Mr. LEA. Then, this subsection (g) involves an uncertainty, also. Can we regard that with favor in writing this bill?

Mr. CORCORAN. Well, subsection (g), sir, simply says to the Commission, "since you are in this margin atmosphere, anyway, investigate and report back to the next Congress, what you find about the feasibility of handling margins on this basis." If the report shows progress, then the next Congress can say whether it thinks it is worth while continuing to see whether it is possible to put this earnings margin system into effect.

Mr. KENNEY. Will that require further legislation?
Mr. CORCORAN. Yes, sir.

Mr. KENNEY. Not so far-reaching as this?

Mr. CORCORAN. No, sir.

Mr. REECE. Mr. Chairman

The CHAIRMAN. Mr. Reece.

Mr. REECE. I do not wish to ask you to speak for someone else; but what was the view, generally, of those attending your conference at the Treasury Department with reference to this provision; or did you have sufficient information before you to enable you to form an opinion with reference to it?

Mr. CORCORAN. On the attitude of the people at the conference? Mr. REECE. Yes.

Mr. CORCORAN. They were perfectly willing to put the provision in. Mr. Dewhurst of the Twentieth Century Fund, I understand, attended one of the sessions at the Federal Reserve, which I did not attend.

Mr. REECE. I had in mind more particularly those from the Treasury and the Federal Reserve Board than those from outside agencies sitting in the conference.

Mr. CORCORAN. This provision, sir, has been in the draft practically from the beginning of the conferences, has not been objected to at all, and has been talked over. I do not remember that any strong position was ever taken on it one way or another. Apparently everyone thinks it a proposition worth looking into very seriously.

But Mr. Evans Clark who will talk before you some time tomorrow, will be able to give you much better judgment as to the feasibility of this scheme, or a much better factual basis on which you can make a judgment, than I can give you.

Now, if we may go back and look at these margin provisions as a whole.

The general philosophy underlying the changes in the margin provision has been this. First of all, there should be no loosening up of margin requirements of the original bill on speculative securities. But there should be loosening up on margin requirements for stable securities, and there should be considerable loosening up on bank loans, to make sure that the margin requirements interfere as little. as possible with the operations of the banks. But it is felt that it is very necessary to have margin requirements and to have them outlined very rigidly to make sure that they will really cut down the amount of speculative money in the market.

If we may go over to page 14, you will notice a change in the percentage of the market value which is made the basis of the margin requirements. As this bill was originally offered to you, the percentage was whichever was the higher of 40 percent of current market

value or 80 percent of the lowest price the security had reached within 3 years.

An objection was made that whereas in ordinary times 80 percent of the low within 3 years would be a fair margin for a stable security, the last 3 years have been so unusual that even the very best of bonds may have dropped to a point where 80 percent of the low of 3 years would be really less than should now be allowed as a margin on those bonds.

For that reason, although a full 3-year period has been used as the determining factor for the future, insofar as the last 3 years have been concerned, the date of July 1, 1933, has been used instead.

July 1, 1933, was approximately the peak of the N.R.A. boom of last year. There has been a drop since that July 1, 1933, peak, but a drop to levels not comparable to those reached at the lowest point over the whole of the last 3 years.

Then, you will notice that in addition to raising the basic valuethat is, taking the low since July 1, 1933, instead of the low over the last 3 years the percentage that might be lent on such basic value has been raised so that it is now 100 percent of that low after the July 1, 1933, peak, not exceeding 75 percent of the current market value.

An expert who will testify before you tomorrow, I hope, Mr. Chairman, on the operation of this formula. It works out, as I understand, very satisfactorily and very equitably. This new formula is a distinct concession in favor of higher margin value on stable securities. The margin value on the more volatile securities remains the same as in the original bill.

You will notice on page 14 that the margins of which I have just been talking to you are the margins required to open an account at a broker's.

On page 15, there is a provision that although a broker must require such margins to open an account, he may maintain the account until the collateral has dropped considerably lower.

If you will look on page 15, under (c), under (ii), you will see that although on the initial opening of an account a broker may lend only 40 percent of the value of what we call here "speculative securities", he may carry those securities down before he has to drop the account until he has lent 60 percent on the market value of these securities.

