3. We believe that the Federal home-loan banks should not have excessive capital. In this connection, the following recommendations are made:

(a) The banks should not be permitted to borrow unless the demand for funds for advances to member institutions requires it. Such borrowings should not be made for the purpose of investing in United States Government obligations.

(b) Provision should be made for flexibility in the working-capital structure of the banks involving not only capital stock but also earnings, and borrowings through the issue of debentures or bonds. When there is excessive working capital, it is suggested that the Government's investment be repaid (Federal Home Loan Bank Administration and Federal Home Loan Banks Audit Report for Fiscal Years Ended June 30, 1945 and 1946).

HOME LOAN BANK BOARD

1. The financial transactions of the Federal Home Loan Bank Administration (now Home Loan Bank Board), including the Federal Home Loan Bank System, should be subject to budgetary control and audit in the same manner as Government corporations, under the Government Corporation Control Act (59 Stat. 597), rather than under the Budget and Accounting Act of 1921.

All revenues of the Administration and the System (except those derived from reimbursement for examinations of savings and loan associations) are obtained from assessments made on the wholly or partly owned Government corporations under the supervision of the Commissioner. Without an audit of this activity there is insufficient control over the expenditure of these funds. It should be noted that the activities of the Administration and the System are not financed out of appropriated funds.

Therefore, it is recommended that the Congress consider amending title I of the Government Corporation Control Act, as amended (59 Stat. 597), to include the Home Loan Bank Board and the Federal Home Loan Bank System (Federal Home Loan Bank Administration and Federal Home Loan Banks Audit Report for Fiscal Years Ended June 30, 1945 and 1946). As the amendment to H. R. 2799 has been introduced since the completion of this audit report, the committee may wish to consider the following suggested addition to section 3 of this amendment, which amends section 11 of the Federal Home Loan Bank Act, as amended, by adding a new subsection, viz:

"(k) The provisions of titles I and III of the Government Corporation Control Act, as amended, shall be applicable to the Home Loan Bank Board and the Federal Home Loan Bank System."

FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION

1. The investment of the United States Government in Federal Savings and Loan Insurance Corporation should be held directly by the Treasury Department and not by Home Owners' Loan Corporation. Home Owners' Loan Corporation is in process of liquidation, and it would be desirable, in connection therewith, to divest Home Owners' Loan Corporation of this investment. It may be observed that this proposed change, which would require legislation, would require only internal bookkeeping in the agencies concerned. If it be so changed, the statutory requirement that the Federal Savings and Loan Insurance Corporation pay cumulative dividends (equivalent to the bond interest cost to Home Owners' Loan Corporation) should be amended to direct that the payment of dividends accruing in the future be made to the Treasury at approximately the interest cost of funds to the Treasury (Federal Savings and Loan Insurance Corporation Audit Report for Fiscal Years Ended June 30, 1945 and 1946). It should be noted that the Government corporations appropriations bill, 1949, as proposed in the House, provides that "all right, title, and interest of the Home Owners' Loan Corporation in the capital stock of the Federal Savings and Loan Insurance Corporation is hereby transferred to the Secretary of the Treasury."

The committee report on the bill states specifically (p. 26) that this includes any unpaid dividends.

It is recommended that the organic law which created Federal Savings and Loan Insurance Corporation be amended to authorize the directors of the Corporation to retire all but a nominal amount of its capital stock. Retention of such nominal amount is appropriate, we believe, in order to evidence definitely, to all concerned the Government's ownerhsip of the Corporation. (Recommendation 1 above provides for the transfer of the capital stock from Home Owners' Loan Corporation to the Treasury Department.) We suggest that whenever the cotal of the outstanding capital stock and insurance reserve fund (surplus) shall exceed $150-,

