The remaining 20 excepted positions would be compensated at salary levels lower than GS-16.

None of the 40 excepted positions would be from the Civil Service "supergrade" pool or other authorization for excepted positions. The authority of the Corporation to appoint them would derive solely from Section 323 (d) of the Bill.

Senator WILLIAMS. As to the amount of assets to be turned over, approximately how much will that be?

(The following information was lated supplied :)

FINANCING OF OPIC

RESERVES

The only charge on the budget for FY 1970 is the requested authorization to appropriate $75 million new obligational authority as an addition to the approximately $100 million of existing reserves that would be transferred to the Corporation.

DIRECT INVESTMENT FUND

The $100 million revolving loan fund would be financed, at the rate of $20 million a year, from reflows on outstanding A.I.D. loans which would otherwise be available for relending by A.I.D.

ADMINISTRATIVE EXPENSES AND OPERATING PROJECTIONS

All administrative expenses and overhead of the Corporation, including investment promotion costs, would be financed out of fees charged for insurance and guaranties and interest earned on Corporation loans.

The financial projections for the Corporation over its first five years of operation show total revenues of $150 to $160 million, expenses of approximately $20 million, with net revenues of $130-$140 million available for allocation by the Board of Directors to the reserve funds, addition to the direct investment fund and payment of dividends to the Treasury.

Barring a major political setback in a country where there is substantial investment insurance outstanding, the $130-$140 million net earnings over the five-year period substantially exceed any losses which could reasonably be anticipated.

Dr. HANNAH. My original figures were correct. We expect the total of reserves to reach accumulation of about $135 million, and we will turn over to the new corporation about $100 million, and retain about $35 million as a reserve against claims which might arise under housing guaranties in Latin America, Asia and Africa.

STOCK OWNERSHIP OF OPIC

Senator WILLIAMS. Who would own the stock of this corporation? Would it be a wholly owned Government corporation?

Dr. HANNAH. Yes, wholly owned.

Senator WILLIAMS. Wholly owned, and $100 million worth of the stock?

Dr. HANNAH. It is $100 million.

Senator WILLIAMS. $100 million.

This $135 million or $100 million that you would turn over to the corporation, would that be used as payment initially for the stock, or would that be turned over to them to build up a surplus in the beginning?

Dr. HANNAH. The $100 million would be paid in by the President at the rate of $20 million per year at the call of the OPIC Board. Upon each payment the Treasury would obtain the equivalent amount in stock. Funds for this would come from reflows of principal and interest on prior development loans.

Senator WILLIAMS. Well, the reason I asked is, as I understand it, the suggestion is that we put that $20 million a year for the next 5 years in purchasing the stock, and you have a $100 million accumulation already. I just wondered if this $100 million will be used to buy this stock as it grows or will Congress have to provide the $100 million to buy the stock.

Dr. HANNAH. The $75 million is requested to augment existing reserves for insurance guaranties. It is the advice of the technical people in the insurance business that the investors who would be buying insurance with this new corporation would want an adequate liquid cash reserve to pay reasonable claims promptly.

Now, this is a matter that has to be worked out over a period of time. The reserves transferred to the corporation and the $75 million additional that is being recommended is to be a reserve item, and it is not for operating expenses at all. The total operating costs will be borne by the fees charged the people who use the service.

RESERVES AND CAPITAL STOCK

Senator WILLIAMS. I understand that. But in the initial establishment of the company, you are incorporating it for $100 million stock, and the Government will be buying that stock, and what I am trying to establish in my mind is how this other $100 million that has been accumulated thus far will be handled. Will it be $100 million stock or $100 million surplus to begin with or will we use all of it just for common stock.

Dr. HANNAH. Senator Williams, again I am adverting to a document-I should have it in my head better than I have it-the document says:

"The total initial capital in the direct investment fund will be $100 million. It will be paid in on the call of the corporation at the rate of $20 million each year for 5 years using reflows of principal and interest from prior loans, and the corporation will issue an equivalent amount of capital stock to the U.S. Treasury."

The stock is to be paid for over a 5-year period in the amount that has been indicated.

Perhaps we had better have a more detailed statement submitted for the record, as in all of these questions, which we will be glad to do.

