believe. I don't recall for certain, but I believe that Secretary Kennedy was not in the city at that time. I consulted with Secretary Kennedy and then sent this letter, which I will put in the record, to Senator Baker. I have reviewed this letter with Secretary Connally and he agrees that this is the Treasury Department's position today, also. The relevant paragraphs are brief and I shall simply read them: The amendment to H.R. 4148 under consideration merely extends exactly the same treatment to water and sewer bonds as was given to the college dormitory bonds in 1968. This Department feels that the public policy arguments made in favor of the 1968 dormitory amendment exist perhaps in even greater magnitude with reference to the water and sewer pollution control projects. The Treasury Department therefore strongly supports the amendment of the Senate which would permit both national and state member banks of the Federal Reserve to purchase, underwrite and deal in obligations issued by any State or political subdivision or any agency of a State or political subdivision for water or sewer purposes, provided that such bonds are considered by the Comptroller of the Currency to be of sufficiently high quality so as to be eligible for inclusion in the investment portfolio of a national bank. In summarizing, in the view of this Department, permitting commercial bank underwriting of water and sewer project bonds would provide important and material assistance in the fight against environmental pollution without raising any problems of banking prudence or safety. Senator RANDOLPH. Mr. Secretary, what was the date of that letter? Mr. WALKER. February 3, 1970. Senator RANDOLPH. Mr. Chairman, I think the letter in full should be made a part of the hearing. Senator MUSKIE. Without objection, it and any other related material which we may subsequently receive will be included. (The letter of Under Secretary Walker, referred to, and a letter of reference, subsequently supplied by the Committee for Study of Revenue Bond Financing, follows:) Hon. HOWARD H. BAKER, Jr., THE UNDER SECRETARY OF THE TREASURY, DEAR SENATOR BAKER: In response to your request, we are happy to give the views of the Treasury Department on the desirability of including in the Federal Water Pollution Control Act the provision permitting commercial banks to underwrite and deal in certain revenue bonds issued by state and municipal governments for the purpose of financing water and sewer projects. Under present law, commercial banks, while a most important factor in the underwriting and marketing of general municipal obligations are prevented by Federal law from underwriting and dealing in municipal bonds payable only from specific revenues. In 1968 the Congress adopted an amendment to the Housing and Urban Development Act of 1968, which removed the restriction on bank underwriting for revenue bonds issued for housing, university or dormitory purposes provided that such bonds had sufficient credit quality to be eligible for portfolio investment by national banks. Section 1705 (h) of P.L. 90-448. The Comptroller of the Currency advises me that in the comparatively short period of time since the enactment of the 1968 Housing Act in late 1968, national and statemember banks of the Federal Reserve have participated in the underwriting of a number of dormitory issues to the benefit of the colleges and states involved. The amendment to H.R. 4148 under consideration merely extends exactly the same treatment to water and sewer bonds as was given to the college dormitory bonds in 1968. This Department feels that the public policy arguments made in favor of the 1968 dormitory amendment exist perhaps in even greater magnitude with reference to the water and sewer pollution control projects. The Treasury Department therefore strongly supports the amendment of the Senate (Section 110 of H.R. 4148, as amended by the Senate) which would permit both national and state-member banks of the Federal Reserve to purchase, underwrite and deal in obligations issued by any state or political subdivision or any agency of a state or political subdivision for water or sewer purposes, provided that such bonds are considered by the Comptroller of the Currency to be of sufficiently high quality so as to be eligible for inclusion in the investment portfolio of a national bank. The Treasury Department supported in 1967 S. 1306, a much broader bill which would have permitted commercial banks to underwrite all investmentgrade revenue bonds of states and political subdivisions regardless of the projected use of proceeds of the bonds. This bill also received the support of the Board of Governors of the Federal Reserve System. S. 1306 was passed by the Senate in November of 1967, but was not acted upon by the House of Representatives. Perhaps the most extensive discussion of the merits of permitting commercial banks to expand their underwriting of municipal bonds is contained in the Senate hearing and committee reports on S. 1306. The Report of the Senate Committee on Banking and Currency (Rep. No. 713, 90th Congress, First Sess.) reviewed the importance to our hard-pressed municipalities of having as broad a potential market as possible for their obligations. The report at page 5 contains the following as to the effect of increasing the number of possible initial bidders for revenue bonds: