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Chapter 47: Cost of Financing and Management

Graham cautions the investor about the mischievous activities of the investment banking industry.

·         It was an established Wall Street maxim that capital for a new enterprise must be raised from private sources. These private interests would be in a position to make their own investigation, work out their own deal and keep in close touch with the enterprise, all of which safeguards were considered necessary to justify a commitment in any new venture.

·         Investment banking is ripe for conflicts of interest. He makes a deal on his own behalf with the originators of the enterprise and then he makes a separate deal with the public to raise from them the funds he has promised the business. He wonders if the size of the compensation should cause the stock buyer to view the investment banker as essentially his agent and representative or must view the issuing house as a promoter-proprietor-manager of a business, endeavoring to raise funds to carry on.

·         Securities Act of 1933 aims to safeguard the security buyer by requiring full disclosure of the pertinent facts. Although full disclosure is undoubtedly desirable, it may not be of much practical help except to the skilled and shrewd investor or to the trained analyst. Modern financing methods are not far different from a magician’s bag of tricks; they can be executed in full view of the public without its being very much the wiser.

·         Regulations against swindles, has led to a different type of security promotion. Instead of offering something entirely worthless, the promoter selects a real enterprise than he can sell at much more than its fair value. By this means the law can be obeyed and the public exploited just the same. In theory a promoter may offer something worth $1 per share at $5, provided he discloses all the facts and adds no false representations.

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