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an initial loan upon the securities, for the amount for which they are then pledged, the provisions of the bill apply.

Now, if we may turn to the provision-
Mr. COLE. Mr. Corcoran, may I ask a question?
Mr. CORCORAN. Certainly.

Mr. COLE. As I understand the new bill, the margining features become effective August 1.

Mr. CORCORAN. Yes.
Mr. COLE. Then, this subsection (g) on page
Mr. CORCORAN. Page 19.
Mr. COLE (reading):

(g) The Federal Reserve Board in cooperation with the Commission shall study the feasibility of fixing maximum loan values on the basis of the earnings of the issuer over a period of years and the feasibility of other methods of determining margins, and shall report the results of its study and its recommendations to Congress on or before January 3, 1935.

Mr. CORCORAN. Yes.

Mr. COLE. That means putting the new arrangement into effect for 6 months, anticipating some changes to be recommended, does it not?

Mr. CORCORAN. The point of (g) is to catch a suggestion of the Twentieth Century Fund, which recommended that as a scientific matter, the best way to compute margin values is on the basis of earning power of securities. Scientifically, everyone agrees with that. The difficulty is that at the present time there is no way of computing earnings comparatively between companies, because there is no uniformity of accounting methods among companies even in the same industry. As a practical matter, therefore, you cannot just now apply any theory of margins based on earnings, because you do not know what earnings are.

The purpose of this subsection (g) is to suggest to the Federal Reserve Board and the Federal Trade Commission a study to determine whether there is any feasible method, except over a rather long period of time, to work out computations of earnings that are fair enough as between companies so that margin values can be based on them. Until comparative earnings are known, loose accounting would give companies with poor accountants better collateral value for their securities than companies with good accountants.

The purpose of (g) is to have a report in by the time the next Congress meets as to the feasibility of methods of attempting to put earnings margins into effect. The report will probably come back with a recommendation that the commission be given the job of trying to compile comparative earnings of a certain list of stocks, for instance, to determine whether over the succeeding year it will be possible to make a beginning of working out earnings on which margins can be based.

Mr. Cole. In view of such a report as you anticipate next January, do you think it advisable for so short a period as 6 months to impose arbitrary margin requirements?

Mr. Čorcoran. Decidedly, sir, because there is no system of computation of margins on the basis of earnings that can go into effect for at least the next year, anyway.

The Commission will make a preliminary report and probably on that basis ask for instructions by Congress to go further in the actual

of you.

compiling of earnings. Since there is no certainty what this report will be, and since the present margin provisions, based on a percentage of market value, have been worked out to a point where experts at the Federal Reserve Board think they are perfectly fair and perfectly feasible, there is no reason why you should postpone any control over margins until you are sure you can work out this more scientifically accurate sytem of controlling the margins as a function of earnings. We just do not know what you are going to get out of this report, and you have an immediate problem of controlling a stock market ahead

Mr. WADSWORTH. Mr. Chairman-
The CHAIRMAN. Mr. Wadsworth.

Mr. WADSWORTH. May I ask, is it the opinion of the authors of this bill that the Commission will require additional legislation immediately following January 3, 1935?

Mr. CORCORAN. No, sir. Three or four problems are left to reports by the Commission and by the Federal Reserve Board.

Mr. WaDSWORTH. I was wondering why you had this provision in the bill making it mandatory on the part of the Commission to make a report, with its recommendations, to Congress on or before January 3, 1935.

Mr. CORCORAN. You mean on the basis of (9)?
Mr. WADSWORTH. Yes.

Mr. CORCORAN. You will notice, sir, that these reports are staggered.

Mr. WADSWORTH. I did not notice anything but the language of the bill

Mr. CORCORAN. Well, sir, there is a report
Mr. WADSWORTH (continuing). In this respect.

Mr. CORCORAN. A report is required on the feasibility of determining other methods of margins by January 3, 1935; another report is required on the feasibility of continuing the practice of admitting unlisted securities to trading privileges, on exchanges.

Mr. WADSWORTH. I was not asking about that. I was confining my question to this particular one. We will come to those others later.

Mr. CORCORAN. A third report to be made on combined brokers and dealers is required for the year afterward.

