NATIONAL SECURITIES EXCHANGES-H.R. 7852

WEDNESDAY, FEBRUARY 21, 1934

HOUSE OF REPRESENTATIVES,

COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE,

Washington, D.C.

The committee met, pursuant to adjournment, at 10 a.m., in the committee room, New House Office Building, Hon. Sam Rayburn (chairman) presiding.

The CHAIRMAN. The committee will come to order.
You may proceed, Mr. Corcoran.

STATEMENT OF THOMAS GARDINER CORCORAN, COUNSEL WITH THE RECONSTRUCTION FINANCE CORPORATION, WASHINGTON, D.C.-Resumed

Mr. CORCORAN. Just as a preliminary, it is very impressive to see that the Babson Letter this weeks says that the stock exchange bill is not so bad.

I want also to correct an impression which apparently I gave yesterday to some of the press, and that is that it is the judgment of the drafters of this bill that a rigid margin requirement should not be made and that there should be complete discretion in the matter to let values run up as high as 100 percent.

What I thought I said, and what I certainly meant to say, was this: That we certainly think the top-loan value on stocks should be indicated by a bright fixed line so that the market can become adjusted to it and all speculation and operations of the market circulate around it, but if it is felt necessary to permit a measure of discretion to go beyond that bright line that discretion should be made difficult to exercise by requiring the concurrence of two boards, the Federal Trade Commission, or whatever other body may be administering the act, and the Federal Reserve Board. Then the fact that these two bodies would have to agree before margin requirements could be lowered would provide a safeguard against the terrific pressure to which any administrative body given such discretion would be subject. In any event I think there should be certainly some fixed point below which those two boards could not lower the margin requirements. You see, this margin requirement in the bill represents a matter of arithmetic, a splitting of the difference between those who think no margins should be permitted, and those who want the present stock exchange margin of 20 percent.

Mr. LEA. I should like to ask there, To what extent under the existing law the Federal Reserve has this power now?

Mr. CORCORAN. To what extent the Federal Reserve has that power now?

Mr. LEA. Yes.

Mr. CORCORAN. The Federal Reserve Board has the right under the Banking Act of 1933 to prescribe the general amount of securities loans in which its banks may invest.

Of course, you remember what happened in 1928 when there was much discussion as to whether the Federal Reserve Board should somehow prevent its banks from going too far in the securities market. That is the time when Mr. Mitchell defied the Board. You probably

remember that incident.

Mr. WADSWORTH. I have been absent from two or three of the sessions, and it may be that this point has been discussed, and if so, I will not press it; but am I right in interpreting the second paragraph in the margin requirement section of the bill as fixing any loans made at any bank in the United States?

Mr. CORCORAN. The second paragraph?

Mr. WADSWORTH. The second paragraph.
Mr. CORCORAN. Is that (c)?

Mr. WADSWORTH. Paragraph (c), I should have said, the third paragraph. Am I right in that?

Mr. CORCORAN. Yes, that fixes the amount of the loans which may be made upon listed securities by any bank in the United States. Mr. WADSWORTH. Listed securities?

Mr. CORCORAN. Listed securities only; not unlisted. And as we tried to explain yesterday, this provision fixes the amount of all loans made upon listed securities except loans made upon securities which have been owned outright for 30 days prior to the loan. That 30 days' provision provides, roughly, a rule of thumb which was used as a substitute for any language attempting to distinguish between loans made for commercial purposes, and loans made for the purpose of carrying securities. Since it is so very difficult to prove an intent, and to distinguish one type of transaction from another, we just tried to make the distinction between commercial loans and security loans by raising the irrebuttable presumption that if you own securities 30 days before coming into the bank for a loan on them, you probably want the loan for a commercial purpose, rather than for the purpose of buying stocks.

Mr. WADSWORTH. What is the objection to such a loan on securities? If you have owned the securities for one day, you own them. Mr. CORCORAN. Well, sir, what you are trying to do is to find a rule of thumb.

Mr. WADSWORTH. I am not trying to find a rule of thumb. I am trying to avoid it.

Mr. CORCORAN. I mean, under such circumstances, it would not be very hard to arrange a 1-day loan with someone, somewhere else, to enable you to purchase those securities and own them for one day.

Suppose I wanted a loan from a bank to enable me to carry securities. If I owned the securities outright, even though I had held them for only 1 day, I would be without the scope of this provision. All I would have to do would be to arrange a 1-day loan through a friend, or some other way, and the bank would never need to know about it.

Mr. WADSWORTH. In other words, you counsel evasion.
Mr. CORCORAN. What is that, sir?

Mr. WADSWORTH. That is, you think it could be evaded?

