SECURITIES AND EXCHANGE COMMISSION, Hon. WRIGHT PATMAN, Congress of the United States, House of Representatives, Washington, D.C. DEAR REPRESENTATIVE PATMAN: This is in reply to your letter of July 3, 1974, in which you express concern with respect to the proposed issue of floating interest rate notes by Citicorp, the parent holding company of the First National City Bank of New York. Citicorp has filed a registration statement with the Commission for the purpose of registering these notes under the Securities Act of 1933 for sale to the public. You state that if this issue is successful, other holding companies may issue similar securities and suggest that this is something "which affect the entire financial community at a time of great concern over disintermediation and liquidity, not to mention the adverse effects on the housing industry." You refer to legislation now pending before the Congress which would increase the authority of the Federal Reserve Board over holding company operations and which could possibly be construed to confer authority over the kind of situation you describe. You state that as Chairman of the Banking and Currency Committee, you are anxious that all of the ramifications of the proposed Citicorp issue be taken into consideration before these notes are actually sold, and refer to discussions which you have initiated for the purpose of determining what, if any, additional courses of action should be taken by the Congress. You then state that "[w]ith these points in mind I am therefore asking that the Securities and Exchange Commission stop the issuance of the proposed Citicorp notes until the Congress has an opportunity to complete its study of the issues in consultation with the various bank regulatory agencies." In your letter, you point out that the Board of Governors of the Federal Reserve System has expressed to you a concern about these notes, but has stated that it has no statutory power to control their issue. While we appreciate the concern you raise in your letter, as to the possible ramifications this offering may have, under the Securities Act of 1933, we cannot prevent this registration statement from becoming effective if full and adequate disclosure is made. Under that Act, a registration statement becomes effective twenty days after the filing of the last amendment, which has not yet occurred in the case of Citicorp, although the Commission does have authority, upon request of the issuer, to accelerate the effective date of the registration satement having due regard for the statutory standards, set forth in Section 8(a) of the Securities Act. These standards broadly relate to the general disclosure purposes of the Securities Act. It is the long-standing policy of the Commission, as reflected in our rules "upon request . . . to permit acceleration of the effective date of a registration statement as soon as practicable after the filing of an appropriate amendment correcting the deficiencies therein, if any, and setting forth . . ." additional relevant information. We have so advised the Federal Reserve Board, in a letter to them, dated July 3, 1974, a copy of which is enclosed for your information. The Commission is aware of the broad significance of the issues which you raise, and of course, wishes to be responsive within the limits of its jurisdiction, as outlined above. If you have any information or views which may have a bearing upon the exercise of our authority, we would appreciate receiving it, and would give it most prompt and expeditious consideration. Sincerely, Enclosure. PHILIP A. LOOMIS, Jr., JULY 3, 1974. GEORGE W. MITCHELL, Vice Chairman, Board of Governors, Federal Reserve System, Washington, D.C. DEAR MR. MITCHELL: This will acknowledge and thank you for your letter of July 2, 1974, with respect to a registration statement of Citicorp pending before the Commission covering a proposed issue of Floating Rate Notes due in 1989. The Commission will appreciate receiving any further comments your staff may have concerning the adequacy of the disclosures in that statement as suggested in your letter. While we appreciate the concern you raise in your letter, as to the possible ramifications this offering may have, under the Securities Act of 1933, we cannot prevent this registration statement from becoming effective if full and adequate disclosure is made. Under that Act, a registration statement becomes effective twenty days after the filing of the last amendment, which has not yet occurred in the case of Citicorp, although the Commission does have authority, upon request of the issuer, to accelerate the effective date of the registration statement having due regard for the statutory standards, set forth in Section 8(a) of the Securities Act. These standards broadly relate to the general disclosure purposes of the Securities Act. It is the long-standing policy of the Commission, as reflected in our rules "upon request . ..., to permit acceleration of the effective date of a registration statement as soon as practicable after the filing of an appropriate amendment correcting the deficiencies therein, if any, and setting forth . . ." additional relevant information. In view of the concerns expressed in your letter, we thought it appropriate to advise you of the nature of our authority with respect to this registration statement. In this connection we would appreciate any information or views which the Board may have bearing upon our exercise of this authority. Sincerely yours, PHILIP A. LOOMIS, Jr., Commissioner. U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON BANKING AND CURRENCY, Washington, D.C., July 8, 1974. Hon. ARTHUR F. BURNS, Chairman, Board of Governors, Federal Reserve System, Washington, D.C. DEAR MR. CHAIRMAN: As you know, Citicorp is scheduled to issue $850 million in floating interest rate notes this week and it appears that the Securities and Exchange Commission will not take any steps to halt the offering. The Federal Reserve, while expressing concern about the nature of this offering, has stated that it has no statutory powers to regulate the issuance of the notes. While the Federal Reserve's reading of the law may be open to question, it is a fact that your agency, as a result of its wide-ranging regulatory powers, has great moral suasion