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standards of a community are governed far more by the character of the lowest than of the best sections, whether residential or commercial. When the base is lifted, the physical and consequently the tax-paying qualities of middle-grade realty are enhanced, and inroads upon highgrade areas are minimized. We, therefore, unqualifiedly endorse those provisions of S. 1592 which further slum clearance. We believe that it affords effective means to check the causes that have driven many of the more responsible tax-paying elements from established municipalities. We endorse it because, aside from social implications, it will in our opinion strengthen municipal credit at its foundations.
Fortunately, our local governments have passed through a decade of debt reduction. They are in a fiscal condition to attract idle capital to the extent necessary to finance their share of the housing problem. At the present time we can find ample funds for the municipalities at little cost, and they are in excellent shape to carry on whatever work is required from there.
As I said, we have been the leading distributors of local housing authority bonds, so that in some measure I represent 100 security dealers.
The impulse that the proposed housing program can give to employment in the construction trades is thoroughly clear. We investment security dealers are not mass employers of labor. In recent weeks, however, our office has enjoyed a constant procession of intelligent, alert servicemen. A number of them have entered our employ. We must count upon an increased volume of such financing activities as that of distributing housing securities to provide these men with secure and adequately compensated careers. It is important that they be given the sinews of success for, if we judge them rightly, they give promise of being leaders among leaders. Disillusionment will better neither the quality nor direction of their leadership.
Less than 6 years ago, no investor had heard of a local-housing authority obligation. In February 1940, the security was introduced to the public. As Commissioner Klutznick has already told you, interest rates at the outset averaged 2.61 percent. The interest cost of the most recent loan was 1.61 percent. Money has cheapened in the interval, but by no means to the extent of the difference in rate. The longer the term of the bond, the higher, of course, is the cost of borrowing and the greater the interest rate. Thus, the change is the more noteworthy because the longest maturity sold publicly of the initial loans was only 25 years; that of the latest loan, 46 years. Moreover, the investing public could be persuaded to provide only 15 percent of the funds required for the earlier projects, whereas it provided the entire amount required for the most recent. In the latter instance. Federal funds were relieved of the entire burden of the direct financing of that particular project.
The CHAIRMAN. You are an investment company?
Mr. VEIT. We are an investment house; yes, sir.
The wisdom, forethought, and realistic policies of the Federal Public Housing Authority and its predecessor, USHA, have had much to do with the decisive cut in the cost of financing. They have cooperated to the utmost with the investment dealers in our efforts to secure markets. After all, ours has been the compelling job of kindling the enthusiasm of the investing public. We have achieved sufficient
success to induce the investor to accept the uneconomic theory that higher prices are the proper and natural concomitant of increased volume and greater supply.
Our contact with the investor has revealed all the reasons why housing bonds should not be bought. Out of that experience we believe that we can offer constructive criticism. For example, in order to resolve technicalities, we recommend a change in paragraph 5, page 85, of the bill which amends paragraph 3, section 14, of the existing act. We should like to see the words "to forward economy and be in the financial interest of the Federal Government" replaced by the phrase "to forward the purposes of the act." As we read the proposed passage, the rate of contribution established by an initial assistance contract relating to any given project may by a later rewriting be diminished, but not increased. While heartily favoring economy, we conceive that interest rates may rise as well as fall in the long interval of months that elapses between the conclusion of the initial contract and the sale of bonds against it. We should like to see a liberalization that would permit within the other limitations set by the act, upward as well as downward adjustments in contributions, in order that sufficient annual sums will certainly be available to meet going rates of interest and yet amortize the debt within 45 years.
We have faced hitherto one argument against investment in housing obligations. Fortunately, proper amendment is furnished in section 704. I refer to the existing section that permits interruption of the Federal contribution in support of principal and interest payments in the event of certain breaches in the contracts entered into between FPHA and the local authority. The amendment provides for continuation of the contribution under FPHA management of the project, until a cure of the breach permits the normal flow of funds through the local authority. We unhesitatingly commend this amendment which we regard as a condition precedent to the advantageous flotation of local-housing authority bonds in the increased quantity that is anticipated.
