(The letter and resolution referred to follow:) Hon. CHARLES W. TOBEY, BOARD OF GOVERNORS OF Chairman, Committee on Banking and Currency, United States Senate, Washington, D. C. DEAR SENATOR TOBEY: For your information there is enclosed 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. Very truly yours, S. R. CARPENTER, Secretary. RESOLUTION ADOPTED BY THE EXECUTIVE COMMITTEE OF THE FEDERAL ADVISORY COUNCIL ON MAY 17, 1948 In connection with the proposed amendment to H. R. 2799, the Executive Committee of the Federal Advisory Council is in agreement with the Board of Governors of the Federal Reserve System that the following three features of the proposed amendment are undesirable: 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. If such authorization is provided at all, it should be limited to welldefined 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, as determined by the Home Loan Bank Board. It is appropriate that the Federal Savings and Loan Insurance Corporation, as a Government corporation, should obtain its funds from the Treasury; but it should first be required to build up adequate reserves to avoid an unnecessary burden on the Treasury. 3. Section 8 of the amendment would make insured share accounts of savings and loan associations lawful investments for fiduciary and public funds. Such shares are not appropriate investments for such funds, but the fact that they were approved as such would convey a misleading sense of liquidity to other investors. Mr. FITZPATRICK. We have been unable to do it to our satisfaction, Senator. Senator CAIN. But I raise the question again, under date of May 17, people who so far as I know, have never previously evidenced any interest in this problem, now in very sturdy fashion say that section 3 is ill-advised. Mr. FITZPATRICK. If I may interject there, Senator, we think it would be unwise to attempt to do so. In the event of the occurence of an emergency not covered by the definition, the very purpose of the legislation would be defeated. I think that the Federal Reserve Board in the course of its clearance did indicate its interest in section 3 prior to this time. This is simply a reiteration. Senator CAIN. This is the Federal Advisory Counsel, not the Federal Reserve Board. Mr. FITZPATRICK. I see. Senator CAIN. This means that this letter was stimulated by somebody for reasons which seemed to them to be very valid. We started out some weeks ago with apparently an agreed-upon section of an amendment, and now we are faced with a situation from this side of the table where the only major agency which from your point of view, Mr. Fitzpatrick, has been fully in accord with this amendment, is not on record so far as I know one way or the other, and the other Federal agencies to whom the matter was referred are all in opposition to it. Is my opinion unsound or sound when I suggest that the matter ought to be returned to conference and a new start made on this situation? I certainly do not want to be disrespectful. The committee has no intention of being adverse to Mr. Foley's interests. What would your recommendation be? Mr. FITZPATRICK. I would say simply that you should follow your consistent practice of considering the legislation on the merits. You have received from the Housing and Home Finance Agency and from the Home Loan Bank Board our testimony and our indications as to why we have felt that these particular provisions are necessary; as to why they are especially essential to the operations of the Home Loan Bank Board; as to why they represent sound public policy. If these other agencies now desire to express objection to that particular provision, your committee should hear evidence from these gentlemen, and on the basis of the previous testimony which you have received from us and from the representatives of the savings and loan industry, you can, on the basis of what you now hear, reach your decision as to whether you think that our position is sound and that you should go forward with this legislation, or whether you think our position is not sound and that you should not go forward with this legislation. Senator CAIN. I am advised that when we had a hearing on this amendment, April 28, representatives of all the agencies involved were here. Personally, I sat in on that session. I do not recall that any one of those gentlemen rose and asked to be heard in opposition to this section. Now the heads of those agencies are entering for the record official objections to this provision. Mr. Witness, it is a little curious, to say the least, not that it is not proper. Sometimes people move too hastily and we ought to feel free to reopen for discussion a serious matter. I think thus far the record includes in a rather bewildering fashion all the component parts of this problem, and we will have a chance to analyze that record and straighten it out. Mr. Witness, I have not endeavored to be discourteous to you. Will you please continue? You gentlemen do not leave us, please. Mr. RECKMAN. May I add for the record, Mr. Senator, from