Now, under the terms of the suggestions presented, some changes are made relative to our participation in the financing of the Federal savings and loan associations. I think I may say, expressing the view of all of the other members of the board, as well as my own, that the experience has convinced us that the provisions made by Congress for the organization of these Federal savings and loan associations was one of the wisest things that has ever been done in the field of finance in this country.

These associations, as you know, are almost ideal in their general character; that is, they represent the best experience down to now in this field of financing homes on a sound basis. Under the terms of the law at present we may take up to 50 percent of the shares of the Federal association. with a limit of $100,000. That is something of an obstacle to rapid development, and not only that, it is a barrier to the conversion of some of the existing associations, where it would be of great advantage if constructive conversion could be effected. We therefore propose that, first of all, where it seems to be desirable to do it, that we may take up to 75 percent in stock of new Federal associations, and we suggest removal of the limits, so far as subscription up to $100,000 is concerned. As you are aware, in dealing with the financial situation in the commercial banks, the Reconstruction Finance Corporation has taken stock in these banks without limit depending upon the particular conditions in a particular case. Moreover, the Reconstruction Finance Corporation takes in return for the money advanced by the Government a definite junior lien, inasmuch as, of course, the deposits are a prior claim against all of the assets of the bank. The money we put into the Federal savings and loan associations is on exactly the same basis as that of the other stockholders, of the community of stockholders, and it is, with the rest of the money, a first lien on all of the assets of the association. There is no type of financial institution in the country which has passed through this depression with a better record than these mutual community building and loan associations. They have their difficulties, of course, like all other institutions, but by and large the showing they have made is quite remarkable. If you are not aware of it, you may be interested to know that approximately one half of all the counties in the United States have no mortgage-lending institutions of this sort at all, no thrift and savings institutions whatever, and that situation is one that it is very important to meet constructively and as quickly as possible.

We believe that one of the greatest influences which can be developed to help to meet that situation is the Federal savings and loan association. Aside from that, in a good many of the States there are building and loan associations which are in difficulties today, and which ought to be reorganized; where those conditions exist, the opportunity is presented to take their sound assets and transfer them to a newly chartered Federal association and liquidate the slower part of their assets through a liquidating corporation of some sort. With the removal of the limitations on the power of this board to help along the lines proposed in the act, we believe that the corporation and the bank system can help very substantially in improving conditions all along the line.

You will note that we have also suggested certain steps for giving assistance to the home loan bank system. That bank system has been

developing very rapidly. At the beginning of last year, we had about 116 members; now it is more than 2,200. The assets of the member banks and building and loan associations and other lending institutions now run to nearly $3,000,000,000; lines of credit have been created of about $240,000,000. There is a large opportunity for these member associations to take advantage of the rediscount privileges of the home loan bank system, to the great advantage of the country and the home owners, to make more money available for loans for new construction and modernization. At the present rate of progress, the banks will utilize all of the resources now at their disposal within a comparatively short time. In the ordinary course of business, they would then begin to issue bonds. The bonds which they are able to offer to the investing public are certain to be rated in the very first class, without a superior in the whole field of investment, but it would be unfortunate for them to issue those bonds under unfavorable circumstances, or whenever the money market was bad. That would mean paying an unnecessarily high rate on the bonds, and it might also impair their general marketability. It has therefore been suggested that the Home Owners Loan Corporation should be in the position where it may take over bonds of these banks temporarily, loan them money on debentures, or maybe on a basis of direct loans; these transactions would be temporary, of course, and the banks, under more favorable conditions, would issue their bonds, and would take over these obligations from us. But it does represent a recourse which we regard as very important, particularly under present conditions.

There is one other incidental provision in the act to which I shall refer. As the law stands, Congress gave us $150,000 to promote the organization of the Federal savings and loan associations in all sections of the country. We have organizers out in every section now, and that work is going forward very rapidly. Something more than a hundred associations have been granted charters already, and more than that are applying for charters and raising the necessary money to get into action. It is our judgment that there is nothing more important in the home-lending field than to go on with that work of organization without any reservation whatever during the next year, but it would be impossible to do that unless additional resources are provided, and so provision is made here. You will find it in section 9, page 9; the corporation is permitted to appropriate up to a half million dollars to carry on that work. I think that, gentlemen, covers the general scope of these proposals of the board. I have not attempted to deal with any of the strictly legal phases. The oher members of the board are both members of the bar, and Mr. Russell, our general counsel is here, and aside from certain general observations as they may wish to make, I am sure that they can deal more intelligently with any legal questions involved than I can.

