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exchange at the present time. A banker doing service for these municipalities is ready and willing to support the market for the securities that he has sold to his customers. I can see no gain from listing these securities and this is demonstrated by the active trading in New York City bonds in over-the-counter market as compared to the exchange where they are listed. Several banks took their securities off the New York Stock Exchange because of the possibility of manipulation and the consequent effect on credit of banks. I believe this same rule might be a serious menace to the holders of municipal securities if listed on the exchange; therefore, I strongly recommend, as far as the State of New York is concerned, that they neither be listed nor come under the supervision of the Federal Trade Commission. It is the business of New York State to manage its own municipalities and their finances. Respectfully submitted.

MORRIS S. TREMAINE,

State Comptroller. I might say here, very few men, officials, that is, county, State treasurers, and comptrollers, the mayors and comptrollers of cities throughout the country, county officials, and other municipal officials know that municipal bonds come under the provisions of this stock exchange bill, which is primarily being enacted to prevent speculation.

It is our belief that the bonds of States and political subdivisions and agencies thereof should be eliminated from the National Securities Exchange Act of 1934.

This bill is aimed to correct speculative abuses which do not exist in sale and distribution of municipal bonds. State and municipal securities have no rightful place in the bill and no useful purpose is served by including them in the bill. The inclusion of State and municipal bonds in the bill does not confer any benefit on the holders of municipal bonds nor on the municipalities issuing them on the contrary it imposes a very distinct hardship on both the municipalities and the purchasers of their bonds and will seriously affect their value as investments.

The exemption of the municipal bond will not add to its present value and the refusal to exempt bonds from the provisions of the bill would hurt its value.

Mr. MERRITT. What was that you said just now? Will you repeat what you said about the bonds. Something about abuses?

Mr. GIBBONS. No, I said that the very fact that exemption had been refused would cause the bond to decline.

Mr. MERRITT. Oh, yes.

Mr. GIBBONS. Now then, from this bill you have exempted bonds of the United States Government and if being exempted is helpful to bonds of the United States Government, municipalities and States ought to have the same help. And, if it is harmful to have Government bonds included, it would be harmful to have State bonds included, and municipal bonds included. They all belong to the same family.

Mr. MERRITT. There is a great distinction between values of municipal bonds.

Mr. Gibbons. There is a great distinction, and all that this bill would do would not do anything to help them, but rather on the contrary to hurt them.

Mr. MERRITT. One idea of the bill is to protect the investor against buying poor bonds, whether municipal or otherwise.

Mr. GIBBONS. Well, how can you stop them from buying them?

Mr. MERRITT. I do not know. I was going to ask. I did not want to interrupt you now. I would like to ask some questions when you get through. That is all.

Mr. GIBBONS. If it is of benefit to a bond to be exempted, the municipalities certainly need all of the help that they can get these days, and the States do, in their finances.

Now, the Government is getting that. It has the strongest credit of all and it is of help to them and they are getting it. It is helpful to have the Government bonds exempted and would even be more helpful to the States and municipalities.

Mr. MERRITT. They need the help.

Mr. GIBBONS. They certainly do need the help, and it does not help them any to throw anything in their way, and it is our sincere belief that this would be a hindrance.

Mr. MERRITT. As a matter of fact it has been rather too easy for municipalities to borrow money of later years, has it not?

Mr. GIBBONS. It is easy again now. It is easy and hard, by turns. Those with good credit can borrow now, and it is because their bonds are exempted and sell at high prices, but there is no guarantee that they will be exempted in the future, when the investor has already bought. In other words, the Government might exempt a bond today. It might increase its value, and by this time next year it might withdraw the exemption, and the investor would have them. There would be no safeguard for the future, and it would hurt the prices that they are getting now.

There is one other point that I would like to make.

The CHAIRMAN. Right along that line. The Government of the
United States is not threatened with bankruptcy, is it? It has always
paid its bills.
Mr. GIBBONS. It always has, sir.

The Chairman. Now, there is lodged in this bill authority to
exempt any bonds that it wants to. You have read that.
Mr. Gibbons. So I understand, sir; yes. I have read it.

The CHAIRMAN. Do you think it would be wise to have a blanket exemption, when there has been passed through the House a municipal bankruptcy act and I think probably passed the Senate, for us to say in this bill that we would exempt every municipal bond from the provisions of the bill? Mr. GIBBONS. From the provisions of this bill? The CHAIRMAN. Yes. Mr. GIBBONS. Yes; I think it would be better than to have it included, and have the good ones always threatened with that.

