At that hoped for time in the future when the institutions have been
properly chastised and the small investors come gamboling back into the
stock market, they will pause to listen to fading hoof beats and ask:
"Who was that Masked Man?"
A hearty "HI HO, White House" will echo as someone answers: "Why,
that's Lloyd Bentsen!"
The junior senator from Texas has staked out his claim as defender
of the rights of small investors and stern task-master to institutional
money managers. His Stockholders Investment Act of 1973-to be continued
in 1974-strikes at a problem many investors have been worrying about for
the last several years: institutional domination of the American
securities markets. Senator Bentsen's motives may be suspect since he is
emerging as a potential presidential candidate and there are more
individual investors than money managers. However, his turning the
spotlight of national publicity on the problem is welcome, indeed. Also,
Mr. Bentsen may prove, as did Joseph Kennedy as first chairman of the
Securities Exchange Commission, that it takes one to know one. Prior to
his interest in politics, Mr. Bentsen was noted for his controlling
interests in Texas banks, insurance companies and mutual funds, the very
institutions whose playhouse his legislation is designed to mess up.
Hearings conducted by Bentsen's sub-committee on financial markets
reveal the thrust of his contemplated legislation. First, he wants to
bring the small investor back through liberalized taxes on gains and
losses. Secondly, he wants to put institutional holdings under a
microscope to see if a few changes in limitations on concentration might
help equity capital markets in general.
Monkeying around with
the tax laws generally tends to make a bad situation worse, but Bentsen
believes investors deserve a break in writing off losses on investments
and a capital gains tax that would encourage the taking of profits and
reinvestment rather than locking away appreciated stocks for the milder
bite of estate taxes. Stockbrokers certainly agree with this approach
since it would generate more commissions and prompt the investor, who
would rather "lose the whole damn thing than pay one penny to Uncle
Sam," to jar loose from lock box stocks. Some analysts estimate that the
change proposed by Mr. Bentsen could produce some $20 billion in capital
gains taxes that would never be generated otherwise.
But thinking that these suggested changes will look the same when
and if they ever come out of the congressional meatgrinder is like
planning to hit the four-horse super exacta.
The finger of shame Bentsen points at institutional investors also
points at the basic problem in the securities market today:
concentration of institutionally managed investment money in a handful
of securities while the rest of the list languishes. (See TM, "The
Market Sheds a Tier," January, 1974).
"Suspicions confirmed!" shouts the individual investor when he reads
some of the statistics revealed by Senator Bentsen. Institutions account
for 70 percent of the trading on the New York Exchange. The eight-man
investment committee of the largest bank trust department manages $21
billion worth of common stock. One large bank trust department has
concentrated more than 20 percent of its discretionary stock market
investments in two issues.
The banks, in fact, seem to be the main target of Bentsen's
fusillade, and rightly so. While mutual funds are undergoing a
persistent and perhaps terminal case of net redemptions, bank trust
departments' managed assets continue to grow rapidly, thanks primarily
to the growth in pension fund money. Such assets currently exceed $150
billion, and the figure is increasing by over $14 billion a year,
according to Bentsen. Most of this is managed by bank trust departments,
and most is invested in common stocks. The Morgan Guaranty Trust Company
alone receives more than $800 million in new pension fund money each
year and over 70 percent of Morgan's pension assets are invested in
Some 30 million Americans participate in privately funded pension
plans, and, as Bentsen points out, the safety of their retirement
depends on the safety of the investments in those plans. Bentsen decries
the concentration of these funds in a relative handful of glamour growth
stocks. The potential danger in such concentration was seen dramatically
in the 1973 decline of the lustrated by Jerry Jeanmard hoariest growth
number, IBM, which plunged from 365 1/4 to 235 1/8
during the year, a drop of 35 percent.
Bentsen: "Some of our largest bank trust departments are
concentrating close to ten percent of their total assets in this stock
which lost $5.6 billion in two days of trading. Another of our largest
bank trust departments has concentrated more than 20 percent of the
assets over which it has complete investment discretion in just two
securities, IBM and Avon. Little do the pension plan participants, who
depend on this bank to manage their pension funds, realize that their
future retirement benefits are so closely tied to the fate of one
cosmetics firm and one manufacturer of computers."
Again: "A small number of large institutional investors . . . came
to believe that at one point the stock of a cosmetics firm was valued
higher than the entire U. S. steel industry."
To curb such concentration, Bentsen suggests that a pension fund's
manager could invest no more than five percent of his total
discretionary pension assets in one equity security if the fund is to
keep its tax exempt status. Also, any manager who acquired more than ten
per cent of the outstanding shares of any one company (with respect to
his total managed money) would run the risk of losing tax preference and
suffer other penalties.
Bentsen proposes all this to break the back of the one-decision
investment philosophy that has led to the recent two-tiered market. He,
like many investment industry leaders, hopes this will remove some of
the suspicion the small investor has about how the market has been
"manipulated." And it has been in the sense that a very narrow segment
of the stock list has been bought by institutions and the rest ignored.
But the bigger, deeper problem that concerns both Bentsen and the
investment community is the frightening fact that the securities
industry's main reason for being (perhaps its only reason for being),
its ability to raise new capital for American business, began to
decline. Slowly at first, then so rapidly that today even the most solid
corporation allied with the strongest brokerage firm is helpless to
raise new capital through the sale of equity securities without severely
diluting book value.