You will also notice that he may carry down the stable securities on which at the opening of the account he lent 75 percent of their market value, until he is lending 85 percent of the market value.

That suggestion originated from this House committee-I do not remember from which member-It has been embodied in this bill with a considerable differentiation between the margins for the initial opening of the account and the margin at which the account may be maintained.

Mr. PETTENGILL. These margin requirements go into effect when? Mr. CORCORAN. As shown on the mimeographed statement which was put before you, the margins would go into effect on October 1, 1934. That is a misprint. As the bill now reads they would go into effect on August 1, 1934, to prevent speculation getting under way this summer. Since all existing accounts have been substantially exempted from the application of these margin requirements, there

is no reason, if the public interest is such that there should be a limitation on margins at all, why these margins should not go into effect as soon as possible. Therefore, with the complete exemption of past accounts from the application of these margin provisions, the effective date for the application of new margins on new accounts has been moved up to August 1.

Mr. PETTENGILL. May I ask a question, Mr. Chairman?
The CHAIRMAN. Mr. Pettengill.

Mr. PETTENGILL. Mr. Corcoran

Mr. CORCORAN. Yes.

Mr. PETTENGILL. Under the bill as written, if it went into effect today, would it require forced liquidations?

Mr. CORCORAN. What is that, sir?

Mr. PETTENGILL. If the bill as changed went into effect today, would it force liquidations?

Mr. CORCORAN. No.

Mr. PETTENGILL. Why not?

Mr. CORCORAN. It would not touch a single existing account.
Mr. PETTENGILL. On the present current market prices?

Mr. CORCORAN. All of those accounts would be exempted under the provisions of subsection (f) we have been talking about for the last few minutes. This bill would not force liquidation of a single account in either the banks or with the brokers.

Mr. PETTENGILL. Under-water accounts, you mean?

Mr. CORCORAN. Yes; it would not force liquidation of any accounts. because of these margin requirements

Mr. PETTENGILL. It might force the closing of accounts.

Mr. CORCORAN. What is that, sir?

Mr. PETTENGILL. It might force the closing of accounts, if there was a slight drop in the market.

Mr. CORCORAN. No.

The CHAIRMAN. What you are trying to say, Mr. Corcoran

Mr. CORCORAN. All present accounts are exempted from all of the provisions of the act. They could be maintained.

The CHAIRMAN. What you are trying to say is that the bill does not, but you cannot tell what the banks would do.

Mr. CORCORAN. You cannot tell what the banks would do.

But let us make very sure about that, sir. If we may go back a moment to page 18, and the provision of the bill that relates to both initial opening of accounts and maintenance of accounts, you will note:

(f) The provisions of this section shall not apply on or before January 31, 1939, to any loan, renewal, or extension thereof made on any security or securities prior to the enactment of this act or on any exempted securities and/or securities registered on a national securities exchange substituted therefor.

Now, these margin sections have been worked out so that a borrower can substitute within an account if he keeps it with the same broker, or the same banker, so long as he does not increase the loan, and also that be can transfer an account from a broker who is unreasonably squeezing him to another broker.

Mr. KENNEY. If the security was up to 60 percent at the time this law went into effect, that would probably have the effect of causing some liquidation?

Mr CORCORAN. No, sir. If the security was at 60 percent, the bank could then carry it down to 40 percent before the bank would be compelled to liquidate.

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

The CHAIRMAN. Mr. Mapes.

Mr. MAPES. May I ask you this

Mr. CORCORAN (interposing). I do want to be certain that (f) is very clear, because we worked out these provisions as carefully as possible to make certain that there could not be any deflation through forced liquidations of accounts.

Mr. KENNEY. Suppose the security is 40 percent. Will that result in many liquidations, if the security is 40 percent at the time of the passage of this act?

Mr. CORCORAN. No; not until the security gets up to 60 percent. Mr. KENNEY. I mean, under the law, the bank might be inclined to liquidate?

