LEGAL DIVISION

Because of the determination by the President in October 1937 that the Reconstruction Finance Corporation should enter a stage of liquidation, the legal expense in the fiscal year 1939 will increase over the actual legal expense of the past year.

The outstanding loans of Reconstruction Finance Corporation at any one time have generally not exceeded two and one-half billion dollars and at the end of 1937 will approximate $2,000,000,000. Liquidation will not diminish this amount substantially for several years, and consequently the care and administration of collateral, which has been one of the major duties of the legal division since 1935, will not diminish until the volume of outstanding investments is substantially diminished.

Furthermore, entry into a complete stage of liquidation, as borne out by the history of closed banks and business corporations, entails a growth in legal matters to be attended to considerably in excess of those that a going concern encounters. It is expected that litigation and contested matters will materially increase and that additional legal personnel will be needed to carry on this work, as it must either be done by the Corporation's legal division or by counsel under contract in the field, and the latter type of help for most matters is ultimately more costly.

At the present time the legal division has administrative work to perform on investments, including those in industrial loans, preferred-stock purchases, mortgage loans, railroad loans, self-liquidating and mining loans, drainage, levee, and irrigation loans, Disaster Loan Corporation loans, and bank and insurance loans. In addition it supervises about 28,000 cases in litigation and about 28 railroad reorganizations in which the Corporation is interested. Of this latter type only a few reorganizations have progressed very far, and when all have reached the courts it will multiply the required work far in excess of the capabilities of the present force.

In addition to the foregoing it is to the interest of the Corporation to assume supervision over much litigation being now carried on by about 800 field counsel, practically all of whom are under fee contracts and not paid on salary. As the assumption of this work by attorneys on salary greatly cuts the ultimate costs otherwise necessary, increased budget estimates required to carry out such assumption is clearly on economy. It is obvious that with a given amount of legal work to be performed reductions in the estimated expense of the legal division will be more than offset by the increased expense of employing counsel on a fee basis, and hence estimates should provide for sufficient funds so that all the legal work possible can be accomplished by attorneys on salary who fall within the limitations of the budget.

SECRETARY'S OFFICE

The office of the secretary is one of the major divisions of the Corporation, touching the activity of every other part. All action of the board of directors and executive committee, and many of the functions of the other divisions of the Washington office and of the loan agencies in the field, involve and necessitate much administrative work on the part of this office.

It keeps the minutes of the board of directors and executive committee, which is a large and important undertaking. These minutes, as the official record of the Corporation, must be prepared with extreme care and checked in detail as to every item. They are typed and bound in permanent form and every entry is indexed.

The secretary's office is required to advise the other divisions in Washington and the loan agencies in the field of action by the board of directors and executive committee.

The secretary's office also keeps the minutes of The RFC Mortgage Co. and Disaster Loan Corporation. An assistant secretary of the Corporation is secretary of The RFC Mortgage Co. and another assistant secretary is assistant secretary of that company. The secretary of the Corporation is secretary of Disaster Loan Corporation; an assistant secretary is assistant secretary of Disaster Loan Corporation; and an assistant to the secretary is assistant to the Secretary of Disaster Loan Corporation.

The minutes of Electric Home and Farm Authority are prepared in the secretary's office of this Corporation. The secretary is a member of the board of trustees, and vice president of Electric Home and Farm Authority; an assistant

secretary of the Corporation is general manager and secretary of that Authority; and an administrative assistant is assistant secretary of that Authority.

A large volume of correspondence is conducted by the Secretary's office as a result of action by the board of directors and executive committee, and this office also has charge of the general correspondence of the Corporation.

The general files, containing the files of the Reconstruction Finance Corporation, the RFC Mortgage Co. and Disaster Loan Corporation, also are in the secretary's office. These files are great in volume. It is a large task to keep them current and, in response to numerous calls daily, to make them available to employees of the three Corporations and to see that they are returned. The file room is one of the largest in the Government service.

