Georgetown forum; U.S. foreign investments

US foreign investments are a challenge to students. The topic of the eleven hundred and sixty third consecutive broadcast of the Georgetown University radio forum another in a series of educational and informative programs from Washington D.C. a Georgetown forum was founded in 1946. This is Wallace Manning speaking to you by transcription from the Raymond Rice studio on the campus of Georgetown University historic Jesuit seat of learning in the nation's capital. Today's discussion will be U.S. foreign investments challenge to students. Participating our Dr David S. Mulford a member of the foreign department white weld and company. Mr Robert o sailor senior in the Georgetown University School of Business Administration and chairman of the business school clubs Coordinating Committee. Mr Christian Hoffman senior in the School of Business Administration and president of the finance club and Mr. George Director of Education

Investment Bankers Association of America I'm a student of today is the international diplomat and businessman of tomorrow. And unless there is a radical and worldwide change in the system capital will continue to be a pivot on which developed and developing nations will increasingly depend. Where capital is a dynamic force there may well arise political and moral questions. Today's youth want to form your opinions on the realities of international finance in the hope that when their time comes they can help shape a better world. Hence the undergraduates of the Georgetown University School of Business annually invite investment bankers to the campus for an exchange of questions and answers on the role of capital in world affairs and in relation to that program. Our panel is brought together today will launch the discussion by asking Mr Eurico to give us a

broad stroke heart rate of investment banking what it is what it does Mr Eureka. This program began last year when the student body at Georgetown University approached the investment bankers association. To arrange for a program whereby they could come in contact with businessmen to try to bridge the gap of understanding between college students and the business world. We found in working with the students that there was a lack of understanding of how the industrial growth of our nation was made possible. And the role that the investment banking process plays. The investment banking or the industry itself grew in our nation as a result of mass production and mass distribution which required tremendous amounts of capital. These capital couldn't be raised by individuals or small partnerships. Hence the corporation where many many people can. Contribute

can invest in ownership of the enterprise making possible tremendous plants making possible the jobs. And again these relate to. The ability to make profits. Consequently the investment banking contribution is that. Funds can be raised through the ownership and distribution of securities. Evidence is of ownership in a corporation. They are distributed to the public to public investors institutional investors making possible this great industrial growth. So are you cared. Well one thing that intrigues me the most is what Mr Ricca mentioned about America's growth with its investment banking process. And now that America does have the growth in its own country what is the investment banker from America doing on the international scene how is he helping other countries of the world which hopefully in turn will help America.

I'd like to possibly ask Mr. Mulford internationally the. Similar process is taking place there is a tremendous demand internationally for capital today on the part of governments international agencies of various kinds and private corporations and the investment banker is in fact playing the same role internationally. In putting these potential borrowers in touch with sources of funds which to them represents capital. And I'd like to get your opinion on the type of individual. That you would expect or want to see in the field. Thinking. You mean young man coming into Mr. HALL. Well I think one would hope to see in international investment banking.

People with very broad horizons. People who've had. Broad training in their education. People who have a willingness to learn the techniques involved in investment banking. People who have a working knowledge of. Government Politics languages currencies legal problems. In fact a very very broadly educated person. I would add that it is summation that the individual who is interested in everything. With the broad scope of interests of our social economic political. Considerations is the person who would be attracted most useful in the industry. You know strikes me as. One that all of the industries today are in a sense that's correct except that in the investment banking. Firm

there is a great demand for technical competence and this is only achieved through some measure of formal education in these technical areas such as Business School or banking and also some practical experience where one builds up the knowledge necessary to actually operate in the field. But as background. And I emphasized background I think it's very important that the person be a broadly educated person. With the thing that interests Chris and myself as students. Is the fact that we are we have gotten a very good social and possibly too moralistic base in terms of the business community and in terms of international relations and of course the technical operation. Now that we have to get an understanding of to be able to apply these social ideas is the next thing that we're looking at. And could you possibly give us one or two ideas as to how this international investment banking

