The total cumulative income of the Insurance Corporation from premiums to December 31 last was $21,768,272. Cumulative operating expenses to the same date amounted to but $2,029,472, or 9.323 percent of the insurance-premium income. Senator DANAHER. Now, Mr. Fahey, that differential between the cumulative premiums on hand and the cumulative operating expenses which you just gave, will be the reserve fund which is to be transferred to the reserve under section 404, under this bill? Mr. FAHEY. No, no. Senator DANAHER. Where do you get that reserve fund which is to be transferred to the 404 reserve? Mr. FAHEY. That represents the earnings on bonds of H. O. L. C. Senator DANAHER. Oh, entirely? Mr. FAHEY. Yes. I will come to that. Senator DANAHER. Thank you. Mr. FAHEY. Entirely that. This is irrespective of the earnings of H. O. L. C. Senator DANAHER. I understand now. Thank you. Mr. FAHEY. The total cumulative income of the Corporation from all sources to the end of the last calendar year was $53,338,314. The cumulative operating expense to that date represented 3.805 percent of the total income. If during 1943 the premium rate of the Insurance Corporation had been reduced to one-twelfth of 1 percent, the income from premiums would have declined from $4,110,298 to $2,740,199, and the total income for 1943 of $7,486,977 would have been reduced as of last year to $6,116,878. As I have stated, the total earned income of the Corporation to December 31 last was the $53,338,314, and after deducting the total operating expense, the net cumulative income was $51,308,842. This amount, $51,308,842, included the accumulated H. O. L. C. dividends of $25,500,000, and also earnings from the reinvestment of these dividends, which was a little rising $2,000,000. If all such earnings and if net losses were eliminated, the remainder would have been over $17,000,000, or approximately three times the total of contributions and losses for over 9 years. This particular period called for severe readjustments following a record-breaking depression and the most serious difficulties which home-mortgage lending institutions had ever encountered in this country. Aside from the problems which the country had to meet from 1929 to 1935, it is also to be remembered that with the severe decline of 1937, additional obstacles had to be surmounted in that year and in 1938. In view of our experience thus far with the Federal Savings and Loan Insurance Corporation and the careful studies we have made for several years, we believe that the premium rate may now be safely reduced to one-twelfth of 1 percent, especially in view of the fact that the trustees of the Corporation would still have the right at any time to mark up the premium charge to one-sixth of 1 percent. There are a large number of lending institutions in the country which are not yet insured. They are estimated to hold over 21⁄2 billions of dollars of savings. It would be highly desirable from the standpoint of the public interest if they were insured. With some of them at least the premium cost has been a deterrent factor. There are reasons to believe that with the readjustment of the rate there will be a substantial increase in the number of insured institutions. The increase in savings in institutions which are now members of the Federal Savings and Loan Insurance Corporation is likely to continue it was at a rate of 14 percent for the last calendar year-and the premium income to record a corresponding rise from year to year. The As is well known, there is at present an immense amount of money in circulation, most of which ought to be in the custody of the savings institutions of the country. The present figure of over $21,000,000,000 is double what it was in 1941 and four times the figure of 1934. more of this money that can be gotten into the savings institutions of the country, the better it will be for our national economy. It is to be hoped that both the Federal Deposit Insurance Corporation and the Federal Savings and Loan Insurance Corporation will continue to render important public service by persuading people to place more money in the insured institutions of the country. Senator BUCK. Do you say that the reason that is not in there now is because there are institutions where these people live that have not joined with the F. D. I. C.? Mr. FAHEY. There is no doubt that a certain number of our people are still apprehensive as to the safety of their money and still a lot of them that hide it under the bedding and the pillow and all that kind of thing. Senator BUCK. People of that kind are not going to bring it in, even though it is insured. Mr. FAHEY. How is that? Senator Buck. Those people will not even use our banks if they know the money is insured. Mr. FAHEY. Some of them will not, but the rapidity with which money that was in circulation was returned to the banks and the savings institutions generally after the Insurance Corporations were created is pretty conclusive evidence. Senator Buck. Mr. Fahey, is there ever any thought of making it compulsory for banks to join the F. D. I. C.? Mr. FAHEY. Well, of course that is a question of public policy; but if you ask me, just as