over what is and is not done in the banking community. As a result of the expanded powers given the Federal Reserve in the 1970 amendments to the Bank Holding Company Act, this moral suasion is even greater over bank holding companies. Therefore, Dr. Burns, I am calling on you to engage in what has become commonly known as "jawboning" to persuade your good friend, Mr. Walter Wriston, chairman of the Citicorp, to temporarily withhold the issuance of these $850 million of floating interest rate notes until such time as the Congress and the bank regulatory agencies can determine the full ramifications of this proposed action. I know that some of your fellow members of the Board are deeply concerned about the impact of this issue and while they may hestitate to talk about it publicly I am sure that they would approve of their Chairman moving in vigorously to halt this issue. In fact, it appears that only such "jawboning" can fill the real or imagined gaps in existing law and regulation and protect the public interest. The Federal Reserve's letter of July 2 to S.E.C. described the outflows of savings from the thrift institutions which provide the great majority of funds for housing in this nation. This is a very dangerous situation and the problems are heightened by the fact that other bank holding companies will follow the lead of Citicorp in issuing similar securities in the coming months. The end result could have devastating effects in the money markets and could all but crush an already severely depressed housing industry. It is obviously something which calls for more than a technical rendition of the law and official responsibilities and that is why I am calling on you to take the extraordinary step of personally calling on the Citicorp to act in the public interest. The proposed issuance of these new notes is simply the latest in a series of moves in the endless competition for funds during prolonged periods of high interest rates. These high interest rate policies have been pursued by your agency, over the objections of many of us in the Congress, and I feel that you have a moral responsibility to do everything possible to correct the tremendous problems which result from these policies. It is also true that the bank holding companies have become more aggressive and more expansive under the regulation of the Federal Reserve and it is regrettable that your agency, as the sole regulator of these holding companies, did not foresee the kind of problems which would be created by the issuance of securities as contemplated by the Citicorp. So, here again, I think a heavy responsibility rests on your shoulders to correct the situation and to prevent the dislocations in the financial community. This episode illustrates the inherent weaknesses of the competitive relationships in the financial community and the inadequacies of Regulation Q. We have never developed a competitive situation which allows equity for all savers and at the same time provides a steady and adequate flow of funds into the housing market. Obviously, the Citicorp issue is not a solution to the problem, particularly when it comes at a time when well over half the population is priced out of the housing market and when other credit needs of the community and the nation cannot be met because of ever-increasing interest rates. Therefore, Dr. Burns, I call on you to: 1. Immediately contact the Citicorp and ask that the issue be withheld pending a full study by the bank regulatory agencies and the Congress. 2. Immediately draft legislative proposals to provide regulation over such issues as contemplated by Citicorp. 3. Immediately draft legislative proposals on interest rate regulation designed to improve the competitive situation among the various entities of the financial community and to provide equity for savers of all classes. It is suggested that these proposals be undertaken in coordination with the other bank regulatory agencies and the Federal Home Loan Bank Board. I would hope that these efforts would be undertaken by the Federal Reserve Board on an emergency basis and I will assure you that the Banking and Currency Committee will give immediate consideration to the proposals. Sincerely, WRIGHT PATMAN, Chairman. CHAIRMAN OF THE BOARD OF GOVERNORS, Hon. WRIGHT PATMAN, Chairman, Committee on Banking and Currency, U.S. House of Representatives, Washington, D.C. DEAR MR. PATMAN: I have your letter of July 8, 1974, concerning the floating interest rate issue proposed by Citicorp. You will be interested in the enclosed copy of a telegram that I have just sent to Mr. Walter B. Wriston, Chairman of Citicorp. You will be interested also, I am sure, in the enclosed copy of a letter that has just gone to Senator Proxmire. Sincerely yours, Enclosures. ARTHUR F. BURNS. WALTER WRISTON, [Telegram] JULY 9, 1974. Chairman, Citicorp, New York, N.Y. In view of your concern on the part of Congress and the regulatory agencies, I must earnestly request that you postpone for an interval of two weeks the Citicorp floating interest rate issue. Such an interval would enable the Congress and the Government officials principally concerned to study with due deliberation the economic and financial implications of this novel type of issue. ARTHUR F. BURNS, Chairman, Federal Reserve Board. 36-684 O - 74-2 Hon. WILLIAM PROXMIRE, CHAIRMAN OF THE BOARD OF GOVERNORS, FEDERAL RESERVE SYSTEM, DEAR SENATOR PROXMIRE: Your letter of July 8 requests the assistance of Board staff in developing possible legislative proposals that would give us authority to deal with bank holding company security offerings such as the proposed Citicorp issue. We are glad to comply, and our staff will be in touch with Mr. Shuman. It is difficult at this time to predict what the effects of the Citicorp issue, and others like it that may follow, would be on the pattern and geographic distribution of financial flows. It seems probable that banks and thrift institutions would lose deposits to instruments of this type and, if the volume of such offerings were large, the amount of disintermediation could be significant. It should be recognized, however, that a sizable proportion of the subscriptions to such issues would represent shifts from other market instruments or the placement of funds that might have been