Senator WILLIAMS. That will be fine.

(The following information was later supplied:)

DIFFERENCE BETWEEN RESERVES AND CAPITAL STOCK

RESERVES

The Foreign Assistance Act has provided an undifferentiated reserve to discharge liabilities under four separate programs: specific political risk insurance, extended risk guaranties, Latin America and world-wide housing guaranties. By the time the legislative process is completed this year we estimate that the total reserve available will be approximately $135 million, composed of approximately $57,400,000 in appropriated funds and the remainder accumulated from earnings of the four programs.

Under section 204(d) (4) (b) of the proposed Act, $35 million from accumulated reserves remain available to A.I.D. to back up the Latin America housing program and outstanding housing guaranties in Africa and East Asia. This would leave about $100 million available for reserves to be allocated by the

OPIC Board to separate insurance and guaranty accounts after consultation with the Treasury Department.

Section 325(f) authorizes to be appropriated to OPIC such amounts as may be necessary from time to time to replenish or increase the insurance and guaranty fund. Under that authority $75 million is requested for appropriation to increase the reserves account. The $75 million of new obligational authority would be added to the $100 million accumulated and would be allocated by the Board of Directors after consultation with the Secretary of the Treasury.

CAPITAL OF THE CORPORATION

The capital of the Corporation is separate and distinct from the reserves from existing guaranty programs which will be transferred to OPIC. The Corporation's capital will be applied, not to the insurance or guaranty programs, but to the Direct Investment Fund which will be used for loans. This capital will be $100 million, paid in at the rate of $20 million per year for five years at the call of the Corporation. The funds for these payments will come from reflows from outstanding A.I.D. and predecessor agency development loans.

ADMINISTRATIVE EXPENSES AND OVERHEAD

All administrative expenses and overhead of the Corporation, including investment promotion costs, will be fina.aced out of fees charged for insurance and guaranties and interest earned on Corporation loans. The financial projections for the Corporation over its first five years of operation show total revenues of $150-$160 million, expenses of approximately $20 million, with net revenues of $130-$140 million available for allocation by the Board of Directors to the reserve fund, addition to the Direct Investment Fund and payment of dividends to the Treasury.

INVESTMENT GUARANTIES ASSUMED BY CORPORATION

Senator WILLIAMS. Now, are all the obligations for this $6 billion insurance which is current turned over to this new corporation? Dr. HANNAII. That is correct.

Senator WILLIAMS. The corporation would assume all of the liability for the insurance for investment guaranties that have been previously issued and those which would be subsequently issued. It will all be a part of this stock issue?

Dr. HANNAH. It is correct, that the corporation would assume all such liabilities except for housing guaranties retained by AID. The capital stock issue will be used for direct investments, not for insurance or guaranty reserves.

Senator WILLIAMS. Would this corporation have with it, in addition to the stock, any liability of the U.S. Government beyond the stock that is owned in the corporation?

Dr. HANNAH. The insurance and guaranties issued by the corporation would be full faith and credit contingent obligations of the U.S. Government. The answer is, no.

Senator WILLIAMS. Would they have a right to sell securities in the free market?

Dr. HANNAH. It is not contemplated that it will sell its own securities. It may sell participations in its loan portfolio.

Senator WILLIAMS. I know, but would they have any authority to sell them if they did wish to?

Dr. HANNAH. The way they are set up, not unless their charters were changed, and it would require congressional authorization. Senator WILLIAMS. Not unless they get further congressional authorization?

Dr. HANNAH. Correct.

EXTENT OF LIABILITY OF THE FEDERAL GOVERN MENT

Senator WILLIAMS. In the event that this corporation is established, and these functions and all these operations are turned over to them, and they have about $6 billion in investment guaranties, as I understand it-I realize that thus far the premiums have more than paid the losses, but sometimes things have ways of switching-and assuming that the losses exceeded the premiums, would the Federal Government have any obligation under this corporation to make up that deficiency? Dr. HANNAH. I assume that the new corporation would carry with it whatever obligation the Federal Government has now for what we are carrying on. This has been a Federal operation carried on through AID, and we would like to have it transferred to this corporate entity for the reasons that I indicated earlier. I do not think that AID is in as good a position to handle it as a private corporation that is largely controlled by practical businessmen who are more accustomed to doing business the way banks and insurance companies operate.

