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application to corporations having their stocks listed. What, in your opinion, would be the effect of that class of provisions on listings of corporations and the maintenance of their listings of their securities?
Governor Black. Of course, I am only giving a personal opinion.
I remember the Federal Reserve System, when it was established, that the national banks were going to quit, and the national banks were fighting it, and were going to quit, and it was going to be a great disaster, and nothing happened.
Mr. HUDDLESTON. Corporations are required to make certain reports and certain acts of officers are forbidden. They are forbidden to collect proxies, except under certain limitations. They are forbidden to deal in the securities of corporations, subject to certain limitations; and there are various provisions for which the violation of which would subject them to heavy penalties.
Governor BLACK. That is right, sir.
Mr. HuddLESTON. You do not think that would operate as a deterrent to listing?
Governor BLACK. It might operate as a deterrent, but on the other side, by being listed, they have got a perfectly free market for their stocks all of the time.
Mr. HUDDLESTON. Have got what?
Governor BLACK. A free market for their stocks, which I think that they should have. I do not think that stock exchanges ought to be closed. I think they serve a very useful purpose in furnishing a free market for equities in America, and I think these corporations are going to have in mind the fact that while they have got to go through these formalities and live under these restrictions, that they want a perfect free market for their stocks, and that especially if you look at the larger ones, which have such a large number of stockholders.
Mr. HuddLESTON. In your view, should corporations be encouraged to list their securities and not discouraged?
Governor Black. Well, I think the listing of securities is entirely an appropriate thing for a corporation to do, sir.
Mr. HUDDLESTON. I am wondering what effect it would have to permit the trading in unlisted stocks on the exchanges.
Governor BLACK. Unlisted stocks are not traded in on the exchanges.
Mr. HUDDLESTON. They are on some exchanges, it seems, from the testimony that has been given here.
Governor BLACK. I thought that you were talking about national exchanges, and listed securities on national exchanges.
Mr. HÚDDLESTON. The provisions of this bill, of course, forbid trading in unlisted stocks.
Governor Black. Well, it limits it only in the open market. I mean, the over-the-counter operations can still be handled under regulations made by the Trade Commission.
Mr. HUDDLESTON. I am under the impression that the New York Curb Exchange permits trading in unlisted securities.
Governor BLACK. I think that is right. I was talking about registered
Mr. HUDDLESTON. I am wondering whether it is not desirable in the public interest that a market for unlisted securities should be provided. Is it not desirable, in the public interest, that there should be free commerce in all kinds of securities, listed as well as unlisted?
Governor BLACK. I think so, sir.
Mr. HUDDLESTON. Yes, this bill makes it impossible to trade in such securities on a national exchange.
Governor Black. Well, as I say, when we talk about national exchanges, I was talking about Boston, or Philadelphia, or San Francisco or the New York Stock Exchange.
Mr. HUDDLESTON. Yes.
Governor BLACK. I did not understand that they traded in unlisted securities on those exchanges, but only listed securities.
Mr. HUDDLESTON. That is no doubt correct as to them.
Mr. HUDDLESTON. I am inviting your attention to that, and want to ask you about your opinion. Do you think that it would be a desirable thing to relax the rule and permit trading on national exchanges of unlisted securities?
Governor BLACK. I do not know that there is any rule against that, sir, except it just is not the custom of the exchanges to deal in any such securities, except those represented by the registered companies.
Mr. HUDDLESTON. This bill, as is my understanding of it, prohibits trading in unlisted securities on the exchanges that are licensed.
Governor BLACK. Well, I do not understand that. I understand this bill limits borrowing by members of exchanges on unlisted securities.
Mr. HUDDLESTON. Now, going to that ponit. Is that desirable, in the public interest?
Governor Black. Well, I think that is the only way you can curb loans on securities, speculative loans, based on securities, because if you do not do that and allow loans of a speculative character to be made on unlisted securities, for speculative purposes, it is very difficult to get any margin requirements, because nobody knows what is the loan value of those securities. There is no market.
Mr. HUDDLESTON. You would not think that it would be desirable to forbid a bank making loans on unlisted securities?
