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Mr. BULWINKLE. If you will pardon me right there, I am not talking about the secrecy, but I would like to know who drafted the bill. The statement that I am getting is just “a lot of fellows."
Mr. CORCORAN. You mean, you want the names?
Mr. CORCORAN. There was Mr. Landis, Federal Trade Commissioner Landis. He was assisted by some men over in his office. I do not remember quite who they were. Then, there was Mr. Cohen here, who you will remember drafted a similar bill last year. I, too, worked on the drafting of this bill, and four or five members of the Pecora committee worked on it. Mr. Pecora, Mr. Flynn, Mr. Lowenthal, Mr. Silver, Mr. Meehan, and others of Mr. Pecora's committee worked upon it.
Mr. KENNEY. What Mr. Meehan is that?
Mr. CORCORAN. I am sorry. It is the Fletcher committee, and I should have mentioned his name because as chairman he has taken a deep and active interest in the drafting of the bill
. I am very sorry. Because I have been contacting with the Pecora people in connection with the investigations of that committee, and we see a lot of Mr. Pecora, I have come into the habit of calling it the Pecora committee. I am wrong about that.
The CHAIRMAN. Furthermore, was not the drafting of this bill the outgrowth of a committee headed by Secretary Roper, during the summer months, at the request of the President to investigate this subject, and this bill is based to a large extent upon the recommendations of that committee?
Mr. CORCORAN. That is correct, the Dickinson committee. Then, you must remember, there was another report which really deserves much more attention than it has had. That is the report of the Twentieth Century Fund, Inc. I think I have it with me. I have here a list of the directors of the Twentieth Century Fund, Inc.
That report came out on the 8th of February Mr. KENNEY (interposing). What report is that? Mr. CORCORAN. The report of the so-called “Twentieth Century Fund." I have a list of the directors here. The Twentieth Century Fund is a research foundation which has done a great deal of fundamental work in this direction. You will remember one of the books they published is a study of internal debts of the United States by Evans Clark.
Edward A. Filene is the president of the fund; Henry Bruere, of the Bronx Bank, New York, who came down here as the President's coordinator, credit coordinator, is a member; Evans Clark is director.
I will read the list of the board of trustees. You understand that this report has been submitted to this board of trustees by the experts whom they employed to work the thing out. I do not know whether it has been formally approved by the board of trustees, but it was published practically in full in the newspapers.
Newton D. Baker; Bruce Bliven; Henry Bruere; Harry S. Dennison, that is Dennison of the Dennison Paper Co., he is now over with the Industrial Advisory Board of the N.R.A.; John H. Fahey, who is head of the Home Loan Bank System; Edward A. Filene; James G. McDonald; Roscoe Pound, who is dean of Harvard Law School; Owen D. Young.
So, that is where the bill came from.
Mr. CORCORAN. As I have carefully said, Mr. Mapes, I do not know. I only know that they hired this committee to do this job, and received this report.
Mr. Mapes. You just enumerated the names of the men, and then you said that that is where the bill come from.
Mr. CORCORAN. On, no. I was talking about the report.
Any bill as complicated as this if it is worked out in conscientious detail
, picks up its ideas from a great variety of persons. There is a very interesting news item by an editor of the Herald-Tribune, about a week ago, in which he takes the Dickinson report and the Twentieth Century Fund report and this bill and matches them in the places where they differ, and where they agree. You see a rather close similarity all the way through, except that this bill, in common with the Twentieth Century Fund report, ties down things a little tighter than the Dickinson report.
The chairman asked me to come to grips with specific provisions of this bill. I will try to tell what ideas are in the bill, what evils it tries to meet, and how it tries to meet them. Then, Mr. Cohen, who did the job of drafting this bill in detail, because that is always a one-man job, will go over it with you, if you choose, word by word, and comma by comma.
Now, I will come to grips with it, and you can pound me all you want to on margins, if you will just give me a few minutes to describe the structure of this bill.
The President's message, you remember, lays down a declaration of social policy on the problem of speculation by those who cannot afford to speculate, upon which there seems to be a difference of opinion around this table.
The bill was pointed at what it was expected such a message would recommend, and it may be a good thing right now to see how the bill ties into what the President asked, to remind ourselves what his message said on the subject of the policy of preventing overspeculation by those who just cannot afford to speculate.
