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As the bill is set up right now, it represents such compromise. However, you heard one witness tell you the other day that he thought no margin trading at all should be allowed, and you will undoubtedly hear representatives of the brokerage houses when they come down here tell you that you ought to leave margins alone. This bill is a compromise.

Mr. HUDDLESTON. If you should require payment in full of the stocks, you would not safeguard against business incapacity.

Mr. CORCORAN. No; but, sir, you lessen the chances of loss. Not quite so many traders will be cleaned out on larger margins.

Mr. HUDDLESTON. Then, what are you trying to do with this bill; is it to keep men, who have not the capacity to go into the business out of it?

Mr. CORCORAN. This bill does try to do that, but at present it is probably impossible to legislate margins out of existence. This bill therefore compromises. It is perfectly understood that the bill does not eliminate the problem, but only lessens the danger.

Mr. HUDDLESTON. The difficulty with me is that I do not see that you are lessening it. You are just prolonging the agony.

Mr. CORCORAN. No; not quite. Increasing the margin requirement has two effects. If a purchaser sees a stock at 100, somebody tips him that the stock is going up to $150, and he thinks he can have a ride for those 50 points' profit by putting up only $25, he will not only want to go into the market with one $25, but with a he has and will sink in the aggregate a great deal more money than if the chances of profit were smaller. If he had to go into that market on a 60-percent margin, he would neither buy so many shares nor risk so much money, because the chances of making a killing would be less.

Mr. HUDDLESTON. Now, those are a lot of speculations.
Mr. CORCORAN. They are pretty well borne out, sir.

Mr. HUDDLESTON. I think there is room for discussion on each of the points you have made. I think that the experience of all of us has disclosed that no uniform line of action can be counted upon to be taken-in short, what we are trying to do here is deal with human nature. We want to change human nature by passing a law.

Mr. CORCORAN. Well, sir, that goes back to our lottery bill.

Mr. KENNEY. Thank you very much, but that is not what I was about to say. It goes back to whisky pools where the liquor stock went up about 50 points and in a day or two last summer, as I understand, they went down to where the proposed margin here would not have saved the investor.

Mr. CORCORAN. But, a trader might have saved himself if he had had a 60-percent margin. By selling on the first day he might have saved himself a great deal of money. With only a 23-percent margin he could not have saved himself on that first day.

With the 60-percent margin he would have had at least 2 days to turn around and decide what to do.

Mr. KENNEY, Suppose you were in Washington on a code matter? Mr. CORCORAN. Sir?

Mr. KENNEY. Suppose that you were in Washington on a code matter?

Mr. CORCORAN. Well, sir, if you are in Washington on a code matter, you should put your affairs in the hands of a trustee.

Mr. COLE. Mr. Chairman, may I ask a question?

THE CHAIRMAN: Mr. Cole. THE WITNESS. Yes, sir. Mr. COLE. This bill assumes that it is necessary for the protection of the national banking and Federal Reserve System to impose all of these restrictions.

Mr. CORCORAN. Yes.

Mr. COLE. What assurance do we have, by this law, if a man has $10,000, or has $8,000, and wants to buy $16,000 worth of stock, and the board of directors of several members in a certain bank are interested in the same stock, that in loaning the depositors' money, on listed securities, as collateral, that the stock-exchange requirements as to margin percentage will prevail-in other words, how are going to protect the bank?

Mr. CORCORAN. The bank examiner.
Mr. COLE. How is that?
Mr. CORCORAN. The bank examiner.

Mr. COLE. Oh, the bank examiner comes around once every 3 or 4 months and maybe twice a year. That has been the trouble in the past. They can loan the depositors' money, on listed securities at most any percentage and often on time notes not liquid when the market on such securities falls.

Mr. CORCORAN. Of course, you cannot be sure.

Mr. COLE. In other words, why is there not some provision in this proposed legislation, if this is essential to protect our bank investments, of the depositors' money, for a reasonable margin; why is there not some legislation to put restrictions upon them as well?

Mr. CORCORAN. Well, it is unlawful to make an undermargined loan, by the terms of this bill.

Mr. COLE. Where is that language?

Mr. CORCORAN. It is in (c), down at the bottom of page 12. It is unlawful for a bank to make a loan at less than

Mr. Cole. That is section (c)?
Mr. CORCORAN. Under section (c).
Mr. COLE. Very well.
The CHAIRMAN. Mr. Cole, you are through?
Mr. COLE. Yes, sir.