Governor BLACK. No, sir. We have corrected that in this bill so that they may make them, except for speculative purposes.
Mr. HUDDLESTON. Of course, the purpose of borrowing may be unknown to the bank.
Governor BLACK. Wella banker said that to me yesterday. I said, “I do not believe you have a loan in your bank that you do not known whether it is speculative or is not, and having that intimate knowledge with your loans, and realizing that there is a penalty of 10 years in the penitentiary, I believe it will be very easy to decide whether a loan is speculative or is not.
Mr. HUDDLESTON. We have no definition as to what is a “speculative loan.” It is a rather loose expression, it seems to me.
Governor BLACK. Well, sir, the Senate committee asked me the difference between gambling and speculation, and I told them that I thought there was some pleasure in gambling, and very little in speculating
Mr. HUDDLESTON. That depends upon which side you came out on. Governor BLACK. They asked me that, too, and I told them that I had come out on both ends, and lost in the middle.
The CHAIRMAN. Mr. Marland.
Mr. MARLAND, Governor, I would like to ask your opinion on this. Do you believe the passage of this act as written will have any serious effect on stock-market values as they are at present?
Governor BLACK. I doubt it very much.
Governor Black. Very much. I have heard “Wolf” cried so much about business in this country that I do not have much fear about it. We heard the same thing when we went off of the gold standard; you heard the same thing about the gold clause, and I felt the same way when they took our gold, but I was mistaken in all three things.
Mr. MARLAND. If it had the effect of causing a decline, how would that affect the future sales of Government securities: decline in the general stock-market securities?
Governor Black. Well, I heard Mr. Cassatt make his statement about that just now. Of course, there is a natural trend of bonds to follow in the wake of stocks, but if there was some special reason for stocks declining, such as you suggested, I am of the opinion investors would look to investment in government bonds, and we might anticipate a rise in the price instead of a fall.
Mr. BULWINKLE. Governor, do you think that the Federal Trade Commission, as it is constituted in this bill, is the proper commission or authority to give the workings of this to?
Governor BLACK. I think this should be regulated by a government commission. I would say that the Federal Trade Commission was established to insure fair practices and it thereby would certainly be the proper commission to refer this to.
Mr. BULWINKLE. You are of the opinion, then, that it is the proper commission?
Governor BLACK. Yes.
Mr. LEA. Governor, we have an exchange at San Francisco that does business almost entirely, if not wholly, on unlisted securities. Would you think it better that that business be prohibited, or that the power to permit the sale of those unlisted securities, that is, the trading privilege, should be granted under control of the regulatory body?
Governor Black. Well, now, those securities are listed on that exchange?
Mr. LEA. They are listed only for trading purposes. They are not listed by the corporations whose stock is represented. They are given a trading privilege on the exchange on the initiation of a member of the exchange instead of on the initiation of the corporation whose stock is concerned.
Governor BLACK. Well, now, will you ask your question again, because I did not know there was such an exchange?
Mr. LEA. What I wanted to get was your judgment as to whether or not that class of business should be prohibited or should be permitted under the control of the regulatory body.
Governor Black. Well, your question is an entirely new one, but I would think if it were properly conducted under fair practices, that it ought to be permitted some way, because they are practically listed securities. If they are not listed by the corporations, they are listed, certainly, with the tacit approval of the corporation by members of that exchange. I take it that is true.
Mr. LEA. Thank you.
The CHAIRMAN. Governor Black, I think I express the feeling of the whole committee, that we appreciate deeply having a witness before us who is intelligent in answering questions and who does not dodge, and who presents the case in a fair way.
Governor Black. I appreciate that very much, Mr. Rayburn. It has been a pleasure to appear before your committee.
The CHAIRMAN. We have had too little of it in this hearing.
Governor BLACK. If anything occurs to me, I will be glad to give it to you.
Mr. BULWINKLE. Governor, just a minute, please. You said your studies and the studies of the Federal Reserve Board's staff were continuing
Governor Black. That is right.
Mr. BULWINKLE. Now, have you or the staff got any additional information, or formulated any additional amendments?
