rest assured that if this bill is on the statute books that either the Federal Reserve or FDIC would step in and issue a cease-and-desist order, and conceivably a removal order, depending on the seriousness of the situation.

Senator SPARKMAN. Let me ask you one more question so we can move on to other witnesses.

You are familiar with the American Bankers Association Model State Banking Code, aren't you?

Mr. JENNINGS. Yes, I am.

Senator SPARK MAN. Aren't you impressed with the closeness to its wording with the wording of this bill with reference to these various cease-and-desist orders?

Mr. JENNINGS. I think that may have been by design.

Senator SPARKMAN. It seems to me that perhaps some of the things that you have criticized are exactly in line with this model banking code.

Mr. JENNINGS. Some of the things that the ABA has criticized this morning, some of the amendments they would like to have made? Well I am not aware of that, Senator Sparkman.

Senator SPARKMAN. I can't point out one right now.

Mr. JENNINGS. I wasn't aware of it, but I would hope there are not too many instances of that type.

Senator SPARKMAN. That may be true, but it just seems to be-I did look over this several days ago and it seems to me that some of the criticisms which you direct this morning, could just as well be directed at this [indicating] because they are so similar.

Mr. JENNINGS. I do think that it is worth saying that the bill, as it was originally proposed, is, of course, the bill that many of the State superintendents, as I understand it, have raised objections to. I hope that the State superintendents concerned, when they learn fully of the recommendations of the American Bankers Association, will feel differently.

After all, in the bill as originally proposed, lipservice was paid to the State superintendents, but it wasn't specifically written into the proposed bill that the Federal Reserve and the FDIC had to go to that State superintendent, and then only if he was unwilling or unable to take action, would the Federal Reserve or the FDIC proceed. So we have done a great many things here, which I think, had they been incorporated in the orginal bill, might have created a different atmosphere from the standpoint of the 50 State superintendents.

As I stated at the close of my prepared statement, this bill, S. 3158, as it is written, could not be supported by the American Bankers Association. Well most of the State superintendents have indicated they do not support it, and they do not want it. But I am quite hopeful that they will with the safeguards that have been recommended by the American Bankers Association, and that includes careful consideration by the State Bank Division of the American Bankers Association.

Senator SPARKMAN. I want to say to you that I think safeguards ought to be put in the bill, and I strongly believe that, with reference to the State banking system, and I think you have made some very good suggestions that will be helpful to us.

Thank you, Mr. Chairman.

Mr. JENNINGS. Thank you, very much.

(The following amendments were submitted by the American Bankers Association for inclusion in the record:)

[S. 3158, 89th CONG., 2d sess.]

IN THE SENATE OF THE UNITED STATES

AMENDMENTS

Intended to be proposed by Mr. to S. 3158 to strengthen the regulatory and supervisory authority of Federal agencies over insured banks and insured savings and loan associations, and for other purposes, viz: On page 21, after line 14, insert the following:

"(15) No action shall be taken by the Board under this subsection, as amended by section 101 of the Financial Institutions Supervisory Act of 1966, for the suspension or removal of any person, or for the issuance of any cease and desist order, involving any institution (other than an institution organized under this section) unless

"(A) the Board has given written notice to the appropriate State supervisory authority, if any, of the condition which, in the opinion of the Board, warrants such action;

"(B) such notice is accompanied by a request to such authority to take appropriate corrective action within such time as the Board determines to be reasonable, having due regard to the need to protect the assets of the institution and the interests of the savings acount holders; and

"(C) such authority has notified the Board that it is unable to take such action, or the Board determines, upon the expiration of the period of time specified, that such action has not in fact been taken."

On Page 21, line 15, strike out "(15)" and insert in lieu thereof "(16)".

On page 43, beginning with line 24, strike out all through line 5, on page 44, and insert in lieu thereof the following:

"(o) State-Chartered Institutions.-No action shall be taken by the Corporation under subsections (e), (f), (g), or (h) of this section for the suspension or removal of any person, or for the issuance of any cease and desist order, involving any institution (other than a Federal savings and loan association) unless"(1) the Corporation has given written notice to the appropriate State supervisory authority, if any, of the condition which, in the opinion of the Corporation, warrants such action;

"(2) such notice is accompanied by a request to such authority to take appropriate corrective action within such time as the Corporation determines to be reasonable, having due regard to the need to protect the assets or earnings of the institution and the interests of its insured members; and "(3) such authority has notified the Corporation that it is unable to take such action, or the Corporation determines, upon the expiration of the period of time specified, that such action has not in fact been taken." On page 47, strike out lines 5 through 7, and insert in lieu thereof the following: "sections (b), (c), and (d) as subsections (o), (p), and (q), respectively, and by adding after subsection (a) the following new subsections :".