000,000, the Corporation should be required to retire so much of its capital stock (in units of $5,000,000) as will reduce the total capital to $150,000,000, until the capital stock is reduced to a nominal amount-$1,000, for example. (This will not, however, in any way prevent the Corporation from building up the reserve fund to the level contemplated under the law, but will merely provide for the return to the Treasury of the funds originally provided.) The following suggested change in the language contained in section 6 (i) of the proposed amendment will accomplish this purpose, and provide for future payments in lieu of dividends:

"(i) [After the effective date of this subsection] Beginning July 1, 1948, the Corporation is authorized and directed, whenever the aggregate of the capital stock and insurance reserve fund (surplus) shall exceed $150,000,000, to pay off and retire [annually] at par, [an amount of its capital stock equal to 50 per centum of its net income for the fiscal year next preceding that in which such retirement is made, unless the Home Loan Bank Board by resolution shall determine that a smaller amount shall be retired. Such payments shall be made at the end of each fiscal year (beginning with the first fiscal year which begins after the date of enactment of this subsection) until the entire capital stock is retired.] the amount by which the aggregate of such capital stock and insurance reserve fund (surplus) exceeds $150,000,000, but no such payments shall be made in units of less than $5,000,000: Provided, That the final payment may be in such amount as to leave the nominal amount of $ of capital stock outstanding, and to so remain outstanding until the Corporation shall be liquidated and dissolved. In lieu of any and all [unpaid] dividends [,] accruing after July 1, 1948, [whether for any present, past, or future period] on its capital stock, [all of which dividends are hereby waived,] the Corporation shall pay to the Secretary of the Treasury, at the end of each fiscal year (beginning with the first fiscal year which begins after the date of enactment of this subsection) a return on the average amount, at par, of its capital stock outstanding during such fiscal year at a rate determined by the Secretary of the Treasury, annually in advance, calculated to reimburse the Treasury for its cost." [taking into consideration the current average rate on outstanding marketable obligations of the United States as of the last day of the sixth month of such fiscal year. The retirement of such capital stock shall not affect the applicability to said Corporation of the Government Corporation Control Act, as amended."]1

2. The General Accounting Office has informed the Congress of practices, involving corporations, which they believe constitute a circumvention of the ordinary congressional appropriation procedures. During the hearings before the Procurement and Buildings Subcommittee of the Committee on Expenditures in the Executive Departments, House of Representatives, a representative of the General Accounting Office, in connection with the Reconstruction Finance Corporation, pointed out that, through this means of borrowing, access to public funds were provided, which avoided the ordinary Government processes for controlling the expenditures of cash resources, namely, through appropriations; and that by means of such borrowings the ordinary congressional procedures by which appropriations of public funds are reviewed, debated, modified, and approved or disapproved in advance were avoided.

Under such a situation the Congress, at some later date, would have to authorize or appropriate funds, to the extent of such utilization of borrowings, long after the Treasury funds have been expended, and thus circumvent normal congressional appropriation procedures adopted to implement the basic concept expressed in the Constitution, which provides in article 1, section 9: "No money shall be drawn from the Treasury, but in consequence of appropriations made by law ** * "" It is further provided by law that "No act of Congress passed after June 30, 1906, shall be construed to make an appropriation out of the Treasury of the United States, * * * unless such act shall in specific terms declare an appropriation to be made *"" (34 Stat. 674; 31 U. S. C. 627).

* *

It is consequently recommended that the borrowings of Federal Savings and Loan Insurance Corporation be made out of appropriations made in advance to the Treasury for this purpose and the following language to carry out this principle is suggested, involving changes in the amendment in section 6:

"(j) The Corporation is authorized to borrow from the Treasury, out of appropriations made to the Secretary of the Treasury in advance for this purpose, and such appropriations are hereby authorized, and the Secretary of the Treasury is author

1 If it should be decided not to retain a nominal amount of capital stock, the last sentence of the above language enclosed in brackets should be reinstated in the bill, as otherwise the Corporation would eventually be exempted from the Government Corporation Control Act.