The Commission is thus pressed to take up these propositions in the order of their comparative urgency. Is it that you do not think that any deadline should be fixed for reports by the Commission?

Mr. WADSWORTH. No, I do not. I do not think that they can do this job between now and January 3.

Mr. CORCORAN. You see, sir

Mr. Wadsworth (continuing). At least, I do not think that they should be required to.

Mr. CORCORAN. In the case of these earnings—I am not going to fight with you—but in the case of these earnings, probably a great deal of ground work has been done by the Twentieth Century Fund report. As a matter of fact, the Commission could probably take the findings of the Twentieth Century Fund report as a basis and work from that point on.

The CHAIRMAN. They will take all available information.
Mr. CORCORAN. All available information.

Mr. LEA. Is there not a danger that margins based on earnings will work in the reverse of what is intended? In flush times you will have a high market, under flush conditions, inducing speculation, and when you have dull times and poor earnings, you will have a provision that will work just the opposite of what should be the case.

Mr. CORCORAN. Well, the Twentieth Century Fund report, sir, recommends that margins based on earnings should be based on earnings over

Mr. MERRITT. Will you speak a little bit louder, please?

Mr. CORCORAN. I am sorry, sir. The Twentieth Century Fund suggests that if margins are to be based on earnings, they be based on a percentage of the aggregate of earnings over, say 5 years, which would, to some degree, even out the hills and valleys in between. Mr. Evans Clark, of the Twentieth Century Fund, will, I understand, appear before you this week, probably tomorrow, and if you want to ask him further questions about his suggestion for basin margins eventually on earnings as distinguished from market quotations, I am sure that he can give you a better answer, sir, than can I.

Mr. LEA. And, then, would you not recognize, also, that if the loaning or borrowing quality of a stock depended upon its earning capacity, that that would probably be a great inducement to-lax bookkeeping methods, to try to show earnings that do not exist?

Mr. Corcoran. That, sir, is the practical difficulty with the application of the earnings standard.

As I think I have said before, the reason why that standard cannot be put into effect now, even if you wanted to, is that there is such a variety in the accounting systems even between companies in the same industry, that a company whose accountants have been completely lax in determining earnings would thereby give the holders of the stock of that company a collateral advantage over the holders of a stock of a company whose accountants had been very strict and taken all charge offs before reporting earnings. You are quite right, sir.

Mr. LEA. In other words, it would hardly be practicable to establish such a system before we had uniform accounting; is that not true?

Mr. CORCORAN. Yes.

Mr. LEA. And that would take a considerable period of time at best to establish a uniform accounting system?

Mr. Corcoran. It would seem so, sir. Possibly there is some short cut. The purpose of requiring that a report be made was to see whether such a short cut is possible.

Mr. LEA. Does this billper mit unlisted stocks as collateral for margin purposes?

Mr. CORCORAN. In banks, sir; but only in banks.
Mr. LEA. Only in what?
Mr. Corcoran. In banks, sir; in bank loans; not brokers' loans.

Mr. LEA. Any uniform accounting system would have to be applied to unlisted stocks as well as to the listed, in order to operate uniformly?

Mr. CORCORAN. Yes, sir.

Mr. LEA. And that would mean all stocks must be brought within the control system; all stocks offered to the public?

Mr. CORCORAN. Within some control, sir, either voluntary or involuntary.

Mr. LEA. Then, this subsection (g) involves an uncertainty, also. Can we regard that with favor in writing this bill?

Mr. CORCORAN. Well, subsection (g), sir, simply says to the Commission, "since you are in this margin atmosphere, anyway, investigate and report back to the next Congress, what you find about the feasibility of handling margins on this basis.” If the report shows progress, then the next Congress can say whether it thinks it is worth while continuing to see whether it is possible to put this earnings margin system into effect.

Mr. KENNEY. Will that require further legislation?
Mr. CORCORAN. Yes, sir.
Mr. KENNEY. Not so far-reaching as this?
Mr. CORCORAN. No, sir.
Mr. REECE. Mr. Chairman-
The CHAIRMAN. Mr. Reece.

