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The CHAIRMAN. Do you think there ought to be a margin requirement?

Mr. WHITNEY. Do we?
The CHAIRMAN. Yes.
Mr. WHITNEY. Yes, sir; and we have them.
The CHAIRMAN. How long have you had it?

Mr. WHITNEY. Why, ever since I can remember as a governor of the exchange. Certainly since 1932, when the questionnaire was originated.

The CHAIRMAN. Not before that?

Mr. WHITNEY. I do not think from the point of view of the exchange there was any definite understanding as to the margin requirement. That was 1922. I beg your pardon, when the questionnaire was originated.

The CHAIRMAN. You think that there ought to be a flexibility, then?

Mr. WHITNEY. I do, sir. I think it is absolutely necessary to be flexible.

The ChairMAN. You do not think that there should be any standard set?

Mr. WHITNEY. If a basic standard is possible of setting, naturally there could be no objection. I think there is grave question whether a basic standard can be set. I am touching upon that in my statement.

The CHAIRMAN. Well, let me ask you right here, what your margin requirement now is. Somebody said that it was 23 percent.

Mr. WHITNEY. It is 30 percent of the debit balance.
The CHAIRMAN. How much was it in 1922?

Mr. Whitney. In 1922 I think it was 20 percent, raised to 25 percent, and at times during the 1929 period, I believe it was placed at 30. That was from the point of view of the exchange. Many, many brokers demanded additional margins and the underlying rule of the exchange is that every account must be capable of handling itself; of banking itself.

Now, in that regard there have been certain stocks, over certain periods, high priced, when the banks would take arbitrarily 100 points off of the stock, selling for 300, and they would only loan on it at 200 a share, and take 25 percent off of that as a margin, in addition. That was demanded by the exchange to be passed on to customers, so that each and every account would stand on its own feet in being banked.

Mr. LEA. Mr. Chairman-
The CHAIRMAN. Mr. Lea.

Mr. LEA. As I understand it, the exchange has a minimum margin requirement; is that right?

Mr. WHITNEY. It has a minimum margin requirement, sir, with regard to debit balances, what is loaned; yes. Mr. LEA. Is it a fixed standard?

Mr. WHITNEY. It is a fixed standard, and besides, what I have just stated to the chairman, that each and every account must stand on its own feet is so far as the securities in the account will carry the account, if banked.

Mr. LEA. Well, this bill fixes a standard of minimum margins, as I understand it, but the margin is computed under a different method than that followed by the exchange. Is that not a fact?

Mr. WHITNEY. That is true. It is computed on the current market price, thereby at the present time giving a margin requirement as computed on the debit balance of 150 percent.

Mr. LEA. So it has the effect in the main of permitting a lower margin than the bill would perinit.

Mr. WHITNEY. I do not understand.

Mr. LEA. I say, the margin permitted by the New York Stock Exchange in the main is smaller than the margin required by this bill.

Mr. WHITNEY. Yes, sir.

Mr. LEA. Do you know what the practice is of the other exchanges in the country as to their margin requirements?

Mr. WHITNEY. I cannot speak of that. I do not know.

Mr. LEA. Well, the main difference is a question as to what margin should be required, is it not, between the New York Stock Exchange and this bill?

Mr. WHITNEY. Yes, sir.

Mr. LEA. And you believe that the minimum margin required here is too large; is that the main objection?

Mr. WHITNEY. If I can explain, this margin is so large that, to my way of thinking, it will eliminate the carrying of accounts, presumably on a margin. It will do away with the speculative feature in the carrying of stocks, entirely, because 150 percent margin on the debit balance will, as I see it, take away the ability of those who may wish to buy stocks on margin, to the extent that they are practically paying for them in full.

Mr. LEA. What is the object of imposing a minimum margin, by the New York Stock Exchange?

Mr. WHITNEY. A minimum? Mr. LEA. Yes. What is the purpose, what is the justification for it? Why are you requiring a margin, in other words?

Mr. WHITNEY. Safety in the account from the point of view of the investor and the point of view of the house; and therefore in its relation to it from the point of view of the individual customer; from the point of view of the house in its relationship to all other customers because if such operations are carried on with the money borrowed from banks for the consummation of such trades. The banks in New York demand the same margin, 30 percent, on the amount owed.

