payment of dividends, regardless of the future condition, experience, or financial requirements of the insurance system.

Although I am strongly in favor of retiring Government stock in the Insurance Corporation as rapidly as is reasonably and prudently possible, I cannot regard this plan as being a step toward getting the Government out of business.

In the first place, let us be quite clear as to the reasons why, and the extent to which the Federal Government is involved in the basic responsibilities and purposes of the Federal Savings and Loan Insurance Corporation. The Government's stake in this program is not tied to its relatively minor and temporary capital investment. It stems from far more basic considerations: First, the national policy of encouraging thrift and long-term savings in institutions of the savings and loan type; second, the national concern with the safety of individual savings in these institutions in bad times as well as good; and, third, the pledge of Treasury support which is the real mainstay of public confidence in the insurance system.

By the end of the current fiscal year, the volume of savings insured by the Insurance Corporation will be approaching $25 billion. Under the law the Treasury is committed to support the Corporation in case of need up to $750 million, and I am sure that no member of this committee doubts that this amount would be increased if the stability of the Nation's economy should make such action necessary.

Now, in comparison to these basic dimensions of insurance risk and Government commitment, a slight acceleration in the retirement of the present capital investment of some $60 million, all of which would be retired in any event in less than 5 years, is a pretty insignificant matter. I think we should not deceive ourselves on the fundamentals of this problem. The Federal Government is not going to be out of the business of the Insurance Corporation when the Government capital is retired, whether that is tomorrow or 4 years hence. The Insurance Corporation is and should remain an agency of the Federal Government so long as the Federal Government bears the ultimate responsibility for the protection of the people's savings against economic disaster.

Mr. PATMAN. May I submit a parliamentary inquiry? This is about the bill, H. R. 5945. Is it included in the housing bill? The CHAIRMAN. No.

Mr. PATMAN. Why would we be considering it, then?

The CHAIRMAN. Because it is germane to the housing bill, and we might want to consider it.

Mr. PATMAN. This is such an important question, Mr. Chairman, and so far-reaching, that I certainly hope that you don't consider it in connection with the housing bill. Because I think it should be considered separately.

The CHAIRMAN. It may be considered separately. I just wanted to get the opinion of the agency on it.

Mr. McAllister is for it and Mr. Cole says it is contrary to the policy of the Administration, and there is the issue.

Have you finished your statement, Mr. Cole?

Mr. COLE. Not quite, Mr. Chairman.

The CHAIRMAN. Well, finish your statement.

Mr. COLE. Now, let me make clear that the administration wants to see the corporation as self-sufficient financially, as little dependent

upon the Federal Treasury as possible. I think the question must be bluntly asked and answered: What is the real measure of the selfsufficiency of the Insurance Corporation? In my judgment, it is the ratio of the earned capital and reserves of the corporation to its insurance liability. Under the existing law, the full net income of the corporation after the Government capital has been retired in the relatively near future will be available to strengthen and improve that ratio. Under the plan proposed in this bill, up to one-half of that net income will be drained off for other purposes. I do not see how this committee can fail to conclude that such a plan would make the corporation more, and not less, dependent upon the Federal Treasury.

It should be borne in mind that the contingent risk of the Corporation has expanded and is expanding today by leaps and bounds. As short a time ago as 1950 it was only a little more than $10 billion. By the end of this fiscal year, only 5 years later, it will be nearly $25 billion. So rapid has this growth been that the ratio of capital and reserves to the contingent risk has gone down, not up, in recent years. In the light of these facts, and taking into account the obligations the Government has assumed toward the investing public, your committee may want to consider whether this would not be an especially ill-chosen time to consider a proposal such as that advanced in H. R. 5945.

I would also suggest to this committee that it give some thought to the precedent which this bill would establish in the matter of ownership and control of Government corporations. The home loan banks are regulated and supervised by the Board, but they are owned and partly controlled by their member institutions. The Home Loan Bank Board is also the directing Board of the Insurance Corporation. To what extent would the Board in ultimate practical effect be bypassed by authorizing the banks to acquire the ownership interest in the Insurance Corporation? Remembering that the banks are supervisory agents with respect to their member associations and that the Insurance Corporation is also a supervisory agent with respect to the insurance of these same associations, would these new relationships ultimately affect the protection of the interests of the investing public? These are some of the questions raised by this proposal which ought to be carefully studied and thought about, it seems to me.

