134

TRUCTION

RECONSTRUCTION FINANCE CORPORATION

Mr. ST. JEAN. It is a subject up now, because you can not get it to the cotton spinner in a 90-day period; it has got to take a longer period, 9 months or 12 months, before the sale is liquidated.

The CHAIRMAN. Do you think it would prove helpful in that connection?

Mr. ST. JEAN. I am convinced it would, Mr. Chairman.

The CHAIRMAN. To move cotton and wheat?

Mr. ST. JEAN. Yes.

Mr. BUSBY. Do you not think that the foreign exchange situation is more detrimental than the situation we are trying to remedy in this bill?

Mr. ST. JEAN. You are getting into another economic discussion, because the exchange risk must be considered by itself.

Mr. MCFADDEN. Does the scope of your business embody shipments of foreign goods into the United States?

Mr. ST. JEAN. No; we do not work on imports.

Mr. MCFADDEN. If this organization, if it does handle it-how are those foreign acceptances covering goods shipped into the United States, for instance, from Germany or England handled? Through what channels?

Mr. ST JEAN. They are usually taken up

Mr. MCFADDEN. I am speaking of the bills.

Mr. ST. JEAN. The bills are handled on a 30-day basis, as a rule, because they are liquidations of the American importer.

Mr. MCFADDEN. Say a bill originated in Germany for a shipment of goods into the United States; will you go through that process, so that the committee may understand just how that acceptance is handled?

Mr. ST. JEAN. For 12 months, Mr. McFadden, which is current down to and including the present time. foreigners selling to the United States have uniformly insisted that, in order to put the credit at their disposal at the earliest possible moment, the American importer shall open a credit through his New York or other note bank for them, and the domestic bank

Mr. MCFADDEN. Why would that be?

Mr. ST. JEAN. Well, if we are buying from Germany, they will insist that the Bank of New York & Trust Co., for illustration, would open credit with the Deutsch Bank, so that the Deutsch Bank knows that when the goods are shipped, their credit is at the disposal of the shipper in Germany, and he can start using the money, it may be for 30, 60, or 90 day periods, depending on how the credit of the American importer has been opened with his bank.

Mr. MCFADDEN. Following the acceptance route to the final destination and payment?

Mr. ST. JEAN. Well, I go into the New York Trust Co. and I want credit opened for me for the credit of Hans Schmidt & Co., of Hamburg, and Mr. Traphagen, the president of the bank, says:

All right, Mr. St. Jean; you have secured a line of credit and we will just charge your line of credit with $25,000 that you want, and we will notify the Deutsch Bank that, upon presentation of a draft drawn on you, with the documents attached we will pay Mr. Schmidt $25,000.

Schmidt goes into the Deutsch Bank and he brings in a draft on me in New York, payable at the Bank of New York & Trust Co., with documents attached, for whatever he is shipping over here,

Dresden china, and so forth, and that draft is, with the shipping documents, forwarded by the Deutsch Bank to me in care of the Bank of New York & Trust Co., and when it arrives that Bank of New York & Trust Co. will complete the charge, since they have already charged me with $25,000. Then they will carry the acceptance for me until I have completed the distribution, if I am a wholesaler.

Mr. MCFADDEN. But not to exceed 90 days?

Mr. ST. JEAN. Yes; and they will make a new acceptance, at my request, credit my bank with $25,000 and sell that acceptance in the bill market, and I pay it when the goods have been sold.

Mr. MCFADDEN. And from the bill market it could be bought by a small bank and would be eligible?

Mr. ST. JEAN. Yes.

Mr. MCFADDEN. Or it could be bought by a member bank and be eligible?

Mr. ST. JEAN. Yes.

Mr. MCFADDEN. So, as a matter of fact, the Federal reserve credit would be used in financing that shipment of goods

Mr. ST. JEAN. Yes.

Mr. MCFADDEN. From Germany to the United States?

Mr. ST. JEAN. Yes; no question about that.

The CHAIRMAN. Mr. Dempsey, how much time do you want? I was wondering whether we could undertake it this afternoon.

Mr. DEMPSEY. I do not think over 10 minutes, but at the same time, if the committee wants to adjourn, I can come up in the morning. Mr. MCFADDEN. I move that we adjourn and hear Mr. Dempsey at 10.30 in the morning.