Mr. REECE. I do not wish to ask you to speak for someone else; but what was the view, generally, of those attending your conference at the Treasury Department with reference to this provision; or did you have sufficient information before you to enable you to form an opinion with reference to it?

Mr. CORCORAN. On the attitude of the people at the conference? Mr. REECE. Yes.

Mr. CORCORAN. They were perfectly willing to put the provision in. Mr. Dewhurst of the Twentieth Century Fund, I understand, attended one of the sessions at the Federal Reserve, which I did not attend.

Mr. REECE. I had in mind more particularly those from the Treasury and the Federal Reserve Board than those from outside agencies sitting in the conference.

Mr. CORCORAN. This provision, sir, has been in the draft practically from the beginning of the conferences, has not been objected to at all, and has been talked over. I do not remember that any strong position was ever taken on it one way or another. Apparently everyone thinks it a proposition worth looking into very seriously.

But Mr. Evans Clark who will talk before you some time tomorrow, will be able to give you much better judgment as to the feasibility of this scheme, or much better factual basis on which you can make a judgment, than I can give you.

Now, if we may go back and look at these margin provisions as a whole.

The general philosophy underlying the changes in the margin provision has been this. First of all, there should be no loosening up of margin requirements of the original bill on speculative securities. But there should be loosening up on margin requirements for stable securities, and there should be considerable loosening up on bank loans, to make sure that the margin requirements interfere as little as possible with the operations of the banks. But it is felt that it is very necessary to have margin requirements and to have them outlined very rigidly to make sure that they will really cut down the amount of speculative money in the market.

If we may go over to page 14, you will notice a change in the percentage of the market valne which is made the basis of the margin requirements. As this bill was originally offered to you, the percentage was whichever was the higher of 40 percent of current market value or 80 percent of the lowest price the security had reached within 3 years.

An objection was made that whereas in ordinary times 80 percent of the low within 3 years would be a fair margin for a stable security, the last 3 years have been so unusual that even the very best of bonds may have dropped to a point where 80 percent of the low of 3 years would be really less than should now be allowed as a margin on those bonds.

For that reason, although a full 3-year period has been used as the determining factor for the future, insofar as the last 3 years have been concerned, the date of July 1, 1933, has been used instead.

July 1, 1933, was approximately the peak of the N.R.A. boom of last year. There has been a drop since that July 1, 1933, peak, but a drop to levels not comparable to those reached at the lowest point over the whole of the last 3 years.

Then, you will notice that in addition to raising the basic value that is, taking the low since July 1, 1933, instead of the low over the last 3 years--the percentage that might be lent on such basic value has been raised so that it is now 100 percent of that low after the July 1, 1933, peak, not exceeding 75 percent of the current market value.

An expert who will testify before you tomorrow, I hope, Mr. Chairman, on the operation of this formula. It works out, as I understand, very satisfactorily and very equitably.

This new formula is a distinct concession in favor of higher margin value on stable securities. The margin value on the more volatile securities remains the same as in the original bill.

You will notice on page 14 that the margins of which I have just been talking to you are the margins required to open an account at a broker's.

On page 15, there is a provision that although a broker must require such margins to open an account, he may maintain the account until the collateral has dropped considerably lower.

If you will look on page 15, under (c), under (ii), you will see that although on the initial opening of an account a broker may lend only 40 percent of the value of what we call here "speculative securities”, he may carry those securities down before he has to drop the account until he has lent 60 percent on the market value of these securities.

You will also notice that he may carry down the stable securities on which at the opening of the account he lent 75 percent of their market value, until he is lending 85 percent of the market value.

That suggestion originated from this House committee- I do not remember from which member-It has been embodied in this bill with a considerable differentiation between the margins for the initial opening of the account and the margin at which the account may be maintained.

Mr. PETTENGILL. These margin requirements go into effect when?

Mr. CORCORAN. As shown on the mimeographed statement which was put before you, the margins .would go into effect on October 1, 1934. That is a misprint. As the bill now reads they would go into effect on August 1, 1934, to prevent speculation getting under way this summer. Since all'existing accounts have been substantially exempted from the application of these margin requirements, there

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