On page 47, line 8, strike out "If," and insert in lieu thereof "Subject to the provisions of subsection (1), if”.

On page 47, line 10 and 11, strike out "or has engaged or is about to engage". On page 47, line 12 and 13, strike out "or has violated or is about to violate". On page 47, line 13 and 14, 15, strike out "or any condition imposed by the agency or any agreement entered into with the agency,". Or alternatively inserting the words "formal and written" before the words “condition” and “agreement" as used in line 13 and 14.

On page 48, line 22, strike out "Whenever" and insert in lieu thereof "subject to the provisions of subsection (1), whenever".

On page 50, line 13, strike out "Whenever," and insert in lieu thereof "Subject to the provisions of subsection (1), whenever".

On page 51, delete lines 3 through 19 inclusive, thus eliminating subsection (e) (2). Or alternatively if it should be decided that subsection (e) (2) be retained, the language should be redrafted so as to define what is meant by "unfitness" as used in the subsection. The term "other businesses" as used in the subsection in lines 6 to 12 might be changed to "other financial institutions," and it should also be made clear that the term "conduct or practice" as used in line 11 is tantamount to a breach of fiduciary duty or reflects a violation of the accepted standards of financial integrity.

Also in subsection (e) (2), page 51, line 16, delete "officer or other person," and insert in lieu thereof "or officer". Also page 51, line 17, delete "and/or to prohibit his further participation in any manner in the conduct of the affairs of the bank."

On page 51, line 22, after "may," insert "subject to the provisions of subsection (1),".

On page 54, line 9, after "may," insert "subject to the provisions of subsection (1),".

Page 54, line 25, strike out the period after the word "bank” and add thereto ", unless the consent of the Corporation to such director or officer serving as a director, officer or employee of the bank is granted under section 19 of this Act." On page 56, line 1, strike out "otherwise ordered for good cause found." And insert in place thereof "a public hearing is agreed to by the party afforded the hearing and by the appropriate Federal agency."

On page 59, after line 20, insert the following:

"(1) (1) Action under subsections (b), (c), (e), or (g) of this section for the suspension or removal of any person, or for the issuance of any cease and desist order, involving a national banking association or district bank, shall be taken by the Comptroller of the Currency only after the facts relating thereto have been certified to the Board of Governors of the Federal Reserve System, and such action has been approved by such Board.

"(2) No action shall be taken by the appropriate Federal banking agency under subsections (b), (c), (e), or (g) of this section for the suspension or removal of any person, or for the issuance of any cease and desist order, involving a State bank (other than a District bank) unless

"(A) such agency has given written notice to the appropriate State supervisory authority, if any, of the condition which, in the opinion of such agency, warrants such action;

"(B) such notice is accompanied by a request to such authority to take appropriate corrective action within such time as such agency determines to be reasonable, having due regard to the need to protect the assets of the bank and the interests of its depositors; and

"(C) such authority has notified such agency that it is unable to take such action, or such agency determines, upon the expiration of the period of time specified, that such action has not in fact been taken." On page 59, line 21, strike out "(1)” and insert in lieu thereof "(m)". Page 60 strike lines 1 through 4 inclusive and insert in lieu thereof "any notice or order served by the FDIC or Federal Reserve Board upon any institution or any director or officer thereof, pursuant to the provisions of this section shall be sent to the appropriate State supervisory authority, and copies of any notice or order issued by any of the Federal banking agencies shall be sent to the other two Federal banking agencies."

On page 60, strike out lines 5 through 11.

Senator MUSKIE. Our next witness is Mr. Edward L. Johnson, President, Council of Savings and Loan Financial Corporations.

STATEMENT OF EDWARD L. JOHNSON, PRESIDENT, COUNCIL OF SAVINGS & LOAN FINANCIAL CORPORATIONS; ACCOMPANIED BY VICTOR H. KRAMER, COUNSEL

Mr. JOHNSON. Thank you, Mr. Chairman.

My name is Edward L. Johnson, and I appear here today as president of the Council of Savings and Loan Financial Corporations. I am also the president of Financial Federation, Inc., one of the members of the council, and a director of several federally insured savings and loan associations.

Since 1962 I have had the honor of serving as a director of the Federal Home Loan Bank of San Francisco, and during 1964 I served as a member of the Federal Savings and Loan Advisory Council.

I am accompanied here today by the counsel for our organization, Mr. Victor H. Kramer of the firm of Arnold & Porter in Washington. The Council of Savings & Loan Financial Corporations deeply ap

preciates the opportunity you have extended us to express our views concerning S. 3158.

Mr. Chairman, we have, of course, filed our complete statementSenator MUSKIE. To the extent you can abbreviate your statement, it might be helpful.

Mr. JOHNSON. We intend to do that, Mr. Chairman. We have filed the statement, and in the interest of conserving your time, we certainly will try to skip certain phases of it.

