There are therefore very good reasons for confining loans by brokers to loans on listed securities, not only to protect from evasion whatever margin requirements you may want to set up for listed securities, but because of broader economic reasons make it desirable that loans on unlisted securities should be held in the bank and subject to all of the rules of the bank examiner, than in brokerage accounts. Insofar as new issues are concerned, no reputable stock exchange will list a new issue until it has seasoned a little while, or until it has been distributed widely enough so that the exchange may be certain that there will not be any cornering of the security. During the interim banks carry the loans that were necessary to underwrite and distribute that new security.

Everything about margins goes in pairs, like the animals into the Ark. There are two kinds of accounts to think about: Those accounts which are already in existence and are now being carried by banks and brokers, and those accounts which would be newly opened after this bill would go into effect.

When this bill was drawn and the date on which the margins requirement was to become effective was made October 1, the draftsmen thought that the 8 months of what everyone expects will be a pretty good market would be enough to bring up the present underwater loans in the banks to a point where the new margin requirements would not be burdensome.

But a great many small banks particularly are terribly afraid that under-water accounts will not be able to meet the margin requirements by October 1. If that is the situation, the bill should be changed so its margin requirements will in no way imperil accounts already in existence. Everybody is willing to agree to that. You may want to carry such accounts for a definite time; or you may want to forget about margin requirements altogether on present accounts; but it is important that no margin requirements in a bill like this should imperil a bank now carrying under-water loans.

What shall be done with listed securities in cases where they are not being offered to banks as collateral for speculative purposes, but where a manufacturer wanting a loan at a bank runs into the situation that the bank, operating in the tradition of banks for the last 10 years, doesn't want to make the loan on the basis of no economic judgment of the prospects of the business, but wants collateral security for the loan?

If it were possible to provide that banks would not be bound by the margin requirement on listed securities except where the loan was being made to carry securities, and if it were possible to determine such intention at the time a loan was requested, such a provision would be very desirable in the bill.

But matters of intention are very difficult to prove. For that reason the draftsmen of the bill have tried to work out a rule of thumb to determine whether a borrowing at a bank on securities is for the purpose of carrying the securities for speculation or for a legitimate enterprise.

You will notice that they therefore provided that a bank will not be bound by the margin limitations even on listed securities, if the securities pledged have been held for 30 days prior to the time of the loan. That is only a suggestion for working out the problem. Possibly

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there is some better way to work it out without getting into indeterminable questions of intention.

We are down to the problem of rates of margins. Do you want any rigid margin requirements in the bill? If so, what should those rigid requirements be? Margins are among the few real causes of stock-market abuses and the difficulties which follow for industry and banking.

The two real causes of trouble in the stock market are speculation with borrowed money, that is, on margin, and lack of adequate publicity.

This bill permits a maximum of 40-percent loan value on the current market prices of speculative securities. The 80-percent provision reaches only the more stable securities. Comparing that 40-percent loan value with margins in vogue at the present time, remember that stock-exchange margins are expressed from the layman's point of view in a peculiar way. The stock-exchange rules do not say, as does the language of this bill, that the customer may borrow 40 percent, 50 percent, or any other percentage of the market value of securities carried. They express margins instead as a percentage of the debit balance in an account.

A margin of 50 percent of the debit balance is a 33-percent margin on the market price of the securities, or a 66-percent loan value on the market price of the securities carried.

A margin of 30 percent of the debit balance is a 23-percent margin on the market price of the securities carried.

The present rules of the Governing Committee of the New York Stock Exchange provide that where the debit balance is under $5,000 (which is the situation when the customer does not put up more than $2,500), the customer must put up 50 percent of the debit balance. That means that with $2,500 deposit, the maximum deposit that comes within the 50-percent rule, a customer can carry $7,500 market value of securities. With the same $2,500 deposit the customer could carry under this bill securities with a market value of one and twothirds times $2,500; about $3,100.

If you take the margin which the stock exchange allows for bigger accounts, which is really a 23-percent margin, the difference is more striking. On the present New York Stock Exchange margins with a $10,000 deposit you could buy $43,000 market value of securities.

Mr. MAPES. I am not questioning your figures at all. I do not understand why there sould be such a wide difference in percentages between the amount that $25,000 will buy and that $10,000 will buy.

