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informed that the FDIC at the time of the hearings on the bill either by implication or through direct testimony was in support of section 3? We are going to find out precisely who is changing whose mind and for what reasons.
Mr. MCKENNA. It is my understanding, sir, that the letter which was sent to us purporting to give the administration's position stated that the Bureau of the Budget had resolved conflicts which arose between the various agencies of the executive branch of the Government.
Senator CAIN. Prior to the time the committee was considering the legislation, is that correct, Mr. McKenna?
Mr. MCKENNA. Yes, sir.
Senator CAIN. Let us move rather slowly. Let us move rather slowly for the reason we are all only concerned with getting an accurate picture.
If the gentleman across the table would like to identify himself and make an observation?
Mr. WILLIAM MORONEY (Federal Deposit Insurance Corporation, Washington, D. C.). I am William Moroney of the Federal Deposit Insurance Corporation. I am speaking only to correct the impression, let us say, that is made by Mr. Foley's letter and the statement at the hearings that there was happy harmony on the proposals. The FDIC made its objections to a number of the proposals of the Housing and Home Finance Agency. Certain of those were not submitted to the committee. Certain of the objectionable proposals were not submitted to the committee and certain of those to which the FDIC objected were submitted. The committee has afforded the FDIC an opportunity to present its views and those views are stated in the letter of Chairman Harl, of May 13.
Senator CAIN. Without prejudice to anybody, the understanding of the committee is approximately correct, then, that Mr. Foley's testimony indicated at the time the full committee was actually considering this legislation that all differences had been resolved and that the bill as presented by Mr. Foley was for that reason deserving of affirmative consideration and action by the Banking and Currency Committee. Is that correct?
Mr. MORONEY. I think that was the understanding at the last hearings, at which FDIC was not present and an effort was made by the FDIC to have Mr. Fitzpatrick, general counsel of the Housing and Home Finance Agency, correct the impression made by Mr. Foley's statement and letter.
Senator CAIN. We are beginning to understand now for the first time the background of the dilemma, namely, that when the full committee considered the legislation and recommended favorably, that was its intention, anyway. It did so on the assumption that all of these questions we talk about this morning had been successfully resolved in the past.
Mr. MORONEY. In speaking to Mr. Fitzpatrick, he said it was not the intention to give the impression that all the recommendations of the agencies had been resolved by the Bureau of the Budget. He said that he would attempt to correct that impression with the committee.
Senator CAIN. We do not criticize him, because it may very well turn out to be that the committee erroneously made an assumption which was not a fact.
Here is a letter of April 26, 1948, addressed to the Honorable Charles W. Tobey, United States Senate, and signed by Raymond M. Foley, Administrator. The last paragraph on page 5 I want the record to carry. [Reading:]
The Bureau of the Budget has advised me that our original draft of the proposed amendments to H. R. 2799 was referred to the Treasury, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the General Accounting Office, and that on the basis of their views and conferences with representatives of my office, certain changes were recommended. Such recommended changes had been incorporated in the enclosed draft to the proposed amendments to H. R. 2799. The Director of the Bureau of the Budget has authorized me to state that the enactment thereof would be in accord with the program of the President.
At this point it is somewhat difficult to reconcile that statement of April with several other communications, one of which I have referred to as being under the date of May 13, written by the FDIC to Senator Tobey, and to quote from that letter, with reference to the item to which the witness has just been directing his attention:
* * * we do not believe that such a general authorization for the purpose of providing a greater liquidity to that system should be given until its member associations are required to maintain a greater degree of liquidity.
The letter referred to follows:
FEDERAL DEPOSIT INSURANCE CORPORATION,
Hon. CHARLES W. TOBEY,
Chairman, Committee on Banking and Currency,
United States Senate, Washington 25, D. C.
MY DEAR SENATOR: This will acknowledge receipt of your letter of May 12, 1948, requesting an opinion as to H. R. 2799 including the amendments proposed by Mr. Foley, Administrator of the Housing and Home Finance Agency.
