The Protection of American Foreign Bondholders

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THE activities of our bankers in sponsoring the sale of foreign securities in the American market is now under investigation. This is not surprising when we consider that out of a total of approximately eight billion dollars of foreign loans floated here during the past ten years, almost one billion are either in default or will shortly be in default as a result of the moratorium legislation which has been adopted by various foreign debtor countries. In addition, many other foreign issues are selling at a fraction of the price at which they were originally marketed. The American investor is a newcomer in the field of foreign financing and his first and possibly natural reaction is to place the blame for this situation upon the bankers who have sold the securities. Granted that there was over-lending during the past few years, and that other mistakes have been made, we nevertheless are perhaps inclined to exaggerate the bankers' share of responsibility. The foreign loans sponsored by the most experienced of the European bankers have suffered in much the same way as our own and they have been partners with our bankers in many of the foreign issues which originated in the United States. It is true that we have recently been the largest lenders to foreign countries, but this is largely accounted for by our possession of available capital seeking employment rather than by any fundamental difference in policy between the European and the American houses of issue.

Where there have been widespread defaults on foreign issues the direct cause, both in the past and at the present time, can be traced to a world-wide depression. For example, it is calculated that the North and South American securities listed on the London Stock Exchange depreciated over $500,000,000 during the five years preceding 1895, and the British investor had a somewhat corresponding loss in the years following the depression of 1873. These depressions were no more predictable than the present one; the consequences to the investor were much the same, and it is hardly fair to saddle the bankers with sole responsibility for failing to forecast and provide against such conditions...