Governor BLACK. Up to the present time?
Mr. BULWINKLE. Have you in view any that you are going to give us?
Governor Black. None, unless they may be on some technical exchange operations. We are looking into them more fully. The trouble is that we are not, any of us, experts in stock exchanges.
Mr. Chairman, I came near omitting one thing that the board asked me to call the attention of the committee to and suggested a bill, which we recommended 2 years ago relative to fixing reserves of members banks, not by fixed numbers as they are now, 37, 10, and 13 percent, but upon the basis of velocity in the turn-over in the bank. I guess you remember that. I would like very much to leave a memorandum with the clerk on that.
The CHAIRMAN. I think that would come before the Committee on Banking and Currency.
Governor BLACK. Probably I had better submit it to them because we think that would be a benefit now.
The CHAIRMAN. We are very much obliged to you, Governor.
The CHAIRMAN. Mr. Corning, you have someone who wished to be heard?
Mr. CORNING. Yes; Mr. Chairman. Mr. Gibbons.
STATEMENT OF GEORGE B. GIBBONS, MUNICIPAL BOND DEALER,
49 WALL STREET, NEW YORK, N.Y. The CHAIRMAN. Will you qualify by giving your full name and your business?
Mr. GIBBONS. George B. Gibbons. I am a municipal bond dealer, 49 Wall Street, New York City.
The municipal bond dealers in New York City appointed a committee, and appointed me as chairman to bring some points before your committee. You have been kind enough to let us do that, and these are the points. In going over this bill, it has seemed to us very clearly that it was designed to correct speculative abuses on stock exchanges. We cannot see, after very careful examination, where that applies to municipal bonds or just why they should be in the bill.
For instance, they are not speculative in any manner, except possibly, Government bonds, because there are not enough of them, as a rule, of any one particular maturity or kind, or rate of interest, to speculate in them.
Now, the purchasers of municipal bonds, are, in a good many instances, insurance companies, trust funds, savings banks, local banks. Once they are bought they stay bought, as a rule, until sold for need, and to list them on the exchanges would not do them any good at all. In fact, it would do them some harm.
Now, the abuses that apply to other securities such as washed sales does not apply to State and municipal bonds. There are not enough of them available. If you did have a wash sale, or if you sold short, you could not buy them back. And, you do not buy them with your customer's money. You buy them with your own. Ind, by having these State and municipal bonds under the provisions of this bill would be very harmful in their price and desirability, and availability for collateral for loans. They would either have to be listed or they would have to be exempted, or they would not be available as collateral and for ready sale.
The very fact that the Federal Trade Commission has the power to exempt a municipal bond or refuses to exempt it, would be a continual depressing thought on that bond.
A man might buy a bond, or an institution might buy a bond, and after they bought it find it was not exempted, or the exemption was withdrawn. It affects the value and he would be unable to sell it readily.
I have a telegram here from a man who is financial officer of the State of New York, Mr. Morris Tremaine, State Comptroller. He is the custodian of $180,000,000 municipal bonds issued by 600 different municipal subdivisions of New York State, and here is what he says with regard to it.
ALBANY, N.Y., Mar. 23, 1934. GEORGE B. GIBBONS,
New Willard Hotel, Washington, D.C. You are authorized to use this telegram before any Governmental committee and file it as a matter of record. I firmly believe that the listing of municipal bonds on any stock exchange would be injurious to the credit of our municipalities and serious harm would come from such listing for the reason that manipulation of prices on an exchange for this type of security is far more likely than if they were traded in over the counter. Printed prices for small issues of securities such as some of them are could be used as a basis of soliciting orders above al natural market. Depressing prices could also be done through public quutations; at the present time there are 15 issues of New York City bonds listed on the New York Stock Exchange but trades in these issues are very seldom recorded. The State of New York has more than a hundred and eighty million dollars of its investment funds in over 600 municipalities of this State. The State annually invests upward of $15,000,000 in municipal securities of this state and I believe, as the State's chief fiscal officer, that it would not be helpful to the great majority of these municipalities to have their securities listed on any