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can identify a company where you have changed the estimate. You just have a recollection that some of them have been changed? Mr. LEIsy. The figure is updated regularly, on a monthly basis.
Senator HARRIS. I understand that. You have testified to that. That is generality. Now I want to ask you, How do you know that? You say you have changed it in respect to the other companies. It happened in the Bloomington situation that when you changed the estimate of the Government's loss in one company, Bloomington, you double the estimate of the loss, you went from $330,000 to $660,000. Is that correct?
Mr. LEISY. Yes, sir.
Senator HARRIS. What did you do in the other estimates that you changed? Up, down? Which way did it go when you changed the other estimates?
Mr. LEISY. Some of the estimates, I am sure, went up and some of them went down.
Senator HARRIS. Now are you testifying from your knowledge or are you guessing about it? How did you find that out?
Mr. LEIsy. I cannot testify today with detailed knowledge on every company on which we have estimated a change. I think, as Mr. Boutin indicated, we feel we are not going to be in a position to refine that estimate until we complete another series of examinations of every company in the program.
Senator HARRIS. I am not talking about the overall figure. I understand from what Mr. Boutin said that he is not going to make any estimate of loss until he gets through with his examination. You testified here that the $18 million estimate of Government loss in total was made up of estimates as to particular companies, one of which was Bloomington.
Mr. LEISY. Yes, sir.
Senator HARRIS. You raised, after you had looked at it again, the estimate on Bloomington by doubling it from $330,000 to $660,000.
Mr. LEISY. Yes.
Senator HARRIS. You testified this afternoon, just now, that estimates in regard to other companies which made up the $18 million total loss estimate have also been changed.
Mr. LEISY. Yes, sir.
Senator Harris. Then we are interested in what happened in those estimates.
Mr. Greenberg, can you furnish that?
Mr. GREENBERG. Mr. Chairman, as you know, this estimate of losses was made about a year ago.
Senator HARRIS. Yes, sir.
Mr. GREENBERG. It appears to me that at this point to attempt to define what changes have been made, unless there has been a complete writeoff, appears to us to be imprudent at this time. Undoubtedly there have been some changes in these estimates. I would not like to subscribe to any figures on estimate of losses until I have had sufficient information and sufficient professional evaluation of losses being incurred before we give it to the committee.
In this case, it is fairly obvious that the full amount is loss. In others there have been some reductions, but I will not be in a position to tell the Administrator, I am sure from an agency standpoint we would not want to inform the Congress unless we were absolutely sure in our own minds, that (1) the basis for the evaluation was sound, it was based on the best professional advice we could get, and we would be willing to support the figures.
At this point in time, we are not willing to support or are not in a position to support any figures which were previously developed or any changes which have been made, until we have an opportunity to review them.
Senator HARRIS. I can understand that.
Mr. GREENBERG. Now if you want the changes which have been made, prior to our review, at this time, we would furnish that to the committee. I would hesitate to guarantee them to you and say this is our considered judgment until we have an opportunity to get an examination report, applied sound professional evaluation techniques to them and are in position to certify to you that these represent the best informed judgment that we can give you.
Senator HARRIS. It has been announced publicly that the estimated losses under this program will go around $18 million. Is that right?
Mr. GREENBERG. That was the announcement made by the previous Deputy Administrator which the present Administrator and the present Deputy are not in a position to subscribe to support or deny until we have had an opportunity to review. I think it has been testified to
Senator HARRIS. I understand that. You don't understand what I am asking. That was announced publicly by the former Deputy Administrator?
Mr. GREENBERG. That is correct.
Senator HARRIS. You are not in a position to say that is right; too high or too low?
Mr. GREENBERG. Yes, sir.
Senator Harris. Before you came in, there were some changes in the makeup of that estimate which are entitled to at least as much credence as the original $18 million?
Mr. GREENBERG. I concur with that, sir. This estimate was made, the figures that were published, were as of April 30, 1966.
Senator HARRIS. Yes.
Mr. GREENBERG. I have been given to understand that these figures were developed some 9 months to a year ago. Now what has happened in that period of time, I don't know, and I would not be in a position to testify to, sir.
Senator Harris. Very well. The subcommittee will stand in recess in order for us to go over and vote; and we will be back here again just as soon as we can following the vote, at which time we will hear briefly from Mr. Walsh, and then from Mr. Kelley.
We will want to notify Senator Mundt and Senator Javits of that intent.
(Member present at time of recess: Senator Harris.)
Senator HARRIS. The subcommittee will be in order. We will call Mr. John J. Walsh, briefly. The same Mr. Walsh who testified previously in these hearings. You understand you are still under oath?
Mr. WALSH. Yes, sir.
TESTIMONY OF JOHN J. WALSH-Resumed
Mr. WALSH. Senator, I would like to introduce two charts which have been prepared under my direction which relate to the estimated loss on problem companies.
Senator HARRIS. Identify the first chart.
Mr. WALSH. This chart is a chart on the estimated loss on problem companies in the SBIC program and the information is dated as of April 30, 1966.
Senator HARRIS. These are the facts as you know them from your investigation.
Mr. Walsh. Yes, sir.
Senator HARRIS. Without objection this chart will be admitted into evidence and marked "Exhibit 54.”
(Document referred to marked "Exhibit No. 54" for reference and will be found in the appendix on p. 292.)
Senator HARRIS. Before you go to the other charts you want to discuss this one.
Mr. Walsh. Yes; briefly, Mr. Chairman.
This chart was prepared largely from information furnished to us by the Small Business Administration. We received a breakdown of the 232 companies with information as to the Government funds involved and an estimate of loss on individual SBIC's. To summarize this, out of the 232 companies, 52
Senator HARRIS. That is 232“problem” companies?
Senator HARRIS. Out of a total of how many existing companies now?