All studies agree that State and local governments pay a higher rate of interest on revenue bonds than they do on general obligation bonds. Some of this difference can be accounted for by the fact that revenue bonds are of a slightly lower investment quality and slightly longer average maturity. However, when adjustments are made for these factors, a difference of approximately 10 basis points still remains. One basis point is equaled to 0.01 percent, thus, 10 basis points would amount to a difference of approximately one-tenth of 1 percent in interest. Although this may appear small, the annual savings to cities and States would amount to more than $50 million a year in 1968 and as much as $100 million a year by 1975 if the entire 10-basis-point difference were eliminated. In addition to a higher rate of interest, there is additional evidence of a lack of competition in the revenue bond market. Most general obligation bond issues on which there is bank competition, are subject to competitive bidding. A study by the Comptroller of the Currency shows that over the last 3 years more than 99 percent of general obligation bonds were awarded through competitive bidding. Less than 1 percent were subject to negotiated sales. On the other hand, only 81 percent of revenue bonds were awarded through competitive bidding and 19 percent were awarded through negotiated sales. In addition to a higher incidence of negotiated sales, revenue bonds also enjoy fewer bids, even when they are issued through competitive bidding. The study by the Comptroller of the Currency shows that on the average, revenue bonds awarded through competitive bidding received 1.64 fewer bids than those received by general obligation bonds. The study by the Federal Reserve Board found the same discrepancy, even after adjusting for any possible effect of differences in investment quality and maturity. The Treasury Department favors steps which will aid our states and cities in the fight against pollution of the environment. The position of the Adminisstration was stated by President Nixon in his State of the Union message last Friday when he said "restoring nature to its natural state is a cause beyond factions. It has become a common cause of all the people of this country." In the view of this Department, permitting commercial bank underwriting of water and sewer project bonds would provide important and material assistance in the fight against environmental pollution without raising any problems of banking prudence or safety. The amendment in question like the dormitory amendment in the Housing Act of 1968 limits bank involvement only to those bonds with marketable and other safety features sufficient to make them eligible for portfolio investment by national banks under the regulations of the Comptroller of the Currency. Although the statutory language of Section 110 only mentions national banks, by virtue of Section 9 of the Federal Reserve Act, state member banks will receive the same treatment as national banks. The result will be to provide our hard-pressed cities with much needed assistance in the marketing of their obligations, a matter which has never been more important and pressing than it is today. Sincerely yours, Hon BIRCH BAYH, CHARLS E. WALKER. COMMITTEE FOR STUDY OF REVENUE BOND FINANCING, U.S. Senate, Washington, D.C. DEAR SENATOR: We take this opportunity to respond to a letter dated February 3, 1970 from Honorable Charls E. Walker, Under Secretary of the Treasury, purporting to express the views of the Treasury Department in support of the Proxmire amendment to the Water Quality Act of 1969 (H.R. 4148), which would authorize commercial banks to underwrite municipal revenue bonds issued to finance the construction of sewer and water facilities. The views expressed by Under Secretary Walker are essentially the same as those of the American Bankers Association communicated to the members of the Conference Committee by a letter dated December 17, 1969, from Nat. S. Rogers, President of the ABA. We have previously responded to that letter by memorandum distributed to all members of the Conference Committee. In his letter, Under Secretary Walker attempts to portray the Proxmire amendment as necessary to "permit both national and state-member banks of the Federal Reserve to purchase, underwrite and deal in obligations issued by any state or political subdivision or any agency of a state or political subdivision for water or sewer purposes . . .” This statement is misleading at best since both state and national banks have always been eligible to purchase municipal revenue bonds for investment and are an important part of the market for such bonds. The Proxmire amendment deals solely with the question of whether the historic Glass-Steagall Act of 1933, which separated commercial from investment banking, should be amended to permit banks to engage in the risk-taking business of underwriting and dealing in water and sewer revenue bonds. Under Secretary Walker suggests that the Proxmire amendment is a mere logical extension of the Floor amendment adopted by the House during consideration of the Housing and Urban Development Act of 1968, which permitted banks to underwrite revenue bonds issued for housing, university or dormitory purposes, and states that the Treasury Department "feels that the public policy arguments made in favor of the 1968 