Mr. CORCORAN. Probably in many cases some grades of municipal bonds would be exempted, but I do not think the Commission would feel that it could exempt all municipals.

Mr. MAPES. I assume that as long as municipals are not included, that it is not intended to include the bonds or stocks of private corporations; is that right?

Mr. CORCORAN. I am quite sure that is true, sir.

Mr. MAPES. Do you think that the Commission would exclude all securities of all private corporations from this exemption class?

Mr. CORCORAN. I cannot answer that question, sir. The purpose of leaving the exemption provision as broad as it has been left, is to leave the matter to the Commission to handle it as needs develop in a very flexible way, without tying the Commission's hands by too many specifications in the bill. I cannot answer the question you have put to me, sir, as to what the action of the Commission would be in a particular case, because that action would be determined by the specific circumstances under which the case came to the Commission in good time.

Mr. MAPES. I am wondering if the drafters of the bill thought that those all ought to be excluded.

Mr. CORCORAN. No. We had no feeling one way or the other way upon it, sir. We simply felt that the only safe complete exemption you could make at the present time was United States Government. Then as necessities arose and the flexibility and the workability of the act required, the Commission could make such other exemptions as it chose.

Mr. MAPES. You would leave the matter entirely within the discretion of the Commission without any yardstick to guide it?

Mr. CORCORAN. We have given it one yardstick, sir, in Government securities.

Mr. MAPES. But outside of that?

Mr. CORCORAN. Outside of that, sir, the securities situation at the present time is so jumbled up that it is not advisable to give specific directions as to exemptions. The municipal situation is one indication of that.

Mr. MAPES. But you have no idea of restricting the Commission in its judgment to Government or

Mr. CORCORAN (interposing). No.

Mr. MAPES (continuing). Or municipal bonds?

Mr. CORCORAN. No. This is a loophole to let the Commission give the act such lubrication as it needs to avoid its application to situations where its application is unnecessary in the public interest. Mr. MERRITT. Mr. Chairman

The CHAIRMAN. Mr. Merritt.

Mr. MERRITT. I would like to know how this bill affects the situation in the part of the country I come from-New England. Mr. CORCORAN. I come from New England, also.

Mr. MERRITT. Where there have been, as you know, great numbers in all the States of small corporations which have existed for generations; a good many of them are family corporations.

Mr. CORCORAN. Yes.

Mr. MERRITT. Now, they are not of a size that warrants their listing on an exchange, very often, and yet the banks in that vicinity know that their stocks are good and reliable.

Under the old bill there was a provision which apparently prohibited that stock from being put up as a collateral at all.

Mr. CORCORAN. Those stocks could not have been put up, sir, in brokers' accounts. But they could have been put up in banks'

accounts.

Mr. MERRITT. Well, there was a provision to the effect that unlisted stocks could not be used as collateral.

Brokers were not per

Mr. CORCORAN. No; that was not true. mitted to lend on unlisted collateral, but banks were permitted to lend on both listed or unlisted collateral.

Mr. MERRITT. Under the old bill. I do not care to argue it.

But

a bank that dealt with a broker got in the class of a broker after all. Mr. CORCORAN. To be very careful about that, you will notice that the new bill expressly excludes banks from definitions of brokers and dealers.

Mr. KENNEY. What section?

Mr. CORCORAN. May I continue for just one second? You will notice that, sir, in (7) on page 6. It also excludes from the definitions of broker and dealer a man who just buys securities for his own account and is not in the business of making a profit by merchandising them, like an ordinary dealer.

Mr. MERRITT. There is something that I want to clear up in my mind. Under the new bill, how far can the Commission go in interfering with or controlling the banks in New England, for instance, in loaning money on stock of corporations that they have been dealing with for years?

Mr. CORCORAN. So far as loans to the corporations are concerned, the bill does not interfere at all, except as to corporations intending to put up securities of other corporations as collateral. So far as loans to others on the collateral of stock or other securities of those corporations are concerned, they cannot go into brokers' accounts. Mr. MERRITT. What?

Mr. CORCORAN. They are not eligible collateral for brokers' accounts.

Mr. MERRITT. No.

Mr. CORCORAN. But they are eligible collateral for bank loans, and as collateral for bank loans they are eligible for any amount of loan, so long as the excess over what might be lent for the purpose of carrying securities, is lent under such conditions as the Federal Reserve Board prescribes to make sure there will be no evasion.