a citizen and a taxpayer, I think every institution in the United States ought to be insured. Senator BUCK. I mean, has there been any consideration by the Federal authorities? Mr. FAHEY. Not that I know of. I think all of them ought to be obliged to insure. Senator RADCLIFFE. Mr. Fahey, I understand the surety companies have been having a low loss ratio for a number of years, but that the loss experience is beginning to increase. Do you see anything in the operations of these institutions, to which you have been referring, which will suggest the analogous experience? Mr. FAHEY. We do not think so. Of course, they are not only under regular examination by us but they also file regular reports; and aside from these examination reports, the result is that we are constantly in touch with their operations and familiar with what is going on. Moroever, we have the right to put examiners into the institutions at any time, and likewise of course to have independent appraisals made of the properties on which they are making the mortgages; and wherever we have any intimations of unsound management or methods we proceed to move into them promptly. Not only that, but I am convinced that the examination systems both of the Treasury, through the comptroller of the currency, and in these institutions, likewise the State examination systems, have been greatly improved over what they were before 1930. I think in the States and in the Nation we have closer and better examination systems than we have ever had in the history of the country. Senator RADCLIFFE. I think so, too. Mr. FAHEY. Of course, the difficulty that you have to deal with, and happily, which has been only incidental, is the one that the insurance companies are up against; and that is, embezzlements; but of course so far as these institutions are concerned, it is the Insurance Corporation that has to pay for it-I mean the private Insurance Corporation because they are all obliged to carry insurance for their officers who are handling any substantial amount of money. Senator RADCLIFFE. Of course, we have been in a nonspeculative period, and a period of rising prices, both of which are factors, I suppose, that have had some bearing upon the experience of these banks, and also of the other banks, under the F. D. Î. C. Mr. FAHEY. That is right. Senator RADCLIFFE. I mean there is no doubt that those factors among others have had considerable to do with the general results. Mr. FAHEY. That is right. HOME OWNERS' LOAN CORPORATION Section 1 of S. 1034 was introduced in April of 1943, by Senator Taft. It provides that no dividend shall be paid by the Insurance Corporation on the stock owned by the Home Owners' Loan Corporation from June 30, 1943, and that all dividends that have accumulated shall be waived. This feature of S. 1034 is a question of public policy which the Congress should determine. For the time being, I happen to be in the position of a trustee for both corporations and interested in the strength and progress of both. As I have stated, in 1934 when the Federal Savings and Loan Insurance Corporation was formed, Congress provided that the capital stock of the Insurance Corporation should be paid for in bonds of the Home Owners' Loan Corporation and that the Home Owners' Loan Corporation should be entitled to cumulative dividends on the stock, out of net earnings, at the same rate as the interest rate on such bonds, which was 3 percent. This was because Home Owners' Loan Corporation out of its income from the mortgages which it refinanced would have to pay interest of 3 percent and it was felt that this expenditure should be returned to it. If not so returned, it must be recognized that such losses as Home Owners' Loan Corporation may finally sustain will be increased by $25,500,000 as the figure of accumulated dividends stood at the first of this year. It would be more than that, of course, because it continues to accumulate; I mean, at any one time. The 3 percent bonds of Home Owners' Loan Corporation held by the Insurance Corporation were called as of the 1st of this month and have been paid off, and the $100,000,000 investment in the Insurance Corporation is now represented in effect by bonds in that amount which are a part of the total bonded indebtedness of the Home Owners' Loan Corporation. The interest rates of outstanding Home Owners' Loan Corporation obligations have now, however, been substantially reduced from the rate which applied to the 3-percent bonds which have just been retired. 