Part 1: Carry

1. Securities, as we have said, are quoted at a higher price on cash; when the 3 0/0 is 66 on a cash basis and 66 40 at the end of the month, we say that the carry of the annuity at the end of the month is 40 cent. - In this sense, carry is the opposite of discount. When the bearers arrive at liquidation without having provided the values they have to deliver, they are obliged to buy at any price, for fear of execution; it then happens that the cash becomes more expensive than the forward sale. The annuity remains at 66 40 at the end of the month, so if the cash price is 66 70, the discount is 30 cent.

2. The carry is a loan on the deposit of securities; the one who lends is the reporteur, the one who borrows, the reporté. The loan on pledges has been provided for by the Code and is subject to certain formalities of deed and registration; it must be made at the legal rate, under penalty of repression as usury. What did the Stock Exchange imagine? A market fiction, of which the author of the Provinciales would rightly claim the original idea in favour of the RR. PP. Escobar and Lessius, inventors of the Mohatra.

“The Mohatra contract, say these skilled casuists, is one by which one buys fabrics dearly and on credit in order to resell them, at the same moment and to the same person, for cash and at a good price. - Mohatra is when a man who has a business of 20 pistols buys stars from a merchant for 30 pistols payable in a year, and sells them back at the same instant for 20 pistols cash."

Conversely, the carry is a contract through which a capitalist buys securities in cash and at a low price, to resell them, at the same time and to the same person,at a high price and on credit. - The Carryover is when a man who needs 37,500 fr. sells 25 Orléans shares for 1,500 fr. in cash, which he immediately repurchases at 1,510 fr. for the next liquidation.

In the Mohatra, the owner of the securities is, as we can see, no more than a disguised lender; in the carry-over, he is a borrower. That is the difference. The good fathers aimed to calm the consciences of the devout usurers; the financiers had, at the time, to free themselves from the slowness of the contract on pawns and simultaneously to avoid the correction. What do the faithful and the jurisconsults think of these loopholes? They still dare to talk of opposing conscience and good laws to bad instincts!

"In carry-overs, says Mr. Deplanque, we frequently see the interest rise to 10 0/0 of the sum lent for a fifteen-day period, the time frame for which these kinds of contracts are generally consented. At this rate, if the capital could always be used, you would gain a small income of more than 250 0/0 a year. In any case, there is no operation on the Stock Exchange that is better than this one."

" There are every day poor devils of imbeciles who are condemned as usurers for having foolishly given their money at 12 or 15 0/0 a year, against a bill of exchange or other equally serious commitments, to a few sons of families who are hesitant to return it, preferring to have them condemned in the name of public morality. But there's no risk of being accused of usury for lending on deferred terms at 23, 50 and 100 0/0 a year. So long, wise man" (Almanac of the Stock Exchange).

Let us illustrate with a few examples the excellence of the reporteur's position.

I possess 60,000 fr. which I'll need in a month or two; I can't commit them to a trading business for such a short time, and in order not to leave them sterile, I'm doing the following operation: I'm buying 3 0/0 at 67 in cash, and I'm reselling it immediately at the end of the current at 67 35. My funds will be available for the time when I need them, and they will have earned during this month 35 cent. of profit per coupon, that is, a rate of 5 fr. 40 0/0 per annum.

If I want to prolong my operation:

I made an initial carryover at the end of July. I have to deliver to X the securities I sold him; however, I don't need to release my capital yet. I then buy a sum of securities equal to that which I must deliver: my last seller will make the delivery to X, and receive from him the sum which I had to receive myself. I thus keep my securities. I can resell them at the end of August, and repeat from month to month, or from two months to two months, the same operation. In this case, my first purchase becomes an investment transaction; my purchases at the end of the month are speculative transactions: they are consummated within the legal timeframe.

It's good to use this method when, at the end of the contract, funds are in decline. Thus, I bought cash 4 ½ at 89; I will resell it at the end of the next month at 89 75. At the time of delivery, 4 ½ is at 88. It's in my interest to buy back annuities, because I benefit from the difference between 88 and 89 75, which is 1 fr. 75, whereas by delivering my securities bought at 89, my added value is only 75 centimes. So I can wait for the rise. If I'm forced to actualise, I lose nothing on the decline, because I've sold at 75 centimes profit; only I'm short of earnings.

When, on the contrary, funds are rising at the time of delivery, the first operation must be consummated, unless an identical one is repeated the following month. Therefore, in the previous example, supposing that the funds are at 90 fr., I won't buy at 90 to deliver at 89 75; it's my buyer who profits from the added value of 25 centimes. But, once again, I lose nothing, since I receive 89 75 and have paid 89.

The operations we have just described are relatively honest. The clever are not content with this. They rush to sell, make new carry for the same value, resell and carry excessively, crushing prices and pushing down the price in order to be able to buy back at low prices, in liquidation, the securities they are obliged to cover their carry.

They use delay to prolong an operation that would result in a loss, and to temporarily avoid execution.

Example. - I purchase 25 shares in the Banque de France at 3.685 fr. The decline is declared, and I am obliged to sell at 3.675; that's a 250 fr. loss for me if I end my operation there. But I have faith in the return of the rise: at the same time as I sell at 3.675, I repurchase at the end of the current term at 3.680, assuming that the carry rate is 5 fr. I pay the 250 fr. to my deficit in liquidation; only my operation is not finished; I can, if the rise returns, cover my loss and withdraw with a profit. You can repeat the same process from month to month, and get carried forward indefinitely. The stockbrokers find their profit in this, as it's double commission, since there's a double operation; as for the speculators, with rates of 4 to 60 0/0 per liquidation, they often meet with slow and painful agony instead of the violent death that they wanted to avoid.

Just like exchange and securities, carry overs are listed on the Stock Exchange. The transactions resulting are subject to the same rules as others: they may not be carried out for more than one month for rail shares, nor for more than two months for other securities.

We call carry on premium, in the first sense that we have given to the word carry, an operation by which we buy firm securities at the end of the current term, which we resell at premium at the end of the next term. Since selling at a premium is more expensive than selling outright, the carry is higher; only, in the event of a fall, you run the chance of not seeing your securities raised, and of remaining a buyer of funds that you might have had an interest in getting rid of.