The CHAIRMAN. We can adjourn informally, without a vote. Shall we stay, or does somebody move to adjourn?

Mr. STEVENSON. I move to adjourn.

Mr. TIERNEY. I second the motion.

Mr. STEVENSON. I would like to hear Mr. Dempsey, but I have got something else to do.

The CHAIRMAN. Gentlemen, if any member can not stay, let us not go along. Ten minutes does not amount to anything, if that is all the time he wants in the morning.

Mr. DEMPSEY. I would just as soon come in the morning.

Mr SEIBERLING. It seems to me the necessity of the public is such that

The CHAIRMAN. We are going to get through with this bill. I do not mean to urge my view on it, but I think we should accommodate one another as much as we can.

Mr. SEIBERLING. Mr. Sabath told us yesterday that he would take a few minutes. and this morning he took three-quarters of an hour.

STATEMENT OF HON. S. WALLACE DEMPSEY, A MEMBER OF CONGRESS FROM THE STATE OF NEW YORK

Mr. DEMPSEY. Gentlemen, I appear for the Securities Owners Association and have seen the text of the bill as reported in the New York Times and as passed by the Senate.

I have a good deal of diffidence in stating what I do, because I do not know what the disposition of the committee is; whether, on

account of the haste, you are going to report this bill substantially as the Senate passed it, or whether you intend to amend it.

In other words, my amendments are not of a sufficient importance to justify any material amendment to the bill, if the bill were going to be passed as the Senate has passed it, and I would not urge the adoption of my amendment. But if the bill is going to be amended anyway, then I would suggest, with all due deference to the committee, the following amendments, which are not of great consequence, but will be helpful.

In section 5-I am reading from the New York Times, as the bill passed the Senate

The CHAIRMAN. It has not passed the committee at all, Mr. Dempsey.

Mr. DEMPSEY. It has not passed, but reported out by the Senate

committee.

The CHAIRMAN. Yes. Section 5?

Mr. DEMPSEY. Yes; section 5, paragraph 2, states:

All such loans shall be fully and adequately secured in such manner as the corporation shall require.

Now, it seems to me that you are going to place a great deal of discretion in the hands of this board of directors and, if you are, you enlarge their discretion

Mr. MCFADDEN. Let us get that section 5.

Mr. DEMPSEY. Section 5, line 6, page 21, the first sentence of the second paragraph:

All such loans shall be fully and adequatey secured in such manner as the corporation shall require.

I would suggest that, after the word "be," in the first line, you insert instead of the rest of the sentence the following: "as fully and adequately secured,"-" and in such manner as the corporation shall require." In other words, that leaves a large discretion in the board of directors as to how the loan shall be secured.

The CHAIRMAN. Why should we not say they should be amply and fully secured, and stop with that? That is what we ought to do. Mr. DEMPSEY. After all, that is a matter of opinion, and entirely a matter of opinion as to what is adequate security, and the language that I suggested would give them a little broader discretion.

I think, in either event, it is going to rest on opinion, and as I say, the language suggested by me would seem to me to give a little broader discretion. You have to depend on the discretion of these men anyway, and I take it that everybody will have the fullest confidence that men of such experience, ability, and character will be appointed that you would be willing to trust them with a large measure of discretion. What I have in mind is just such a situation as this: You say "fully secured "; what is your criteria?

There is no question that securities to-day are depressed below their real worth. Their market value does not represent their intrinsic value; there is not the slightest doubt about that; and the reason I am suggesting this amendment is that I am fearful that, if you measure by market value, you can not get any securities on which you can make loans.

The CHAIRMAN. What I thought, as far as I am concerned, is that the purpose of this law was to enable those in need of relief to secure

loans, where they had security but not access to credit facilities. I should think that we would be slow to intimate that we expected this money to be loaned without value back of it to make the loans good.

Mr. DEMPSEY. Well, let me just illustrate to you. I personally hold preferred stock in the Nickel Plate Railroad. I have had it for about 15 years. It was first preferred when I obtained it, and when the Van Sweringens bought the road they converted the stock so that there was simply preferred and common. I received the preferred. That stock, for years, was quoted at about 125, as I understand, and always paid 6 per cent. The road was one of the most dependable money-makers in the country. They canceled their dividends in November, and I have not looked it up myself, but I am told that the selling price of that preferred stock is $6 on the hundred. What are you going to do with a railroad of that kind when they come to you with securities? There is not any question but that that railroad, in ordinary times, has the very highest and most dependable earning power; and the other railroads will have to offer you

securities of that nature.

