bonds, and all that they had was invested in good bonds, and to take other securities from some agent going about over the country.

Mr. HARVEY. There is no question about that. There has been a great deal too much of high-pressure salesmanship in the investment business, and I should like to see an end put to it.

The CHAIRMAN. Who employs such fellows? I mean these retailers of securities who become house-to-house canvassers?

Mr. HARVEY. Shall I answer that for my own organization?
The CHAIRMAN. Yes.

Mr. HARVEY. I happen to have been particularly interested in that phase of our business. I have been one of five of the officers, and partners before that, whose duty it has been to interview all applicants for positions in the sales force. I have done that for several years. At least five of us must interview any prospective salesman before we will employ him. We speak to him separately. We try to find out what manner of man he is, how honest he is, how much he knows, how well he will conduct himself, how carefully he will conduct himself. If we all five agree that he is a high-grade young fellow, and that we can trust him after training him, why, we will then make an investigation of him through references, finding out from his home town, and his college; and we always ask him for his minister's name, and find out about his character in every way that we can.

Senator COUZENS. That is the worst thing to ask him about; his minister's name.

Mr. HARVEY. Well, we do that, and sometimes we get some valuable information. We do our best to select good young men, and then we put them through a course of about three months' training in our office, when 40 or 50 of the senior men of our office meet with them for an hour at different times, and discuss different phases of the business. We endeavor to train those young fellows, and we do not give them very much responsibility at first. We endeavor to teach them to be careful and to be prudent. But I realize that you cannot do it with all people. If you have a large organization it is harder to control them than with a smaller one; what I mean is that it is more possible than to have one who is not up to standard in the case of a large organization than it is in the case of a quite small organization.

If I might add this information: We have made it a special point, and this has come down from the tradition in our business, from Mr. Norman W. Harris, who was testified about by Mr. MacLean on yesterday, his son-in-law, and one of his great traditions was to be very careful about every man you employ, to empoly him on the basis that he will some day become one of the partners in the business, and not to select anybody who does not measure up to such a standard. The CHAIRMAN. Then do they go out and engage other agents to sell the securities?

Mr. HARVEY. No, sir. This group of four or five executives in the office are the only ones who can employ salesmen. Now, I am afraid I am keeping you gentlemen. I will be glad to talk all the afternoon if you will permit me, and I love to talk, but I do not want to tire any of you gentlemen.

Senator KEAN. You have had a large experience in this business, and I want to get that on the record. The Chase National Bank is separating you, or getting rid of its affiliate, the Chase Securities Corporation?

Mr. HARVEY. Might I describe that a little differently?
Senator KEAN. Yes.

Mr. HARVEY. They are dissolving the corporation and liquidating the business. It is that rather than the matter of separation.

Senator KEAN. Now, the most of the banks in New York City, and the most of the banks in other places, at least in the larger cities, have had securities affiliates or distributing organizations, and they have done a distributing business. The United States has 11 billion dollars of bonds they have got to sell in the course of a year or two. If we destroy all those affiliates do you think it is going to interfere with their distribution, or not?

Mr. HARVEY. Well, as I have read the bill there is nothing in it to prevent banks from handling United States Government securities, and I therefore assume they will continue to go on, and I think it will be advisable for them to do so.

Senator KEAN. Well, I am not talking about this bill, but about another bill that is to come. How far do you think destruction of affiliates in all these banks is going to affect the marketing of securities? That is what I want to get on the record from you, if I can.

Mr. HARVEY. I think you have raised one of the very serious problems to be considered. I do not see, when you are going to destroy the machinery that the country has built up, or a part of that machinery, for the distribution of securities, how it can result other than to require a little time before you can reconstruct an adequate machine to handle the ordinary volume of securities of this country. Now, with the market as dull as it is now, and with men who, like myself, are very anxious to get back into this business, and I will be out of it very shortly so far as my present connection is concerned, and we are anxious to establish a business, to be operated along proper lines, under laws that make it possible for us to do business, and whereby we can build up our organization as fast as the general market improves so that we will be able to handle business—well, as I was going to say, with the market as dull as it is now, probably you will not be greatly inconvenienced. But I will say to you that if we were to have a great big bond market right after the bill is enacted into law, I think you would find some congestion as a result of lack of machinery to handle it. Does that answer your question? Senator KEAN. Yes. The only question in my mind was, and I wanted to get you as an expert to tell me, whether you thought in these times, with conditions as they are, whether this is a good time to get rid of all of these securities affiliates?