Mr. CORCORAN. Whether the law is enforced depends upon outside factors. This bill recites one of its purposes is to protect national and Federal Reserve banks from fluctuations in the stock market that have made so much trouble for the banks, as Dr. Goldenweiser described the other day, You protect the banking system when you protect it from these stock-market gyrations.

Mr. COLE. I presume it is your idea that section (c), of section 6, imposes the same restrictions upon the banks?

Mr. CORCORAN. As to listed securities.
Mr. COLE. As to listed securities.

Mr. CORCORAN. But not on commercial as distinguished from security loans.

Mr. KENNEY. Well, do you think you will get greater fluctuation with higher margins?

Mr. CORCORAN. No; you will get smaller fluctuations, because you will not have the

Mr. KENNEY. Will it not be necessary to run the market up and down, to a greater extent, in order to scare people out that somebody may make a profit?

Mr. CORCORAN. Unless you have volume, you can not run the market up and down. The public just will not buy so many shares of stock, nor risk so much of its money in the aggregate for the smaller profits involved, if the margin rate is higher. That means that you are going to have less volume in the stock market and volume is the essential on which pools thrive.

Mr. KENNEY. But there will be large holders of stock and it will be to their interest to run the market up and down, I suppose.

Mr. CORCORAN. Yes.

Mr. KENNEY. So as to get people to unload the stock in order that there may be profits for somebody else?

Mr. CORCORAN. But if you do not make it too easy for the public to buy in great volume, there will be no one on whom the pools can unload. A pool cannot get the market up to a high point, unless it can unload on a lot of unsuspecting traders who bought heavily with small margins when the drop comes the pool cannot drive the market so low either.

Mr. KENNEY. But you will have wide fluctuations.

Mr. CORCORAN. But it will be harder to get wide fluctuations, because it is harder to get the public in or shake it out.

Mr. KENNEY. You do not know that it will work to that end?

Mr. CORCORAN. You cannot stop all of it, unless you prohibit margins completely.

I do not say that I do not think the complete prohibition of margin trading would be a good thing. But you are dealing here with the necessity for a compromise between what might be the best theoretical situation, and what can be adapted to the stock exchange system for which you are trying to legislate at the present time, with brokers now operating under the 23 percent margin rule and protesting this bill, because it will cut their volume. Brokers are going to come before you and say that the margin change will affect their commissions, that the drop in commissions will put men out of work. For that reason, this bill is a very moderate bill. It tries to compromise between what is the most socially desirable end, and what we now have.

Mr. COLE. Let me ask you one more question along the line that I asked a moment ago.

Mr. CORCORAN. Yes, sir.

Mr. COLE. You told me that subsection (c), of section 6, applies to our banks?

Mr. CORCORAN. Yes.

Mr. COLE. And that states nothing about banks except that it is unlawful for any person to extend or maintain credit

Mr. CORCORAN. Well, you will notice that it permits
Mr. COLE. Let me finish my answer, just a moment.
Mr. CORCORAN. Yes, sir.

Mr. Cole. In the definitions of the bill, on page 6, paragraph 9, “the term “person' means an individual, a corporation" and so on. In other words, there is specified the meaning of the word. Why could you not put in “banks”?

Mr. CORCORAN. Well, the definition uses abstract terms to catch everything-but a bank' is included.

Mr. COLE. National banks is what we generally say, when we want to designate a national bank.

Mr. CORCORAN. Yes, but a bank is an “association."

Mr. COLE. Yes; but you do not refer to banks as associations, do you? Would it not be better to say "banks.” If banks, members of Federal Reserve, are to be included, do you not think that that wording should be in there?

Mr. CORCORAN. If necessary to clarify; yes. But a national bank, sir, is included under the term “association.” Under the National Banking Act, a bank is called "a national banking association."

One of the necessities to make these margin provisions apply to banks even though you might not want otherwise want them to apply, is that a broker could arrange to have a bank carry securities for customers who wanted better margins than he could give them under the bill.

It is a provision to anticipate evasion of other provisions.
Mr. COOPER. Mr. Chairman, may I ask the gentleman a question?
The WITNESS. Yes.
The CHAIRMAN. Mr. Cooper.

Mr. COOPER. Is it your intention to discuss sections 11 and 12 of the bill?