Mr. MERRITT. I should say that a prudent man would not interfere with them at all.

Mr. CORCORAN. No. I am coming to that bank-collateral situation in just a moment, sir.

as you

There was among members of the Federal Reserve staff, will find in many places, a very distinct feeling that the brokers should be taken out of the lending business completely, and the control of credit put completely in the banks; that a broker should be only an agent to execute orders, and should not be a banker, a lender, who by his willingness to lend money tempts a customer into buying more than the customer wants to buy, or can buy without that assistance of speculative credit. That feeling that all lending functions ought to be in the hands of the banks, which require a borrower to make an adequate proof of credit standing to get a loan on securities, rather

than in the hands of brokers who almost push credit down the customer's throat to give themselves bigger turn-over and commissions. The margin requrements for bank loans have been very carefully worked out to leave as much latitude as possible, and, of course, there is an escape valve in 6 (d), by which the Federal Reserve Board, in certain situations, may loosen up the margin requirements beyond what the bill now provides.

Mr. PETTENGILL. Where is that?

Mr. CORCORAN. That is in section 6 (d), beginning at the bottom of page 16. The real biting language is the first new paragraph on page 17. [Reading:]

Although the limitations of this section 6 upon the extension and maintenance of credit shall, except in the extraordinary circumstances hereinafter referred to, be strictly adhered to by the Federal Reserve Board as the considered policy of Congress, the Federal Reserve Board may, notwithstanding the other provisions of this section 6, in situations where it deems such action vitally essential to the accommodation of commerce and industry and with regard to its bearing on the general credit situation of the country, by rules and regulations permit lower margin requirements for particular securities or transactions or classes of securities or transactions, and for particular periods.

It says in substance that Congress wants the Federal Reserve Board, as much as possible, to stick to the margin requirements laid down in the section, but that in emergencies when the Federal Reserve Board deems such action vitally essential to the commerce and industry of the country, the Federal Reserve Board may loosen the margin requirements.

Mr. WOLVERTON. Mr. Chairman

The CHAIRMAN. Mr. Wolverton.

Mr. WOLVERTON. Why limit the power to lower the margin requirements?

Mr. CORCORAN. There is a provision, sir, in 3 (d), which allows the Federal Reserve Board to tighten up in any situation whether or not the situation meets the requirement, that it shall be vital and essential.

Mr. WOLVERTON. Then, there is a discretion lodged in the Federal Reserve Board by this bill that will enable it either to increase or lower margin requirements?

Mr. CORCORAN. The Federal Reserve Board can increase the margin requirements very easily, and with considerable brakes to lower margin requirements.

Mr. WOLVERTON. Was there such power in the original bill?

Mr. CORCORAN. No; there was just the power to raise margin requirements.

Mr. WOLVERTON. It would seem that such provision in the bill takes into consideration the statement which was made in the Dickinson report to the effect that power should be given to devise rules and regulations on the subject from time to time after appropriate studies.

Mr. CORCORAN. Yes; although the Federal Reserve Board is circumscribed considerably in its discretion to loosen up. But it has complete discretion to tighten up.

Mr. MAPES. I think Mr. Corcoran has answered this question in reply to Mr. Merritt to some extent, but for my own satisfaction I would like to restate it and see if my understanding of his answer is

correct: That so far as this legislation is concerned, it does not interfere with a bank making a loan on any terms it sees fit to its customer or customers, except insofar as the Federal Reserve Board passes regulations to limit loans by banks coming under its jurisdiction? Mr. CORCORAN. No; that is not quite so. It says may I read this section that covers the whole thing?

Mr. MAPES. It would be so except in case the loan is made for the purpose of speculation?

Mr. CORCORAN. Unless the loan is made for the purpose of purchasing or carrying securities. Yes, your statement is correct.

Mr. MAPES. What limitation is put upon the borrowing of funds, even though they are to be used for speculative purposes?

Mr. CORCORAN. Except where the Federal Reserve Board exercises what I call the escape valve, which I have just been discussing with Mr. Wolverton, the banks are expected not to lend for the purpose of carrying or purchasing securities in amounts which represent a higher percentage of the market value of the collateral than a broker could lend. But when the loan is made not for the purpose of carrying or purchasing securities it may be made without reference to margin requirements, so long as it is made under such rules and regulations as the Federal Reserve Board prescribes to make certain that the excess loan will not be used to carry and purchase securities.