the testimony of Mr. Foley on April 27, 1948, this proviso: This provision having to do of course with section 3 would authorize the Treasury in case of emergency need to purchase the obligations of the Federal Home Loan System in amounts not exceeding $1,000,000,000 outstanding at any one time. In my opinion, this is the most important single proposal in the legislation the emergency need. I reiterate what I said previously, that there is no definition as to the emergency need, and no instructions at all in the bill to the Secretary of the Treasury how he shall determine, first, does the need exist; secondly, as to the extent of the need; and third, what shall he do about it. Shall we proceed with section 8? Senator CAIN. Please do. Mr. RECKMAN. Section 8, Mr. Senator, has to do with the deposit, so-called deposit, of public funds by the purchase of share accounts in Federal savings and loan associations. I should like to read section 8 in the amendment for the record: Without regard to the provisions of any other law respcting the investment of or security for such funds, shares, deposits, certificates, and all forms of accounts which are insured under title IV of the National Housing Act as now or hereafter in force, shall be lawful investments and may be accepted as security for all fiduciary, trust and public funds the investment or deposit of which shall be under the authority or control of the United States or any officer, officers, agency, or agencies thereof. We are unable, Mr. Senator, to determine from the language as proposed to what extent the public funds will be collateral if, as and when they are deposited in a Federal savings loan association by the purchase of share accounts. Share accounts, as we understand, are not deposits because, as I have indicated in my opening remarks, the function of a Federal savings and loan association is to receive funds for investment of those who have funds for investment and not deposits. So, if a Federal agency has funds which would be used to purchase share accounts, question: What would be the security to the Federal agency for the public funds so invested in a share account of a Federal savings and loan association? Senator CAIN. And from the bill as written, you do not know anything about that security. Mr. RECKMAN. We don't see that protection to the Federal agency attempting to deposit or purchase, and we say it is "purchase" because of the intent of Congress in the bill for the public fund. Senator CAIN. Let me stop you there if I may. Mr. McKenna, will you provide for the committee the marked passages of the various agencies concerning their views on this subject? From the Federal Deposit Insurance Corporation, a letter of May 13, 1948, I quote the following: 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 and agency thereof, and the shares, deposits, certificates, and accounts of institutions insured by the Federal Savings and Loan Insuarance 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. The insured banks are prohibited from paying interest on deposits in public funds unless such funds are time deposits, in which case they can pay only 21⁄2 percent depending upon the maturity of such deposits. Under this proposal custodians of public funds and institutions insured by 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 and competition, requiring the deposit of public funds which would not be investments in long-term home financing at all but in fact would be demand deposits. Mr. S. R. Carpenter, Secretary of the Federal Reserve System, has the following in his letter of May 11, to say about section 8, and I quote: 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. Do you have anything else? The Federal Advisory Council in its resolution of May 17, takes the same position as taken by the Federal Reserve System. Let me ask Mr. Fitzpatrick if to his knowledge we have included somewhere within the record the Treasury Department's attitude toward section 8? Mr. FITZPATRICK. No, sir. As far as I know, apparently you have no letter from the Treasury Department. I will say, however, that when the initial draft of the amendments was submitted for clearance, there was not included a provision limiting section 8 to insured accounts. Such a limitation was recommended by the Treasury and has been incorporated in the present draft so as to limit the application of section 8 to insured accounts. Senator CAIN. But it is to the insured accounts that the present witness is taking sturdy objection and the other agencies which I have quoted have taken positive opposition views. Mr. FITZPATRICK. May I also say, Senator, that we have indicated to the members of the staff since this matter has come up that while we feel that the provisions of section 8 are wholly appropriate, we do not feel that they are so essential to the Home Loan Bank System as we do in the case of section 3. We have indicated that the omission of section 8 would not seriously hurt us. Senator CAIN. But do you agree with me, Mr. Fitzpatrick, representing