Mr. CORCORAN. Well, we have worked these out. We worked them out last night with the help of a brokerage house margin clerk, and I do not trust myself completely on margins. I do not even trust a margin clerk on margins, but I have these things all worked out, and I will send them around to you.

Mr. MAPES, Is there not some simple way of stating it so that all of us can understand it?

Mr. CORCORAN. Well, you see when you work it out on the stockexchange formula-may I just pass this up to you so that you can see the algebra involved?

Mr. MAPES. Yes.

Mr. PETTENGILL. Can you not translate that into one simple thing, $10,000 into the terms of this bill? Where is the 40 percent of the $10,000 as against the $33,000?

Mr. CORCORAN. Now, just a minute. Your market price equals the down payment plus an inverted percentage of the down payment. Let's work it out first on the smaller account and see where we come to. Suppose we put up $2,500-no, I am wrong and you are right, Mr. Mapes. My figures are a little bit off. The $10,000 that I am reading, from my margin figures, are from the formulas of the stock exchange. $10,000 will buy $43,333 market value of stocks, under the stockexchange rules, and the same $10,000 deposit under the margins in the proposed bill will buy only $16,666 worth of stocks. There is a very real difference.

The CHAIRMAN. You said awhile ago that you could take $2,500 and buy $3,000. You mean $4,100?

Mr. CORCORAN. No; one and two-thirds; one and two thirds times $2,500.

The CHAIRMAN. That is $4,100 instead of $3,100.

Mr. CORCORAN. You are right, $4,100, as against $7,500 under the New York Stock Exchange margin rules.

Mr. PETTENGILL. Excuse me for just a minute. That is not plain to me at all. You say that the $10,000 under this bill will permit the customer to buy $16,660 worth of stock, or market value of stock? Mr. CORCORAN. Yes.

Mr. PETTENGILL. You simply multiply the $16,666 by 60 percent? Mr. CORCORAN. Yes.

Mr. MAPES. In the stock-exchange figures you gave, do you multiply the total investment by 33% percent?

Mr. CORCORAN. You multiply it by 4%.

The CHAIRMAN. Four and one third?

Mr. CORCORan. Yes.

Mr. MAPES. The total investment?

Mr. CORCORAN. Your total debit.

Mr. MAPES. And the margin must be put at 33% percent?

Mr. CORCORAN. Of the debit balance.

Mr. MAPES. Of the total investment?

Mr. CORCORAN. Yes.. The stock-exchange rules express the margin as a proportion of the debit balance.

Mr. PETTENGILL. One more question. To pin this down then, this bill, as against the present practice of the exchange, would be that the customer under this bill, with reference to the amount of $10,000, would be able to buy that much less, or the difference between $16,000 and $43,000?

Mr. CORCORAN. Yes, sir. And the same proportion, on the $4,100 and $7,500.

Mr. PETTENGILL. He could buy $26,000 less?
Mr. CORCORAN. That is right.

Remember that margin differences not only operate at the opening of an account but also with respect to what is called "pyramiding.' If a stock goes up enough, the profits may give enough margin to buy considerably more stock without further cash. In the days when stocks went up very, very fast, margins were not fixed. There was a provision in the stock-exchange rules that lending on inadequate margins was bad practice, for which a member could be disciplined, but it was only recently, as I remember, that the rules crystalized out definite percentages.

Mr. MAPES. May I interrupt?

Mr. CORCORAN. Yes.

Mr. MAPES. I would like to ask this question. If I understand it, there are very few losses in brokers' loans, comparatively few. Is that correct?

Mr. CORCORAN. You mean the broker does not lose?

Mr. MAPES. Yes.

Mr. CORCORAN. Yes.

Mr. MAPES. And the banks who lend to brokers seldom lose?

Mr. CORCORAN. Yes.

Mr. MAPES. It is the speculator who loses, because he loses his stock, because he has his stock on such a narrow margin that he puts up?

Mr. CORCORAN. Yes.

Mr. MAPES. So that it can be said that this margin provision in this act is more for the protection of the investor in securities than it is for the regulation of the practices of the stock exchanges.