Mr. MAPES. Unless the bank knows that the funds are to be used for speculative purposes, it may make such loans as it sees fit, if it complies with the regulations.

Mr. CORCORAN. Of the Federal Reserve Board.

Mr. MAPES. Of the Federal Board. What obligation is placed upon the bank to ascertain whether or not that the loan is wanted for speculative purposes?

Mr. CORCORAN. That is up to the Federal Reserve Board.

Mr. MAPES. As to whether or not the funds are to be used for speculation?

Mr. CORCORAN. That is up to the regulations of the Federal Reserve Board.

Mr. KENNEY. Mr. Chairman

The CHAIRMAN. Mr. Kenney.

Mr. KENNEY. What section are you referring to?

Mr. CORCORAN. We are talking, sir, about subsection (e) of section

6, which begins on page 17.

Mr. WADSWORTH. May I ask a question?

The CHAIRMAN. Mr. Wadsworth.

Mr. WADSWORTH. To clear it in my own mind, Mr. Corcoran, I call your attention to the sentence which commences in line 6. The CHAIRMAN. Where?

Mr. WADSWORTH. On page 18.

The provisions of this subsection shall not apply to a person making a loan other than in the ordinary course of business.

Mr. CORCORAN. Yes.

Mr. WADSWORTH. Will you clarify that, clarify my mind on that? Mr. CORCORAN. That was to meet the situation, sir, suggested here of a friend wanting to lend money to a friend to help on a margin account, not as a business loan but to make sure that the account could be carried-a father making a loan to his son, where the trans

action is not really a commercial loan in the ordinary course of business.

Let me be clear about one thing. You will notice that this section, subsection (e) limits banks only on the amount they can lend on listed stocks. On unlisted stocks, the banks can lend anything they want to. The bank examiner takes care of the problem of overvaluation of unlisted stocks.

Mr. MAPES. Even though the funds are to be used to speculate with?

Mr. CORCORAN. Yes. A broker cannot lend on unlisted stocks at all.

Mr. MAPES. So that the limitations in the other draft, that were put upon banks making loans for use primarily for business purposes are substantially removed?

Mr. CORCORAN. Yes; that is true.

Mr. MAPES. There is no limitation in that respect in the new draft? Mr. CORCORAN. You see, value of unlisted securities is never exactly known, except in unusual cases of a highly organized market such as the New York bank stock market. In the case of little family corporations, such as we have in New England, there is really no market for that unlisted stock. It is too closely held. A bank which lends on it has to be outside the scope of any specific margin require

ments.

Mr. CROSSER. Mr. Corcoran, would you mind restating as concisely as possible your justification for applying this bill to transactions that have already occurred?

Mr. CORCORAN. The provisions of the bill do not apply to transactions that have already occurred.

Mr. CROSSER. Well, you are giving 5 years.

Mr. CORCORAN. Five years?

Mr. CROSSER. I mean, why apply that at all?

Mr. CORCORAN. You mean, why the 5-year limitation?

Mr. CROSSER. Yes.

Mr. CORCORAN. That was inserted

You have misunder

Mr. CROSSER. I do not mean that, at all. stood me. Why have it apply to these matters at all, even by requiring them to be closed up at the end of 5 years?

Mr. CORCORAN. That limitation, sir, was put in at the suggestion of the banking authorities in the Treasury, who thought that the banks should be given warning that at the end of 5 years they would have to have made some final adjustment on accounts now under water. The banks would have 5 years in which to work out those loans, but would definitely understand that at the end of 5 years the loan had to be out of the bank.

Mr. CROSSER. Why, particularly, did you provide 5 years?

Mr. CORCORAN. A suggestion, sir, was made for 3 years and then it was loosened up to 5. I should think the Treasury wanted, sir, as part of the new banking program, to prevent banks carrying bad loans indefinitely. At the end of a certain period the bank would have to wipe the loan off its books.

Mr. CROSSER. Then it is for the purpose of taking care of the banks, rather than the stock exchange.

Mr. CORCORAN. Oh; yes, sir. Brokers will get out long before the 5 years.