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I would sell when it came within 15 points of margin and take no chances.

Mr. KENNEY. Would not such legislation require the broker to exact a higher margin from his customers, and tend to keep the little fellows out of the market?

Mr. CORCORAN. Well, that is true.

Mr. KENNEY. Suppose that I had $350 on margin for $1,000 worth of stock, and I put in an order to sell. What guarantee have I that the specialist will sell my stock in the regular order?

Mr. CORCORAN. Well, on the good exchanges you have some guarantee now.

Mr. KENNEY. It might be that I could get out of the market without any liability, but on the other hand I could lose very much more than I had up with the broker even though my order to sell, if executed, would have saved all loss. Is that not so?

Mr. CORCORAN. Of course, that would depend entirely on the efficiency of the house.

Mr. KENNEY. Should there not be a protection for the customer?

Mr. CORCORAN. Yes; but, of course, you must remember, in talking about all these things, that we are not dealing just with the big board. There are three stock exchanges in New York alone, three organizations dealing in securities.

Mr. KENNEY. As I understand your argument, we should tell the little fellow to keep out of the market.

Mr. Corcoran. Right.
Mr. KENNEY. He is not wanted in the market?
Mr. CORCORAN. Yes, that is right.

Mr. KENNEY. Now, I would like to ask if you believe we should find something else less harmful than the stock market for the little fellow?

Mr. CORCORAN. You are talking about this legislation?

Ir. KENNEY. We are dealing with this legislation, and in that connection I would refer you to the Roper report. You have read the Roper report?

Mr. CORCORAN. Yes.

Mr. KENNEY. The Roper report suggested that it might be well if something new or less harmful could be found to take care of the speculative activities of the great masses of the people. Are you familiar with that?

Mr. CORCORAN. Yes.
Mr. KENNEY. Do you agree with that?
Mr. CORCORAN. Do I agree with what?

Mr. KENNEY. Do you agree with that observation, to the effect that there ought to be something else less harmful than the stock exchanges to give a legal outlet for the speculative desire of the little fellow?

Mr. CORCORAN. I do not know. I do not know much about that. Mr. KENNEY. You know about the Roper report?

Mr. CORCORAN. Yes, I know what the Roper report said something about the desirability of some innocent gambling amusement into which we could divert the gambling instinct without raising difficulties for industry.

Mr. KENNEY. Did you read the reference in the magazine, "Time": to that part of the Roper committee report, under date of February 5?

Mr. CORCORAN. Which referred to what, sir?

Mr. KENNEDY. Which referred to that part of the Roper report.

Mr. CORCORAN. Well, sir; that is just a philosophical observation that it would be a nice thing if we could have some kind of gambling game that did not interfere with the industrial situation.

Mr. KENNEY. Do you agree with that?
Mr. CORCORAN. I beg your pardon.
Mr. KENNEDY. Do you agree with that?

Mr. CORCORAN. I think that it would be a lot better if we did not have any gambling at all.

Mr. KENNEDY. Yes; but you realize that we do have gambling do

you not?

Mr. CORCORAN. I am afraid we do.

Mr. KENNEDY. And you know that we are not going to stop it by this bill?

Mr. CORCORAN. You can never stop gambling in some other way, by this bill.

Mr. KENNEDY. There will always be gambling, and if the masses are not permitted to gamble on the stock market, they will gamble in some other way; is that not right?

Mr. CORCORAN. I think that is right.

Mr. KENNEY. Now, if we had a less harmful way for the ordinary man to take a chance to better his condition, you do not think that would be much more preferable?

Mr. CORCORAN. Yes; if we had something that was less harmful.

Mr. KENNEDY. Have you ever considered or studied the advisability of a national lottery to be conducted by the Government of the United States?

Mr. CORCORAN. I understand that-
Mr. KENNEDY (interposing). Have you given any study to it?

Mr. CORCORAN. I understand this, that the French are able to raise money right now, only through the use of a national lottery.

Mr. KENNEY. You say that is the only way France can sell her bonds, and you realize, I suppose, that other countries are raising money in the same way.

Mr. CORCORAN. If you want to introduce a lottery bill, Mr. Kenney, I will help you draw it.