Mr. PRALL. May I ask a question?

The CHAIRMAN. Yes, sir.

Mr. PRALL. Why is the time for the exchange of bonds limited to 6 months?

Mr. FAHEY. Because we feel that is ample time to make the exchange, and that within that period all of those who wish to exchange

will do so. Moreover, we feel that if they are not exchanged within that time, we would very likely arouse a good deal of criticism and antagonism, because it is extremely likely that after the 6-month period we would be able, from time to time, to issue these bonds at a lower rate than those that are put out at the beginning, and if we extended over a long period, we might meet the criticisms of those present holders, who would say, when we suddenly provide for a new issue and lower the rate, that we were not playing fair with them, because we did not let them know we were going to do anything like that.

?

The bonds

Mr. PRALL. You would anticipate doing that within a year Mr. FAHEY. Oh, yes; and before the 6 months are up. first issued will probably carry us for 3 or 4 months, and maybe

for 6 months.

Mr. FISH. May I ask a question?

The CHAIRMAN. Certainly.

Mr. FISH. When will you issue the bonds, and what will be the rate?

Mr. FAHEY. Just as soon as Congress gives us authority we will provide for the first issue of new bonds and fix the rate.

Mr. FISH. How much will there be in the first issue?
Mr. FAHEY. We do not know.

Mr. FISH. You have not estimated that as yet?

Mr. FAHEY. No; we have not figured that out yet. That will depend upon the definite consents we have in hand at the time, that are close to closing.

Mr. FISH. Can you give a general estimate? Will there be $500,000,000 or $100,000,000?

Mr. FAHEY. Although I am a native of New England, I would rather not go too far in guessing; I would not say it would be anything like that.

Mr. PRALL. I would like to ask another question; how many of the Federal associations have been organized; did you say about a hundred?

Mr. FAHEY. Yes; roughly. How many of the Federals have been actually organized so far, Mr. Russell?

Mr. RUSSELL. It is substantially above 100; 167 was the last charter granted.

Mr. PRALL. That is all, Mr. Chairman.

The CHAIRMAN. Before you leave that, I believe under the original bill we provided for the expenditure of $150,000 for this work? Mr. FAHEY. Yes.

The CHAIRMAN. How much of that have you used?

Mr. FAHEY. All of it would be used up by the 1st of July on the present basis.

The CHAIRMAN. And for that work the Board feels that there should be in this measure provision for $500,000?

Mr. FAHEY. Yes, sir.

The CHAIRMAN. That was a matter of some difference of view in the committee when the other bill was passed, and we finally reduced the amount to $150,000. I was wondering if that had been enough; we did reduce the amount.

Mr. FAHEY. In the old bill. No; in my judgment it would have been better if it had been at least $250,000 to $300,000, because it

would have enabled us to organize very much more rapidly, and the important thing to all these things is expedition.

The CHAIRMAN. Interrupting you, do you think your work in that connection has been somewhat retarded by the lack of funds?

Mr. FAHEY. I Would not say that exactly; we would not have been so cautious about it; we would organize on a larger scale. The CHAIRMAN. You could have done better work.

Mr. FAHEY. We could have done it quicker.

Mr. PRALL. You will organize more associations, pro rata with the funds you wish now than you did with the $150,000 which you had?

Mr. FAHEY. That is our judgment.

Mr. PRALL. Because a great deal of that, undoubtedly, was used in the work of organizing your force and getting into the field. Mr. FAHEY. That is right.

Mr. PRALL. Now, you are ready to quickly organize at a very much less expense than formerly.

Mr. FAHEY. Exactly; of course, there is another thing about it; like everything now, you know there has to be a lot of education about these things.

The CHAIRMAN. You have to get started.

