Mr. FAHEY. Surely; yes. Senator RADCLIFFE. It has, under the plan which was set up and under which we have been operating, accumulated much faster than was expected? Mr. FAHEY. Yes. Senator RADCLIFFE. Because the losses have been very much less than we had a reasonable right maybe to expect, based upon past tests? Mr. FAHEY. That is right. Senator DANAHER. The reserve is about nine times the amount of your historical loss, is it not? Mr. FAHEY. No, no; the total losses here are approximately— well, it depends upon what you call a loss. If you take the whole reserve, including H. O. L. Č., it would not be far from that. It is, without the H. O. L. C., as I have explained, the net reserve, less than $17,000,000. With the other, it would be close to $45,000,000. Senator BUCK. You mentioned a loss of about $5,000,000? Senator BUCK. And a $45,000,000 reserve? I guess that is where the Senator got his figure. Senator DANAHER. That is right; but he has to take the two items to get the $45,000,000. Mr. FAHEY. Yes; I am taking the H. O. L. C. plus what the Corporation has earned. Senator RADCLIFFE. Mr. Fahey, in the estimates which you have. made from time to time as to the liquidation. of the H. O. L. C., those estimates I suppose have been based upon the assumption that these differences would continue to be abated; is that true? Mr. FAHEY. No; we dropped it out of consideration altogether, because we had not received the money. This would reduce the estimated loss by that amount. Senator RADCLIFFE. In not receiving the money, did you in any way carry the claim as an asset? Mr. FAHEY. No. Senator RADCLIFFE. Or does it appear in any way in your figures showing your worth? Mr. FAHEY. No; because as a stockholder--which is what the H. O. L. C. is in this case-it had not taken its dividend, and it was there. If the losses had been larger, and the Insurance Corporation had to make them good, those dividends might have been impaired. I mean they may not have been able to pay the dividend. Senator DANAHER. Anyhow, they "washed each other," as you previously explained? Mr. FAHEY. That is right. Senator RADCLIFFE. Have you anything further? Senator DANAHER. Yes. I want to come back then to S. 756. I did not want to interrupt your statement on it at the time. Mr. FAHEY. All right. Senator DANAHER. I noticed that in this section 3 you would authorize the Secretary of the Treasury to use the proceeds of the sale of any securities hereafter issued under the Second Liberty Bond Act as a public-debt transaction. Will you please explain for the record what you mean by the technical expression "public-debt transaction"? Mr. FAHEY. I will ask Colonel Lee, if he will, to explain that. Colonel LEE. That is a matter of bookkeeping to permit the Secretary of the Treasury to raise funds, and that is the way in which he raises funds subject to the limitations on the public debt, to obtain funds under--I think it is—the Second Liberty Bond Act; so that that is merely a question of whether it will be treated as a public debt transaction or not, and it is a part of the public debt; and it provides under that how he shall riase funds by the issuance of obligations of the United States. Senator DANAHER. It specifies on page 3 that— The Secretary of the Treasury shall not at any time purchase any obligations under this subsection if such purchase would increase the aggregate principal amount of his then outstanding holdings of such obligations under this subsection to an amount greater than three times the aggregate amount of the then outstanding capital stock, reserves, and surplus of, in the instance of obligations issued under this section, the Federal home loan banks, or * * * Now, the alternative is stated-or three times the amount issued under title IV. Colonel LEE. Of the National Housing Act. Senator DANAHER. Yes. Colonel LEE. There are two authorizations for having access to the Treasury. One is for the Federal home-loan banks, and the other is for the Federal Savings and Loan Insurance Corporation; and in either case the limitation is the same-three times the capital stock, reserves, and surplus of the one that has access. Senator DANAHER. Do you mean three times one or the other, or three times both? Colonel LEE. The meaning of this is, if the Federal Home Loan Banks are borrowing, their limitation would be three times; and if the Insurance Corporation is borrowing, it would be three times its capital, reserves, and surplus. Senator DANAHER. Will you please break that down and tell us what those two items of aggregate amount would be, in the one case and in the other? Colonel LEE. In dollars? Senator DANAHER. Yes. Colonel LEE. That would be Mr. TwоHY. Three times the capital stock, reserves and surplus. You mean, of the Insurance Corporation? Colonel LEE. Of the Insurance Corporation-would be $442,356,000. Mr. TwоHY. Yes; and the banks would be I can give it to you exactly, Senator. Senator DANAHER. Yes please. Mr. TwоHY. $201,000,000, capital, surplus, and undivided profits, in the case of the banks. As of March 31, it would be $201,684,000. Of course, the Insurance Corporation, then, would be $147,452,000, the capital stock, reserves, and surplus. Colonel LEE. It would be three times. Mr. TwоHY. Yes; that would be the