Mr. WALSH. This was out of a total of 637 reporting companies and 686 actual licensed companies.
Senator HARRIS. So this chart lists 232 problem companies.
Mr. Walsh. Yes, sir; 52 of these problem companies were listed as being in litigation. This includes companies which have been referred to the Justice Department or which are in suit or receiver has been requested. These 52 companies received $19.2 million in Government funds. All 52 of the companies in litigation have received Government funds. There are no companies that are listed in litigation which are not recipients of Government funds. In the estimate of loss which has been drawn up, losses were estimated on 43 of the 52 companies in litigation. No loss was estimated on nine of the companies. The loss that was estimated to be incurred in the 43 companies amounted to $8.6 million out of total Government investment of $19.2 million.
Mr. ADLERMAN. Can you establish on what basis they determined that 43 companies were going to have a loss and that the loss was going to be $8.6 million.
Mr. WALSH. The information which I received and which I believe has been testified to already is that these estimates were made as a result of a canvass of the people in the Washington office of SBA who had geographic responsibility for these companies. As to the criteria for each individual SBIC I have no knowledge what criteria were used to establish loss.
Mr. ADLERMAN. In other words, this was a sort of educated guess. Mr. WALSH. Yes.
Mr. ADLERMAN. And the educated guess was made by the people in the Washington office.
Mr. Walsh. That was my understanding; yes, sir. To go to the next line there were 55 companies out of the 232 problem companies which were listed as capitally impaired which means that they had lost 50 percent or more of their capital. SBA classified 13 of these 55 as nonviable which means that they believe that these companies could not be saved. Forty-two were classified as viable which means that SBA felt that the management of these companies could rescue them from bankruptcy. Total Government funds involved in these 55 companies amounted to $21 million–54 of the 55 companies which were capitally impaired had Government money. The SBA had estimated that the Government would suffer a loss in 37 of the 54 companies which had received Government money. The total loss in the 37 companies was estimated by SBA as $6.7 million out of the total $21 million.
Mr. ADLERMAN. Again, this is a guess? Is it based upon any criteria or any method of choice or is it just the guess of an individual examiner or director?
Mr. Walsh. I believe it is a guess, sir. The third category is one where we combined three categories. These were cases, problem cases, which were under investigation, which were inactive or which were listed as being in violation of SBA regulations. The total of these companies was 86 of the 232 problem companies; 68 of these companies had received Government funds. The Government funds totaled $22.1 million-19 companies out of the 68 companies receiving Government funds were estimated to be probably representing a loss to the Government and a total of only $2.5 million loss was estimated out of the total of $21.1 million Government money,
Senator HARRIS. The last line in the summary, quickly then.
Mr. Walsh. These are companies which were surrendering their charter, 39 all together, $3.5 million in Government money extended to 16 companies. Four of these companies were estimated to present a possible loss with a loss of only $400,000 out of the $3.5 million Government money.
Senator Harris. Then for 232 problem companies in which $66,800,000 had been invested, SBA estimates that there are, out of the 190 of these companies which have Government funds, 103 which will suffer a loss totaling $18.2 million as of April 30, 1966. Is that right? Mr. Walsh. Yes, sir.
Senator HARRIS. What is your next chart? Was this chart which is entitled "Reporting SBIC's—Government Funds With Deficits, 9–30–65” prepared under your direction and control and does it state the true facts as your investigation reveals?
Mr. Walsh. Yes, sir, it does.
Senator HARRIS. 'It will be admitted in evidence without objection as exhibit No. 55.
(Document referred to marked "Exhibit No. 55" for reference and will be found in the appendix on p. 292.)
Senator HARRIS. Will you briefly state what this chart shows.
Mr. WALSH. This is a breakdown of 324 SBIC's which have received Government funds and which are in a reporting status. In other words, these are companies which are submitting reports regularly to the Government.
Senator HARRIS. You have broken it down then by percentages of impairment of private capital.
Mr. WALSH. Yes, sir.
Senator HARRIS.' I understand there are 14 SBIC's where there has been over 100 percent private capital impaired.
Mr. WALSH. Yes, sir.
Senator HARRIS. And then the other percentages as shown on the chart?
Mr. WALSH. Yes sir.
Senator HARRIS. What does the note at the bottom of the chart mean?
Mr. Walsh. In addition to the 324 companies which are reporting a deficit we find there are 111 additional companies which are in one of three categories. They have not reported to the Government at all. They do not have Government money, or their deficits cannot be determined by the reports because their accounting system does not show the deficit.
Senator Munur. The 111 comprise the total number of SBIC's. Mr. WALSH. No, sir, these are companies which have deficits.
Senator MUNDT. It would be 435 that have deficits of some kind or another.
Senator HARRIS. Not necessarily. If I understand this, there will be 435 companies which either have deficits or are not reporting or you can't determine if they have deficits.
Mr. ADLERMAN. We have been conservative on this and only picked those companies where we can actually show deficits. We can show deficits for 324 out of 686 which means almost 50 percent of the companies had deficits.
Senator HARRIS. That is your finding, Mr. Walsh ?
Senator HARRIS. Is it a correct statement to say that to the degree that private capital is dissipated or impaired the Government's risk increases progressively?
Mr. Walsh. Yes, sir, I think that is a fair statement.
Mr. Walsh, in the category of 26 to 50 percent how many companies are there?
Mr. Walsh. There are 76 companies which have lost over 26 percent of their capital and have received Government funds.
Mr. ADLERMAN. How much Government funds have they received ? Mr. WALSH. $28 million.
Mr. ADLERMAN. In the category of 11 to 25 percent of capital impairment how many companies are there?
Mr. WALSH. Ninety-one companies.
Mr. ADLERMAN. How much in Government funds have they received ?