Mr. FAHEY. Yes.

Mr. FISH. I hold nothing against anyone coming from New England, and I remember that former President Coolidge was not hazarding any guesses, but could you hazard a guess as to the possible rate of interest below 4 percent on these bonds?

Mr. FAHEY. I think that that is next to impossible to say; that would be taking a pretty long shot; you will have a lot of Government financing here over 5 or 6 months, and other demands on the money market as well, and it is pretty hard to say what that rate will be. I ought to explain why I have mentioned it; we have to agree with the Secretary of the Treasury on the rate on these bonds; we have no right to issue any except with the approval of the Secretary of the Treasury. Our operations are a part of the general financing program, and we have to work with the other departments, the Reconstruction Finance Corporation, and so on.

Mr. KOPPLEMANN. Do you remember my calling on you the latter part of August or the first part of September?

Mr. FAHEY. Yes; I do, Mr. Congressman.

Mr. KOPPLEMANN. Do you remember at that time that I expressed the hope that this act would so function and would be so handled as to reflect credit not only upon the Board itself, but upon the administration?

Mr. FAHEY. Oh, yes; I certainly do.

Mr. KOPPLEMANN. And that I called to your attention at that time a mistake in the matter of the personnel, not only in the State of Connecticut, but in my own district in Hartford.

Mr. FAHEY. I do.

Mr. KOPPLEMANN. And I called certain specific matters to your attention and you promised to investigate them. I want to read from a letter under date of November 21, in which you say this was November 21, although I saw you in the latter part of August or the 1st of September

I am sorry I have not had an earlier opportunity to get in touch with you concerning the further complaint you made to me relative to one of the men in Hartford.

Concerning this situation, inquiry was made but we were unable to obtain any evidence that there was any criticism in Hartford of the man to whom you refer. Thus far, we have received practically no criticism of the management of the Hartford office. It may be, of course, that our inquiry has not been sufficiently comprehensive. We are at present engaged in a survey of the work in New England, and if you feel disposed to advise us of specific cases in or about your district which you think call for investigation, you may depend upon it that we will be glad to have them looked into.

I should like to ask if you made any further investigation in view of your statement here:

It may be, of course, that our inquiry has not been sufficiently comprehensive.

Mr. FAHEY. Yes, Mr. Congressman; we did in the State of Connecticut, just as elsewhere. The Corporation has field men and inspectors sent out from time to time to look into conditions, to investigate anything which shows up, as indicating error or mismanagement, and so forth. We have investigators of that type in the State of Connecticut from time to time. We have also gone to some pains, individually, at various times, the members of the Board, in making direct inquiry, personal inquiry, where complaints were made. I can only say, with reference to the particular men referred to in that letter, that your complaint was the only one that ever came into this Corporation with reference to him, and such inquiry as we made in the city of Hartford did not support the claim which we understood had been presented to you, that he was distrusted by the public generally.

Mr. KOPPLEMANN. Did you discover that while a director of the City Bank & Trust Co., and still is although the bank is out of business—he was conducting an insurance business?

Mr. FAHEY. Yes; we understood that he had been in the insurance business up there.

Mr. KOPPLEMANN. Did you go into the matter of his solicitation of insurance from people who were asking for loans from his bank?

Mr. FAHEY. So far as we could find out, we were unable to get the names of any people who were soliciting loans from the Home Owners Loan Corporation; as to his bank, no.

Mr. KOPPLEMANN. I will get to that, Mr. Fahey. First, I want to get the background of this gentleman. Do you recall that I told you that he solicited me, after I had made a request for a loan from that bank and that I gave him insurance?

Mr. FAHEY. Yes; I remember.

Mr. PRALL. We were called here to discuss this bill, and not to go into any phases of this whole situation. It seems to me our time is too valuable, and we are here to discuss the merits of this par

ticular bill.

Mr. KOPPLEMANN. Let me say to Mr. Prall, if you will, that I voted for the bill in committee last year, and I voted for it in the Congress. I have complaints, and I am trying to make this as short as I can; I have a multitude of matters, but I have an individual case which I intend to bring out. When I go back to my district, I am held responsible, as every other member of this committee, for

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