We likewise favor, from practical considerations, the proposal to relate the going Federal rate to Government securities of 20-year term, rather than of 10-year term. That change in effect should permit the final serial maturity to fall within 45 years. It should make possible distribution to the public of 100 percent of the local housing authority loans. The shock is by no means mitigated by the fact that this particular passage is the sole deviation of S. 1592 from the local financing provisions of S. 1342, the original housing bill introduced on August 1 of this year by Senators Wagner and Ellender. The desirability of that procedure which removes the burden of direct financing entirely from the Federal Treasury has already been mentioned.
We who deal in housing securities admit to intense astonishment at the proposed amendment contained in section 704 to the Banking Act which seeks to permit commercial banks to become dealers in housing bonds. A decade ago prolonged congressional inquiry was made into the interrelation of commercial banking and investment banking. It led to the inescapable conclusion that commercial and investment banking must be segregated into separate hands. Security dealers may no longer accept deposits nor act as commercial bankers.
The banks are limited in security dealings only to Government securities and the direct obligations of the States and their subdivisions. They may not deal in bonds supported out of nontax revenues, and it is into this category that housing securities fall. It may be, though we question it, that the conditions that dictated the segregation have become impossible of recurrence. If that is the fact we submit that the Banking Act should be examined on its merits and that any backward step be taken only in the light of that examination. Otherwise the act should stand unweakened.
As a matter of fact, it appears that confusion prevails between what the banks may do under the present banking law and what they might not do. They might, if the Comptroller of the Currency feels it wise and desirable to rule liberally, invest 10 percent of their capital surplus in the obligations of each and every individual housing authority. Thus the commercial banks of New York City, together, could at one time hold for investment up to more than $160,000,000 of the bonds of each of the housing authorities of the country; those of Chicago, up to $33,000,000; those of San Francisco, up to $30,000,000. The commercial banks of the country as a whole could hold in portfolio a total of some $800,000,000. These figures pertain, not to aggregate holdings of housing bonds, but merely to the holdings in each individual housing authority. It is highly questionable whether any one authority, even that of New York City, will under the proposed authorization have outstanding as many bonds as could be bought by the commercial banks under existing law.
We have, of course, placed sizable amounts of housing bonds with commercial banks. Such purchasers have been with little exception confined to relatively short bonds, in conformity with the long-standing fundamental bank policy and practice of seeking the liquidity and stability afforded by nearby maturities. While we have welcomed that business, it has not solved our problem, as more than half the aggregate amount of recent issues has matured in 25 years or longer. That is well beyond the customary range of bank investment. We have been in the past, and assume that we will be in the future, forced to look otherwise than to commercial banks for permanent absorption of the major and more difficult part of housing financing. The proposed amendment affords no means of altering that necessity.
Moreover, the commercial banks are permitted to underwrite, that is to buy at public sale, housing obligations for their own investment. If it transpires that wider investment powers are deemed desirable. that can be conferred by a simple amendment that will ameliorate, but not begin the emasculation of, the salutary provisions of the Banking Act.
Practically, the admission of banks to dealings in housing obligations will narrow, not broaden, the market. Security dealers possess the buying, trading, and selling organizations calculated to obtain widest distribution. The banks do not have comprehensive sales organizations. We have ample capital. According to the July 1945 issue of Finance, investment banking, using the term to include corporations and partnerships engaged in securities underwriting, but excluding banks, had capital of $400,000,000, and borrowing power of more than $3,500,000,000 wholly mobile, constantly being turned over. It has been our task to place governmental and quasi-governmental
securities with savings banks, insurance companies, trustees, and individuals. Among our principal customers for housing bonds have been the trust departments and trust affiliates of the commercial banks. It is significant that banks acting as dealers do not place with their trust accounts the securities in which they are financially interested. Consequently, an important and desirable segment of the investment field would be narrowed to housing bonds by bank dealings in them. The CHAIRMAN. You have these very high maturities, haven't you? Mr. VEIT. Yes.
The CHAIRMAN. And a very low rate of interest.
Mr. VEIT. We have an extremely low rate of interest, for which the interest cost of the last loan was only slightly over 12 percent. Running from 1 to 45 years. Most of the bonds were 30 years or longer. The CHAIRMAN. Did you have any difficulty in selling them?
