this kind of agency. In the last few months there has been a tendency to erpand the kinds of agencies, or the kinds of purposes, which can be served by these independent agencies in this borrowing process. I think that unless some action is taken this may get out of control.

Secretary KENNEDY. You are precisely right. These activities have grown substantially in recent years. It does present a real problem and with the budget stringency, the cutting back of Government expenditures, every one wants to get outside of the budget purview, and at times I would almost like to get out myself, but

Representative BROWN. I think the fact is we are not fooling anybody. Secretary KENNEDY. That is right.

Representative BROWN. We are certainly not fooling the money markets because the money markets respond to the number of people coming to them for capital financing and this kind of borrowing.

Secretary KENNEDY. That is right.

Representative BROWN. I think Members of Congress recognize what is going on here and apparently the administration does, so I do not know what the purpose of it is.

Secretary KENNEDY. Well, you have raised a real issue and one that we are concerned about and we are studying.

SUPPLEMENTAL STATEMENT OF INVESTMENT BANKERS ASSOCIATION OF AMERICA IN OPPOSITION TO AMENDMENT No. 8 To S. 523: TO PERMIT COMMERCIAL BANKS TO UNDERWRITE SEWER AND WATER REVENUE BONDS

The Investment Bankers Association of America, encompassing 631 firms with 2187 branch offices throughout the nation, continues to oppose underwriting of revenue bonds by commercial banks. Specifically, it opposes the proposed Amendment No. 8 to S. 523. This position, first formulated in 1955, and reaffirmed in 1963, 1967 and 1968 represents the views of the substantial majority of our members. However, it is not unanimously subscribed to by the IBA membership, which includes approximately 140 commercial banks.

The IBA delivered detailed testimony opposing bank underwriting of revenue bonds before the Subcommittee on Financial Institutions of the House Committee on Banking and Currency on October 7, 1963, and appeared before the Senate Committee on Banking and Currency (now Banking, Housing, and Urban Affairs) on April 27, 1965 and August 29, 1967. The salient points of that testimony are summarized below.

Any merging of commercial and investment banking results in erosion of the Glass-Steagall Act of 1933 which was enacted in response to glaring conflicts of interest between the functions of investment and commercial banking at the time, and which has served to prevent a recurrence of the abuses of that era. There is nothing to suggest that, without the Glass-Steagall Act, the climate for such abuse is less conducive today than it was in the 1920's.

Investment bankers have sufficient capital and staff to provide the vigorous competition which exists in bidding on revenue bonds. In fact, the level of competition present in bidding on such issues is virtually identical to the competitive level of bdding on general obligation bonds, where the banks do participate.

We view the argument that granting permission to banks to underwrite revenue bonds will expand the flow of credit into this area as specious. Banks already are permitted to bid on such bonds for their own account; what they canont do is sell revenue bonds to others. The supposed advantages of increas ing the number of potential dealers and distributors of municipal bonds must be weighed against the historical experiences of bank imprudence in this area and possibility of monopoly and concentration in the municipal bond market. Commercial banks, which accept deposits and can deduct interest paid on loans to carry a municipal bond issue, enjoy a competitive advantage over dealers. Thus, the ultimate effect of the proposed amendment would be to foster a monopoly by a few large city banks and to force many investment firms to leave this field of underwriting. The effects of the resultant weakening of the current effective distribution system would be most evident in periods of credit stringency like 1966 or 1969. Banks are primarily interested in shorter-term commercial credit and view municipal investment as of secondary importance.

Thus, when faced with demands for commercial loans and withdrawal of savings, they become sellers of municipal bonds. The pressure of unsold bonds in a less competitive market would result in higher borrowing costs to the issuers of revenue bonds; costs which could easily force postponement of community facilities.

We believe the issues are the same today as when we last testified. If any expansion of the supportive data contained in our prior testimony on this subject is desired, please contact us.

Senator MUSKIE. The next witness is Mr. Corcoran. There will be questions submitted in writing to the witnesses, a number of questions that I am sure the Senators have not been able to ask because of restraint on time.