What I am providing here is that you should say that there shall not be a situation in this bill that this board, in making loans, must be bound by the present market values, which are not real, which are far below the real value.

Mr. STRONG. The intrinsic value should be considered rather than the market?

Mr. DEMPSEY. Yes; and all I have in this amendment is to give the board reasonable discretion, and not have them bound by the market quotations, for instance.

The CHAIRMAN. We do not say that, but we would make them responsible for taking good security.

Mr. DEMPSEY. I think they should be.

The CHAIRMAN. And they would be the judge.

Mr. DEMPSEY. Yes.

Mr. MCFADDEN. If I may interrupt, take the Nickel Plate Railroad, and suppose it came to this organization to-day for a loan, if it was organized, what security would you consider to be good?

Mr. DEMPSEY. Well, of course, that would depend entirely-I would have to look over their balance sheet. I could not pass upon that offhand, or give an offhand opinion. I would have to go through their balance sheet very carefully, and see what they had. As a matter of fact, you understand, the Nickel Plate road holds a large amount of stock in other railroads. It was the original road of that system, and in acquiring other roads, my understanding is that the Nickel Plate was used as a holding system and not simply as a railroad, and it holds a large amount of stock in the other roads.

Mr. MCFADDEN. It is fair to assume that those securities which it holds represent collateral security for debentures or other borrowings?

Mr. DEMPSEY. I could not say.

Mr. MCFADDEN. They would probably, before they came to this institution for relief, have exhausted all other resources. Mr. DEMPSEY. That is the purpose of the bill.

Mr. MCFADDEN. Is not it a fact that most of the railroads are in

that position?

Mr. DEMPSEY. I think so; every one.

Mr. MCFADDEN. That all they have to offer are their equities? Mr. DEMPSEY. I think that is true.

Mr. MCFADDEN. Which would be represented by their notes with the pledge of such equities as they might have?

Mr. DEMPSEY. Well, of course, what they may have, you can not tell until you see their balance sheets; but what they will be permitted to borrow on is to be regulated in some way.

Mr. MCFADDEN. Whatever securities they will have, will have to be second liens or third liens?

Mr. DEMPSEY. It is going to be a lien subject to their bond issues, and I suppose there will be primarily their stock issues.

Mr. MCFADDEN. With all due respect to you as a stockholder, the governor of the Federal Reserve Board stated to us yesterday that the railroads were largely in the hands of the bondholders at the present time.

Mr. DEMPSEY. That is undoubtedly true. As I was

Mr. MCFADDEN. So that they could not increase their capital stock and offer it as security, because that would be no security? Mr. DEMPSEY. No.

Mr. MCFADDEN. And the bonds being held in the hands of the public, what then have they got to offer to this finance corporation? Mr. DEMPSEY. Of course it would be what their equities are, subject to their bond issues. Now, I say you should not measure that by the market quotations, and that they should be extended such liberality as will enable the board to exercise reasonable discretion.

You would not pass the bill at all if there was not a real need here, if there was not a real emergency, a most unusual situation.

Mr. STRONG. If they had good security, based upon the present market conditions, this would not be necessary at all?

Mr. DEMPSEY. Not at all.

Mr. MCFADDEN. Is it your understanding that the usual banking sources are not able to accommodate

Mr. DEMPSEY. They are exhausted. When you see that the New York Central passes its dividends, and when you see the Illinois Central passing its dividends-as I understand, the Illinois Central has paid a dividend regularly for 51 years-you realize that the situation is most unusual and of a highly emergency nature.

Mr. MCFADDEN. The New York Central got out an issue here recently of $100,000,000, and used it as collateral for a loan of $20,000,000.

Mr. DEMPSEY. They used it as collateral at the banks. They did not try to place it with the public, because they found they could not. Mr. BUSBY. What kind of security holders do you represent, Mr. Dempsey?

Mr. DEMPSEY. The Security Owners Association.

Mr. BUSBY. What is that? I want to know something about the nature of the body that you represent.

Mr. DEMPSEY. Well, all I know is that it is the security owners, composed very largely of insurance companies, for instance.

Mr. BUSBY. They have those securities in their possession as investments-is that the idea?