Mr. KENNEY. I have already drafted one, Mr. Corcoran, and have introduced it in the House of Representatives. I am looking forward to the early passage of my bill. I believe it is salutary and much needed for the protection of the masses, and is, besides, a source of large, painless revenue to meet the demands of the Budget. I would like to have your support on it.

Mr. CORCORAN. I will come down here and appear for you on it. Mr. KENNEY. Thank you.

Mr. CORCORAN. Now, you want to remember when we are dealing with this stock-exchange problem, we have more than the New York Stock Exchange to consider. We have the curb exchange, the produce exchange in New York, the Chicago Stock Exchange, the Chicago Curb, the Chicago Board of Trade. We have exchanges in Boston, Detroit, Philadelphia, Cincinnati, New Orleans, San Francisco—Í do not know how many there are of them. You want to remember that when you are dealing with the practices on the Big Board, as a general rule, with the exception of say 4 or 5 other exchanges, they are much ahead of the practice in the rests of the country. For that

reason, there has been incorporated in the bill a provision for the same requirement which the stock exchanges in New York, and the law of the State of New York require, as to raising of money by brokers, by hypothecating their customers' securities. That is what (d) and (e) refer to on page 14. (f) on the same page, 14, touches another practice, Mr. Lea, which you were talking about the other day, in connection with short selling.

In connection with short selling a broker has to find somewhere securities to deliver against short sales. In normal times there is a regular practice of brokers lending securities of customers to cover the short sales.

You think, for instance, that the stock of X Co. is going to drop. It is now at 100. You contract to sell that stock at 100. You hope that when it goes down to 80, as you are betting it will, you can buy in the stock that you sold for 100, at 80, and thereby make 20 points. But you have to deliver stock tomorrow against the sale you made today at 100, under the ruling of the stock exchange, which now requires—it used to be 1 day-now 2-day delivery. From somewhere you have to borrow stock to delivery to your buyer. Your broker possibly borrows it from some other broker. There is a regular business of lending stock to cover short sales.

7 (f) chops into that custom a little by requiring a broker, if he uses stocks belonging to a customer, to cover a short sale of another customer, or lends such stock to another broker to let him cover short sales for his customer, to credit interest paid for the lending to the customer's account.

Heretofore it has eften been pocketed by the broker. When you open an account with a broker you do not sign a note. You just open an open account. You sign a card, which gives the broker the right to hypothecate you securities for his own loans, secure borrowings for money he has lent others, as well as that which he lends you.

Mr. LEA. Do not customers ordinarily know about that?

Mr. CORCORAN. Well, the customer does not, sir, because most men dealing with the market do not know quite what they are doing anyway.

Mr. KENNEY. That gives the broker permission to use the stock?
Mr. CORCORAN. That is right, sir.
Mr. LEA. What are, ordinarily, the purposes of that arrangement?

Mr. CORCORAN. Well, sir, you see the broker has to carry the load and borrow the money which pays for that part of the purchase price of the security you do not put up. Now, no broker has enough capital to carry all his customers.

Suppose you put up a margin. The broker has to find the rest of the purchase price, because he has to pay somebody in full for the stock he buys for you. Now, if there were only you to deal with, the broker's capital might be enough to make up the difference; but there are lots of "you”. "You” are multiplied thousands of times over, so the broker simply has to go out and borrow, and to borrow he has to have some security, so he takes your security and my security, and his own security, and he pledges them in the aggregate for one big loan at the bank.

The CHAIRMAN. We will resume Tuesday morning at 10 o'clock.

(Thereupon, at 11:47 a.m., the committee adjourned to meet Tuesday, Feb. 20, 1934, at 10 a.m.)

NATIONAL SECURITIES EXCHANGES-H.R. 7852..

TUESDAY, FEBRUARY 20, 1934

HOUSE OF REPRESENTATIVES,
COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE,

Washington, D.C. The committee met, pursuant to adjournment, at 10 a.m., in the committee room, New House Office Building, Hon. Sam Rayburn (chairman) presiding:

The CHAIRMAN. The committee will come to order.
You may proceed, Mr. Corcoran.