Such services as telephone and telegraph in Washington, the purchase of furniture and equipment and supplies for the Washington office and the field, and the supervision of the maintenance and repair of the buildings occupied by the Corporation in Washington, constitute part of the duties of the Chief Clerk, whose office is a section of the secretary's office. The secretary negotiates all leases for quarters for the Corporation in Washington.

The Chief Clerk also has charge of all printing and duplicating for the Washington office.

The secretary's office prepares and certifies the pay rolls of the Washington Office and maintains a personnel record of each employee in Washington and a personnel card for each employee in the field. Complete leave records of all employees in Washington are kept in the secretary's office, and applications for leave of any character must be approved by the secretary or an assistant secretary.

All checks issued by the Corporation are verified and countersigned by the secretary or an assistant secretary.

The secretary passes upon the monthly and quarterly reports of the Corporation, required to be made by law. With the Chairman, he signs the quarterly reports to Congress.

The secretary is the keeper of the seal, and he is required to attest a large number of documents which must be certified and checked in his office. The secretary affixes and attests the seal in connection with proxies authorizing loan agency managers or others to vote the stock of banks and insurance companies that has been purchased by this Corporation or held by it as pledges. Before the seal is affixed and attested, all such proxies are checked in the secretary's office for accuracy and the authority for their execution. Approximately 3,000 such proxies are issued in connection with the annual meetings of these institutions.

Since virtually every action of the Corporation and every phase of its functions in some form or other involve the secretary's office, its operations necessarily will continue to be extensive even though the volume of business will diminish, for which allowance has been made in the estimates.

DRAINAGE, LEVEE, AND IRRIGATION DIVISION

In view of the very substantial reductions previously effected in the personnel of this division during the past 18 months, it is unlikely there can be further savings of moment without seriously impairing the efficiency of the office.

Outstanding authoriations of this division aggregate over $119,000,000, of which only $78,815,562.12 has been disbursed, leaving a considerable volume of business still pending and in process of closing. There are now outstanding 74 authorized loans on which no disbursements have been made, not counting supplemental loans for construction and other purposes. While it is probable that several of these will not be closed, the recent enactment of a new Municipal Bankruptcy Act has revived a number of cases which had been dormant since the former Bankruptcy Act was held unconstitutional. There are also 175 disbursed loans still awaiting delivery of refunding bonds, which will require considerable work in this office.

To conserve the security and prevent dissipation of assets the servicing of 437 borrowers is now a very important activity of this division which is constantly increasing and requires not only frequent personal contacts and examinations by our field force but careful analysis in this office of budgets, reports, financial statements, and annual levies and assessments, with the resultant correspondence to obtain corrections and adoption of good business practices. As

much of the difficulty of our borrowers in the past, which necessitated refinancing operations, was due to lack of supervision by creditors, we are especially anxious to avoid a repetition of these conditions. If the refunding bonds we take are to be sold, it is essential that no defaults occur in the payment of interest and installments of principal as they mature.

Our experience during the past year indicates that maintenance of substantially the present force in this division is essential if its work is to be handled efficiently.

OFFICE OF THE TREASURER

There was a net decrease of 46 in the number of employees of the office of the treasurer during the fiscal year 1937 which offset the decline in activity in that period. There are approximately 10,000 loans aggregating over $1,800,000,000 on the books of the Corporation as well as 9,600 loans and mortgages of The RFC Mortgage Co., 6,000 of Disaster Loan Corporation, and 2,000 issues or blocks of securities purchased or to be purchased from the Federal Emergency Administration of Public Works. There probably will be made well over 1,000,000 cotton and corn loans for the account of Commodity Credit Corporation during the remainder of the current and early in the next fiscal year. It is not probable therefore that there can be any substantial decrease in the number of employees in this office during the next fiscal year.

SELF-LIQUIDATING DIVISION

The self-liquidating division with its self-liquidating, mining, and catastrophe sections employs between 40 and 45 people and is handling 538 loans totaling an aggregate amount of $463,000 involved. These activities are set out in some detail as follows:

The self-liquidating division has charge of 71 active loans made under the provisions of Emergency Relief and Construction Act of 1932, aggregating a total of $137,703,403 securities held by this Corporation. In addition to these, there are extensions authorized to several of such loans, in an aggregate amount of $178,962,433, the total of securities held or to be acquired being $316,655,836.