We concur in the position of the Housing and Home Finance Agency in opposing the reduction of the insurance premium rate from one-eighth of 1 percent which the members of the Federal Savings and Loan Insurance Corporation are now assessed, to one-twelfth of 1 percent. Consideration of such a reduction should be postponed at least until the Federal capital funds of that Corporation have been retired.
We are opposed to section 3 of the amendments proposed by Mr. Foley, which would permit the Secretary of the Treasury to purchase obligations of the Federal home-loan banks in an amount not greater than $1,000,000,000. However helpful such assistance from the Treasury might be to the Federal home-loan banking system in times of emergency, we do not believe that such a general authorization for the purpose of providing a greater liquidity to that system should be given under its member associations are required to maintain a greater degree of liquidity. If it is desired that such member associations should be in a position to repurchase shares on demand, it would seem appropriate that they be required to maintain an adequate reserve for that purpose and that some limitation be placed on their investment in nonliquid assets.
We are opposed to section 8 of the amendments proposed by Mr. Foley, which provides for the investment of fiduciary, trust, and public funds under the control of the United States or of any officer or agency thereof in shares, deposits, certificates, and accounts of institutions insured by the Federal Savings and Loan Insurance Corporation and acceptance of such shares, deposits, certificates, and accounts as security for such funds. The effect of this provision would be to make it possible for institutions insured by the Federal Savings and Loan Insurance Corporation to seek and obtain Federal funds on more favorable competitive terms than can be offered by the insured banks. Insured banks are prohibited from paying interest on deposits of public funds unless such funds are time deposits in which case they can pay only up to 21⁄2 percent depending upon the maturity of such deposits. Under this proposal, custodians of Federal funds in institutions insured with Federal Savings and Loan Insurance Corporation might obtain even a higher return on what are essentially demand deposits. The provision of this section definitely opens the way for dangerous practices in competition to acquire
the deposit of public funds which would not be investments in long-term home financing at all but would, in fact, be demand deposits.
* * *
The receipt of any public funds, which are in the nature of demand deposits for temporary safekeeping, is contrary to the stated purposes of Federal Savings and Loan Associations "to provide local mutual thrift institutions in which people may invest their funds and to provide for the financing of homes * * *"" (12 U. S. C. 1464). For public funds to be tied up for indefinite periods in equity interests in such associations, whose funds are invested in long-term home financing, would be manifestly improper and unsound. This provision is so broad as to permit the Federal Savings and Loan Insurance Corporation to invest its funds in institutions insured by it. The impropriety of this authorization becomes apparent when one considers the position in which the Federal Savings and Loan Insurance Corporation would find itself, if it were to so invest its funds in the very institutions which it insures. Its funds, in times of emergency, therefore, would be available only to the extent of the liquidity of the associations insured by it.
Further, we regard this proposed section 8 permitting the deposit of public funds in such institutions as an encroachment on the functions of banks. The effect of giving to such institutions powers which invest them with the traditional characteristics of banks is to set up another banking system and to divide the responsibility for controlling expansion in banking services with the result that no effective control could be exercised. In this connection we need only call attention to the disastrous consequences which followed the establishment of the excessive banking facilities in the United States.
We believe it is highly important to maintain a clear line of demarcation between the long-term home-financing purposes and solvency attributes of shares of institutions insured by the Federal Savings and Loan Insurance Corporation on the one hand and the purposes of controlled diversification of investments and safekeeping of funds and the liquidity attributes of demand, time, and savin ́s deposits in banks insured by this Corporation. It is only by observing these distinctions that sound systems of banking and home-financing institutions can be maintained and unwarranted competition between them be avoided.
If any institutions insured by the Federal Savings and Loan Insurance Corporation desire to function as banks, we believe it would be better to permit them to convert into mutual savings banks, as has been proposed in connection with H. R. 2798, or into commercial banks, rather than permit such institutions to gradually assume the attributes of banks without the restrictions placed upon banking operations in this country.