Senator MUSKIE. We want you to hit us with the important

sections.

Mr. JOHNSON. Very well.

Now, Mr. Chairman, we also propose several amendments to S. 3158 in our statement, and we have put these in draft form. Copies have been given to the committee and I would ask that they be included in the record following our statement.

Senator MUSKIE. Without objection, they will be inserted at the end of your statement.

Mr. JOHNSON. Thank you.

Without describing the nature of the council, we represent roughly $5 billion in assets in the savings and loan business. We have members in the States of California, Ohio, Nevada, Texas, Washington, Colorado, Illinois, New Mexico, and Virginia. We are the newest of the trade associations, having been organized in 1965.

Now, our interest in this bill is not limited entirely to stock savings and loan associations. As financial intermediaries, we are interested generally in the health and stability of all financial intermediaries, whether they are savings and loans or banks, whether they are federally chartered or State chartered, and whether they are organized on a mutual basis or a stock basis. Public confidence in all financial institutions can be shaken by troubles involving any one type of institution. The San Francisco National Bank failure, for example, had repercussions in the savings and loan industry. Thus, if I may be permitted a rough paraphrase of the John Donne's famous sermon, if the bell tolls for any financial institution, there is no need to send for whom it tolls; it tolls for all of us.

Our testimony today, however, is limited to title I of S. 3158, and more specifically to section 102, the section dealing with federally insured savings and loan associations. From time to time I shall refer in this statement to "the Board," meaning the Federal Home Loan Bank Board. I intend to include within this term, where appropriate, the Federal Savings and Loan Insurance Corporation and the Federal Home Loan Bank System.

At the outset, let me make it clear that the Council supports the underlying premise of title I of the bill, as stated to this committee by the chairman of the Federal Home Loan Bank Board on April 4, 1966.

PERMANENT CEASE-AND-DESIST ORDERS

Title I of S. 3158 proposes that the Board would have the power to issue cease-and-desist orders after hearings for violations of law or regulations or for the commission of unsafe or unsound practices. Chairman Horne described the procedure for issuing such orders in the following language in his statement:

Following notice and the holding of a full hearing on the record before an independent hearing examiner, an order could be issued by the Board which

would become effective after 30 days. If during that 30-day period an association wished to appeal to a court of appeals, it could do so, and obtain judicial review of the Board's action.

We support the Board's request for the proposed cease-and-desist remedy. We believe that if the Board is granted these new powers it will be encouraged to resort to the new processes of law given it in this legislation rather than to rely on behind-the-scenes arm-twisting and threats of revocation of insurance in order to obtain the ends it believes desirable.

Let me be clear. We do not challenge the moral integrity of any member of the Board, or any person on its staff. It has been our experience, however, that past Boards have had constant resort to threats and innuendoes, rather than to due process of law, in order to achieve their ends. These informal arm-twisting procedures have been rationalized on the ground that the only legal remedy available to the Board and its staff is the drastic one of instituting proceedings to revoke insurance. Under this procedure, as Chairman Horne put it in his statement to this committee, "the safeguards of the judicial process can be used to delay the final result." If the normal cease and desist procedure requested is granted to the Board, neither it nor its staff will have a valid excuse for failing to proceed in accordance with law. In such proceedings we will be able to obtain independent adjudication of our rights, and will no longer be put in the position of having to forfeit rights to avoid the initiation of insurance revocation proceedings.

REMOVAL OF OFFICERS AND DIRECTORS

In proposing new and needed remedies, however, S. 3158, we believe, would give the Board more power than it needs in two important respects. Indeed, it would give the Board more power than should be entrusted to any administrative agency.

First, in subsections 407 (g) and (h), the bill proposes to give the Board the power to summarily suspend or remove from office by administrative fiat-in other words, to fire-any officer or director of any insured savings and loan association. I am sure I need not dwell on the reasons why the Council of Savings and Loan Financial Corporations opposes granting this power to the Board. So far as I am aware, this request is unprecedented. The misuse of such a power could destroy reputations and opportunities for livelihood. Savings and loan executives could be permanently discredited before a trial and without even a hearing before the agency.

We believe that the possibilities of misuse of such powers are not merely hypothetical, and it seems that Senator Douglas was concerned with the reality of this possibility when he asked the agencies to try to devise stricter safeguards to protect individuals from arbitrary administrative action. The records of committee of the Congress have already documented the excesses in which past Boards have indulged their zeal to perform their duties. I refer particularly to the studies by the House Committee on Government Operations relating to Board actions in Long Beach, Calif., Clovis, N. Mex., and Alice, Tex.

Under our system of jurisprudence, a citizen who is believed disqualified to hold a position of trust or confidence must first be indicted by a grand jury and then tried and convicted or acquitted by a jury of his peers. Our system has no place for destruction of reputation by