Mr. CORCORAN. I mean, I am expecting all kinds of attempts to evade the act, and for that reason we adopted this 30-day provision on the theory that it is much harder to arrange a securities loan for 30 days than it is for 1.

As I said yesterday, we are perfectly willing to suggest the modification of the language of this section; it can be worded so as to enable you to really watch the situation-to say in hale verba, that loans made by banks for bona fide commercial purposes, and not to carry securities, are not within the provision of subsection (c).

Mr. WADSWORTH. Those are the loans I have in mind, and, of course, it is known that they have been made by the tens and tens of thousands, and are scattered all over this country in every bank in the United States, and the Federal Reserve banks, and nonmember banks.

Mr. CORCORAN. At the present time.

Mr. WADSWORTH. At the present time. Of course.

Mr. CORCORAN. Of course, we said yesterday, when you were not here, that we were quite agreed that loans at present outstanding should not be within these margin provisions. They would apply only to loans made on or after the act became operative.

Mr. WADSWORTH. Even then it seems to me that it is greatly restrictive.

Mr. CORCORAN. Sir?

Mr. WADSWORTH. It seems to me that even then it is greatly restrictive.

Mr. CORCORAN. Well, that all depends, sir, upon the degree to which you think stock-market collateral--and remember, we are talking only about listed securities.

Mr. WADSWORTH. Surely.

Mr. CORCORAN. The degree to which stock-market collateral should be used for commercial loans.

You will remember there was a time when banking in this country was probably a lot sounder than it is today. Banks did not make the amount of a loan to you depend solely on the loan value of the security tendered. They made the loan to you as an individual, taking into consideration the nature of your business, and really looking into the possibilities to see whether the risk, viewed broadly, was a safe one.

Under the easy-chair banking of the last 10 years, where, if a manufacturer comes in for a loan, the bank, instead of looking into the proposition of the manufacturer and really taking a risk on the business, simply says, "Of course, I will make the loan if you will put up marketable securities."

So, the banker does not have to think. All that the banker has to be is a margin clerk who looks at the listings in the morning, and subtracts the amount which the stocks sold for the night before. It is something rather new and something that a lot of people do not think is very good banking practice.

Mr. WADSWORTH. A part of the purpose, then, of this paragraph is to regulate banking?

Mr. CORCORAN. No.

Mr. WASDWORTH. It has its effect upon banking, most profoundly.

Mr. CORCORAN. No; because, as I say, we are perfectly willing to modify this provision so as to exempt loans made upon securities as part of a commercial loan.

Mr. WADSWORTH. Of course, that is the type of loan that I had in mind.

Mr. CORCORAN. Quite right.

Mr. WADSWORTH. Of course, the section does not read that way, at all.

Mr. CORCORAN. Well, the section attempted to cover it by exempting securities that had been paid for in full more than 30 days before the loan. That is, if you wanted a loan from your bank to carry inventory, and the banker said, "Well, haven't you some securities that you could put up to cover the loan?" you took such securities out of your strong box and laid them on the table—that is what you are talking about.

Mr. WADSWORTH. Exactly.

Mr. CORCORAN. Now, most of those securities that you pulled out of your strong box would not be within the language of that section, because most of them would have been paid for in full more than 30 days before.

Mr. WADSWORTH. I cannot understand the necessity for 30 days. If the securities are owned, they are owned, and they are good collateral.

Mr. CORCORAN. But you have the 30 days, because a shorter time makes it easier for evasion. The shorter you make the time, the easier it is to evade.

This is one of those cases where you simply have to draw these broad lines, because otherwise you cannot handle the practical administration of the statute.

May I go on, sir?

Mr. WADSWORTH. Yes.

The CHAIRMAN. You may proceed.

Mr. CORCORAN. Now, just as we finished last time, we were talking about the provisions of section 10, about the segregation of various mechanicians of the market. You remember we were talking about four kinds of people who operate in the stock market.

One is the underwriter, who has to shepherd the securities which he underwrites more or less for the sake of his own reputation. He is very much interested in the market for those securities because of his personal interest and the interest of the secret partners with whom he has cooperated in various syndicates during the flotations of the various issues.

Then, secondly, you have the dealer who buys securities with the hope of passing them on at a profit, very much as a retailer buys merchandise.

There are well organized dealers for certain classes of securities in the markets of this country.

Thirdly, there is the broker, the fellow who acts as an agent for you and me when we put in an order to buy securities.

Then, fourthly, there is the man who has enough money to buy himself a Stock Exchange seat and instead of acting as a broker, finds it more profitable to go on the floor with the brokers who are operating for you and for me, to buy and sell for his own account,