Mr. CORCORAN. I do not know why it should, sir. It is not compelled by law to dump, and any bank which has a 40 percent margin these days is resting pretty easily. The law requires nothing and puts no pressure on the bank at all.'

A loan is not to become subject to these margin requirements until it runs up to a 60-percent margin, and then drops again to 40 percentthat likelihood is very, very small

The CHAIRMAN. Mr. Mapes.

Mr. MAPES. Mr. Corcoran, I did not have an opportunity to look at this bill until we convened this morning, that is the new draft. I notice throughout this section it speaks of listed securities, and also "other than exempted securities."

Mr. CORCORAN. I know what you are thinking, sir. If you will

turn over to

Mr. MAPES (continuing). And the definitions of the term "exempted security" is found on page 8

Mr. CORCORAN. Yes, sir.

Mr. MAPES. That seems to say that an exempted security is a present obligation of the United States Government and some of the agencies of the Government, "and such other securities and instruments as the Commission may by such rules and regulations as it deems necessary or appropriate in the public interest or for the protection of investors."

Mr. CORCORAN. And for specific sections of the act, or for the whole act, as the Commission thinks wisest.

Mr. MAPES. I was wondering what you and the others responsible for this draft had in mind that that would include. How general is the class of exempted securities to be, or how limited is it to be?

Mr. CORCORAN. It is not possible at this time, sir, to tell just what classes of securities and what grades within those classes the Commission would find wise to exempt. The difficulty with exempting securities by classes, sir, is that at the present time there is so tremendous a variety of gradations within securities of different classes. Mr. MAPES. Would it include the securities of local companies, for example, that were seasoned and had a well-defined valuation in the local communities?

Mr. CORCORAN. And are listed?

Mr. MAPES. And were not listed on the stock exchanges.

Mr. CORCORAN. Well, sir, the only real control that the Commission would have over those unlisted securities would be in connection with its attempt to control the so-called "over-the-counter" market.

Mr. MAPES. The old draft seemed to limit the right of a business man to go to the bank and make a loan on perfectly good collateral if it was not a listed security.

Mr. CORCORAN. There was no limitation of that kind, sir, in the old draft, unless the proceeds of the loan were to be used to buy or to carry other securities, and in this draft the

Mr. MAPES (interposing). There was, unless a person had owned the securities for 30 days.

Mr. CORCORAN. That has all been stricken out.
Mr. MAPES. That has all been stricken out?

Mr. CORCORAN. Yes. That ties up with the problem that was bothering Mr. Wadsworth when I was last here-about a man's going into a bank with securities he had owned for 30 days and arranging on them a loan which he did not intend to use for the purpose of carrying other securities. You will notice that in this draft that situation has been left completely to the regulations of the Federal Reserve Board, which may lay down rules and regulations to make sure that in such cases the amount by which the loan exceeds that which might have been extended for the purpose of purchasing and carrying securities is not used for such purposes.

You will see that, sir, back here on page 18.

Mr. WADSWORTH. I wish that you would develop that a little further.

Mr. CORCORAN. I am between two fires, just now.

Mr. WADSWORTH. Excuse me, Mr. Mapes.

Mr. MAPES. Just for a minute.

Mr. CORCORAN. Yes.

Mr. MAPES. Suppose that a customer of a stockbroker approached him for a loan and offered to put up good collateral, but unlisted.

What I am trying to get at is: Would that come under this exemptedsecurity definition?

Mr. CORCORAN. I should not think so.

Mr. MAPES. Just what is security contemplated by the term "exempted security"?

Mr. CORCORAN. It is contemplated to cover, first of all, Government bonds. Then, there may be other classes of securities that for the purpose of particular sections should not be included within the purview of those sections.

Mr. MAPES. Under this language you do not enumerate securities or bonds of municipalities?

Mr. CORCORAN. For a perfectly good reason, that at the present time, municipals are running very unevenly. The fact that the Senate has already passed a municipal bankruptcy bill, and there is now pending before your House a municipal bankruptcy bill, argues that you can no longer put all municipals in the same exempted grade as Government bonds.

Mr. MAPES. I assume that you do not put municipal bonds in at all?

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