the committee, that it is a very unfortunate thing that other Government agencies have recourse to such words as "dangerous,' and "misleading impressions of liquidity," and so on? Mr. FITZPATRICK. Indeed I do agree with you on that, Senator. Senator CAIN. Those things constitute rather harsh language which, because of the very nature of the subject we are discussing, deserves a reexploration by responsible people who have any interest, direct or indirect, in such legislation as is before us. Your position is very clear, and I respect that position. I likewise respect the position, until we know more about it, of anybody who takes the contrary view. When your agency says, "In our opinion this is appropriate legislation," and when another Federal agency says it is dangerous legislation, then I say it is more confusing than is the general case. Because, again, referring to Mr. Foley's original letter back in April where he said various points of view were compromised and agreed to, and we have taken other views into consideration and made our amendments in accordance with those views in a general understanding, and his recommendations come to the committee and now several short weeks later no one can construe from what we have before us this morning that there was an agreement by anybody. If there was an agreement, which Mr. Foley obviously thought there was, what accounts for the fact that the agreement has been so completely destroyed in 2 or 3 weeks' time? Mr. Witness, do you have anything further to relate on section 8? Mr. RECKMAN. I should like to continue, Mr. Senator. There is no limit, as we construe section 8, as amended, as to the amount in which an agency may purchase shares of the Federal Savings and Loan Association. If there is to be the insurance of accounts limited to $5,000, there is no limitation spelled out in the amendment to section 8. If reference is made, as you have quoted from, I think it was the letter from the Federal Deposit Insurance Corporation, referring to deposits, again coming back to the intent of the Congress that the Federal savings and loan associations do not accept deposits, their function is to receive investments; and if it is the intent of this bill, which frankly we are having difficulty ascertaining, whether the Federal agencies shall deposit or shall invest in the share accounts. If they deposit, then we come to that controversial question with the banking industry, where the banks accept demand deposits upon which they are not permitted under the Federal Reserve regulations to pay interest, and in those instances where they do accept a time deposit there is a limitation of time when that deposit becomes a demand deposit and must from that point on be repayable on demand, and the interest which they may pay on that class of so-called time deposit which later bècomes a demand deposit, is limited to 22 percent by the Federal Reserve regulations. Senator ČAIN. I am a little puzzled, Mr. Witness, why you or some other official spokesman for the American Bankers Association was not here on the 28th day of April. This a matter of grave concern to you and the whole financial structure of the country, if I were to share your point of view. Mr. MORONEY. May I comment on that, Senator Cain? In the announcement of that day, H. R. 2799 was not mentioned and the FDIC for that reason did not know of the hearings. That may likewise apply to the ABA. Mr. RECKMAN. That, Mr. Senator, concludes what I have to say. Senator CAIN. For the record, are we to understand that the American Bankers Association, for the reasons stated, is in opposition to sections 3 and 8 of H. R. 2799, as now written? Mr. RECKMAN. Correct. Senator CAIN. You have no interest in S. 2415, which is a reciprocal conversion bill permitting Federal savings and loan associations to utilize state charters and vice versa? That is no concern of your Association? Mr. RECKMAN. At the time we have no comment to make on that. Senator CAIN. You have no concern with S. 2417, which covers the Federal Savings and Loan Insurance Corporation premium-reduction proposal? Mr. RECKMAN. At the present time we have no comment to make. Senator CAIN. I do not want to have you go away with any false impression. You say "at this time." Maybe if the committee has its way, for a change, by the time you think of it for a time the legislation will be law. Mr. RECKMAN. We recognize that, Mr. Senator. Senator CAIN. All right, Mr. Witness, thank you very much, sir. The only observation I should like to make is that I would encourage the various parties to this problem to avail themselves freely of the record which was developed this morning, particularly your boss, Mr. Foley, Mr. Fitzpatrick. I have just been handed by Mr. McKenna, of our staff, a statement which was submitted recently by the National Association of Mutual Savings Banks, over the signature of Mr. A. George Gilman, chairman of the committee on Federal legislation, which will be included in the record at this point. (The statement referred to follows:) |