Finally, let me say that I have great difficulty in discovering the advantages that might be hoped for from this proposal. It would perhaps benefit the home loan banks in a limited sense, in that they would have an outlet under the bill for the investment of a certain volume of funds at almost a guaranteed rate of return, but I do not understand that there is any particular need for such a guaranteed investment. It would not benefit the Insurance Corporation, since it would set up a serious drain on the Corporation's future earnings and reserves. And, in my judgment, it would not benefit the Treasury, despite the fact that the Treasury would immediately realize a return of invested funds.

I say that the Treasury would not really benefit for two reasons: First, the long-term interest of the Treasury, like that of the Corporation itself, lies in the protection provided by the earned capital and reserves. I doubt very much that the Treasury would consider it worthwhile to retrieve the invested capital a few years earlier,

which is all this would amount to, at the price of a greatly increased risk for the indefinite future because of the diversion of earnings from reserves to the payment of dividends.

Second, it should be borne in mind, I think, that the basic source of liquidity in the home loans banks is the authority of the Treasury to extend them funds up to $1 billion in time of need, just as the basic source of security in the insurance system is the obligation of the Treasury to extend funds up to $750 million. These are the fundamental financial responsibilities and commitments of the Government, and their real significance is determined by the soundness of operations throughout the savings and loan system, and the condition of the general economy. There can be no real increase in the security of the Treasury merely from moving capital back and forth between these parts of the overall system of Government support for the savings and loan industry.

It is for these reasons that the administration recommends against the enactment of H. R. 5945.

The CHAIRMAN. The Federal Savings and Loan Insurance Corporation and the Home Loan Bank Board were originally created as independent agencies, were they not?

Mr. COLE. Yes, that is true.

The CHAIRMAN. And they operated as independent agencies for how long?

Mr. MCALLISTER. Until 1939. to 1939.

From 1932, we might say, 1933,

The CHAIRMAN. What was the reason? What was the fundamental reason why they were put under the Housing and Home Finance Agency?

Mr. COLE. Mr. Chairman, I think because Mr. McAllister has a different opinion from the point of view of the administration, it would be helpful if both of us had an opportunity to answer. We are very friendly opponents in this situation, I want you to know.

May I answer as I understand it? As I said in my statement, the purpose of placing Home Loan Bank Board under the Housing Agency was twofold: One, the need of the President to have as few independent agencies reporting to him as possible. Secondly, coordination of the policies of housing.

Those were, I think, the two reasons. The CHAIRMAN. They have lost their independence, and it seems that they are anxious to have it restored. Everybody connected with the Federal Savings and Loan Insurance Corporation and the Home Loan Bank Board that I have had any chance to discuss the matter with want to have their old status restored.

Mr. COLE. That is true, Mr. Chairman.

The CHAIRMAN. And they are willing to retire the stock in order to accomplish that purpose. Doesn't that sound like a good argument? Mr. COLE. Let me see how I can say it and say that I don't believe it is a good argument, Mr. Chairman, and in such a way that it will be understood.

The fact that the savings and loan institutions want is indicative of the fact that they have given a lot of study to it, and may I say to you that both of these associations have done a wonderful, remarkable job in representing the industry.

On the other hand, the administration believes that there is a public interest in this matter, an interest beyond the interest of the savings and loan institutions, an interest which has to do with the depositors, with the shareholders in the savings and loan institutions.

This is primarily one of the reasons, or one of the principal reasons, for the objection.

The CHAIRMAN. You and Mr. McAllister have different views about it?

Mr. COLE. Yes, as I said we are very friendly opponents about this situation. He told me when he first became chairman of the board that this was his personal opinion, and he has always held this opinion. There hasn't been any change, and he has been very honest and forthright about his opposition to it.

The CHAIRMAN. Would you like to make a statement in rejoinder, Mr. McAllister?