Mr. CORCORAN. Yes.

Mr. COOPER. While I am interested in the regulation of the stock market, I am also interested in those two sections relative to the issuance of securities.

Mr. CORCORAN. We will get there in just a minute, sir, if we may. There is one more

The CHAIRMAN. Let we ask just one more question, Mr. Corcoran, before you leave this.

Mr. CORCORAN. Yes, sir.

The CHAIRMAN. The complaint against business done on these exchanges is that the margins have been so low that a slight fluctuation would shake them out.

Mr. CORCORAN. Yes.

The CHAIRMAN. Now, in response to that, even the stock exchanges have raised the margin, but it remains a fact that they can change them next day, if they want to.

Mr. CORCORAN. Oh, yes, sir.

The CHAIRMAN. And, the reason for this high margin is to protect the man that invests his money from being shaken out on the slightest fluctuation.

Mr. CORCORAN. Yes, sir.

The CHAIRMAN. And that if he could stay in 3 days, he might recover, whereas if he is shaken out the first day he has got no opportunity to recover.

Mr. CORCORAN. That is right, sir. Take the American Commercial Alcohol pool of last summer. The committee ought to follow the Senate investigation on that pool, rather closely, because it throws light on this margin problem.

The alcohol pools of last year demonstrate in a small compass, where you can watch the process in simple operations, every evil that developed on the stock exchanges in the period of 1929.

The discouraging aspect of 1933 is that apparently we learn of nothing from 1929. We went merrily on doing exactly the same thing, 1933 is aslo a good laboratory in which to watch unfortunate effect on business of the gyrations in the stock market, which Dr. Goldenweiser described to you the other day. Last summer a little

boom started which looked as if it might permanently amount to something. The stock exchange ran it up out of sight. Then the bottom dropped out, out of the stock market and the business boom stopped with the stock-market boom.

The CHAIRMAN. The same thing happened in the commodities.

Mr. CORCORAN. Yes; the same thing happened in the commodity markets.

The CHAIRMAN. Wheat went up to $1.12 or $1.15.
Mr. CORCORAN. Yes.

The CHAIRMAN. When, according to the market, there was no justification for its going above 85 cents.

Mr. CORCORAN. The undesirable situation is that everybody rushes in, hoping to make a killing over night. In those alcohol stocks, the speculator out on a 23-percent margin must have had a pretty bad time the first day. If he had had a 60-percent margin he would have been in a position where he could have helped himself the first day by readjusting his holdings. If he had been smart he could have been out in time to have saved something, even going through the second day. But after the second day even the trader with a 60-percent margin would have been squeezed out of that alcohol stock.

Mr. KENNEY. If he had had a 10-percent margin he would have gotten off easier?

Mr. CORCORAN. The trouble is, sir, that you'd never get out with a 10-percent margin. A trader in the market on a 10-percent margin would be sure that the market would straighten itself out, and would beg, borrow, or steal to scrape up enough to put up additional margin. When finally he did get cleaned out, he would not only be cleaned out of what he had originally put in, but would be owing a lot of people what he had borrowed from them while trying to hold on.

Mr. KENNEY. That is, if the broker had sold you out your losses would have been 10 percent?

Mr. CORCORAN. But, a trader never lets the broker quite sell him out. He always strains your resources to the breaking point, to put up, put up and put up more.

Mr. KENNEY. I do not agree with you altogether.
Mr. PETTENGILL. Mr. Chairman.
The CHAIRMAN. Mr. Pettengill.

Mr. PETTENGILL. Before we get away from the margin matter, you have stated that at the present time $10,000 buys $44,000 worth of stock and under the bill it would buy $16,000, or a difference of $26,000?

Mr. CORCORAN. Plus.
Mr. PETTENGILL. Plus?
Mr. CORCORAN. Yes, sir.

Mr. PETTENGILL. Does that mean when this bill goes into effect that everybody who has $10,000 in margins and are carrying $43,000 worth of stocks and cannot put up more margin, must immediately drop their stocks down to $26,000?

Mr. CORCORAN. No, sir; as I said to you at the beginning of the session this morning, Mr. Pettengill, the proposals in this bill are to apply only to new accounts opened after October 1, and the margins provided for have no reference to accounts that have been carried before that time.

Mr. PETTENGILL. Apply only to new accounts?

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