base, three times. Senator DANAHER. I just wanted to get to what extent we were authorizing the Treasury to treat these as public-debt transactions. Well, that is not inordinate. You said in the course of your statement, Mr. Fahey, that section 3 is the most important section of the bill. Was that put in there at your instance, or at the Treasury's instance? Mr, FAHEY. You mean this section? Mr. FAHEY. No; it was put in at our instance. Senator RADCLIFFE. The Treasury does not approve that section, does it? Mr. FAHEY. This section? Senator RADCLIFFE. Yes-3. I am not informed. Senator RADCLIFFE. Here is a letter, which came in last year. Senator RADCLIFFE. I do not know whether anyone would speak for the Treasury at this time, or not. In that letter it is stated: The Treasurer has no comment with respect to the first two of these provisions, for the purchase of obligations of the Federal Savings and Loan Insurance Corporation by the Secretary of the Treasury appears reasonable, in so much as a similar authority now exists with respect to the Federal Deposit Insurance Corporation, and its adoption in this case seems necessary in order to provide a corresponding protection for the contracts of insurance entered into by the Federal Savings and Loan Insurance Corporation. The Treasury purchases of obligations of the Federal home-loan banks appear definitely objectionable, however. The proceeds of such purchases could be used by the home-loan banks only in order to permit their boards either (1) to extend mortgage loans beyond the amount of funds provided by their shareholders, or (2) to permit the withdrawal of share accounts when funds would not otherwise be available. Neither of these purposes is a suitable use of the Treasury funds, and their authorization would appear particularly unfortunate at this time when every attempt should be made to concentrate all of our available resources on the war effort. Now, there may be somebody speaking for the Treasury Department. This is a letter which came in a year ago, but it represents the viewpoint at that time. Mr. FAHEY. As to that, I think, Mr. Chairman and gentlemen, that if the Treasury examined the situation a little further, they would probably be inclined to change their opinion. In the first place, the Secretary of the Treasury has complete power under the proposal here to decline to do anything at any time. It is wholly a question of judgment and option on his part. In the second place, as I have pointed out here, the principal value and purpose of this proposal is to make sure that when this bank system, two-thirds of which is owned by the Government itself, if it is faced with an inability in some emergency to meet its debenture obligations, the Treasury should be in a position to protect it. If it is not logical to do it in that case, it is not logical for the Treasury to be in the position that it is in with reference to credit for farms in the farm-mortgage field and in the other Government agencies which it is obliged to back up, including the Federal Reserve System itself. Senator RADCLIFFE. There is also a letter from the Treasury, which was written last June, which may or may not represent their present views, and possibly someone would speak for them in opposition to S. 1034. Are there any other questions? Senator DANAHER. No other questions, thank you. Senator RADCLIFFE. Thank you very much indeed, Mr. Fahey. Have you anything further, Mr. Fahey? Mr. FAHEY. No. Senator RADCLIFFE. Governor Twohy? Mr. TWOHY. Nothing further, Senator, from me. I think Mr. Fahey has covered the bills from our standpoint. Senator RADCLIFFE. Have you an additional statement to make? Mr. TwоHY. No, thank you, Senator. Senator RADCLIFFE. Would you comment on that section that I have just read from the letter of the Treasury? I do not know that that letter has in any way been recalled or modified, in which the Treasury voices its opposition to the purchasing of obligations of the Federal home-loan banks. Mr. TWOнY. I have no information as to whether the Treasury has changed its position since that time. Of course, I take it they were notified of this hearing, and, as Mr. Fahey says, I would judge that on further study of this situation they might change their position; but I guess that is for them to say. Senator DANAHER. I never was impressed by their position, I will comment, because it is nothing but an authorization anyhow, and they do not have to use it, unless they want to. Senator RADCLIFFE. Yes. Mr. TwоHY. It is perfectly discretionary, and it brings our system, with its great and far-reaching importance, somewhat on all fours or in line with the other fiscal agencies in relation to the Treasury. Senator RADCLIFFE. I was not expressing either approval or disapproval at all. I just wanted to have that information, so we could have it before us for discussion. Mr. FAHEY. Right on that point, Senator, I would like to point out this fact. I have referred to the fact that the home-mortgage debt of this country is the greatest single item of private debt we have in the national balance sheet. Now, we know what happened from 1931 to 1933, when we had over a half million foreclosures in this country, and they were rising to a rate of 1,000 a day in the spring of 