Mr. BROWN of Michigan. The evil that was sought to be overcome by this was that some were charging 4 percent to receivers of insolvent banks and 311⁄2 to open banks. That was the evil. Mr. JONES. There is a bigger hazard and we will have more loss on loans to these closed banks, we think. Mr. WILLIAMS. I was just going to ask you that question-whether you can continue to operate without loss in making these loans to closed banks? Mr. JONES. We will sustain, I think, some losses on loans to closed banks. The CHAIRMAN. We have to leave now to attend roll call. I suggest that we meet tomorrow morning at 10:30. If you have not finished, and I assume that you have not, we will be glad to hear you tomorrow morning. Mr. JONES. I would be very glad to come back tomorrow morning. The CHAIRMAN. Then we will meet tomorrow morning at 10 o'clock. (Whereupon, at 12:40 p. m., an adjournment was taken until Thursday, Mar. 12, 1936, at 10:30 a. m.) TAXATION OF SHARES OF PREFERRED STOCK OF BANKS WHILE OWNED BY RECONSTRUCTION FINANCE CORPORATION THURSDAY, MARCH 12, 1936 HOUSE OF REPRESENTATIVES, COMMITTEE ON BANKING AND CURRENCY, Washington, D. C. The hearing was resumed at 10:30 a. m., Hon. Henry B. Steagall (chairman) presiding. The CHAIRMAN. All right, gentlemen, the committee will come to order. Mr. Jones, the committee will be very glad to have you resume your statement, if you desire to proceed further. STATEMENT OF JESSE H. JONES-Resumed Mr. JONES. Well, gentlemen, I do not want to bore you too much. I have forgotten where I was when we stopped, when I was telling the story. Mr. CROSS. You had gotten as far as the laws of Texas, as I remember. Mr. JONES. There are a few things that I would like to mention, and then if you want to lead the witness, I will be very glad to be led. Here is a memorandum of a few banks, and if it is agreeable with the committee, this statement may be inserted in the record. (The statement is as follows:) Mr. JONES. Those were just some banks picked at random. We have not had time to check all the 31 States, but this is illustrative of the situation and I thought it should be in the record. Mr. FORD. When you put that money in those banks, did they need the money; for instance, that Texarkana Bank? Mr. JONES. Yes; they needed the capital. It was stated here. yesterday, I think, that they had charge-offs of something like $390,000. Mr. FORD. How much? Mr. JONES. They had charged out losses of $391,000. Mr. BROWN of Georgia. You cannot call those loans at any time you want to? Mr. JONES. No; we cannot require that. Mr. HANCOCK. What is the condition of the Texarkana Bank today? Mr. JONES. It is slightly better than when we went in there, but not a great deal, but it is sound; it has plenty of capital; it is the biggest bank there. Here is some information I should like to introduce. It is a list showing the amount of preferred stock in the national banks in State banks and debentures in State banks, and the number of banks in each State. For instance, Alabama has 20 national banks. There we have $7,871,000 in preferred stock in national banks, and we have $2,960,000 in preferred stock in State banks. Now, after we were authorized to buy preferred stock, which was nonassessable, many of the States enacted laws permitting State banks to issue such preferred stock, and we are not permitted to buy capital notes or debentures in a State bank that has authority to issue preferred stock that is non-assessable. But if we have bought debentures from a bank before the law permitted him to issue preferred stock, we have no way of compelling him to change; that prevents a situation of our having in some States-here is California for instance-where we have $19,000,000 in preferred stock in national banks, $23,000,000 in preferred stock in State banks, $5,000,000 of capital notes in State banks. That is made necessary because a State bank is a mutual savings bank, and it could not issue and has issued no stock, and we take capital notes. That situation is true in Maine, it is true in Michigan, New Jersey, and in Vermont. We have in those States preferred stock in national banks, preferred stock in State banks, and capital notes and debentures. I think it would be well, Mr. Chairman, to put this table in the record. The CHAIRMAN. Without objection, it may be incorporated in the record. (The matter referred to is as follows:) Reconstruction Finance Corporation investment outstanding as of Feb. 29, 1936 Total.. 1, 917 469, 561, 071. 63 1, 601 178, 352, 745. 72 2, 1682 30, 482, 938. 72 5, 6868 78, 396, 756. 07 1 Reduced $7,500,000 by retirement of American Trust Co., San Francisco. The CHAIRMAN. Mr. Jones, let me ask you one question: I guess this is clear to everybody, but I do not think it is entirely clear to me: In the making of advancements to banks, the result was identically the same when you did it in the form of purchasing preferred stock, or in the form of purchase of notes and debentures? Mr. JONES. Yes; all the same. The CHAIRMAN. The reason you permit the three methods was so that your law would give you the power to deal with the different provisions in the different States, where different powers exist in banks? Mr. JONES. That is the way we construed it. The CHAIRMAN. No difference to you and no difference to the banks? Mr. JONES. Not the slightest. The CHAIRMAN. Whether you own a preferred share of stock, or a note, or a debenture? Mr. JONES. Not the slightest. We stumbled a little bit on the mutual savings bank. I mean by that, that we had to make our own regulations about that, more or less. Mr. FORD. Mr. Jones, might I ask you another question? Assuming there was some bank whose capital structure was of such a character that it did not have to have this money, did you permit them to reduce their capital stock and give them more money, or did you loan them additional money? Mr. JONES. Gave them additional capital. Mr. JONES. Yes; no reductions were made. Mr. FORD. The statement has been repeatedly made, and was made on the floor, that one of the purposes of the issuance of preferred stock was to enable banks to change the taxable stock for nontaxable stock and, therefore, defeat the taxing power of the State and develop a new class of tax-exempt securities? Mr. JONES. That is not correct. Mr. HOLLISTER. There was never any so-called conversion from one kind of stock into another? Mr. JONES. No; except as our preferred stock is retired, it must be replaced by an equal amount of common. Mr. HOLLISTER. But there was never any conversion of common into preferred? Mr. JONES. No, except that conversion; well, I am not sure how they get that additional common, but as they retire the preferred, then they must replace it with common. Mr. BROWN of Michigan. Insofar as the common stockholders are concerned in any bank, whether it is preferred stock, or capital notes, or debentures, your advances to these banks were in the nature of liabilities, as far as the banks are concerned? Mr. JONES. That is right. Mr. BROWN of Michigan. And following out that thought, logically, this tax that is paid by the bank-or if it could be given to the bank, and of course you say it could not be and I agree with you-but if it could be, you would not be taxed on the assets of the bank, but would be taxed on the liability of the bank, would you not? Mr. JONES. I do not think I quite understand. Mr. BROWN of Michigan. Well, there is not any difference, logically, as far as the bank is concerned, between a capital note and the liability to the depositor? Mr. JONES. Yes; there is a difference. Mr. BROWN of Michigan. There is a difference in the case of liquidation, but they are both obligations of the bank? Mr. JONES. They are both obligations; yes. Mr. BROWN of Michigan. One is the obligation to the depositor and the other is the obligation to the person who furnishes the capital? Mr. JONES. Yes; they owe us the money. |