STATEMENT OF THOMAS G. CORCORAN, ESQ., CORCORAN, FOLEY, YOUNGMAN & ROWE, WASHINGTON, D.C.

Mr. CORCORAN. I have with me Mr. Foley, appearing in support of the Proxmire amendment.

May I say particularly that in view of the fact that I have respect of the time of the Senate and the Congress, you can consider my statement as put in the record, and I want to make a few observations about it.

Senator MUSKIE. Fine, Mr. Corcoran. We will include your prepared statement in its entirety at this point in the record inasmuch as you wish to make references to it.

(Mr. Corcoran's prepared statement follows:)

PREPARED STATEMENT OF THOMAS G. CORCORAN

Thank you, Mr. Chairman, for the opportunity to appear before your Subcommittee today. I am testifying on behalf of the commercial banks throughout the country that assist the federal government and state and local governments by underwriting their securities. I am here to testify in support of Amendment No. 8 offered by Senator Proxmire to S. 523. This amendment would permit state and local government units access to the capital resources of commercial banks when they sell water and sewer revenue bonds.

I have followed with great interest the testimony presented to your Subcommittee since these hearings began on March 15. It seems perfectly clear that the environmental problems of this country, and particularly those relating to water and sewer needs, are a matter of highest national priority.

It has been my experience during my nearly forty years in Washington both in and out of government service that, when national priorities are identified and goals established, the problem of capital finances is the first item that must be solved.

We have today another crisis of national concern dealing with the environment-in particular, a national commitment to clean up our lakes, streams, rivers and to provide waste treatment facilities to eliminate and abate water pollution.

What is the magnitude of the environmental problem at hand?

S. 523 authorizes a $25 billion, five year program for water pollution control, of which $12.5 billion would be financed by federal grants while state and local governments would furnish the remaining $12.5 billion. The proposals introduced by Senator Cooper on behalf of the Administration would authorize federal money of $2 billion annually for fiscal 1972-74 as the federal share of a $12 billion nationwide construction of waste treatment plants. The National League of Cities and U.S. Conference of Mayors have surveyed the water pollution control needs of more than 1,100 cities, counties and special districts and they have concluded that the national need for water pollution control over the next five years is between $33 billion and $37 billion. I think it is clear to any observer that all of the capital resources of the private market place =must be mobilized to meet this present national crisis.

A significant share of the projected environmental financing will require the issuance of revenue bonds. Studies referred to by Senator Proxmire in a letter accompanying his amendment indicate that perhaps $7 billion of revenue financing will be required under S. 523. At the present time, commercial banks are unable to participate as underwriters of their community's water and sewer revenue bonds. I believe it would be useful to put into perspective for the members of this Subcommittee the clear public interest that would be served by permitting banks to compete for these high social priority issues.

Three separate studies-one by Dr. Reuben Kessel in association with the National League of Cities, one of the Federal Reserve System and one by the Comptroller of the Currency-have demonstrated conclusively that bank participation in the revenue bond market would result in lower borrowing costs to our state and local issuers. It is a general economic law reinforced by common sense that increased competition reduces cost. The reduction in cost created by competition in this instance would directly accrue to our fiscally hardpressed municipal governments.

As important as interest savings to individual issuers are-I thing that the magnitude of this crisis suggests demands upon the municipal market that are unprecedented. At a time when supplemental financing techniques are being considered to assure accommodation of these issuers at reasonable ratesshouldn't these issuers have access to the capital resources that the commercial banks are anxious to make available.

Congress, time after time, has been careful to insure that these capital resources are made available to the U.S. Government bond market, the various federal agencies, TVA Authority, the Export-Import Bank, the Asian Development Bank, general obligations of state and local governments, and housing. university and dormitory revenue bonds. In fact, the supplemental financing technique discussed before this Subcommittee today, namely the Environmental Financing Authority, preserves these capital resources for the Federal Government at Section 14 of S. 1015.