As you were told by Dr. Goldenweiser, such people are never able to recoup their losses.
For instance, the Senate investigating committee right now is talking about the pool of alcohol stocks in the early part of last summer. The little fellows on the outside of those pools did not recoup their losses. They were just royally burned.
You will remember that in American Commercial Alcohol the pool ran the stock to 89%, I think, and within 3 days after the peak that stock was back down again to 28 and something.
Now, the little fellow in that market who was not on the inside of that pool, which the Senate committee has been investigating in the last 2 days, just got his shirt taken away from him and ants put in the pants that were left him.
But I will come to that when we talk about margins. You remember the President's message reads like this:
There remains the fact, however, that outside the field of legitimate investment, naked speculation has been made far too alluring and far too easy for those who could and those who could not afford to gamble.
Such speculation has run the scale from the individual who has risked his pay envelop or his meager savings on a margin transaction involving stocks with whose true value he was wholly unfamiliar, to the pool of individuals or corporations with large resources, often not their own, which sought by manipulation to raise or depress market quotations far out of line with reason, and all of this resulta ing in loss to the average investor, who is of necessity personally uninformed.
The exchanges in many parts of the country which deal in securities and commodities conduct, of course, a national business because their customers live in every part of the country. The managers of these exchanges have, it is true, often taken steps to correct certain obvious abuses. We must be certain that abuses are eliminated and to this end a broad policy of national regulation is required.
İt is my belief thta exchanges for dealing in securities and commodities are necessary and of definite value to our commercial and agricultural life. Nevertheless, it should be our national policy to restrict, as far as possible, the use of these exchanges for purely speculative operations.
Now, this bill has at bottom five ideas in it, and all 36 pages tie in around the five ideas.
The first idea is control of the amount of credit that gets into the market. That relates to the amount that brokers can borrow from banks and the amount that brokers or banks can lend to individuals to buy more securities than the resources of those individuals justify. That is point one.
It is concerned with how much of the national credit resources get into the market? It relates to all of the mechanics and all of the questions of proportions, and similar matters about which Dr. Goldenweiser has been talking to you.
Then, we go to the next point, and that is control of manipulations. As I will point out later, there are only a very few real battlegrounds in this act. Manipulation is not one of them. The provisions of this bill, as to manipulations upon stock exchanges, are agreed to practically everywhere. The Dickinson report agrees with them. The Twentieth Century Fund agrees with them. Matched orders, washed sales, pools, options—all of the rest of them are out. So, control of manipulative practices is really not something your committee has to thrash out around this table.
So first we have a problem of credit control. Then we have a problem of manipulation. Next comes the everlasting problem of protecting the fellow on the outside from the insider, the thing you were talking about the other day, Mr. Marland. That is, the problem of protecting the stockholder--and every fellow who buys into the market is a stockholder—who does not know as much about the company as the fellow on the inside. Under those conditions as Dr. Goldenweiser has said, the poor little fellow does not know what he is getting into, and it is just as important in preventing unwarranted and destructive speculation, to have the fellow on the outside protected from the fellow on the inside who is an officer or director of the corporation or a pool with inside information, as it is not to let the little fellow buy too much stock by setting the margins too low.
Then, there is a fourth idea in here. That is the elimination of abuses in the market machinery that tend to make the market a place for speculation rather than an investment. That relates to this everlasting problem you heard so much talk about, about specialists, floor traders, dealers, underwriters, when all, except the floor trader, are acting as brokers for you and me, when we send in an order to buy stocks. You have that problem of exchange machinery.
Then you reach the fifth problem. If you are going to regulate the stock exchanges, who is going to have the job of doing the regulating? Are you going to try to let the exchanges regulate themselves? Are you going to set up a new separate commission down here, or are you going to try to tie this job in with the jobs of the Federal Trade Commission in relation to the securities act, the N.R.A., and everything else, so that one body watches the whole problem?
This bill therefore points up directly to the problem of speculation that the President talks about in his message.
Again, there are five problems. First the amount of credit that gets in the market. Second the manipulative practices in the market. Third the machinery of the market, the relations of the brokers, the floor traders, the dealers and the underwriters, to those outside, fourth, the protection of the corporation outsider from the corporate insider, and finally the problem of administration.