Mr. CORCORAN. The investor is protected with a 60-percent margin up. If your securities start to drop, you can, by selling out a portion decrease the debit you owe the brokerage house, and the required margin until the market value of the securities drops to the debit balance.

For instance, suppose a customer takes 100 shares at $100 each, and puts up a 60-percent margin, as this bill requires. The broker lends $4,000 and the customer deposits $6,000. That starts you off with a balance sheet that shows a market value of $10,000 and a debit of $4,000.

Now, if the stock drops 25 points, the account will show securities of a market value of $7,500, and a debit of $4,000. The debit must be adjusted, because the broker is not permitted to lend 40 percent on $7,500. But by selling $1.66 market value of the stock for every dollar by which the debit must be reduced, the customer can bring the account back in adjustment, and will not be cleaned out.

Mr. MAPES. This whole legislation probably can be said to be for protection ultimately for the protection of the investing public-but what I had in mind is this, to the extent that we put in any marginal requirements, to that extent, we are limiting the judgment and discretion of the individual investor as to the use of his money.

Mr. CORCORAN. Yes, you are.

Mr. MAPES. And particularly so far as brokers' loans are concerned. Mr. CORCORAN. Yes.

Mr. MAPES. We do not need to safeguard broker's loans as such because they are now quite safe-because there are very few losses. Is that correct?

Mr. CORCORAN. The broker always wants, as a matter of practice, a percentage of margin a little bit above what the rules absolutely require and when a stock breaks through that point, he calls on the customer for more margin. Brokers, therefor, very seldom lose on loans to their customers. When they lose it is as a result of mixing up the business of loans to customers with transactions in stocks for their own account.

There are two effects of tightening up margin requirements. First, it increases the amount the purchaser is required to put up at the beginning of the transaction. Secondly, margin requirements over

50 percent of the loan value make pyramiding very slow. The Twentieth Century Fund report, to which I referred the other day, tried to make pyramiding impossible by computing margins, not on the market value of the stock, but on a multiple of the earnings of the stock over 5 years. No matter how fast the stock went up, it had no pyramiding possibilities, because the earnings on a 5-year basis would not increase anywhere near in proportion to market value.

Why do you want to prevent purchasers from going into the market on small margins? For two reasons: first, small margins mean big volume. Brokers are against raising the margin requirements not because they are not concerned with small investors' chance of making money. Everybody in the market knows that on the average the small investor never makes money in the market and keeps it. He always loses.

The broker wants to keep margins as low as possible for commissions. If a customer buys 100 shares on a 20-percent margin, the broker gets the same commission as if the customer buys 100 shares on a 60-percent margin. The broker collects a fixed commission on the 100 shares no matter what the margin figure is.

Mr. HUDDLESTON. What is the purpose of the present stockexchange rule on margins?

Mr. CORCORAN. You mean, what is the purpose of the way of expressing the percentage?

Mr. HUDDLESTON. No; I mean, why have any minimum? Is it for the protection of the investor, or the protection of the broker, or stabilization of the market, or just what is it?

Mr. CORCORAN. Well, as I told you, sir, until very recently there were no fixed minimum margins.

Mr. HUDDLESTON. Now, what is the purpose of it?

Mr. CORCORAN. Well, I think the stock exchange acted in response to an agitation that there should not be too much trading on thin margins.

Mr. HUDDLESTON. For what reason?

Mr. CORCORAN. Because it is socially undesirable to have people run too thin on a margin and be cleaned out.

Mr. HUDDLESTON. You have just said that the small investor always loses anyhow. What difference does it make with him whether his margin is great or small?

Mr. CORCORAN. It makes a difference to him, sir, that he will not get cleaned out so early.

Mr. HUDDLESTON. That is just what I was going to say. What is the social advantage, to use your expression, of continuing in the market a man who is incompetent to go into the market? The sooner he is cleaned out and done with, and is out of it for the future, the better it is?

Mr. CORCORAN. Well, sir, there are a great many, many people who feel just the way you do, that it is not desirable to permit buyers to go into the market on a margin.

This bill is a compromise between those who think that it is the wiser social policy that the average man should not be permitted to go into the market on margin, and those who think it necessary to compromise with the present practice; that the broker must be left some business; and that if you want a highly liquid market, you have to leave a little borrowed money in it.