We have been advised by the Bureau of the Budget that while there is no objection to the submission of this letter, the Bureau of the Budget has advised Mr. Foley "that enactment of H. R. 2799, as revised on the basis of advice received from the agencies concerned, would be in accord with the program of the President."
MAPLE T. HARL, Chairman.
Senator CAIN. We have a singularly controversial item called section 3 before us right now. This seems a little laborious, Mr. Witness, but we are trying to pick up a problem of the past,
I should like for the record to quote from a letter of May 11 directed to Senator Tobey, and signed by Mr. S. R. Carpenter, secretary of the Board of Governors of the Federal Reserve System. From the first page of the letter, the following excerpt will be read into the record: The proposed amendment contains three undesirable features:
1. Section 3 of the amendment would authorize the Secretary of the Treasury to purchase up to $1,000,000,000 of the obligations issued by the home-loan banks. The Board
referring to the Federal Reserve System
believes that such authorization, if provided, should be limited to well-defined emergency situations.
(The letter referred to follows:)
Hon. CHARLES W. TOBEY,
BOARD OF GOVERNORS OF
Chairman, Committee on Banking and Currency,
United States Senate, Washington, D. C.
DEAR MR. CHAIRMAN: At the request of the Bureau of the Budget, several agencies, including the Board, submitted reports on an amendment to H. R. 2799 which had been drafted by the Housing and Home Finance Agency. In the Board's report, we objected to several provisions of the draft, and suggested certain changes which would be agreeable_to_us.
In consultation with the Bureau of the Budget, the Housing and Home Finance Agency rewrote the proposed amendment, and, with the approval of the Bureau, but without further consultation with the Board, submitted the revised amendment to your committee. This amendment your committee now has under consideration.
In Mr. Foley's letter transmitting the amendment to the Committee, there is the implication that the amendment in its present form meets the objections raised earlier by the Board and the other agencies consulted. Whie the amendment has eliminated certain provisions to which the Board raised objection, it continues to include other features which are felt to be objectionable. We are writing this letter, therefore, to correct any impression which Mr. Foley's letter may have conveyed inadvertently regarding the Board's position.
The proposed amendment contains three undesirable features:
1. Section 3 of the amendment would authorize the Secretary of the Treasury to purchase up to $1,000,000,000 of the obligations issued by the home-loan banks. The Board believes that such authorization, if provided, should be limited to well defined emergency situations.
2. Section 6 of the amendment would direct the Secretary of the Treasury to loan to the Federal Savings and Loan Insurance Corporation up to $750,000,000, at the request of the Home Loan Bank Board. The Board feels that if this authority is to be granted, the Corporation should be required to accelerate the accumulation of adequate reserves as far as practicable and thus avoid any unnecessary burden upon the Treasury.
3. Section 8 of the amendment would make insured share accounts of savings and loan associations lawful investments for public funds. The Board does not regard such shares as appropriate investments for public funds. Furthermore, the fact that they were approved as such would, in the Board's opinion, convey to investors a misleading impression of liquidity.
Basically, changes such as these would give investors in shares of savings and loan associations an expectation of a greater degree of liquidity than the nature of such associations would warrant. The burden of providing this greater liquidity would be borne by the Treasury, to the possible embarrassment of future fiscal policy. In addition, changes of this character would tend to transform the savings and loan system into another banking system and further complicate the already difficult job of administering national credit policies.
It will be noted that our reasons for these objections are essentially the same as those we have advanced against similar proposals in the past, especially in our letter of April 28, 1945, reporting on the bills S. 103, S. 179, S. 180, and S. 810, to the Committee on Banking and Currency of the Senate.
Very truly yours,
S. R. CARPENTER, Secretary.
Senator CAIN. I will not at this point in the record discuss the other two criticisms. We will stick right to section 3.
