Mr. KENNEY. You said that you would submit a draft of a law which the committee ought to consider with a view to its enactment into law. I take it from that you do not object to Federal regulation of the stock exchanges?

Mr. WHITNEY. Under certain conditions.

Mr. KENNEY. Are you prepared to tell us now, briefly, just what form that regulation ought to take and how far it should go?

Mr. WHITNEY. I should prefer, if I may, to finish my statement which has a bearing on the point that I wish to make, before so doing. Mr. KENNEY. Very well.

The CHAIRMAN. Just a moment. I will ask everybody to keep seated, please. It is the intention of the Chair to ask consent of the House when we meet at noon, which I think will be granted, to permit us to sit during sessions of the House this afternoon and probably tomorrow. Is there any objection? There was no objection.

Mr. PETTENGILL. How early?

The CHAIRMAN. I think that we can get started at 2 o'clock.
Mr. MAPES. That is just for today and tomorrow?

The CHAIRMAN. Then, we will take a recess and come back at 2 o'clock, when you will resume the stand, Mr. Whitney.

(Thereupon, at 11:46 a.m., a recess was taken until 2 p.m., of the same day.)

AFTERNOON SESSION

The committee reassembled, pursuant to the taking of the recess, at 2 p.m., Hon. Sam Rayburn (chairman) presiding.

The CHAIRMAN. The committee will come to order.

STATEMENT OF RICHARD WHITNEY, PRESIDENT NEW YORK
STOCK EXCHANGE, NEW YORK, N.Y.-Resumed

The CHAIRMAN. You may proceed, Mr. Whitney.
Mr. BULWINKLE. Mr. Chairman-

The CHAIRMAN. Mr. Bulwinkle.

Mr. BULWINKLE. Mr. Whitney, the chairman of this committee, and each member of this committee, is in receipt of a telegram from a man named Gene McCann, 25 William Street, New York City.

That telegram states that the New York Stock Exchange is sending $2,000,000 to Washington to Mr. John P. Ryan, and Mr. Roland Redmond, counsel for the exchange, to be spent in Washington, and elsewhere, to stop legislation.

I will ask you, is there any truth to the allegation contained in this telegram?

Mr. WHITNEY. There is no truth, sir.

Mr. BULWINKLE. Who is Gene McCann? Do you know him?

Mr. WHITNEY. I have met him, sir, I believe. He is by way of being a dealer in securities.

He has sued the New York Stock Exchange twice. The first complaint on his part, I believe was ended but not in his favor; was just stopped.

He is now suing us, the governors, and all members, collectively and individually for $60,000,000, on what plea, none of us have any idea.

That is all I know of Mr. Gene McCann.

Mr. BULWINKLE. Has the New York Stock Exchange at any time. sent any money to Mr. Redmond, or to Mr.

the president of the Washington Stock Exchange, or anyone else in Washington for any amount whatever to control or influence legislation?

Mr. WHITNEY. No, sir.

Mr. BULWINKLE. All right; that is all.

Mr. WHITNEY. Mr. Ryan is my assistant, sir.

Mr. COOPER. Mr. Chairman, I did not like that telegram.

Mr. BULWINKLE. I did not like it either. That is why I brought

it up.

Mr. COOPER. When one sends a telegram saying that the New York Stock Exchange is going to spend $2,000,000 to try to defeat this legislation, that goes out in the newspapers of the country and a lot of people have the impression that they are going to use some of that $2,000,000, or try to use it, on Congress, and I think we ought to stop such tactics as that.

The CHAIRMAN. I do not know how you will do it. I get a lot of fool letters every day.

Mr. MAPES. I did not get one of those.

Mr. COOPER. Bring him up here.

The CHAIRMAN. I do not want him around here myself. He appears to me as one who does not qualify as a very informing witness. Mr. Whitney, you may proceed.

Mr. BULWINKLE. Just a minute, Mr. Chairman. I might state that I brought this matter up just in order that Mr. Whitney could have the chance to deny it if he wanted to, because I did not like it either. It has gone out to the press.

Mr. WHITNEY. For which I desire to thank you.

The CHAIRMAN. Proceed, Mr. Whitney.

Mr. WHITNEY. I would like to refer to Mr. Pettengill's request of this morning with regard to the German situation.