The issue was clearly joined by Senator Proxmire in introducing his amendment when he stated:

"It seems to me that if the capital resources of our commercial banks are requested to be available to finance the Environmental Financing Authority, they should be directly available in the first instance to the state and local government units when they attempt to sell their bond issues."

In the enormity of the billions upon billions of dollars required to meet the present water pollution crisis-largely a water and sewer financing crisis— passage of the Proxmire amendment would permit our own hard-pressed communities to have access to all the resources of the capital market.

I therefore urge that this Subcommittee adopt Amendment No. 8 to S. 523.

[92d Cong., 1st Sess., S. 523, In the Senate of the United States]

Referred to the Committee on Public Works and ordered to be printed. Amendment, intended to be proposed by Mr. Proxmire to S. 523, a bill to amend the Water Pollution Control Act.

At the end of the Act, insert the following new Section:

"Sec. 11. The seventh sentence of paragraph Seventh of Section 5136 of the Revised Statutes, as amended (12 U.S.C. 24), is amended by striking the word 'or' where it appears before the word 'dormitory' and by inserting after the word 'dormitory' the following: ', water, or sewer'."

(12 U.S.C. 24)

§ 24. Corporate powers of associations

Upon duly making and filing articles of association and an organization certificate a national banking association shall become, as from the date of the execution of its organization certificate, a body corporate, and as such, and in the name designated in the organization certificate, it shall have power

Seventh. To exercise by its board of directors or duly authorized officers or agents. subject to law, all such incidental powers as shall be necessary to carry on the business of banking; by discounting and negotiating promissory notes,

drafts, bills of exchange, and other evidences of debt; by receiving deposits; by buying and selling exchange, coin, and bullion; by loaning money on personal security; and by obtaining, issuing, and circulating notes according to the provisions of this chapter. The business of dealing in securities and stock by the association shall be limited to purchasing and selling such securities and stock without recourse, solely upon the order, and for the account of, customers, and in no case for its own account, and the association shall not underwrite any issue of securities or stock: Provided, That the association may purchase for its own account investment securities under such limitations and restrictions as the Comptroller of the Currency may by regulation prescribe. In no event shall the total amount of the investment securities of any one obligor or maker, held by the association for its own account, exceed at any time 10 per centum of its capital stock actually paid in and unimpaired and 10 per centum of its unimpaired surplus fund, except that this limitation shall not require any association to dispose of any securities lawfully held by it on August 23, 1935. As used in this section the term "investment securities" shall mean marketable obligations, evidencing indebtedness of any person, copartnership, association, or corporation in the form of bonds, notes and/or debentures commonly known as investment securities under such further definition of the term "investment securities" as may by regulation be prescribed by the Comptroller of the Currency. Except as hereinafter provided or otherwise permitted by law, nothing herein contained shall authorize the purchase by the association for its own account of any shares of stock of any corporation. The limitations and restrictions herein contained as to dealing in, underwriting and purchasing for its own account, investment securities shall not apply to obligations of the United States, or general obligations of any State or of any political subdivision thereof, or obligations issued under authority of the Federal Farm Loan Act, as amended, or issued by the thirteen banks for cooperatives of any of them or the Federal Home Loan Banks, or obligations which are insured by the Secretary of Housing and Urban Development under title XI of the National Housing Act or obligations which are insured by the Secretary of Housing and Urban Development (hereafter in this sentence referred to as the "Secretary") pursuant to section 1713 of this title, if the debentures to be issued in payment of such insured obligations are guaranteed as to principal and interest by the United States, or obligations, participations, or other instruments of or issued by the Federal National Mortgage Association or the Government National Mortgage Association, or such obligations of any local public agency (as defined in section 1460 (h) of Title 42) as are secured by an agreement between the local public agency and the Secretary in which the local public agency agrees to borrow from said Secretary, and said Secretary agrees to lend to said local public agency, monies in an aggregate amount which (together with any other monies irrevocably committed to the payment of interest or such obligations) will suffice to pay, when due, the interest on and all installments (including the final installment) of the principal of such obligations, which monies under the terms of said agreement are required to be used for such payment, or such obligations of a public housing agency (as defined in the United States Housing Act of 1937, as amended) as are secured either (1) by an agreement between the public housing agency and the Secretary in which the public housing agency agrees to borrow from the Secretary, and the Secretary agrees to lend to the public housing agency, prior to the maturity of such obligations (which obligations shall have a maturity of not more than eighteen months), monies in an amount which (together with any other monies irrevocably committed to the payment of interest on such obligations) will suffice to pay the principal of such obligations with interest to maturity thereon, which monies under the terms of said agreement are required to be used for the purpose of paying the principal of and the interest on such obligations at their maturity, or (2) by a pledge of annual contributions under an annual contributions contract between such public housing agency and the Secretary if such contract shall contain the covenant by the Secretary which is authorized by section 1421a (b) of Title 42, and if the maximum sum and the maximum period specified in such contract pursuant to section 1421a (b) of Title 42 shall not be less than the annual amount and the period for payment which are requisite to provide for the payment when due of all installments of principal and interest on such obligations: Provided, That in carrying on the business commonly known as the safe-deposit business the association shall not invest in the capital stock of a corporation