Mr. LEA. Where do you not think that margin control should be exercised also from the standpoint of its effect upon fluctuation in the market, and business stability in the country, and the general public interest, marketing and business?

Mr. WHITNEY. It should be in the credit situation.
Mr. LEA. Yes.

Mr. WHITNEY. Yes, sir; I do; and I think that should be vested in the control of a board that has the credit structure system of the country in its control.

Mr. LEA. I presume that one reason for the control of margins proposed by this Lill is to dis ourage stock investments that are unduly speculative, the feeling that too liberal granting of credit promotes gambling on the stock market and contributes to the unwholesome fluctuation of stock-market prices.

What is your viewpoint about that?

Mr. WHITNEY. Under the Glass-Steagall Act, the power to control the use of credit in speculative pursuits is granted, as I understand, to the Federal Reserve System. That may be exercised to prevent the use, the undue use, of such credit, and in turn, as I see it, it can be used to prevent what is deemed to be unwise or excessive speculation in that regard.

We are heartily in sympathy to prevent unwise and excessive speculation. We want no more i929 booms and depressions following them. They are terrible.

Mr. LEA. Mr. Whitney, as we approach this question, I take it for granted, that we are all agreed that the exchanges perform a useful and necessary purpose in our business structure; but it is the general opinion, I think, of public sentiment, that great evils have grown up under the use of facilities of the stock exchanges of the country.

Now, without reference to the magnitude of those evils, I think you would recognize the fact that there have been evil practices under the stock exchanges of recent years.

Mr. WHITNEY. I do, with the qualification there, sir, that we are the market place and a great many evils, as you described, or abuses have been perpetrated there, but not all of them engineered by our members or for which our members are responsible.

Mr. LEA. I would entirely agree with that; but isn't it also true that your members have been to a large extent beneficiaries of unconscionable practices on the exchanges of the country? I am not trying to throw slurs, but just to candidly view the question that confronts us. Mr. WHITNEY. Well

, I do not really understand your question. "Unconscious"?

Mr. LEA. I say "unconscionable”; but your members, of your stock exchange, are beneficiaries of whatever these evil practices may be at the present time. That is undoubtedly true, is it not?

Mr. WHITNEY. Why, no, sir; I do not think that is true.
Mr. LEA. Well then, they are in part. I do not say entirely.

Mr. WHITNEY. I think it is to the great detriment of the members of the New York Stock Exchange and other exchanges that abuses and evils have occurred in those exchanges. It works against our interest. We are blamed for things for which we may be-well, in some part accountable, but I think there is a very general feeling that people have that we are entirely accountable for things we have been doing our utmost to prevent, and which are without our power of preventing.

Mr. LEA. Now, I would agree that from the long-time viewpoint it is detrimental to the members of the exchange and as a body and as an institution to have the evil practices to which the country has been subjected in recent years; but when we deal with the specific problems, I think you have to admit that members of the exchange have been beneficiaries of the unwarranted practices on the New York Stock Exchange as well as other exchanges. They are beneficiaries of whatever evils there are in this system, are they not?

Mr. WHITNEY. I do not think you have specified as to what you term evils. I will grant, of course, that execution of orders on exchanges accrue by commission to the earnings of our members and those on other exchanges.

Mr. LEA. Suppose we take the pooling of the alcohol stock: The members of the New York Stock Exchange participated to a degree in the benefits of that pool, did they not?

Mr. WHITNEY. Certain members, I believe, had options, but frankly, my personal observations in the spring of 1933 and with particular reference to the alcohol stocks is that there was a craze of speculation that went over this entire country and I think the testimony that we have heard has shown that the majority of the pools with options had their stocks taken from them, and the stock went many, many points higher, because the public sought and insisted in buying them.

Mr. LEA. But, was not the public advised by letters addressed to them, and misleading statements and misinformation, to buy those stocks?

Mr. WHITNEY. I do not think that that is the case. I think that there was a speculative craze in the spring of 1933 and I do not think that that can in any way be contributed to the members of the stock exchange.