system operates and possibly even an example as to what your role might be in helping him develop or developing nation. Well. This question presumably refers to the international market. Which I think I won't take the time to describe. How it arose and so on but just assume that it does exist and that people know about it and the investment banker working in this market. Is. Approached by a borrower theoretically who has a need for funds. And the investment banker makes a judgment as to whether he can locate funds for that borrower. He would usually form a large international syndicate so-called which is nothing more than a group of international banks. And he would manage this group. He would then act on behalf of the borrower and issue securities on

his behalf. Probably bonds or notes and the Syndicate would distribute and sell these. And the investor would have his security and the borrower would in turn receive his funds. Investment bank or operate as a middleman in this process and is at risk during this period. And this is what he's paid for. This is really for two developing nations and in fact in those developing nations where development hasn't yet occurred. There isn't an investment banking process there isn't a system of raising capital as there is in a developed nation. Until the nation has shown a potential for profit for example. Through enterprise. There is no motive for investment and many of these nations will need to be subsidized either by nations which can afford it or by people who see some

unusual potential or ability to develop something. But it is very difficult it's a difficult question as to how you can apply capital to the nations to which you're referring. I believe the system that was just described is applicable to the developed world. And my right is correct we are talking there about a system which is used in the developed international capital market which is fairly clearly defined in international market in which most borrowers who are issuing securities publicly. Venture. The less developed nations of the world. Vary considerably. Some of them. Might conceivably be able to borrow in this market. Others of them look to other sources of finance such as the World Bank such as two governments such as two suppliers of equipment credits for various projects that are going on

in their countries. But it is quite true that they themselves those particular countries do not have an investment banking community in the sense we usually associate with. The national markets in the developed countries or with the international market which is a market which cuts across. All the developed country markets. Dr. M. What criterion would investment banking firms employ in determining which of the underdeveloped countries they might wish to invest in. Only Investment banker does not himself. Make an investment that is to say do not transfer funds into that country. As a company would that is setting up of an operation there the investment banker tries to make a judgement of what. The market's view of that country is. Because if the government of country X Y Z were to

appear in his office and to ask. The investment banker to act on his behalf the investment banker would only agree to do so if he thought that in today's market he could successfully act on behalf of that government and raise the funds that they require. He cannot do this successfully unless he believes that the receiving or the investment side of the market the investor who is going to take up the securities issued is in fact willing to hold securities issued by that government and on the other side he must also determine whether the government is prepared to pay the necessary rate of interest. To secure such a loan it may be that the rate of interest would be astronomically high and that the government would shy away from paying that kind of interest to secure a loan of that size and maturity. In the final analysis then the success. Is measured in terms of profit is that correct.

No it is not measured in terms of profit because in the example I just gave. If the investment banker were to act for that country his profit would be roughly similar to acting for any other borrower. Whether the issue is possible for that government really depends upon whether the market will accept the issue and whether the borrower is prepared to accept the conditions. Which attach to the issue. I think there's a strong case to be made for the fact that among the less developed nations. It is doing. Such countries are a disservice. To raise funds for them internationally at rates of interest which are excessively high in today's market thereby creating for them a long term debt service burden. Far better for them to look to other cheaper sources of finance which may be governmental or World Bank but the investment banker is not so much concerned. He is of course concerned with profit but he. Is not. He does not make his decision

to act for a borrower purely on a profit basis. He has to live in the market if he brings out an unsuccessful issue he must continue to operate in this market and his own reputation will suffer if he does. Taylor do you find that interesting. The thing that intrigues me the most is the apotheosis that profit is not the only motive and. Going one step further. Those are renaissance man once he is in a position to supply capital on a successful basis and that given the terms that we just talked about so big being able to pay for the interest and being able to float that loan or taking that money successful on the open market. What if he has to go one step further and say given some hypothetical example of a country like Romania which supposedly is friendly to us at this time. What if Romania comes to the west or comes to the euro. Dollar market in Europe. And. Asks for money to build some type of a

