Free Rider

In the American Banker for August 15, 1935 an article on Government bonds took issue with various policies of Secretary of the Treasury Henry Morgenthau Jr., concluded by asking whether they were due to "obstinacy, stupidity, or sheer ill advice." Secretary Morgenthau all but ordered the American Banker to send the unknown columnist, one S. F. Porter, to see him in Washington. The magazine refused in a vague letter from which all pronouns were conspicuously absent.

In Washington as in Wall Street, S. F. Porter has long since ceased to be an unknown columnist. No longer is there any real mystery about the pronoun. Yet last week, when Harpers published an able, informative tract freely sharing some of a recognized expert's secrets on How To Make Money in Government Bonds ($3), Author Porter's special secret was tactfully kept.

The fact is that S. F. Porter is a pretty, vivacious, prodigious young lady who was just 22 when she tweaked Secretary Morgenthau's dignity nearly four years ago. Sensitive about her age ever since Cornell refused her a scholarship because she was only 16. Sylvia Field Porter graduated from Hunter College and talked her way into a job with an investment counsel firm in the desolate year of 1932. In 1935 she went to work as a financial writer for the New Dealish New York evening Post and when the struggling Post last year had to cut expenses, she became its entire financial staff.

Making money in Government bonds, says S. F. Porter, should be easy because: 1) there are $38,000,000,000 worth of Government securities in the market and these are divided into only 49 issues compared to the hundreds of stocks which make up the Stock Exchange's $44,000,000,000 listing; 2) by & large all the issues move up and down together. Another inducement is the fact that the Government market, with no SEC to regulate it, can be played on margins as low as 5% instead of the 40% now required for stocks. Biggest inducement is that the Government, with its powers over the banking structure and its large trading operations in its own securities, can and does rig the market to protect its issues, which private financiers are forbidden to do.

Though smart operators can make money by straight buying and selling of Government issues if they watch the market carefully, or by arbitrage if they can detect unwarranted price spreads between different issues, Sylvia Porter thinks the softest touch in the Government market is "free riding." When the Treasury invites subscriptions for a new issue, anyone can write himself down for a block by depositing 10% of the purchase price on the line, the balance payable on delivery. Because the Treasury takes care to make new issues attractive, they invariably command a premium over the par purchase price, thus anyone can take a free ride on what amounts to 10% margin by selling his allotment before delivery. Author Porter figures that some $80,000,000 worth of free rides have been taken on the $15,000,000,000 in Treasury notations since 1933.

The Treasury used to encourage small investors, and inadvertently small free riders, by honoring all single bond subscriptions before prorating its oversubscribed issues to big bidders. Last fall the Treasury hastily changed this allotment system after an article in Scribner's called small investors' attention to the possibilities. But S. F. Porter, who wrote that article, thinks free riding will remain a profitable sport so long as the Treasury can successfully finance its issues.

Sylvia Porter herself has taken free rides on ten Treasury issues, has each year doubled in this and other ways the capital she put into the Government market. She speculates with the help of complicated graphs, for which her husband, Reed Richard Porter of Irving Trust Co., has to do the arithmetic. In what spare time remains, she plays the piano, goes to the movies, and writes fiction that thus far has impressed no publisher.

On long-term Government-bond speculation, Expert Porter is bullish: ". . . Whatever occurs, holders of Government securities may be confident that the nation's fiscal authorities will guard their interests in the market so long as the Treasury faces a tremendous program of debt refunding." When she is asked about short-term prospects, she quotes the forecast of an anonymous financier: "The stock market, sir, will fluctuate."

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