withdrawn from banks and thrift institutions in any event. The specific features of the proposed Citicorp issue are designed to be attractive to relatively small investors, and would place them more nearly on a parity with large investors so far as yields are concerned. On balance, it is not obvious that the long run public interest would be best served by prohibiting or limiting innovative efforts of this kind. Instead it might be preferable to make plans for special assistance to the savings institutions and for provision of an adequate volume of housing finance. For example, the present program of subsidized lending by the Federal Home Loan Bank System might be expanded, and perhaps extended to mutual savings banks. Also, it may be desirable for Congress to consider permitting the Federal agencies to authorize the issuance of variablerate deposit obligations not subject to interest rate ceilings. As offerings of the type proposed by Citicorp may proliferate, we believe that any such administrative plans and legislative proposals should be formulated promptly. If, however, the Congress wishes to limit the ability of bank holding companies to offer instruments that might compete unduly with savings deposits, two possibilities come to mind. First, the Congress could indicate its intent, in PL 91-151, to give the Board authority to regulate the terms of the note issues of bank holding companies and their non-bank subsidiaries—regardless of the intended use of the proceeds. This would make it possible, for example, for the Board to limit the ability of the issuer to offer investors the option of periodic redemption of their notes. This redemption opportunity-particularly since it applies from issue date forward at six month intervals-is the main feature that makes the proposed Citicorp issue appear similar to a time deposit. A second approach, entailing more extensive regulatory involvement, would be to broaden existing regulatory authority with respect to the issuance of a "cease and desist" order so that the Board, on a case-by-case basis, could determine that a proposed note issue would have a sufficiently adverse impact on financial markets or depository institutions to justify imposition of appropriate restrictions by the Board. Such authority would be extremely broad and flexible in character. It would not, of course, apply to issues by any corporations not affiliated with bank holding companies. Sincerely, ARTHUR F. BURNS. The CHAIRMAN. This morning George W. Mitchell, Vice Chairman of the Federal Reserve Board, is here in the absence of Dr. Burns, who has said that he could not conveniently be here today, but he will be here at a date that is fixed for his appearance anyway, the 23d of this month in the monetary hearings. We are glad to have you, Governor Mitchell; Mr. Bomar, Chairman of the Federal Home Loan Bank Board, we are glad to have you, Mr. Bomar; Edward Schmults, Under Secretary of the Treasury; Edward Roob, Special Assistant to the Secretary for Debt Management; and Frank Wille, Chairman of the Federal Deposit Insurance Corporation. Mr. Wille will be here in a few minutes. They will be followed by representatives from the AFLCIO-that will be this afternoon-the American Bankers Association, the National Savings and Loan League, the National Association of Home Builders, the U.S. Savings and Loan League, and others. Mr. Mitchell, I just want to ask each one of you gentlemen these three questions. Mr. Mitchell, almost all of the revenue of Citicorp emanates from the upstream-dividend payments from the First National City Bank of New York and not from other subsidiaries of Citicorp. Since First National City Bank itself could not float such an issue without being subject to Federal regulation by one or several of the bank regulatory agencies, do you think it is a proper observation to make that this issue of $850 million by Citicorp is nothing more than an ingenious device to get around regulation Q controls? What do you say about that, Governor Mitchell? Mr. MITCHELL. Well, in brief, no, I do not think so. I think it is primarily to replace some of the volume of commercial paper they have outstanding. The CHAIRMAN. Mr. Bomar, it has been rumored that in addition to this Citicorp, there is an estimated $5 billion in total of similar bank holding company issues that will soon come to market if this Citicorp issue is successful. Given the fact that the thrift institutions are in a rather dire situation and have no funds at reasonable rates to loan for home mortgages as a result of either the withdrawal of large sums of money from thrift institutions or the lack of additional deposits at such institutions, what effect would $5 billion worth of debentures, Mr. Bomar, issued similar to Citicorp have on thrift institutions? Mr. BOMAR. Mr. Chairman, the $4 to $5 billion figure I have heard may very well just be bank holding companies. However, the information that I have been given, which is hearsay-type information, is the $4 to $5 billion may include bank holding companies, public utilities and others as well. It is not just bank holding companies. However, as to the thrust of your question and the impact on thrift institutions, it is a very difficult problem for thrift institutions as you pointed out. They have a limited capacity to compete for funds. It is, at these market rates, close to impossible for thrift institutions to meet these terms, and therefore the impact is a very negative one on the thrift industry and on housing. The CHAIRMAN. Mr. Wille, we are glad to have you, sir. Since more than 95 percent of the assets of Citicorp, Mr. Wille, consist of the assets of First National City Bank, is it not fair to assume that an investor in this $850 million debenture issue of City Corp. is really looking to the assets on earnings of the First National City Bank for the repayment of the investment or in case of default, and therefore the Federal regulators such as the FDIC should have some surveillance or control over such issues as this by bank holding companies? What do you say to that, Mr. Wille? Mr. WILLE. I believe the public identification of Citicorp with City Bank is clear and definite, Mr. Chairman. While there are legal distinctions between the two entities, I think, in the eye of the public in |