Mr. VEIT. We did at first, but we have established rather a broad market. That is one reason why we are so anxious to have that flow of funds of the local contribution continued, because the greatest objection, the one thing I think has cut our market, probably is the fact that many people are afraid that some breach-I think you perhaps are familiar with those various contracts--some breach between the local housing authority and FPHA might stop the flow of funds. I can go into all the details of that, but it is rather technical.
The CHAIRMAN. Well, no. I was just interested in that one question. There have been things said here that the only difficulty in the selling of the bonds is that the interest is too low. Apparently your experience is otherwise.
Mr. VEIT. Of course, a great deal of that depends-our job, Senator, is to sell securities in bulk, and that is a very different thingI don't mean to express any opinion whatsoever on the taking of individual mortgage notes. I know nothing about that. I do know we can sell securities in bulk, which are good securities, and we can sell them in quantity.
Senator MURDOCK. Who issues the bonds you deal in?
Mr. VEIT. The local housing authority. It used to be called the Alley Dwellings here in Washington.
Senator MURDOCK. Are they general obligation bonds or are they absolutely dependent on revenues from the housing projects?
Mr. VEIT. They are dependent on two things. They are dependent mainly on the assistance given by the Federal Government, which has to be enough to cover the bond and interest on the bond. They are also payable from any surplus earnings that the housing authorities may have.
Senator MURDOCK. You consider participation of the Federal Government one of the big factors?
Mr. VEIT. Oh, that is the ultimate security in these particular bonds.
Senator MURDOCK. Now, if your bonds which carry an interest rate of 1.61, as I understand you, over a period of 45 years—
Mr. Veit. They average that.
Senator MURDOCK. Are considered good security, would you consider a mortgage bearing 3/2 percent, guaranteed by the Governmentby the FHA as an adequate interest rate?
Mr. VEIT. I am not qualified to reply to that in quite the way you put it. I would say if it were a large bond issue with a good market, an established market, it would be very easy for us to sell it. I know nothing about securities that are sold in terms of $500 or $750 or $1,250, but I do know securities that are sold in 10 million and 50 million.
In suggesting commitments to their small bank correspondents, the large banks will be free of any suspicion, however unjustified, of acting in self-interest if they function purely as advisers, rather than as purveyors of housing bonds. Their recommendation in solely an advisory capacity would, in our opinion, be far more weighty in broadening the market, and would alone produce effective results.
During the current year, the security dealers of the United States, in spite of many weeks devoted largely to flotations of the Federal Government, will have underwritten, it is estimated, more than $6,000,000,000 of corporate securities of all kinds and qualities. This has been accomplished amid intense competition, which has been to the interest of the borrower and investor alike. In the light of this record, we feel ourselves competent to distribute the necessary amount of housing bonds, an obligation of the highest type, that are contemplated in section 704. We see no reason to reopen a door that for good reason was presumably closed forever. A radical amendment to the Banking Act is, in our opinion, not called for to attain the aims of the Housing Act.
The CHAIRMAN. Thank you very much.
Senator ELLENDER. Did you say in your statement who your firm is! Mr. VEIT. Shields & Co., a New York investment house.
Senator ELLENDER. Your stockholders are from where?
Mr. VEIT. We have no stockholders.
We own our own business. We do our own job. It is our own money we risk in these commit
Senator ELLENDER. Well, you talked about $50,000,000.
Mr. VEIT. Of course, that is not all ours. We form groups of any where from 1 to 50 houses, but they compete with each other. We have had very keen competition for the housing bonds, which has helped the project.
Senator MURDOCK. Keen competition with an interest rate of 1.61! Mr. VEIT. Keen competition and a lot of hard selling and spade work has brought that interest rate down to 1.61.
Senator ELLENDER. We are of course grateful for the criticism you have laid against some portions of the bill. I am wondering how you feel about the bill as a whole.
Mr. VEIT. We believe in private enterprise, quite clearly. On the other hand, I might say we also believe in creating as many stock and bond buyers as we can get. We think that anything, if it is not carried to extremes, if it tends to raise the average well-being of the American people, is in the interest of all the people. In other words, you take a certain number of people and put them in better housing and they are going to be better people. That doesn't apply to everybody, of course. There are exceptions. We have got our clients' money in this thing. We are particularly impressed with the way it has helped the colored people in particular.