Mr. HARVEY. Well, I think any radical and sudden change in a vital part of our economic machinery might be expected to bring bad results until the new machine has adjusted itself to the changes. Senator KEAN. And that would take some time.

Mr. HARVEY. It might.

Senator BULKLEY. Assuming that we are going to get rid of these securities affiliates of the banks, what could be a better time than now? Mr. HARVEY. There could be no better time.

Senator KEAN. Then you think this is a good time to do it? Mr. HARVEY. Well, we will at least have a better opportunity to adjust ourselves than in the case of an active bond market.

Senator KEAN. The only question is this: Here is a large issue of United States Government bonds coming along, and should we get

rid of these affiliates now or give them four or five years in which to do it? In your judgment what would be the best time to do it?

Mr. HARVEY. I have seen no better time since 1914, because the market has never been so dull since then. You do not need any machinery at the moment, except trading machinery.

Senator KEAN. Do you think it would be better to get rid of the securities affiliates at once rather than to give 5 years in which to do it?

Mr. HARVEY. Expressing only my own personal opinion, if it is going to be done, yes. I think there would be no better time to do it than now. The sooner you throw open to the machinery that is left, and to that which will be building, the burden of carrying on, the better, because they will gradually build up and be ready to meet the situation. And I hope I will be a part of that building-up machinery in this country, which I think is an extremely necessary machinery for the welfare of the country and of the whole securities business. I hope we will have reconstructed our machine so that it can carry the burden for the benefit of the whole country, by the time we are needed. And I see no better time to put that burden on us than right now.

Senator KEAN. You think it is all right to simply cancel this whole thing at the present time and let them take their wrecking?

Mr. HARVEY. It would seem so.

The CHAIRMAN. You have sold securities, I presume, that have since defaulted?

Mr. HARVEY. I have, very much to my regret. But they are a small, a very small part of the securities that we have sold. To be perfectly fair, I think Senator Couzens got the idea that I was indulging in self-adulation. I should like to say that I was actually out selling securities from 1916 to 1926; that during that time I sold three issues of securities that have gotten into trouble, and two of them came out all right, but one did not. That was the Fruit-of-the-Loom Co., up in New England. That was the only one. But, if I had stayed out as a salesman during the succeeding 5 years my record would not have been nearly so good, because that was when the greatest troubles came, with issues that came out during that particular period.

The CHAIRMAN. I am speaking of whether your house had not sold securities that have defaulted.

Mr. HARVEY. Oh, yes; we have..

The CHAIRMAN. To what do you attribute that default?

Mr. HARVEY. Well, let us take, for example, a real estate project that we handled, a hotel in New York, the Hotel Governor Clinton, a little below the Pennsylvania Hotel. I will mention that because probably you are familiar with the property itself. That issue was brought to us as a construction proposition. The land had been purchased, and I have not the definite figures in mind, and therefore will have to speak in approximate terms, but do not hold me to accuracy; but the whole project, the real estate and the building, cost something like 51⁄2 million dollars, as I remember. And we were asked if we would handle a first mortgage of 3 million dollars on that property.

Now, I think you will all agree that that was in an extremely fine location, almost at the Pennsylvania Station. It was a hotel which

would attract a little different clientele, a little cheaper clientele, than the Pennsylvania Hotel. It was not a competitor of the Pennsylvania Hotel. It looked like 3 million dollars as a first mortgage on that property ought to be safe. But it did not turn out to be a safe loan because the hotel business has been terrible, and that hotel is operating today on about 40 percent of its capacity, and is just barely covering operating charges, with no net earnings left over for bond interest.

Now, if anybody could have forseen that that was going to happen they would certainly have enjoyed a better foresight than we had. Senator BULKLEY. How long has that hotel been open?

Mr. HARVEY. Three or four years. That is not the only issue we have had that has gone wrong, but I would say in general, if you want me to answer the question in that way, that a small percentage, a very small percentage of all the issues that we have handled, have had difficulty.