I want now to include in the record an excerpt from a letter of May 12 written to Senator Tobey over the signature of Mr. Lindsay C. Warren, Comptroller General of the United States. This excerpt covers again section 3 with which all of us are concerned this morning:
We believe that funds utilized for the purpose of purchasing the obligations of the Federal home-loan banks should be solely out of appropriations made in advance by the Congress to the Secretary of the Treasury for such purpose. Such appropriations should be used for the creation of a revolving fund through
which all receipts and disbursements in connection with purchases and sales by the Treasury of obligations of the Federal home-loan banks will be made. Funds for the purchase by the Treasury of any obligations insured by the banks should be drawn from such a revolving fund, and the proceeds from any later sale of such obligations should be credited to the revolving fund. The yield on the bank's obligations held in the revolving fund should compensate the Treasury for its interest costs of funds utilized for revolving-fund purposes. No specific language for implementing the above suggestions is made with respect to subsection (i).
(The letter referred to follows:)
Hon. CHARLES W. TOBEY,
GENERAL ACCOUNTING OFFICE,
Chairman, Senate Committee on Banking and Currency,
Washington, D. C.
DEAR MR. CHAIRMAN: In accordance with the request of a member of your staff, I am submitting for your consideration certain suggestions which are pertinent to the proposed amendment of H. R. 2799, Eightieth Congress. The substance of these suggestions is being included in our reports on the Federal Home Loan Bank Administration, the Federal home-loan banks, and Federal Savings and Loan Insurance Corporation for the fiscal years 1945 and 1946, and Home Owners' Loan Corporation for the fiscal year 1947, which now are in final typing and should be submitted to the Congress before June 1, 1948.
In order to effectuate the broad objectives contained in the attached memorandum, suggested changes in the language of the amendment are offered where considered appropriate. Suggested deletions are included in brackets and new proposed language indicated by italics. I hope that these comments will be of service to you in considering the proposed amendment.
LINDSAY C. WARREN, Comptroller General of the United States.
COMMENTS ON PROPOSED AMENDMENTS TO H. R. 2799
FEDERAL HOME-LOAN BANKS
1. The Federal Home Loan Bank Act, as amended, at present does not authorize the Secretary of the Treasury to purchase debentures or bonds of the Federal home-loan banks. Under section 11 (b), the Federal home-loan banks may issue consolidated debentures to the public with certain limitations on the aggregate amount. Under subsection (c) of section 11, the banks are authorized to issue consolidated bonds to the public without limitation but under such terms and conditions as the Federal Home Loan Bank Board may prescribe. However, no bonds may be issued if any debentures are outstanding, except for refunding purposes. Section 3 of the proposed amendment to H. R. 2799 would authorize the Secretary of the Treasury to purchase any obligations (either cohsolidated debentures or bonds) up to an aggregate amount of $1,000,000,000. The suggested amendment proposes the use of public-debt transactions for the purpose of such purposes.
We believe that funds utilized for the purpose of purchasing the obligations of the Federal home-loan Banks should be solely out of appropriations made in advance by the Congress to the Secretary of the Treasury for such purpose. Such appropriations should be used for the creation of a revolving fund through which all receipts and disbursements in connection with purchases and sales by the Treasury of obligations of the Federal home-loan banks will be made. Funds for the purchase by the Treasury of any obligations issued by the banks should be drawn from such a revolving fund and the proceeds from any later sale of such obligations should be credited to the revolving fund. The yield on the banks' obligations held in the revolving fund should compensate the Treasury for its interest cost of funds utilized for revolving fund purposes.
No specific language for implementing the above suggestions is made with respect to subsection (i).
2. It is suggested that the Federal home-loan banks should be required to pay cumulative dividends on the United States Government's investment at a rate substantially the equivalent to the interest cost of the funds to the United States Treasury (Federal Home Loan Bank Administration and Federal Home Loan Banks Audit Report for Fiscal Years Ended June 30, 1945 and 1946).