manufacturing plant. And later on during the course of negotiation the investment banker finds out that that plant won't be built in Romania but in Red China to manufacture nuclear missiles in this kind of a far stretch to example what. And it's possibly not so far stretch what would be the position of the investment banker would he accept just those two previous criteria or would he go one step further and turn. Make a value judgement and the first question is whether Would the investment banker would in fact in today's market. Act for. Rumania. That is a question which perhaps is open to doubt. If in your example a loan was actually. Being handled by an investment banker and we needn't cite a particular country at all if the borrower. Has come to the investment banker to raise funds for a certain purpose and in the middle of the issue or prior to the issue being floated

changes his mind then the entire. Operation is subject to cancellation and is subject to reconsideration. And if this were done. On the sly as it were the investment banker would would would probably just terminate all negotiations with that borrower and have nothing more to do with the Mittal irrespective of the merits of the other project because he is representing an issue to the market. The use of which is for a certain identified purpose and one wants complete openness and honesty on these matters in the market. Mr Hofmann seems to indicate that the investment banker is somewhat ethical. Kind of moral individual. I think that's a fair assumption yes. Well this is a very interesting area now because I think it's really at the root of what. The program is what we're talking about as we're all aware there. Is a certain amount of unrest as it's. Generally referred to on

campuses these days and there's talk of the communications gap. And I think that's exactly what we're talking about here with you. You youngsters are are seeking to find out from these gentlemen. Whether they are Trust where they are whether they do have a sense of moral responsibility. And I'm going to ask Mr. Eureka at this point. As director of education for the Investment Bankers Association of America who who and what does he does he is he charged with educating. In my capacity have had an opportunity to see some studies that were done by. Opinion Research Corporation and other research organizations. On. What the attitudes of the public and college students and high school students are toward profits. And I was very much surprised that. A large majority of our public including. College students.

Actually feel that profits are not essential that there is no need for profits and that profits are exceedingly high. There are more that there are immoral and in fact it's the profit motive that makes the entire economic system of free enterprise possible without the profit motive. There would be absolutely no incentive to invest. There would be no large factories and it would be no jobs. And it's surprising how many people don't realize this. In the absence. Of capital. What what would be the prospects for International Development of underdeveloped countries and so forth. Or. Is there anything that could substitute for it. But I think the absence of capital is what I take to mean private capital. What I'm saying is is there another system. That would be as practical.

As the free enterprise right in the. In my view no but there are people who have different views about this and who feel that. A socialist system of. Allocating resources is more efficient. Certainly in social terms and there certainly are arguments to be put forward. For that view. There are as you know certain countries in the world which do not use a free market system to allocate resources and to in effect produce the capital required to produce factories and goods and so on. And it can be argued that these systems within their own national entities operate reasonably well these days. I don't think myself that they're as efficient. I can't imagine them serving as the basis for a worldwide system of capital movement and allocation and so on. It seems to me that this this really does depend

upon a free market system because the process is so enormously complex. In our system of free enterprise there are checks and balances. This is not an unregulated. Financial market. There is regulation both federal regulation state regulation and internal regulation. This regulation is for the public interest and to preserve. Even Flow of markets. To protect the public the public interest. And we have with that regulation. A free choice in our society in this country. We can still elect to invest or not to invest. We can choose between alternate alternate smh any alternatives for investment. We can save our money or spend it. And yet there is enough regulation to protect the public interest. Now it seems to me that we in this nation of achieved a balance

between complete regulation which is a socialistic system and what might be on the other side. And as a result we have had an industrial growth in this nation which is only equal in the history of the world. What I meant by allocation of resources. In social terms was that it could be argued that. Within this country and when one speaks in the very broadest senses there are certain areas of our public life which do not have sufficient resources allocated to them. This is not really within the realm of the investment banking function what I meant was that if you're talking about curing certain urban problems or other social problems one could make a case for saying that the mechanism for. Allocating our national resources has not been as efficient in that case as it might have been hoped. Let's say one thing it is intriguing me more and more is this idea of where do you draw the line between total regulation of business investing and