In answer to the question asked this morning as to publications dealing with the German attempts to regulate the security business, I am advised by telephone from New York that the following documents contain not only contemporary but also the most informative information on this subject.

The report was made by Mr. Julius Muth, American Consul in Magdeburg, dated August 31, 1896, United States Consular Reports, Volume LII 194, published November 1896;

A further report by the same gentleman, dated April 1900, United States Consular Reports, Volume LXII 235;

A report entitled "Working of the German Law against Speculation in Grain", by American Consul General Frank H. Mason, dated August 28, 1900, United States Consular Reports, Volume LXIV 243, published December 1900; and

There have been two articles by H. C. Emery, the first entitled "Should Speculation Be Regulated by Law? Lessons from German Experience"; and the second entitled "Ten Years of Regulation of the Stock Exchange in Germany", both of which articles were reprinted in the volume of testimony taken in 1914 by the Banking and Currency Committee, Sixty-third Congress, second session, on S. 3895, which was commonly known as the "Owen bill."

We also have a résumé that our economist has made up from these various documents, which I am having sent here, and will be placed before you and the committee, if that is your desire.

Mr. PETTENGILL. I will be very glad to have it.

Mr. WHITNEY. Shall I proceed, sir?

The CHAIRMAN. Yes, sir.

Mr. WHITNEY. I am now considering section 6 of the bill and subdivision (a).

The evident purpose of this provision seems to have been to discriminate between brokers and other lenders of money in the amount of credit which can be advanced upon unlisted securities, but it is capable of another interpretation which would have even more serious consequences. As I have pointed out, a person who transacts a business in securities through the medium of a member who transacts a business in securities through the medium of a member of an exchange is likewise included in the prohibition of this subsection. If banks buying and selling securities for their own account or as agent for their customers should be held to be persons transacting a business in securities, then this prohibition would make all unlisted securities worthless as collateral even in bank loans.

There is one other important point in regard to this section which requires clarification. The definition of the term "security", which is contained in section 3, subsection 10 (which appears on page 6 of the committee print), excludes from the definition any "direct obligation guaranteed as to principal or interest by the United States." For the purposes of the bill, therefore, Government bonds are not securities and will not have to be registered on an exchange and therefore, brokers may extend credit on Government bonds on such margins as they may elect. If this interpretation is sound, then section 6 does not prevent brokers extending credit against real property or any form of personal property other than a "security" as defined by the act. This is obviously improper because it is well known that real estate and such personal property are not normally as liquid as securities and should not, therefore, be the basis of this type of credit. The New York Stock Exchange has long recognized this fact and in determining the financial condition of members, our committee on business conduct does not place any value upon real estate holdings, furniture and fixtures, equipment of offices or even upon stock exchange memberships. We have felt that it was necessary to exclude these items, which, although of undoubted value, are not capable of being turned quickly into cash, if we were to be sure that the capital of our member firms was adequate to protect the accounts which they were carrying for their customers.

Subdivision (b) of section 6 makes it unlawful for any member of an exchange or person who transacts a business in securities through a member of an exchange to extend or maintain credit to any customer on securities registered on a national exchange in an amount which at any time exceeds (1) 80 percent of the lowest price at which such securities have sold during the preceding 3 years or (2) 40 percent of the current market price, whichever is the higher. This subsection further provides that the Federal Trade Commission may fix lower loan values during any stated period of time or in respect of any specified class of securities.

The minimum margins established by this subdivision have naturally been one of the features of the bill which has evoked the greatest amount of public discussion. Few people, however, seem to understand how this provision will operate. As I see it, the amount of margin which will become the minimum depends upon the course of prices more than upon the percentages set forth in the bill. For instance, a security selling at $100, and which has not sold for less than $100 during the preceding 3 years, can be carried in a margin account at 80 percent of its current market price, because its current market price and the lowest price reached within 3 years happen to be identical. If a broker advances 80 percent of the current market price of such a security, he will have only 25 percent margin against the actual debit balance. He will be advancing $80 against every $100 of value and the leeway or margin between the amount which is owed him and the current value of the collateral will be $20 or 25 percent of the sum which is owed him. Many people have become confused in discussing this question of margins and it is sometimes said that a margin should represent a certain percentage of the value of the collateral for the loan. This method of computing margins completely disregards the essential nature of a margin.