ized and directed to loan to the Corporation, on such terms as may be fixed by the Corporation and the Secretary, such funds as in the judgment of the Home Loan Bank Board are from time to time required for insurance purposes, not exceeding in the aggregate $750,000,000 outstanding at any one time, and the Corporation hereafter shall not exercise its borrowing power under the first sentence of subsection (d) of this section for the purpose of borrowing money from any other source: Provided, That each such loan shall bear interest at a rate determined annually in advance by the Secretary of the Treasury, calculated to reimburse the Treasury for its cost." [taking into consideration the current average rate on outstanding marketable obligations of the United States as of the last day of the month preceding the making of such loan: Provided further, That nothing in this subsection shall prevent the Corporation from issuing debentures in accordance with the provisions of subsection (b) of section 404. For the purposes of this subsection the Secretary of the Treasury is authorized to use as a public-debt transaction the proceeds of the sale of any securities hereafter issued under the Second Liberty Bond Act, as now or hereafter in force, and the purposes for which securities may be issued under the Second Liberty Bond Act, as now or hereafter in force, are hereby extended to include such loans. Any such loan shall be used by the Corporation solely in carrying out its functions with respect to such insurance. All loans and repayments under this subsection shall be treated as public-debt transactions of the United States."]

Senator CAIN. Let me raise the inquiry now as to whether there is any official representative of Mr. Foley here?

Mr. Fitzpatrick is here. Mr. Fitzpatrick, you come and make yourself more available while at the same time being more comfortable. I don't know whether you have been here since we began a few minutes ago, but we are taking testimony on section 3 of the amendment to H. R. 2799. There appears to be a major misunderstanding, namely, the committee could only construe from the official letter of recommendation of April 26 by Mr. Foley to Senator Tobey and the committee, that section 3 as amended had been previously agreed to by all the parties who were asked to reflect their views

On the basis of letters received since the matter was first before the committee, probably during the latter part of April, we find dissents from everybody, and are left only with the conclusion that the only official source in support of section 3 happens to be the Housing and Home Finance Agency.

Would you just cast a brief reflection?

Mr. BERCHMANS T. FITZPATRICK (general counsel, Housing and Home Finance Agency, Washington, D. C.). I think that is not quite correct, Senator, for this reason: First of all, the letter itself indicates, in the paragraph to which you have referred, that the original draft of these amendments was sent to the Bureau of the Budget for the clearance and advice as to the relationship of the proposed amendments to the program of the President.

Senator CAIN. Correct.

Mr. FITZPATRICK. Further that paragraph states that the original draft was referred by the Bureau of the Budget to a number of interested agencies, listing those to whom it was referred. It further states that on the basis of the suggestions and views of those agencies, and after conferences with us, certain changes were recommended in the original draft of the amendments; that those recommended changes were incorporated in the amendments and that, when so incorporated, the enactments of the legislation would be in accord with the program of the President.

Senator CAIN. Right.

Mr. FITZPATRICK. I do not think that means, suggests, or implies, in connection with the legislation, that all conflicting views or objec

tions expressed have been resolved in favor of the agency expressing such objection. In the course of the clearance of legislation, it necessarily follows that everybody's views cannot obtain. Otherwise, you do not get legislation. Obviously, the clearance of the revised amendments as being in accord with the program of the President means that all conflicting views and objections expressed by other interested agencies were, for that purpose, resolved on the merits of the objection or recommendation. So far as section 3 of the bill is concerned, the major agency which has the primary interest in that is the Treasury Department. You may recall in Mr. Foley's testimony he indicated that, when he took office, this question of Treasury support of the Home Loan Bank System had long been an unresolved question. He felt his first duty was to develop a proposal which would have the Treasury support and insofar as possible, the support of other interested agencies, to be sure, but that the main job was to develop a proposal that was satisfactory to the Treasury Department. Senator CAIN. What is the attitude of the Treasury at this time? Mr. FITZPATRICK. The attitude of the Treasury is in support of this legislation.