1933. In that emergency, because of its close relationship to the lives of our people in the millions of other mortgaged homes in the country which were approaching peril as foreclosures went on, the Government simply had to step into the situation and protect it. Now, you have got a most important situation today so far as post-war recovery is concerned. We are developing an enormous shortage of houses in this country, and we have got to be in a position to finance them, and there ought not to be any question whatever of any development arising here which would disturb public confidence even for the time being. Senator RADCLIFFE. This much is certainly true, Mr. Fahey, that the home-loan banks and the Federal associations come in here with a record of successful achievement behind them which, as I think, exceeded that which was anticipated at the time-decidedly so. The record has certainly been a very satisfactory one as far as results are concerned. Mr. TWOHY. Mr. Chairman, Colonel Lee says that if you wish, he could put into the record here just the precise extent to which the Treasury supports other agencies. I mean, if that is needed for the record, he could put that in. Senator RADCLIFFE. Yes; why don't you do that, Colonel? Colonel LEE. The Federal Reserve System is authorized to issue Federal Reserve notes, which are obligations of the United States. Federal Reserve notes may be issued at the discretion of the Board of Governors of the Federal Reserve System, for the purpose of making advances to Federal Reserve banks. The Federal Farm Mortgage Corporation, upon approval of the Secretary of the Treasury, may issue its obligations, fully guaranteed by the United States as to principal and interest, to the extent of $2,000,000,000. The Secretary of the Treasury, in his discretion, is authorized to purchase any bonds so issued. The Federal Deposit Insurance Corporation, has the right to sell its obligations to the extent of $500,000,000 either to the Secretary of the Treasury or to the R. F. C. It is to the R. F. C., up to $250,000,000, and the, Secretary of the Treasury, for another $250,000,000, and then the Secretary of the Treasury must make up any difference that the R. F. C. may fail to purchase. The R. F. C. and the Secretary of the Treasury are directed to purchase these amounts, and in addition the Secretary of the Treasury is authorized, in his discretion, to purchase any obligations of the Federal Deposit Insurance Corporation. The Federal Public Housing Authority, upon approval of the Secretary of the Treasury, may issue its obligations up to $800,000,000, fully guaranteed by the United States as to principal and interest, which may be purchased by the Secretary of the Treasury. Those are the principal items; so that there is ample precedent for the request. Senator RADCLIFFE. Mr. Fahey, Governor Twohy, and Mr. Leehas any one of you any additional statement to make at this time? Mr. FAHEY. None, Mr. Chairman. Senator RADCLIFFE. I understand there is present a representative of the Federal Reserve Board. I thought possibly it might be well while we are discussing Government agencies to hear from him, if he is here. I have no name of any official given me, but I am told that a representative is here. I am now advised, by this gentleman that while he is one of the attorneys for the Federal Reserve, he came down with no authority to make a statement. (The following statement was later submitted for the record:) Hon. ROBERT F. WAGNER, BOARD OF GOVERNORS, Chairman, Committee on Banking and Currency, United States Senate, Washington, D. C. DEAR SENATOR WAGNER: In your letters of February 23, 1943, you requested opinions as to the merits of bills S. 756 and S. 757, which would amend the Federal Home Loan Bank Act and the Home Owners' Loan Act of 1933. Our response was delayed because at that time it appeared that the bills would not receive immediate consideration. We are now, however, in receipt of advice that hearings will be commenced at an early date and therefore the Board feels that it is appropriate to present its views at this time. You will recall that on three previous occasions the Board, in response to similar requests, has expressed opposition to like or related proposals contained in legislation which was then pending. During the first session of the Seventy-sixth Congress it reported on S. 2098, and during the third session of the same Congress it reported on S. 4095. Again, during the first session of the Seventy-seventh Congress, it reported on S. 2146, S. 2147, and S. 2148, which together constituted one program. Its opposition to S. 2098 was directed generally at provisions which would have expanded the field of operations of Federal savings and loan associations and other member institutions of the Federal home-loan banks beyond their original objectives and at provisions which would have lent further liquidity to the shares of such institutions. In the bills or series of bills which followed, some of the provisions specifically opposed by the Board were changed and some were omitted; but the basis of the objections remained and the Board has consistently opposed their enactment both in its reports and in the testimony of Governor Ransom and myself at hearings on S. 4095. |