Mr. MCALLISTER. Well, I had not read Mr. Cole's statement. I do not know whether I can do proper justice in replying to it, but I would like to point out 1 or 2 things. The point is made that the risk of the Insurance Corporation will be increased by this proposed procedure. Let me say to you that the Corporation's capital was originally $100 million, and due to the amended statute in 1951, half of the net earnings of the Corporation have been applied to the reduction of the Government's capital, and $35 million of the capital has been retired.

Mr. PATMAN. Mr. Chairman, may I ask him to get that straight? Do you mean using the profits from the Government capital to retire the Government capital?

Mr. MCALLISTER. No, sir, the Insurance Corporation charges the member associations an insurance premium for the service that is rendered, just like any other insurance company, and that premium has been far in excess of the cost of operating the Corporation, of setting up reserves for possible losses, and a payment to the Government as determined by the Secretary of the Treasury-interest for the use of the Government capital.

The CHAIRMAN. What does that surplus amount to now?

Mr. MCALLISTER. About $145 million.

The CHAIRMAN. Then they would have no difficulty in retiring the stock now?

Mr. MCALLISTER. No, sir, and it will not place an additional burden upon the Corporation to pay the banks a return on their invested capital because we are already paying a return to the Treasury for the use of the Government's capital. We are taking half of the net earnings of the Corporation now to retire the Government's capital, and as Mr. Cole pointed out, very correctly, the payment of half of the earnings, in retirement of the capital, in the amount of $35 million, means that there is $35 million that has not gone into reserves that would have gone into reserves, so that the capital structure of the Corporation today is $70 million worse off than it would have been if the Government's capital had not been retired.

Now we are proposing that the banks take 20 percent of their capital, in round figures a hundred million dollars, and purchase $100 million of stock of the Insurance Corporation. That stock would be nonvoting, and the control of the Însurance Corporation

would be in the Board, and as the risk increases-in other words, as the capital of the bank system increases the Board would have the right to require the banks to continue to purchase additional stock in the Insurance Corporation.

So instead of weakening the Government's position and placing on it a greater risk with regard to the $750 million that the Treasury has to lend the Corporation in the event of emergency, the Government's risk would be diminished because the capital of the Insurance Corporation would be increased as the risk increases.

I think that the savings and loan business, representing in excess of $30 billions, producing some 35 to 40 percent of the home mortgages year after year, is entitled to recognition and to the prestige that will be given to the board if independence is granted.

I think that the Board should be in a position to deal with other Government agencies on a direct basis.

I want to say that Mr. Cole has just been a great boss to work with, he has not denied a single request that I have made of him, but in our opinion, the authority to control the Board rests with the Administrator, and if it were someone else besides Mr. Cole, it might be rather irritating and embarrassing at times. It has not been, I am glad to say, so far.

The CHAIRMAN. We know the good things about Mr. Cole are true because we have worked with him, too, on this committee, but you feel that once having been independent, that that should be returned to you?

Mr. MCALLISTER. That is right. There are approximately 60 governmental agencies that are independent, and I can assure you that the judgment of this committee would indicate that there were less than a half dozen of them that are of greater importance to the economy of this country than the Home Loan Bank Board.

We are self-supporting. In other words, when the Congress, when the House approves appropriations, it is an authorization, and our expenditures and expenses are then paid by an assessment against the banks, and an assessment against the Insurance Corporation, and the Home Loan Bank Board is not supported by the tax dollar. That is not entirely the truth, because we are not privileged to pay rent for that portion of the space that is occupied by the Board. We would be very glad to do so if the Congress would change the law.

The CHAIRMAN. You want to discharge all your obligations before attaining that position.

Mr. MCALLISTER. Quite right.

Mr. WOLCOTT. Could this matter be properly handled by reorganization, by recommendation by the President?

Mr. COLE. Mr. Wolcott, the answer is yes. Of course, Mr. Wolcott, as I commented, the administration

Mr. WOLCOTT. All I wanted you to answer me was could it be done by reorganization?

Mr. MCALLISTER. Yes.

Mr. WOLCOTT. Has the President been consulted about it?

Mr. MCALLISTER. Yes.

Mr. WOLCOTT. If he wanted to move, he would move, by reorganization?

Mr. MCALLISTER. That is correct.

Mr. WOLCOTT. He obviously doesn't want to move, then?