The CHAIRMAN. Well, the good ones can get credit. Mr. GIBBONS. What is that, sir? The CHAIRMAN. The good ones can always get credit. Mr. Gibbons. If you have something like a $200,000 bond issue of a municipality, you have got to have that exempted, before you can buy it, or before a man can sell it.

The Chairman. If the city is in good shape, financially, they can borrow money and if they are not in good shape, they cannot.

If they were all in good shape, they would not be asking for this bankruptcy act, would they? Mr. GIBBONS. Some of them are not. That is very true. But, npose that a city was in perfectly good financial condition, or say,

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any State, and it sold its bonds to its local bank, and afterward, suddenly that bank got into difficulty and wished to borrow upon those bonds or sell them. It would first have to go through the formula of procedure, finding out whether those particular bonds were exempted and if not, would have to get them exempted, and by the time they found out whether some dealer was willing to buy them, or loan upon them, it might be too late.

The CHAIRMAN. We had that in connection with the securities act. That was the argument, that there would be delay, but sometimes a little delay results in a saving to the public.

Mr. GIBBONS. I beg your pardon.

The CHAIRMAN. Sometimes a period of delay between the issue and the putting on the market is a very helpful thing to the vesting public.

Mr. GIBBONS. The outstanding issues have been marketed and have been exempted. Now, that exemption might be withdrawn later. You see, these bonds are outstanding now to the extent of about $19,000,000,000.

The CHAIRMAN. I very seriously doubt if there would be anything said about municipal, county, or State bonds in this bill, if they were as in good shape as Government bonds, but they are not. Some of them are not worth a dime on the dollar.

Mr. GIBBONS. Many of the States are in good shape.
The CHAIRMAN. How is that?
Mr. GIBBONS. I say, many of the States are.
The CHAIRMAN. The States are?
Mr. GIBBONS. Absolutely; and many of the cities.

The CHAIRMAN. Surely. I do not contest that. I am glad they are. I wish they were all in such shape that we could exempt them, every one of them, from this bill.

Mr. GIBBONS. There is not more than 1 percent of them that are in default in any part of the bonds, in something like $19,000,000,000, outstanding, there is not more than about a billion and a half of those bonds that may be said to be in default. That includes $400,000,000 bonds in Detroit.

There is one other difference between dealers and brokers, so far as it affects municipal bond dealers.

Municipal bonds are sold at public sales, as a rule, and on open competition, and this bill would greatly retard or greatly reduce competition for bonds, which would make it costly to the municipalities that sell them, and this is the way that it would work: Take, for instance, a recent sale of $30,000,000 Pennsylvania bonds. Two syndicates bid upon those bonds. One syndicate had some 40 members. They knew in advance, each syndicate did, if they purchased those bonds at their bids that the losing syndicate would have to buy a great many of the bonds from them for their customers.

Now, if the municipal bond dealer cannot act as both dealer and broker, the syndicate that bought the bonds would have to sell them all to their own customers which they would not be able to do, and the syndicate that did not buy them would be prevented by law from going to the other syndicate that did buy them and buy bonds from them for their customers.

In other words, in the sale of every batch of municipal bonds there can only be one successful bidder and if any other broker or dealer intends to handle any of those bonds, he must buy them from the

successful bidder who bought as a dealer and sells to his customers as a broker, and there is no other way he can do, unless he sends his customers over to the successful dealer for them. It is not the same as if he were on the stock exchange, buying one stock and selling, too. It is so utterly different from that that a rule for one does not apply to the other.

Mr. PETTENGILL. There are about $16,000,000,000 or $18,000,000,000 worth of municipal bonds outstanding?

Mr. GIBBONS. So I understand, sir.

Mr. PETTENGILL. And, what do you say is the total percentage of outstanding bonds that are now in default?

Mr. GIBBONS. Well, the bonds of municipalities who are in default on all or a portion of their debt amounts to about $1,500,000,000. That does not mean $1,500,000,000 bonds are all in default; but if one city had $1,000,000 bonds, and were paying on all except one issue, which came due, and were paying the interest on all, the whole issue is counted in default, the entire outstanding of that aggregate of those bond issues, and outstanding by cities or towns which are in default on some portion of their debt amounts to, I believe, about $1,500,000,000. I did not compute it myself.

Mr. PETTENGILL. What is that 1 percent that you were mentioning?