dormitory amendment exist perhaps in even greater magnitude with reference to the water and sewer pollution control project." We are unaware of whatever significant "public policy arguments" were made in favor of that amendment which was so well disguised when offered that four members of the House Banking & Currency Committee, Reps. Ashley, Gonzalez, Johnson, and Brown, thereafter took the floor to criticize the manner in which the amendment was adopted and subsequently interpreted by the Comptroller of the Currency. A copy of their remarks as reported in the Congressional Record is enclosed. Representative Gonzalez stated "it was not our purpose to offer up new areas for bank underwriting by adopting section 1705 (h). The amendment was brought up during the last stage of the legislative process, and its adoption was without the benefit from any of the Government agencies who would normally be asked to submit their opinions on any major change in this area. Representative Ashley remarked; "It was not at all the intent of Congress to make a major amendment to the GlassSteagall Act of 1933 and to open to the large banks a new area of underwriting this is not now presently available to them." Surely the 1968 Housing Act amendment did not represent a major policy decision by Congress and should not be relied upon as a basis for further erosion of the Glass-Steagall Act. The enactment of the amendment to the Housing and Urban Development Act of 1968 has, however, provided an ideal opportunity to test in the market place the validity of the principal arguments advanced through the years by the nation's large banks in support of their efforts to amend the Glass-Steagall Act so as to permit them to underwrite revenue bonds, i.e., such additional competition in underwriting will result in more bids per issue and lower interest costs to the issuer. This Committee undertook a study of 51 college facility issues which came to the market during the year following the 1968 Housing Act, which banks were eligible to underwrite, and compared them with 48 issues of the same type which came to the market during the year preceding the amendment. This sample includes all the issues of this type which could be identified during the year preceding and the year following the effective date of the amendment. This study clearly proved the following: 1. Commercial bank entry into this area of municipal financing had no effect on the number of bids per issue. The average number of bids per issue declined from 3.02 to 2.92 and the number of single bid issues as a percentage of all issues actually increased from 18.8% to 23.5%. 2. There was no significant change in interest yields after bank underwriting. There was a slight decline of .02 yield points (2/100th of one percent) for 10-year maturities, but an equivalent increase of about .02 yield points on the 20-year maturities. 3. An increase in underwriter "spread" actually occurred. This increase in "spread" cannot, of course, be attributed to the entry of commercial banks but was probably due to general market conditions. Under Secretary Walker refers to a report of the Senate Committee on Banking & Currency (Rep. No. 713, 90th Congress, First Session) on S. 1306 in support of the Proxmire amendment, quoting at length therefrom. The quoted portions attempt to make two points-first, that revenue bonds generally have a slightly higher rate of interest than general obligation bonds and secondly, more revenue bond issues are negotiated than is true of general obligation bonds. Both statements on the surface are true, but the implication that this is the result of banks being able to underwrite general obligation and not revenue bonds is demonstrably false as the experience since the enactment of the 1968 Housing Bill so clearly demonstrates. Slightly higher interest rates generally commanded by revenue bonds are the result of their lower investment quality and longer average maturity. With respect to the difference in the average number of bids on the two different types of bonds, state law requires, almost without exception, that general obligation bonds be offered competitively. This is not true with revenue bonds and for practical reasons, having nothing whatsoever to do with the number of potential bidders, many revenue bond issues, particularly the larger ones for turnpike construction, etc., are negotiated. A study made by the Comptroller of the Currency shows that when competitive bids are asked on revenue bonds an average of more than five bids are received, more than adequate to insure a competitive rate of interest is obtained. Mr. Walker refers to the fact the Comptroller of the Currency and the Federal Reserve supported S. 1306 in 1967, which would have permitted commercial banks to underwrite all revenue bonds, implying that the Proxmire amendment is merely a part of this whole loaf. What he neglects to point out is that S. 1306 included various safeguards designed to minimize inherent conflicts-of-interest and competitive advantages banks enjoy when engaged in underwriting. None of these provisions is present in the very brief Proxmire amendment. In the next to last paragraph in his letter, Mr. Walker seems to suggest that the Treasury Department view he espouses is the view of the Administration. One is entitled to doubt if this is true in the absence of any indication in