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 common stocks.
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 3651/4 to 2351/8 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.
This inability to increase equity investment in American business has come at a time when new capital is desperately needed. The situation has driven more and more companies to borrowing in the long term debt market and directly from banks at rates that go as high as 2.5 percent over prime with a 20 percent compensating balance. Money is so expensive at these prices it’s doubtful that many companies can invest it profitably. And the debt to equity ratios of some companies are getting dangerously unbalanced toward heavy reliance on debt. No one suggests that bank trust departments were in collusion with their corporate loan departments, drying up equity investment in order to force companies to depend on banks for money needed to expand. But that, according to Bentsen’s hearings, appears to be the result.
And this lack of equity capital comes at a most inconvenient time for business, which is almost forced to expand to meet demand. Not only is the normal growth of commerce in some jeopardy, but the huge influxes of capital needed to meet water and air pollution control standards are also going to be very hard to come by.
Bentsen also worries a great deal about where the money to foster the next IBM is going to come from when money managers control most of the investable funds and are prevented from taking much risk with them because of their fiduciary responsibility. He proposes that one percent of the funds in pension plans be exempted from the “prudent man rule” so that much can be invested in emerging companies where the risk is great and the potential reward is, also. One per cent doesn’t seem like much, but that would be a great deal of venture capital if it came from that $155 billion currently in pension funds.
So Senator Bentsen has some real concerns: the safety of pension funds invested in too narrow a range of securities. How to attract the small investor back to the market. Where the equity money is coming from for new ventures, to finance expansion and pollution control improvements. How to save the securities industry from itself.
Good luck to him. Not only does he have to come up with the right answers, he must also shepherd his legislation through a dark forest of knee-jerk legislators whose most courageous and straightforward action in the last several years has been to end the blackout of home pro football on TV. Senator Bentsen has about as much chance of success as the Oilers do of winning the Super Bowl.
But that may be just as well. IBM is still near its low and many of the other top tier institutional favorites are similarly tarnished. If those stocks do badly, chances are that money managers may get interested in the rest of the list. Neglected stocks will begin to do well, bringing the small investor back into the market to provide liquidity and desperately needed capital.
Perhaps if Bentsen and Congress stay out of it long enough, the market might take care of its own.