Mr. GIBBONS. The number of municipalities that are in default in America is about 1 percent of the total by number.

Mr. PETTENGILL. Total municipalities, or counties?

Mr. GIBBONS. Subdivisions; yes. I do not think that I can state that as a fact. I am simply saying that from computations that are made up by others.

Mr. PETTENGILL. It strikes me that with all of the constitutional questions that are involved in this bill, we have got one over the power of Congress to place any burden upon a State in the marketing of its bonds, a constitutional provision.

Mr. GIBBONS. The mere threat upon the municipality of a refusal to exempt its bonds would mean a lower price, because when the dealers bought the bonds, if they were not to be exempted and not to be listed, they could not borrow on them to advantage and they could not sell them, and the answer is that you would not want to buy them, and if the local banks did buy them, naturally they would buy them cheaper.

Mr. PETTENGILL. Have you thought about the constitutional power of the Federal Government to place any burden on the marketing of the bonds of the 48 States of the Union?

Mr. GIBBONS. No, sir; I have not. I do not know about the constitutional power of the Government. I am just a bond dealer

Mr. PETTINGILL. It seems to me there is a real question there.

Mr. GIBBONS. I am only interested in the practical application of this act to municipalities and States. And, as municipal bond dealers, we think that it is harmful. It does not matter to the dealer whether he deals in bonds or acts as a broker, whether they are bought at 80 cents on the dollar, or 100 cents. He buys and sells and it goes on, but it means an awful lot to the municipality, to the city or the town, or the district that has to sell a bond whether they have to sell a bond bearing 6 percent, or whether they can sell a bond bearing 4 percent, and anything that hinders them, anything that reflects upon them does them damage.

Mr. PETTENGILL. If there is only 1 percent of the municipal and State bonds of America that are in default, is it your judgment that the municipal bankruptcy bill now pending to save that 1 precent and thus impair the confidence in the other 99 percent not in default is a bad bill?

Mr. GIBBONS. I beg your pardon, but I did not get that.

Mr. PETTENGILL. Would you vote for the enactment of the municipal bankruptcy bill, if you were in Congress?

Mr. GIBBONS. I would not care to answer that. But, I do think that the exemption should apply to them—the defaulted municipalities

Mr. PETTENGILL. Well, I voted against it. I did not think we should impair the credit of 99 percent of the municipalities of America in order to aid 1 percent.

Mr. GIBBONS. There are so many things for and against that bill, that I do not like to express an opinion. I have my opinions, too.

Mr. MARLAND. Mr. Chairman-
The CHAIRMAN. Mr. Marland.

Mr. MARLAND. You do not mean to say that there are only $18,000,000,000, or $19,000,000,000 in State, county, and municipal bonds outstanding?

Mr. GIBBONS. I did not count them, or compute them myself. Those are figures that are commonly taken in the records.

Mr. MARLAND. Is that the figure for municipal bonds, or does that include all?

Mr. GIBBONS. Not Government.

Mr. MARLAND. No; State bonds and county bonds, and municipal bonds.

Mr. GIBBONS. Yes, State and county; State bonds, municipal bonds, subdivisions of the State.

Mr. PETTENGILL. But, that does not include, Mr. Marland, special assessment bonds like street improvement or sewer bonds. There are about $16,000,000,000 of those bonds issued on the general credit of the municipalities.

Mr. MERRITT. I understood your suggestion is that those bonds should be included as specifically exempted bonds, is that right?

Mr. GIBBONS. I think that the bonds of the States and municipal subdivisions and agencies of the States should be totally and absolutely eliminated from the provisions of this act and should not come under the jurisdiction of the Federal Trade Commission, and that it would he very harmful if they did.

Mr. PETTENGILL. Are there any abuses, to your knowledge, sir, that is, in the dealing in municipal organizations?

Mr. Gibbons. Well, abuses on the part of municipal officials, or dealers?

Mr. PETTENGILL. I did not mean that.
Mr. GIBBONS. I have heard of some of both.

Mr. PETTENGILL. I am not talking about forgeries, and things of that sort, of which we have had some complaints, of course.

Mr. GIBBONS. Just what did you mean?

Mr. PETTENGILL. I think, so far as the manipulating is concerned, or window dressing, and things of that sort.

Mr. GIBBONS. So far as that goes, when a municipal issue is sold-take any city you wish, Richmond, Va., or Baltimore. They are offered for sale by the people that buy them and they finally

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