When a person borrows money and pledges securities as collateral he normally computes the amount of the margin as a percentage of the amount owed. For example, if I borrow $10,000 and give as collateral $15,000 of Government bonds, I feel, and so does the lender, that he has a margin of safety equal to 50 percent of the amount owed him. In brokerage accounts the amount owed is commonly called the "debit balance" and, therefore, in determining the amount of a customer's margin, this figure is used as the basic one just as a bank, in determining the margin for a loan, uses the face amount of the loan as its basic figure. In either case, a percentage of margin must mean a percentage of the amount owed.

This subdivision might in certain circumstances permit securities to be carried on a 25 percent margin which is less than the New York Stock Exchange now requires its members to demand and maintain. If, however, we imagine a different set of circumstances, the provisions of the bill will have not an over liberal but an almost prohibitive result. For example, if a security like General Motors, which has within 3 years sold at approximately $4 a share and is today selling for approximately $40 per share, should be presented to a broker as margin after the effective date of the proposed act, the broker could only lend $16 per share upon this stock because the 80 percent provision would be rendered nugatory by the low price which General Motors reached at the worst period of the depression. this case, the broker would have 150 percent margin, i.e., he would advance $16 against a stock selling at $40 and the difference between these two or $24 would represent one and one-half times the amount owed him by his customer. It is obvious that margins of 150 percent are not necessary for the purpose of insuring the safety of a customer's account and that should be the sole purpose of a margin provision. Such a margin requirement would have the immediate effect of eliminating a great part of the speculative activity on which the stability and useful function of the market depends, to the great detriment, of course, of all investors and stockholders.

In

The effect on margins of this subdivision will depend upon the course of prices. In periods of stability or of declining prices it will permit overliberal margins and in periods of rising prices it will fix prohibitively high margins. As a practical matter, and because most securities reached very low prices within the last 3 years, the immediate effect of this subsection would be to increase enormously the margins which brokers would have to demand from their customers. At the present time the total debit balances carried by members of the New York Stock Exchange for customers is approximately $1,390,000,000. It is certain that a large part of this total has been advanced against securities which sold at very low prices within the last 3 years, and, therefore, the margins which existing customers will be called upon to put up if their accounts are to meet the requirements of the bill will, of necessity, be very substantial. I am sure that many customers will find it difficult if not impossible to provide the required amount of margin and will therefore be compelled to liquidate a large part of their holdings at a time when no market capable of absorbing such liquidation may exist.

The real difficulty with these proposed margin requirements is that they attempt to set up a rigid formula for a subject which, by its very terms, requires a very flexible rule.

The CHAIRMAN. Mr. Whitney——

Mr. WHITNEY. Yes, sir.

The CHAIRMAN. Are you now referring to stock already outstanding, or loans?

Mr. WHITNEY. I am coming to the question of the loans, where the security has been bought for a period of 30 days or more.

The CHAIRMAN. That is pledged now?

Mr. WHITNEY. Yes, sir.

The CHAIRMAN. I think it is common knowledge that we are not going to do that, not close out a contract that already exists, like bankers, or where a customer has up stock as collateral with the banks at the present time.

Mr. WHITNEY. Yes, sir.

The CHAIRMAN. I do not think we are going to go back of that, if that is what you are talking about.

Mr. WHITNEY. It is a very common experience, insofar as brokers are concerned, sir, the very common practice is that loans are made and may continue for days, weeks, months, or longer, but substitutions are made in those loans, from a broker's point of view, because his customers are buying and selling those various securities. They might go out of his office and new ones come in, and as we interpret the rule, the provision as to such loans, if any substitution was made would bring such loans under this requirement from the point of view of the banker.

The CHAIRMAN. If it is a new matter, of course, it will, if the bill is passed. I am talking about outstanding loans, and I thought that was the very point you were on, about calling these people at a time when they could not pay.

Mr. WHITNEY. That is with regard to brokers; yes, sir; but the broker acts as the agent for borrowing money to carry those loans, for the purchaser of the security in a margin account, and if there is any shift there, then, as we see it, those loans come under the provision of the bill and have no reference to the 30-day clause.