This work involves the checking of plans and specifications of the work to be done under these loans. After construction, the operations of these projects are checked to see that all matters covered by indentures, bond purchase contracts, etc., are fulfilled, such as seeing that they have proper insurance coverage, that taxes are paid, and, insofar as possible, preventing defaults. Insurance policies upon self-liquidating projects aggregate a total of $66,049,102. This also includes examinations in the field by members of this division staff. The Self Liquidating Division has also given technical advice to the Drainage, Levee, and Irrigation section in 47 projects, aggregating a total of $47,532,760, with authorization amounting to $14.698,500. This division has also supervised the construction of several of these projects.

The Self Liquidating Division is also servicing a number of the bond issues which have been acquired from the Public Works Administration. The servicing consists of keeping fully informed by means of periodic reports of projects' financial and operating conditions, of critical examination of the projects' expenses and collections, of making suggestions and stimulating the managements' efforts to increase revenues, of seeing that adequate insurance is carried, of field inspection where necessary.

In the case of large construction projects, this division also makes advance engineering studies and reports prior to purchase from Public Works Administration. These applications so handled to date, aggregate a total of $120,000,000. As of October 27, 1937, the number of issues serviced were as follows:

An additional 1,300 (approximate) bond issues are in the process of being acquired from the Public Works Administration. These issues have been given preliminary study prior to purchase. A large percentage of these additional issues will require full servicing.

Section 14 of Public, No. 417, of the Seventy-third Congress, as amended, authorizes the Corporation to make loans to the mining industry. The Mining Section of the Self-Liquidating Division reviews applications for, makes recommendations thereon and administers mining loans. There are now 83 active approved loans, 58 of which either have been totally or partially disbursed. The remaining 25 applicants to whom loans have been authorized are now preparing to comply with the requirements of the Corporation for loan closing and disbursements of funds.

There are 32 applications on file, upon which no commitment has been made, which are now undergoing field examination by this Corporation's supervising engineers; 19 additional applications have been studied and are on file but not authorized for field examination wherein it has been suggested by engineers of the Mining Section that certain work be completed by applicant to qualify for loan consideration. Many of these applicants have expended money to prepare their properties for examination since they filed their applications. There are also on file 19 applications which have not been studied.

Mining loans are administered directly by the engineers of the Washington office of this Corporation, and field inspection and supervision is handled by the supervising engineers under the direction of the Washington office. Duties of engineers of the Mining Section consist of approving all plans and specifications for construction work, plans for the mining or development of properties and approval of all loan disbursements and expenditures. During the construetion or development period regular inspection trips are made to the properties to determine that such work is being carried on according to the plans and specifications as previously approved and that loan funds are properly expended on the project. When a project is completed and in operation, supervising engineers make regular inspections of the property and are present at all times when cleanups of the bullion or concentrates are made, to determine the amount of bullion or concentrates that will be shipped and to see that proceeds of these shipments are properly received and deposited in the trust fund.

Progress and operation reports and records of all expenditures are kept in the Washington office. After a project is completed, and so long as the loan is unpaid, records are kept of operations, expenditures, and income. Each project is continuously under close supervision of an engineer who frequently furnishes borrower with suggestions or advice whereby ore developments are increased or plant operations rendered more efficient.

In addition to their duties of administering loans to the mining industry, engineers of the Mining Section are frequently called in conference in connection with industrial loans and requested to make inspection trips in connectio with such loans.

The Division also has charge of catastrophe loans made under the provisions of section 201 (a), as amended, of the Emergency Relief and Construction Act of 1932, and Public, No. 160, Seventy-third Congress, to nonprofit corporations of which there are eight. These nonprofit corporations have made, in the approximate aggregate, 934 individual loans, totaling $8,909,882. There are also 321 catastrophe loans made under Public, No. 160, as amended by Seventyfourth Congress, authorizing the Corporation to make loans directly to individual borrowers. These total, in addition to those in the Drainage, Levee, and Irrigation Section, $1,354,498. The servicing of catastrophe loans, which are handled in conjunction with the agencies, consists of preparing reports for the directors, checking of disbursements, watching collections, and, in general, assisting the agencies in servicing these loans.

