that in the process of foreclosing some classes will be cut out. To save a portion or all of the money they have invested, they seek out a banker and give him authority to reorganize the concern. To do this it is needful for all the various parties in interest to unite in the request - all the holders of mortgages and stock, common and preferred. Absolute unanimity is not required, for if it were no reorganization plan would ever be attempted, for there are always a few dissenting ones in every company composed of many persons. Application is made to some court usually for authority to proceed, otherwise dissenters would not be bound by the action of the others. This application is in the form of a petition signed by the great body of mortgagees and stockholders, or their agents, representing a majority, very often two thirds or more in value of the entire property. On this petition an order is granted on proof that a reorganization is desired, in accordance with the wishes of the reorganizers. This is the basis of action by the bank or banker called to perfect and carry through a scheme of reorganization.