Senator CAIN. Do we have that as a part of our record somewhere? Mr. FITZPATRICK. I don't know whether you have a letter from Treasury or not, Senator.

Senator CAIN. What we are faced with, and I think you will recognize that, is if we do not have an affirmative approval by the Treasury, we have strongly negative attitudes by others who have at least an indirect and collateral interest in this legislation.

I think I can agree with you that perhaps the program of the President does not mean that everybody is in agreement on everything, but outside of your own Housing and Home Finance Agency on the basis of the official documents which we have before us, we have conclusive and positive objections to section 3 from three official branches of this Government, which does not leave the committee in a very happy position.

Mr. FITZPATRICK. May I say one other thing, Senator?

Senator CAIN. Certainly.

Mr. FITZPATRICK. So far as section 3 is concerned, my recollection is that as to the FDIC, no question or objection whatsoever was raised by them as to that section in their letter presented to the Bureau of the Budget in connection with the clearance of these amendments. There were a number of other objections or suggestions which FDIC presented. All except one of these were resolved in their favor. The one exception is section 8. However, the question as to Treasury support for the Home Loan Bank System was raised by the Federal Reserve Board in their letter to the Bureau of the Budget. Also, the Treasury itself raised a question as to whether, rather than using an amount of borrowing authority based on a formula, it would be preferable to use a dollar figure. This suggestion of the Treasury was accepted.

Senator CAIN. In other words, you have resolved that particular difference within the Bureau of the Budget as a result of conferences between the agency referred to and yourselves?

Mr. FITZPATRICK. That is correct.

Senator CAIN. And what came to us through Mr. Foley's recommendation had been agreed to?

Mr. FITZPATRICK. Yes.

Further, since that time, and since Mr. Foley's testimony before the Banking and Currency Committee, I have talked to Under Secretary Wiggins. He inquired specifically as to the situation with respect to the provisions of section 3, particularly in terms whether of general support or of emergency support was provided for. He indicated that he felt that it should be emergency support. I pointed out to him at the time that both Mr. Foley's testimony and Mr. Divers' testimony specifically indicated it was emergency support which was intended.

In all of our conferences with the Treasury and the Bureau of the Budget, that intent was clear, although none of us could find the way to spell out on the face of the legislation all the kinds of emergencies that might occur. It was felt that if we attempted to define the types of emergency on the face of the statute-even with the most careful definition you might at any time in the future be up against an emergency not anticipated and not covered by the definition. That would defeat the whole purpose of the legislation. Therefore, the discretionary power to purchase was placed entirely with the Secretary of the Treasury. The whole legislative history indicated emergency support. Furthermore they, not us, construed the statute. At the conclusion of our discussion, and on the basis thereof, the Under Secretary of the Treasury said that was entirely satisfactory to him. Senator CAIN. Would you care to give us an observation as to why an agency of the Government which did not raise the question when requested to give their opinions, as a part of these conferences that you mentioned, has now raised a very sturdy objection?

Mr. FITZPATRICK. I do not believe I would care to comment on that, Senator.

Senator CAIN. It is interesting, and we have to find out why. If we ran all legislative considerations like that, we would be sitting at this and other tables for years. People begin to wonder why the Congress is not going to recess, if it is not, on the 18th day of June, and I think we have a first-class demonstration of that right here.

We have a letter that has just been received, a letter dated May 21, addressed to Senator Tobey, signed by Mr. S. R. Carpenter, Secretary of the Board of Governors of the Federal Reserve System, attaching a copy of a resolution adopted by the Executive Committee of the Federal Advisory Council on May 17, 1948, relating to the proposed amendment to H. R. 2799. I should like to quote from this resolution:

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. If such authorization is provided at all *

A very strong inference that in their opinion it should not be provided

* * * it should be limited to well-defined emergency situations.

But the resolution by no means attempts to point out what a well-defined emergency situation is.