I should like to state that the house of Harris, Forbes & Co., and then Chase Harris Forbes Co.'s, has for the last 2 years been the largest underwriters of securities, the largest originating house in the country, as you know, Senator Kean. And we have participated in a larger number, and with a larger volume of total issues, than any other house. So, naturally, we have exposed ourselves to a great many difficulties, and some have come to us. But I do not see how anybody could have avoided some of them, although, perhaps, as to some of them we might have exercised better judgment, I will say frankly. But where our judgment could be questioned would refer to an extremely limited number. And the cases where our integrity could be justly questioned are simply nil.

The CHAIRMAN. What do you regard as the responsibility of an investment banking house?

Mr. HARVEY. The upright and honorable investment banking house stands in between the borrower of money and the lender of money. It stands in between its customers, who are corporations and other seekers of long-term capital, on the one hand; and those investors, including insurance companies, savings banks, and other banks, educational endowment funds, individual investors, and all kinds of investors, on the other hand. The investment banker stands in between the borrower and the lender, and he therefore has a dual responsibility. He has got a responsibility to his clients on both sides. But I would consider that his responsibility to the purchaser of securities is the greater of the two responsibilities. It is his duty, and as I pointed out earlier, good business, to sell clients good securities, to be absolutely as sure as he can that the securities he asks people to buy are good securities. He cannot continue doing good business otherwise.

The CHAIRMAN. But he does not guarantee them.

Mr. HARVEY. No. As a merchant he will turn over many times his own capital in the course of a year's time, his guaranty would be worthless. But, Mr. Chairman, in effect he must guarantee them, because unless they are good his business is ruined. He must sell good securities or he cannot continue in business. He must command the confidence and respect of investors.

The CHAIRMAN. What does the investment banker do to protect the investor after he sells him securities?

169692-33-20

Mr. HARVEY. Well, the good investment banker, the right-thinking investment banker, the wise and produent investment banker, is looking after his own interest in looking after the interests of the investor, and he will follow the vicissitudes of every bond that he handles and distributes. He must represent his retail customers in watching each issue of bonds, watching the corporation or the municipality that issued it, to see that they are always doing the right thing, so that the securities will be paid at maturity.

And, in this connection, I will give you an example that appealed to me very much when I first came into this organization, which had already been going for 30 or 40 years. They had handled two small issues of bonds for the city of Brunswick, Ga. One of our men happened to be down there 8 or 10 years later, and, as was the custom, he went into the city hall, and asked the treasurer to show him how the sinking fund stood. In Georgia you cannot refund an issue. You have to have securities serial or provide a sinking fund to take care of them at their maturities.

Well, we had handled sinking fund issues, and our representative was down there. So he went around to see how the town was handling its collection of taxes, how it was handling provision for its sinking fund, and so forth. He found that the sinking fund commissioners had gotten several years behind. It was then only 3 or 4 years until maturity. In other words, we were 3 or 4 years from the time when our customers expected to collect, and it looked like there would not be the money on hand to pay them. And the law prohibited a refunding of the issues.

Well, that depreciated the issues very much, and we thought we must do something for the innocent holders of those bonds, and we thought the best way to go about it was to go around and explain the matter to the two newspapers. They were always looking for scandals and anything that was not going along all right. We thought we would get it to them, and would get their support on it. Both newspapers saw that the thing was wrong, and that something ought to be done to protect the credit of the town. So they started a great flare in their papers about the sinking fund, and that the commissioners had been derelict in their duty. The upshot of the whole thing was that the matter was corrected in a very short time. Now, that is just an example of the things that we do.

Senator GORE. Do many States have the same inhibition against refunding operations?

Mr. HARVEY. That is the only one I am sure of. I am a little more familiar with the Georgia laws because I am a Southerner. But I do not know of any other State that has such a law, although I would expect they do.

Senator GORE. Have you formed any opinion as to whether that is a good idea?

Mr. HARVEY. The Georgia law is supposed to be one of the best State laws in the country covering the issuance of municipal bonds. Senator GORE. Is it in the constitution, or is it a statute?

Mr. HARVEY. It is in the constitution. All of their bonds have to be validated by the court, and when they are validated by a court there is no recourse. They are valid obligations from then on, and nobody can say they are not a perfectly valid obligation. Now, to show you how that has worked