60232-44- -4 Senator Buck. They were tax-free bonds, too? Mr. FAHEY. Yes; they were tax free almost entirely, though subject to surtax. If the dividends to Home Owners' Loan Corporation under the present statute are canceled, the effect, of course, will be to strengthen the reserves of the Insurance Corporation. At the same time, however, a corresponding loss must be absorbed by the Home Owners' Loan Corporation. If it is the judgment of Congress that the dividends should not be canceled and additional losses transferred to Home Owners' Loan Corporation, it is not necessary that the total of these dividends should be paid off at once. They could be paid from time to time when such payments would cause no inconvenience. Senator DANAHER. Mr. Fahey, a question, please. If that $25,500,000 should not be added to the reserves of the Corporation, would the reserve fund equal the 5 percent of insured accounts and creditor obligations described in section 404? Mr. FAHEY. No, no; of course, it would not. Mr. FAHEY. Oh, no; a long way from it. Senator DANAHER. Even with the $25,500,000, it still would not come up to it? Mr. FAHEY. Oh, no; it will be long years before any such reserve as that is accumulated. If the payment of dividends is to continue the rate might reasonably be readjusted from the 3 percent figure. If such a readjustment were made, dividends of not more than 1%1⁄2 percent would be necessary to offset the monetary cost to Home Owners' Loan Corporation of the investment in the Insurance Corporation. The explanation of that is that steadily, as bonds of H. O. L. C. have matured, it has been possible to readjust the rates down, and consequently the present cost of all outstanding bonds of H. O. L. C. is less than one and one-half of 1 percent. Senator DANAHER. What has been the total cost to the Corporation for carrying the Federal Savings and Loan Insurance Corporation and providing $100,000,000 capital? Mr. FAHEY. It has been just the 3 percent-one hand washed the other, you see. In other words, the insurance corporation got 3 percent interest on those bonds, and that fixed the rate of dividends to H. O. L. C., to be paid as the law provided. Senator DANAHER. What do you understand as to the theory back of waiving the dividends? I hear your explanation of the effect of it, but what is the theory of it, as you understand? Mr. FAHEY. The theory is that it would have the effect of strengthening the reserves of the Insurance Corporation. Senator DANAHER. And the reserves of the Insurance Corporation are nowhere near the 5 percent that section 404 provides, you say? Mr. FAHEY. No. Senator DANAHER. And yet you would reduce the premium from one-eighth to one-twelfth? Mr. FAHEY. Of course, the point about it is, that under any circumstances it would take long years before any 5 percent reserve was built up. While the experience of the Corporation has been that no losses have been incurred anywhere near in proportion to what were anticipated, of course, this act was passed in the very depths of the depression, and it came out of the unusual circumstances of the times, and there was a widespread feeling that there was much more of weakness and danger in lending institutions around the country than afterwards proved to be the case. As an illustration of that, we will remember that there were a very substantial number of banks which were not permitted to remain open after the "bank holiday," yet nevertheless they liquidated out close to 100 percent; many of them, 100 percent. Senator DANAHER. At least, if you are going to reduce the premium to one-twelfth, it would be a better picture on paper if you could carry the $25,500,000 to the reserves. Mr. FAHEY. Yes, surely; that is right. Senator RADCLIFFE. It would be desirable to have that 5 percent now, but it takes time for it to accumulate, and I suppose the question arises as to how far the operations of today should be taxed for that purpose, rather than having the accumulation spread over a number of years. Mr. FAHEY. Yes. Senator RADCLIFFE. That 5 percent could be accumulated rather quickly by making the premium very high indeed, but that would probably defeat the purposes you contemplate. Senator DANAHER. And you would not have got the number of member companies. Senator RADCLIFFE. No. I mean, in that respect the burdens which have been transferred. Mr. FAHEY. No, it is a matter of practical common sense. If we are going to run into any more panics or depressions like the last one, I do not know how far the Insurance Corporation will go. Neither one of them would stand up. Senator RADCLIFFE. Not far enough. Mr. FAHEY. No; but the insurance, and the authority which you have to insure, is one of the best safeguards I know of to prevent dangerous operations. Senator BUCK. What would this reserve amount to, if you actually had 5 percent? Mr. FAHEY. It would amount to about $45,000,000. had it up to 5 percent? Senator BUCK. Yes Oh, if you Mr. FAHEY. It would be 5 percent on upward of $4,000,000,000. Senator BUCK. $200,000,000? I think that is what it is. Mr. FAHEY. Yes. Senator BUCK. How much is there in the reserve now? Mr. FAHEY. The total reserve here, now, is about $45,000,000, net. The percentage is 1.30, now. Senator BUCK. Instead of 5 percent? Mr. FAHEY. That is right; but that is no mean accumulation for these years and this comparatively short time. Senator BUCK. Oh, no. Mr. FAHEY. In the same way, that there have not been a very much greater number of receiverships and contributions, here, over this 9 years, is quite a gratifying experience. Senator RADCLIFFE. There is no doubt of the fact that, at the time this legislation was passed, it was not contemplated that the reserve would accumulate as fast as it has. Mr. FAHEY. No. It is beyond what was expected. Senator RADCLIFFE. Although it is a long way short of the 5 percent? |