Mr. REUSS. Let me turn to another aspect of Treasury thinking. The Treasury says it is against inflation. Here in your testimony you state that if these new bits of "creative financing" result, as others have said they would, in the departure of funds from thrift institutions, mortgage institutions, that and I am quoting from you on page 10-you would temporarily increase the Treasury's authority to lend to the Federal Home Loan Banks by an additional $3 billion. That is pure inflation, is it not? How do you square that with the Treasury's repeated statement that it is against inflation? It looks to me as if you are for inflation.

Mr. SCHMULTS. We are certainly against inflation; however, we also recognize that under our proposed Financial Institutions Act, the thrift institutions would have the opportunity to restructure the asset side of their balance sheets over a 512 year period.

Mr. REUSS. That is not responsive.

Mr. SCHMULTS. Yes, it is. During this interim period there may have to be some cost involved in terms of the fight against inflation. With respect to the thrift institutions and the housing industry, there may well have to be some subsidized loans from the Treasury to the Federal Home Loan Bank Board, and the President very recently proposed three new actions that would increase assistance in this regard.

Mr. REUSS. The point is that the Treasury does favor the City Bank, Chase Manhattan billion dollar "creative financing" proposals, is that it?

Mr. SCHMULTS. Our position is that we do not object to that financing. We do object to the measure which is now before this committee that would restrict or prohibit that financing.

Mr. REUSS. Do you offer a constructive alternative to the Patman proposal?

Mr. SCHMULTS. Incidentally, one point in connection with your earlier comments-I think it is important to note that this financing will be beneficial to savers, small savers. It will enable them to receive a market rate of interest on their savings, and historically, over the years, the savers, small savers, people lacking in financial sophistication, have indeed been subsidizing the thrift institutions. We think this is unwise. We do not see any reason why consumers, small savers should not be able to avail themselves of market rates of interest for their savings.

Mr. REUSS. In the light of this solicitude for the small saver, what is the Treasury doing about making Treasury bills available, not just to the $10,000 large saver, but to the smaller savers? Are you doing anything about that?

Mr. SCHMULTS. We make notes and bonds available in smaller denominations.

Mr. REUSS. But I am talking about the very high interest Treasury bill which is a real wonderful instrument for the wealthy person. Why not make that available to Archie Bunker?

Mr. SCHMULTS. Right now the notes are yielding more than bills, and there also is a cost factor from the Government standpoint of reducing the denominations of the bills.

Mr. REUSS. That is the answer given, but I either think you ought to forget about that cost factor or stop being pious about the small saver. Let me turn to Governor Mitchell.

The Fed obviously did a 180-degree switch here in a few days. From my kaleidoscopic reading of the press, you were against this issue for a while very strongly, and then when the Citicorp came in and said we will not make this redeemable until July 1, 1976, you came around and joined the throng of yea sayers. I cannot understand it, frankly. What is the big change? After all, these are market rate interest rate bills. They pay a percentage point more than Treasury bills. They are plenty redeemable at or near par any time, I should think, by going to your broker.

Mr. MITCHELL. From your standpoint it may seem a little inconsistent, but from the beginning the Fed did not have any objection to the variable rate provision. It did not have any objection to replacing commercial paper with a lengthened maturity. After all, Citicorp is not selling these for 15 years on the assumption that they are all going to be redeemed after the first 6 months.

I assume they perceive a relatively low rate of redemption, so this was a lengthening of Citicorp's obligations, and Citicorp has a very large volume of commercial paper, and it is desirable, I think, from their standpoint and from our standpoint to see their dependence upon commercial paper decrease.

The feature of the issue which caused us concern was the put feature, which started off at 6 months and was available every 6 months thereafter. We believe that if this put feature is postponed for 2 years, it will not be prejudicial to the public interest as far as we can see it at this time, and when that happened, then our position changed, and that is the only factor that changed it.

Mr. REUSS. What would be the difference on, say, disintermediation out of savings and loans?

Mr. MITCHELL. You see this issue is also listed on the New York Stock Exchange, and so if you wanted to liquidate your issue, you can liquidate it, but there might be a price, there might be a cost of liquidation, whereas by operating your puts, you can get it at par.

We do not know exactly what the experience of that issue might be. The main reason for the Fed not taking a stronger position at this point, pro or con, is that it would like to see how this issue behaves and what kind of a public acceptance it gets.