Senator WILLIAMS. I am not questioning the wisdom of establishing it. I think maybe the thought has some merit. But what I am trying to get at is, as we establish this corporation, assuming that we do, and it is capitalized for this $100 million and the stock is all paid in, and we proceed on that assumption and all the obligations of investment guaranties are turned over to this corporation, if the losses exceed both the paid-in capital and the surplus, and there is a deficiency of, say, $50 million or $100 million, whatever it may be, it could be considerably more than that, would the Federal Government be automatically liable to pay it?

Dr. HANNAH. The only point I am making, Senator-I am not an attorney, but I assume

Senator WILLIAMS. Neither am I. That is the reason why I thought

Dr. HANNAH. We do not acquire any new liability that we do not already have.

Senator WILLIAMS. I realize we have a $6 billion liability now, but if we turned it over to this corporation, and we owned the stock in it and, generally speaking, the individual who owns stock in a corporation does not necessarily assume a liability, unless it is part of the legislation. What I am wondering is, to what extent as a government would be assume that liability?

Dr. HANNAH. Senator, the full faith and credit of the United States is back of these guaranties now, and I assume it would stay there.

Senator WILLIAMS. Well, I realize they are back of it now, but I am not a lawyer. I have always been told by any lawyers I hired to never proceed on assumption but on fact. Could we get a legal answer as to whether or not there would be any legal obligation? I am not speaking of moral obligation, I am speaking of legal obligations on the part of the Government. I am just a layman. We laymen like to ask these questions of these lawyers.

Dr. HANNAH. We will furnish that information.

Secretary ROGERS. Senator, we will give you a legal opinion on that. I think the answer is that the full faith and credit clause requires the United States to meet whatever deficit there is, but we would have to come back, obviously, to Congress to get that, so I believe there is,

there would be, an obligation, and we would have to come back for the funds.

Senator WILLIAMS. There may be a moral obligation, but would there be a legal obligation under this proposed setup? That is what I want to know because it makes considerable difference, as you well recognize, in the amount of premiums that have to be charged if it is operated as a private corporation.

If the full faith and credit of the United States is back of it, you do not have to build up quite the sizable reserves that you would otherwise.

Secretary ROGERS. Yes. We will provide an answer to that question to you.

Senator WILLIAMS. Thank you.

(The following information was later supplied :)

U.S. GOVERNMENT OBLIGATION BACKS INSURANCE AND GUARANTIES

Under Section 327 (c) of the proposed Foreign Assistance Act, insurance and guaranties issued by the Overseas Private Investment Corporation (or previously issued by A.I.D.) constitute obligations of the United States Government backed by the full faith and credit of the United States. Thus if the reserves available to the Corporation for paying insurance or guaranty claims are insufficient to meet liabilities, the United States would be legally obligated to fulfill these commitments.

Although the United States Government itself stands behind the Corporation's insurance and guaranty programs, the Corporation should have a reasonable amount of reserves as a matter of sound businesslike practice and to assure prompt payment of claims. For this reason, it is proposed that the reserves for the guaranty program be maintained at 25% of outstanding commitments. The reserves for the insurance program are not tied to a percentage of insurance commitments because of the size of the program and greater variables in the possibility and size of potential claims. However, the Corporation expects to maintain sufficient reserves for this program to cover claims other than those occurring in the case of large-scale catastrophic losses.

INCREASE IN AUTHORIZATION REQUEST

Senator WILLIAMS. Now, I am not going to take any further time, but there was a suggestion made about the amounts in this AID bill which, as I understand it, are about $800 million more than was approved last year; is that correct?

Secretary ROGERS. Yes.

Dr. HANNAH. Yes, that is the authorization.

Actually, the level of expenditures for fiscal 1970, if the President's request is approved, will be approximately the same as the expenditure level of fiscal 1969.

Senator WILLIAMS. To clarify the record, Mr. Chairman, I would like to ask to be put in the record at this point the memorandum prepared by the committee showing the breakdown of the economic assistance proposals for fiscal 1970.

The CHAIRMAN. Without objection, so ordered. (The document referred to follows:)