RAILROAD DIVISION

In view of the fact that a number of railway-reorganization proceedings will be very active during the winter and also that mounting railway operating expenses may cut into the income of certain carriers to a sufficient degree to require recourse again to loans from this Corporation, the present staff of the Railroad Division will be fully engaged during the coming fiscal year, and it is not anticipated that any reductions can be made. However, additions to the staff or salary increases are not contemplated at this time and, for that reason, the estimate is based entirely on the present salaries and expenses.

The present work of the Railroad Division comprises, principally, inspection of borrowers' properties and records and gathering and analyzing information with respect to physical and financial conditions, operations, traffic, earnings, and related matters in order to advise the Chairman regarding loan commitments and extensions, also as a basis of advice to counsel and testimony by the Division's examiners, in furtherance of Reconstruction's interest in railroad reorganization proceedings before the Interstate Commerce Commission and the courts. This latter phase of the Division's work is steadily increasing in importance and volume.

During 1937 the railroads have been confronted with (1) net reductions in rates even after making due allowance for rate increases recently authorized, (2) increased fuel, material, and wage costs, and (3) additional taxes for Social Security and Railroad Retirement. These adverse factors at a time when there is a moderate recession in railroad traffic will, in the opinion of the Railroad Division, necessitate loans of possibly $100,000,000 up to June 30 next to prevent bankruptcies to railroads now indebted to this Corporation. In view of these prospective loans, the Railroad Division is faced with a heavy schedule in 1938 and cannot consider reductions in the staff but may have to have additional assistance. Moreover, railroad loans approximately $150,000,000 are in default. In the case of each of the railroads concerned, the Railroad Division must take a continued active part in the reorganization proceedings.

While in recent months applications for new loans have required little attention, the Division has been very busy in preparation of reports and studies related to reorganization questions and protection of the Reconstruction Finance Corporation interests therein. These responsibilities are increasing rather than decreasing.

I must, therefore, emphasize that any curtailment in the staff of the Railroad Division will be short-sighted economy, detrimental to the interests of the Corporation in financial problems in which it has a heavy stake.

The service of the traveling examiner is being utilized in the study of shortline loans. This has been a useful work and it is believed desirable that it be continued, but in case of obligatory expense curtailment the elimination of this work would be preferable to curtailing the work performed by other members of the staff.

AUDITING DIVISION

The estimate submitted on August 25, 1937, for the fiscal year 1939 was based on the number of employees in this Division at July 1, 1937, after giving effect to a reduction of eight employees with aggregate annual salaries of $18,940, due to resignations and separations from the service for other reasons. In our opinion, the estimate submitted provides for the minimum staff necessary to perform satisfactorily the functions of this Division with the expected volume of work during the fiscal year 1929.

As you know, the Auditing Division makes a continuous internal audit of the Washington office, periodic field audits of the agencies and custodians, and, from time to time. as requested, field audits of the books and records of industrial-loan applicants and borrowers of the Reconstruction Finance Corporation. In addition. continuous internal audits are also made of the RFC Mortgage Co. and Disaster Loan Corporation.

I wish also to point out that the estimate for the fiscal year 1939 represents a reduction of 16 employees with aggregate annual salaries of $37,200 from the estimates submitted for the fiscal year 1938.

STATISTICAL AND ECONOMIC DIVISION

The Statistical and Economic Division maintains complete statistical records of the activities of the Corporation; prepares the monthly and quarterly reports to Congress; makes up reports for internal use; and handles a large volume of requests for information, many of which come from Members of Congress. The work involved in maintaining statistical records will continue in the fiscal year 1939, as will the monthly and quarterly reports, these two reports being required by law. I anticipate that the number of requests for information will be at least as large as at present, and probably larger during the last half of 1938.

In order to perform the above duties of the Division efficiently and expeditiously, it is necessary to maintain a trained and adequate personnel, familiar with the routine and methods of the Division.