Mr. REUSS. I thank you for answering me fully, as you always do, and my time is up but I have to say that I still am baffled by why this little concession by Citicorp changed the Fed around. From the standpoint of disintermediation, it seems to me, the situation after is about the same as it was before.

Mr. MITCHELL. It is not a little concession in these times, Congress

man.

Mr. BARRETT. Mr. Brown.

Mr. BROWN. Thank you, Mr. Chairman.

As I understand these notes, they are redeemable every 6 months at a rate based upon the average of Treasury bills for the previous 6 months. Is that right? Or during that 6-month period?

Mr. MITCHELL. The rate is fixed at a margin of the Treasury bill rate, and redemption is at par, if you give a 30-day notice every 6 months after June of 1976.

Mr. BROWN. No, then, the portfolio-if I can call it such-behind these is the First National City Bank, right?

Mr. MITCHELL. Citicorp, yes; including City Bank.

Mr. BROWN. Looking over the assets of City Bank, it appears that 94.5 percent fall in this general loan and Treasury bills category. Is that approximately right?

Mr. MITCHELL. Of City Bank?

Mr. BROWN. All I am saying is, it seems to me that we have a vicious cycle here. To be facetious, I would say, under this setup, we could not afford to balance the budget. I mean, Citicorp could not afford to have us balance the budget.

Mr. MITCHELL. You know, Government securities are very attractive to investors, especially these days.

Mr. BROWN. This approach reminds me a little bit of something that happened in Michigan. It has a little bit of the same philosophicalfinancial theory twist as that of the Bank of the Commonwealth. How are these so much different in the basic investment philosophies?

Mr. MITCHELL. Well, a bank holding company has, on the liability side, equity. It has some long-term debt. It has commercial paper. It has Eurodollars, and it has Federal funds. These are the sources, plus its deposits these are the sources.

Among the sources, if you were to take one which gave the bank holding company more flexibility and more certainty as to a source of funds, you would prefer an issue like the Citicorp issue to commercial paper, which matures and has to be rolled over. This does not have to be rolled over, on the assumption that the variable rate makes it reasonably acceptable to holders, and that is the advantage of the issue to both Citicorp and the issue.

Mr. BROWN. Now, 64.1 percent of the portfolio of Citicorp is in loans; I presume those are mostly fixed-rate loans.

Mr. MITCHELL. No, they are variable-rate loans. They have become very common, as well as fixed rate.

Mr. BROWN. But yet, the return on the notes is to be a fixed rate, determinable on the average return, a point over the return on Treasury bills every 6 months.

Mr. MITCHELL. If the Treasury bill rate varies, this rates varies proportionately.

Mr. BROWN. But what is the actual provision? Is it not a point over? Mr. MITCHELL. Yes, it is a point over the T-bill-the Treasury bill— rate. The Treasury bill rate is 7.34; this is 8.34, and that holds for 6 months, and then there is a new rate.

Mr. BROWN. Let us just assume the unusual. During a 6-month period, 5 months of that, Treasury bills are up quite high, and all of a sudden, for some reason, and everything dropped right off to nothing, and everybody gave their 30-day notice. The average of the Treasury bills would be a high rate, and you would be paying a point over it; and yet the ability to, in effect, pay would be substantially reduced, would it not?

Mr. MITCHELL. I think what holders are going to say about cashing in those certificates depends upon their projection of interest rates. at the time they have the option.

Mr. BROWN. But that is exactly what I am saying. If the projection is very bad for return, are they not going to do it at that point in time, because they are only getting the average of the last 6 months? If, in the next 6 months, the money market is going to go completely bad, do they not have a right to give their 30-day notice?

Mr. MITCHELL. They can give their 30-day notice after 2 years. Mr. BROWN. Now it is after 2 years. Originally, it was after 6 months, right?

Mr. MITCHELL. Yes, that is right.