free market investing because somewhere in the middle possibly some compatible government control which would utilize this investment function toward the national objectives whatever those might be might be a much more effective way than having a free market operating a government operating it pops possibly a different objective. Now maybe Dr. Milford could give us a little bit of an idea as to what what the market he feels should operate in the international market is interesting in this regard in that. Compared to. National markets around the world or in the developed world at least the international market is to a large extent an unregulated market. And therefore. The standards in the market. Practices that are observed and so on are a matter for the bankers to agree on and this is done and I must say that the

general level of operations in the international market has been of a very high standard indeed and that the self regulatory capacity of the investment international investment banking community has been a most remarkable thing to watch this contrast rather sharply with some of the national markets where there is a fair amount of government regulation to ensure that certain practices are maintained or are not maintained. And the international market. Really supervises itself what it does not do. That is to say what the investment bankers do not do. They do not hold a board meeting and. Determine how the international market should allocate its capital. To various borrowers. The market itself makes a judgement on these matters and the investment banker works within that market making his assessment of it. And if certain desirable

projects are not fulfilled by this market at the time at the present moment. It simply is a refectory reflection of the general market's unwillingness to provide funds for that sort of project or venture or government or whatever it might be and the investment banker is not in a very strong position to really change that because it's not his money. This is State of student are concerned about just how much freedom does the marketplace have and where does regulation began. There was a judge who said that this is a free country and a person's free to swing his fist in any direction he wants to but that freedom starts where the other stops that freedom stops where the other person's nose begins and it's through these government regulatory agencies and self regulation that that point at which. Freedom of free enterprise. Stops as a result of protecting public interests is determined

it's determined over a period of time. And those guidelines have been pretty well established through the regulations that currently exist. Mr. Milford your comments about free market are very intriguing and. In particular they remind me of the current situation in Europe such as specific way the euro dollar market. This of course is a quite complicated market and field. But I was wondering if you could give us an idea of what the market has done in Europe and just what exactly a euro dollar is. Earlier a dollar is a dollar which put it simply is held by a non-American. And. These dollars which are outside this country represent a very great pool of short medium and long term funds which can be tapped by various kinds of borrowers and which traditionally in the past from

1945 until about one hundred sixty two or three was primarily the market which resided oddly enough in New York. And was used by governmental borrowers of one kind or another primarily since 1962 or 3 which was when the interest equalization tax is passed by the United States. A tax which prevents Americans from buying foreign securities. The market has really shifted its base outside this country and this particular pool of Euro dollars is now being tapped by an ever increasing number of borrowers of greater diversity. And this has been assisted in some measure by the balance of payments program in the United States which has been a program which has forced American borrowers to look overseas for funds. The result has been that the market is growing from a volume and one thousand sixty two or three of about 500 million to a volume of over 3 billion this year. But a great multitude of borrowers.

Mr. Eureka. Mr. Belford students are frequently asked me about careers in investment banking coming from a firm that is engaged in international financial operations. Tell me how you feel about your job about the field itself. And 50 second stuffed animals. Well I I come from a rather varied background myself and I find that it really is extremely exciting that there is no other. Job I can think of which requires a combination of knowledge and experience that is required by international investment banking. There's a challenge if you are really a very great challenge already to I think it's the most exciting field. Today. Gentleman thank you very much for your discussion of U.S. foreign investments as a challenge to you and I thanks to Dr. David S. Mulford a member of the foreign department white welder

and co.. Mr. Robert sailor Sr. in the Georgetown University School of Business Administration and chairman of the business school clubs Coordinating Committee. Mr. Christian Hoffman. A senior in the School of Business Administration and president of the finance club. And Mr. George Eureka Director of Education Investment Bankers Association of America. You have attended the weekly discussion program the Georgetown University radio forum. Broadcast of which was transcribed in the Raymond Rice studio on the campus of historic Georgetown University in Washington D.C. next week you'll hear discussed Latin America nationalism and economic integration. Our panel at that time will consist of Dr. Francesco P. Garcia Amador director of the Legal Affairs Department OAS and Dr. Joseph L. Trianon Dr. Siegfried Gar Boni both associate professors of

economics at Georgetown University. This program has been presented in the interest of public education by Georgetown University or moderator. WALLACE Finally this program was distributed by the national educational radio network.