his letter that the Proxmire amendment, which we have already observed is quite different than S. 1306 passed by the Senate in 1967, has been considered by the Antitrust Division, the Federal Reserve, or the Bureau of the Budget. During the past year Secretary of the Treasury Kennedy appeared before the House Banking & Currency Committee which was then considering the One Bank Holding Company legislation. In response to a question whether that legislation should be utilized to amend the Glass-Steagall Act, he replied "I would feel that the provisions of the Glass-Seagall Act should apply, that the banks should not be in the field of securities. I do have personally a reservation with respect to revenue bonds which are municipal securities, but that is a matter for other legislation and not for here." Although we disagree with Secretary Kennedy's personal reservation on the subject, we endorse the implication in his response that the matter is entitled to consideration on its own merits and not as a nongermane amendment to some other bill. If the matter was inappropriate in the view of the Secretary of the Treasury for consideration in connection with the One Bank Holding Company legislation, we submit a fortiori it is inappropriate as an amendment to H.R. 4148. One final reason for rejecting the Proxmire amendment is found in President Nixon's recent message to the Congress on the Environment. The President noted in his message that during 1969 a total of 509 municipal bond issues for all purposes, totalling 2.9 billion, proved unsalable. For the most part this was the result of the unusually high interest rates prevailing in the market place which in many cases exceeded the interest rates municipalities were able to offer under the law of the state. We are unaware of anyone who has suggested the result would have been different if banks were able to underwrite revenue bonds. In fact, a large majority of such unmarketable issues were general obligation bonds which banks are permitted to underwrite. To alleviate this problem, which is almost entirely a factor of interest rates, President Nixon has proposed the creation of a new Environmental Financing Authority (EFA) empowered to purchase waste treatment plant construction bonds. For the reasons advanced herein and in our previous communications and memoranda submitted to the members of the Conference Committee on H.R. 4148, we respectfully urge you to reject the Proxmire amendment. Sincerely, [Enclosure:] WILLIAM A. GEOGHEGAN, [From the Congressional Record, Friday, October 11, 1968] LOOPHOLE IN HOUSING AND URBAN DEVELOPMENT ACT Counsel. Mr. ASHLEY. Mr. Speaker, I feel compelled to bring to the attention of this body without further delay a matter that should receive our full and careful attention in the next Congress. On July 26 the House approved S. 3497, the Housing and Urban Development Act of 1968, which contained the following, seemingly unobtrusive language as section 1705 (h) amending paragraph 7 of section 5136 of the Revised Statutes (12 U.S.C. 24) by inserting after "the Asian Development Bank" the following: Or obligations issued by any State or political subdivision or any agency of a State or political subdivision for housing, university, or dormitory purposes. I am confident that nearly all of us who voted for S. 3497 were not aware of the broad construction that could be given to these words. It was not at all the intent of Congress to make a major amendment to the Glass-Steagall Act of 1933 and to open to the large banks a new area of underwriting that is not now presently available to them. Indeed, the original wording, as I understand it, was limited to "university housing." Moreover, even as it now stands in S. 3497, the above language is contained under a section entitled "University Housing," which gives a clear indication of what this body meant when it so legislated. It is, therefore, unfortunate that the Comptroller of the Currency chose, in his Banking Circular No. 5 of August 12, 1968-issued only a few days after the bill was signed-to give this amendment its broadest interpretation in the following language: It should also be noted that the obligations made eligible for underwriting by this amendment are not required to be general obligations and that the issuing "agency" which may include a university or college is not required to possess powers of taxation. This is not supported by the bill's legislative history, and is, in my opinion, not consistent with the intent and understanding of most of the Members who voted to approve S. 3497 thinking that this amendment was simply an enactment limited to college housing, a matter which all of us know has been of special interest to our distinguished colleague, Mr. Widnall, of New Jersey. To my knowledge the House certainly had no intent to alter any of the general rules applying to what banks may underwrite except as to college housing. I want this clearly stated in these last days of this Congress and to urge the next Congress to make a full study of this somewhat ambiguous and misinterpreted amendment. They should clear up any questions raised by the circular of the Comptroller of the Currency. And I further wish to point out that I intend to pursue this vigorously early in the next Congress in order that congressional intent can be clearly demonstrated, and in order that the applica |