Mr. LEA. Then, they were participants in part of the benefits of the pool, were they not?

Mr. WHITNEY. Individuals.
Mr. LEA. Individually; yes.
Mr. WHITNEY. Yes; but as a total group; no.

Mr. LEA. Well then, when we come to this question as to regulation, as to what extent we shall regulate the exchanges, we are confronted with the situation that the members of the exchange which really constitute the exchange are beneficiaries of the evil practices this bill seeks to eliminate.

Mr. WHITNEY. We have passed, sir, recently, after some years of investigation and study, certain rules with regard to pools, syndicates, and joint accounts which seek through any device to unfavorably influence the market prices, and if it is that point on which you are specifically speaking, we are entirely in agreement with you.

It is important not to have such practices indulged in, whether they be indulged in through nonmembers, or members. Over the former, we have no control, and over the latter we are seeking, and have sought, to put additional control.

Mr. LEA. Well, does that not lead us to the conclusion that regulation must be left to a body that represents the public rather than a group like the stock exchange that represents itself, to a degree, an adverse attitude to the public? I mean that as a justification for public regulation of the stock exchanges.

Mr. WHITNEY. I have said this many times before, sir: I question whether any regulation of stock exchanges can control the evils for which stock exchanges and their members are in no way responsible and I do not think that such evils as have existed and been brought out in investigations, recently, or in the recent past, can be attributed solely or even in the main to the stock exchange members.

The CHAIRMAN. There is a roll call of the House, and we will recess until 5 minutes past 3.

(Thereupon, a recess was taken as above indicated, for the purpose of permitting the Members to answer the roll call, after which the following proceedings were had:)

The CHAIRMAN. The committee will come to order. All right, Mr. Whitney, you may proceed.

Mr. WHITNEY. 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 nature, requires a very flexible rule, the determination of proper margins requires the exercise of sound discretion. It is impossible to substitute for this discretion a mechanical rule based upon percentages of existing or former values. A sound margin is one which will, in all probable circumstances, protect the lender of money from the danger of loss if security prices should decline. To arrive at a solution of this problem, many factors must be considered. The nature of the security, its activity in the market, the degree to which it is held on margin or as collateral for loans, are all considerations which must be taken into account. In addition, there are special situations which may affect the amount of margin which should be required. There are certain securities which because they fluctuate rapidly and by substantial amounts are considered volatile and therefore not entitled to as high a degree of value for collateral purposes as more stable securities. I could cite you many instances in which these special conditions have made prudent lenders refuse to advance even 40 percent of the current market value. In the face of all of these variable factors it is humanly impossible to adopt any law which will operate fairly in all possible circumstances.

I am convinced that the fixed minimums contained in subdivision (b) of section 6 are utterly unworkable and will certainly operate in a manner which will be detrimental to the public.

In discussing these margin requirements I have not overlooked the fact that the Federal Trade Commission is given authority to fix lower loan values for any stated period of time or in respect of any specified class of securities. This power, while it would allow the Commission to make higher margins mandatory, does not go far enough to give real flexibility. I have already pointed out how special considerations affect particular securities. There is no power, as I see it, given to the Commission by this section to provide that any one security should have a lower loan value than the rest of its class and yet that is precisely what banks and other lenders of money do in actual practice. For instance, in 1901, at the time of the Northern Pacific panic, the proper loan value for Northern Pacific stock was only a fraction of the price at which it was selling, but that did not mean that railroad securities, in general, had to be written down for loaning purposes by an equal amount. The same was true of radio stock when it advanced very rapidly in price a few years ago and there have been numerous similar instances in the recent past. If it should be suggested that this objection might be met by giving the Federal Trade Commission power to fix the loan value of any particular security, I think the provision would still be unworkable because of the practical impossibility of any single administrative body being in sufficiently close touch with all of the security markets of the country and sufficiently familiar with the factors affecting the value of each security dealt in on exchanges to determine promptly and soundly the value which should be attached to each stock or bond for margin purposes. In the last analysis, the problem of fixing the loan value of particular securities is a local one which must be dealt with by persons who are thoroughly familiar with local market conditions and who are in constant daily touch with all the factors on which loan values depend.

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