Mr. BROWN. In a more general way, it seems that in this whole problem of allocation of credit, that we continue to do things, gimmick things, to advantage the disadvantaged credit market. Like we say, give the Federal Home Loan Bank Board another $3 billion to compensate for that which is happening. It just seems to me that our system of continually, through tight money policy, etc cetera, at the Fed are restricting supply, forcing rates, forcing prices up, so that it will become too costly to buy, and that this is working on the wrong side of the ledger. It seems to me and I have argued this time and time again, and will continue to-that the best way to control demand is to make it less, profitable. I do not know if you can dissect the antomy of our credit markets and do not know what percentage goes into corporate borrowings, and things of that nature, but certainly if you can limit demand and make less desirable the borrowing by these sectors of demand through limitation on deductibility of interest

Mr. MITCHELL. Just in the last 4 weeks, corporations have withdrawn $1.3 billion in issues from the market, because they considered the price too high; and State and local governments have withdrawn $1.1 billion from the market because they considered the price too high. So there has been almost $212 billion of market instruments that have been taken off, that have not been sold, that would have ordinarily been sold.

Mr. BROWN. So therefore, you are saying that you think that-
Mr. MITCHELL. They are getting some pressure there, too.

Mr. BROWN. That your policy is coming through.

Mr. MITCHELL. Yes.

Mr. BROWN. My time has expired, Governor.

Mr. MITCHELL. Thank you.

Mr. BARRETT. Mr. Ashley?

Mr. ANNUNZIO. Mr. Ashley, would you yield 1 minute?

Mr. ASHLEY. I will yield.

Mr. ANNUNZIO. I appreciate your yielding.

I came in late. I am a member of the Hansen committee, trying to reform the Congress; and then when I meet with reformers, I find out that they want to reform only what they can get away with. But I read all of your statements, Mr. Wille. Are you for this bill, or against this bill?

You indicate in your statement you are about halfway. Exactly where do you stand?

Mr. WILLE. The last paragraph of my prepared statement adequately reflects my view, Mr. Annunzio.

Mr. ANNUNZIO. I do not want to take Mr. Ashley's time. He was good enough to yield to me, but apparently you are against the bill. Mr. WILLE. I am against the bill before the committee in its present form.

Mr. ANNUNZIO. My good friend from Illinois, we did not have these problems-back in Illinois in 1948, I find that you are against the legislation, Governor.

Mr. MITCHELL. At this time.

Mr. ANNUNZIO. Mr. Bomar, you are against the legislation?
Mr. BOMAR. Yes; I am against this bill.

Mr. ANNUNZIO. I hear all of you talking about small depositors, and what a great break they are apparently going to get. What is your definition of a small depositor? I do not know anybody in my district who has $5,000 or $1,000. What is a small depositor?

Mr. SCHMULTS. The $5,000 limitation, of course, is just on the initial purchase.

Mr. ANNUNZIO. I want to know what your definition is of a small depositor.

Mr. SCHMULTS. If a man who has a savings of $1,000, of course, he would be foolish to put the entire $1,000 in one of these securities.

Mr. ANNUNZIO. We have the financial brains of the Nation before us. Every one of you is against this legislation, and so, for the record, will you tell me what you would do under this situation? I want your solutions. Please tell me; I am looking for help.

Thank you, Mr. Ashley.

Mr. ASHLEY. If we were sitting this morning to consider the proposals of the Hunt Commission, there would be a far different scope of inquiry it seems to me, for the longer term. That, of course, is what we are going to have to address ourselves to; and the fact is that we simply cannot do it now or this year. What we are looking at, in the short term, which is sort of crystal ball looking, is the extent to which this form of financing is going to hurt housing. Is that not what the basic short-term problem is?

I take it that some of you feel those that are mainly concerned with housing that it would be better if the Citicorps were caused to postpone the initiation of this kind of financing until the Congress finds itself in a position to address the broader aspects that are involved in the Hunt Community proposals. Would that be correct? Mr. Mitchell, you say that you do not think the Fed now has the authority to prevent a Citicorp-type of issue, or to regulate its terms? The court case that you refer to is a case which seeks a declaratory judgment on that question. Is that not correct?

Mr. MITCHELL. Yes; it does.

Mr. ASHLEY. If the court case is decided in terms that the Fed does have the authority, I take it that your general thought would be that it would be inappropriate to exercise the authority. Is that correct, sir?

Mr. MITCHELL. Well, speaking for myself, I would say that I would prefer to get a little experience with the issue before I attempted to take steps to control it, beyond the steps that have already been taken; for the reason that I am not sure how it will impact on the thrift institutions, and on the banks themselves.