STATEMENT OF MR. THOMAS GARDINER CORCORAN, COUNSEL

WITH THE RECONSTRUCTION FINANCE CORPORATION, WASHINGTON, D.C.-Resumed

Mr. CORCORAN. You will remember that at the last session we began to talk about provisions in this bill for the control of the amount of credit that gets into the market and we discussed those provisions, of section 7 of the bill which limit the amount of money a broker can borrow. You will remember that the bill limits the amount that brokers can borrow from Federal Reserve banks, limits them to borrowing from any source more than ten times their capital. I understand from some members of the Fletcher Committee, that at times, brokers, members of the New York Stock Exchange, have borrowed as high as 52 times their capital.

Furthermore, there are provisions cutting down the right of brokers to use their customers' securities as collateral for the brokers' borrowings, which accord with the rules of the New York Stock Exchange at the present time, and the requirements of the law of the State of New York. There are also some limitations on the degree to which a broker can borrow stock from one another to cover short sales, and there are provisions preventing a broker from speculating for his own account with that portion of his capital which theoretically is reserved as a cushion for the protection of his customers.

The second part of the control of credit as it gets into the stock market relates, of course, to the credit that can be extended to purchasers of stocks. That brings us to a discussion of margins.

The margins provisions of this bill are all included in section 6. Let me outline the structure of that section before I answer questions. on margins. In substance, subsection (b) of section 6 provides that any member of an exchange or any of the outside brokers of whom I told you the other day who carry on a regular business in securities through members of the exchange acting as brokers can lend only on listed securities and lend only either 40 percent of the current value or 80 percent of the lowest value to which a security which has had a

market for 3 years has fallen during those 3 years whichever is the higher.

That confines people who are in the brokerage business to lending on listed stocks. You understand that are degrees of listings in stocks. Stocks are fully listed on the New York Stock Exchange. That means that the issuing company has agreed to comply with all of the requirements of the exchange. Sometimes stocks are not listed by the issuing companies, but have what is called unlisted trading privileges on an exchange. A great many such stocks

are traded in on the New York Curb Exchange. Mr. Lockwood, counsel for the curb, is here this morning and can tell you about that situation.

Stocks not listed on any exchange range all of the way from the stocks of the big New York banks, which have regularly organized so-called "over the counter markets", to the stocks of little local manufacturing companies that are closely held and have no organized market at all.

This bill says listed stocks only may be lent on by members of exchanges, and by brokers outside of the exchange doing business through members of the exchange.

On the unlisted stocks loans may be made by banks. There is no prohibition against a bank's lending on unlisted securities, as there is against a broker's lending no unlisted securities. But insofar as a bank lends on listed securities it has to lend at the same margin rates as those on which brokers lend on listed securities.

Refusing to allow brokers to lend on unlisted securities has many justifications. First, remember that on one ever quite knows what the market is on the majority of unlisted securities. That is not true of the market in New York bank stocks. But the markets in New York bank stocks, and in a few other stocks which you see regularly quoted in the financial pages are exceptions to the great run of unlisted securities.

Since the value of an unlisted stock is therefore always uncertain, a broker permitted to lend upon unlisted stocks and listed stocks in a parcel, could perfectly easily evade any margin requirements on listed stocks by attributing a value which could never be quite proved wrong on the unlisted stocks, and giving 100 percent margin on that value to compensate for lower theoretical margins on the listed securities.

Reason number two for keeping unlisted securities loans in the banks and out of the brokerage houses is that as Dr. Goldenweiser and Mr. Thomas pointed out the other day, the broker's position is one in which his liabilities come upon him very quickly and it is a dangerous thing for the solvency of the brokerage house to have its assets tied up in unliquid loans on unlisted securities. A loan value on an unlisted security is simply a matter of business judgment, like a commercial loan. You cannot turn to the financial pages in the morning and see a quotation and know that within certain limits you can dump a number of shares of that security at the quoted price. You never quite know what your market is for an unlisted security. Its value depends upon commercial judgment as to the value of a business, and that is a banker's, not a broker's, job. You can safely leave the unlisted securities to the banks because the bank examiner will take care of over-lending by the banks on unlisted stocks and securities.

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