Now, let us talk about this matter of control of credit. Going into the bill in detail, there are two sections to take care of that problem of credit control. One of them is section 7, over here on page 13, relating to restrictions on borrowings of brokers. You will notice that the bill talks about both a member of an exchange, and any person who transacts a business in securities through the medium of a member. That is to meet a situation that is common in the 'street. A great many investment houses do not hold membership on the New York Stock Exchange because they do not want to be subject to such restrictions as the New York Stock Exchange has put on its members. So they stay out, on the outside, but they take orders as brokers and they clear through a member. It is to get that sort of a broker who is not a member of the exchange, but who regularly carries on a brokerage business through a member of the exchange, just like a member of the exchange, that this provision about doing business through a member of the exchange is intended to catch.
The bill needs to be clarified, so that a bank which just acts for you in passing on an order to a broker, for you, does not come within that sort of a provision.
Mr. KENNEY. Why should that limitation be taken out?
Mr. CORCORAN. Because there are plenty of other limitations on the banks. A bank cannot normally go in the business, like a broker, of dealing in securities. For your convenience, for a service
Mr. KENNEY. But they do.
Mr. CORCORAN. They are not allowed to do those things any longer, under the Glass-Steagall bill. They cannot go into a business of dealing in securities, but they can still make a service charge for passing on for you, as a customer
Mr. KENNEY. What business haven't the banks gone into?
Now, when we get into these provisions about the control of credit, you will notice that first of all the bills say to these brokers who really carry on the bulk of the business on the exchanges, "you cannot borrow from any bank except a member of the Federal Reserve."
With the deposit insurance system going into effect, practically all banks will eventually be members of the Federal Reserve System. It is little hardship to any particular bank that it is not allowed to lend to a stock exchange house, if it is not a member of the Federal Reserve, and as Dr. Goldenweiser said to you there is a tremendous advantage in utilizing what control over credit you can get through the degree to which the Federal Reserve System can control the credit extended by its members.
The next provision, 7. (b), provides that a broker cannot borrow from anywhere more than ten times his capital.
You have noticed no criticism of that provision even in the papers that are most tied up with the opposition to this bill. Remember we did not get through the last crash with all brokerage houses standing up There were at least Prince & Whitely and Pynchon. When a broker extends himself too far, this very efficient stock market machinery sees to it that the lender does not lose and closes right down on the broker. The banks refuse to renew the daily loans and the broker does not have any time to turn around. A broker always needs a certain amount of immediate resources to take care of current customers' credit balances and other demands and he always owes customers some securities. Whenever a brokerage house gets over its head on its own obligations, some customer loses.
There has been a favorable reception to this provision 7 (b). It insures two things: First, the solvency of the brokerage house-you cannot go into this business on a shoestring any more
Second, the cutting down of the total volume of borrowed money that gets into the stock market.
Notice section 7 (c). It says, if you are a broker, you have a responsibility for your customers to stay solvent and you cannot play in the market with the capital that theoretically you have invested in the brokerage business, because then your own operations get mixed up with your customers' operations. You are pledging the same securities for their and your own operations, and, if your own operations are unsuccessful then your customers may lose with you. That is, you keep this cushion of capital for the protection of your customers if anywhere in a diversification of loans to customers which are always safer than a position of your own in the market.
Mr. KENNEY. Mr. Chairman. The CHAIRMAN. Mr. Kenney. Mr. KENNEY. You urged a little while ago that there was a reason why it was not possible for legislation to be passed which would permit customers to limit their liability by confining their responsibility to the funds placed with the broker for purposes of a transaction.
Mr. CORCORAN. That is, suppose I buy certain shares of stock at market price, which aggregates $1,000. Under the present rules, if I am a little fellow, the margin would be different from what it would be for the big fellow. But suppose I am a big borrower I might put up $350, you say now, why should it not be possible for my entire liability in that transaction to be that $350.
The answer is that no broker will take that contract, because---a broker cannot be sure in a market that is falling fast, that with all of the diligence in the world he can get the securities sold out of an account in time to protect himself. If you did have such a contract, supposing the broker would play ball on such a basis, you would have a much more vicious market. If I were a broker, and I knew that if the collateral went lower than the margin, I would lose the difference and