organized under the law of any State to conduct a safe-deposit business in an amount in excess of 15 per centum of the capital stock of the association actually paid in and unimpaired and 15 per centum of its unimpaired surplus. The limitations and restrictions herein contained as to dealing in and underwriting investment securities shall not apply to obligations issued by the International Bank for Reconstruction and Development, the Inter-American Development Bank or for the Asian Development Bank, or obligations issued by any State or political subdivision or any agency of a State or political subdivision for housing, university, or dormitory purposes, which are at the time eligible for purchase by a national bank for its own account, nor to bonds, notes and other obligations issued by the Tennessee Valley Authority or by the United States Postal Service: Provided, That no association shall hold obligations, issued by any of said organizations as a result of underwriting, dealing, or purchasing for its own account (and for this purpose obligations as to which it is under commitment shall be deemed to be held by it) in a total amount exceeding at any one time 10 per centum of its capital stock actually paid in and unimpaired and 10 percentum of its unimpaired surplus fund. Notwithstanding any other provisions in this paragraph, the association may purchase for its own account shares of stock issued by a corporation authorized to be created pursuant to sections 3931 to 3940 of Title 42, and make investments in a partnership, limited partnership, or joint venture formed pursuant to section 3937(a) or 3937 (c) of Title 42.

Mr. CORCORAN. Thank you, Mr. Chairman. May I say, first of all. Mr. Foley and I were hardly born yesterday when this problem of relations between governmental and municipal financing and investment bankers and commercial bankers was being discussed. I was at one time-I think the investment bankers know-a member of a law firm in New York specializing in investment banking before I came to the Government, and Mr. Foley was with a law firm in New York specializing in municipal finance before he came down.

One of the things we had to face when we came here to Washington-he as general counsel of PWA and I as Assistant Secretary of the Treasury-was how you were going to handle this problem of municipal finance with the least burden upon the Federal Gov

ernment.

What I am going to say about the Proxmire amendment is exactly the problem that the Under Secretary of the Treasury, Mr. Walker, representing Mr. Connolly, said this morning.

How are you going to get the municipalities to beat the bushes as much as possible to obtain reasonable rates for their own financing on a fairer rate basis rather than burdening the Federal Government unnecessarily. Whether you do it with EFA or no matter which route you take, the Proxmire amendment helps the Government and municipalities in either case. What is the Proxmire amendment about?

If you will turn to my statement, you will find that this Proxmire amendment has endorsement not only of the Treasury but it has endorsement of the Federal Reserve Board, of the National League of Cities, and the FDIC. It passed the Senate last year.

The Proxmire amendment amends 12 U.S.C. 24 to add after the word "dormitory" in an already existing amendment of the 12 U.S.C. 24, "Water, or sewer."

Now let's turn over to the last page of the statement that I have given you and look at the underlined section.

The limitations and restrictions herein contained as to dealing in and underwriting investment securities shall not apply to obligations issued by the Inter