Mr. WILCOX. I do not see how it could have. Mr. MAPES. Any jurisdiction over a representative of a city who adopted such tactics? Mr. WILCOx. I do not see how it could have. It is not my thought, surely, that the Securities and Exchange Commission should have authority to decide what is or is not a good settlement. I do not believe in governmental interference with negotiations where the parties can themselves settle or adjust it, either in the matter of bonds or anything else. Mr. MAPES. But if they resist any kind of a settlement? Mr. WILCOX. The courts are open for that. Mr. MAPES. Resorting to a court in a municipal settlement is not very helpful, is it? Mr. WILCOX. This legislation is not designed, and cannot be designed, to set up an agency here in Washington to determine what is or what is not a good settlement. That is the object of the municipality bankruptcy bill, which has just passed the House again, which is to have the courts pass upon settlement agreements and debts, whether or not those settlement agreements represent the capacity of the municipality to pay. That is a judicial question, to be determined by the courts, with all parties before the courts. It is not my thought that the Securities and Exchange Commission should ever undertake to determine whether or not a particular municipality has offered all that it can afford to pay. That is a judicial question. That is a matter of fact to be determined in a legal proceeding. If a municipality refuses to do what it ought to do, if it refuses to do, to the full limit of its capacity to do, the courts of equity are open, mandamus proceedings can be instituted to force taxation levies and to force tax collections up to the limit of its capacity. No court can, of course, make a taxpayer pay more than he can pay, and there is where the Municipality Bankruptcy Act comes in; in those cases in which the municipality has offered to be fair, has offered a fair, equitable, and reasonable adjustment, which the holders of the majority of the debt have agreed is fair and reasonable and equitable, and which a minority have refused to accept. Mr. MAPES. I have forgotten whether it was in your testimony or in the testimony of some other witness before the Commissionbut whichever it was, I was impressed with the force of the statement relative to the difficulties in segregating or tracing through the funds raised for the purpose of retiring bonds. The testimony indicated it was not only very expensive but almost impossible to do so. Mr. WILCOX. It is a difficult matter, and that is the reason it is necessary to have a municipality bankruptcy law, until we have cleaned up the bad situations that result from the late deflation. It is difficult to force tax collections, particularly where the taxpayers believe that the tax levy is unreasonable and inequitable. It is difficult to force an adjustment of bonds, an adjustment beyond what the taxpayers of a particular community believe is fair and equitable; but it is, and it has been, my observation and it has been my experience that where bondholders approach the municipality in a spirit of fairness and equity, they have very, very little difficulty in getting together and agreeing on what is a fair settlement, and those who have a real investment in the bonds are always willing to agree on something fair and equitable. The only people who have any trouble, the only people they have any trouble with in these adjustments, are the fellows who have gone out into the market, after the bonds became in default, and bought up a few bonds at 5 cents or 10 cents or 15 cents on the dollar, and then sit back in the breeching and refuse to pull and hold out for a hundred cents on the dollar, thinking that the majority creditors will buy them out rather than have the adjustments fall through. That is where the municipality bankruptcy bill can come in and make him take what the majority has agreed is fair and equitable; but that is a matter which has to be handled in that way. You cannot handle that through this bill. This bill is designed, as I understand it, to regulate the activities of the man or the committee which sets itself up to represent creditors. It sees to it that that committee does fairly represent the creditors, that it gives them a fair break, that it does not charge the creditor excessive fees, that it does not unnecessarily prolong litigation. Mr. MAPES. Let us get back to the other matter we were discussing. Mr. WILCOX. Yes, sir. Mr. MAPES. I was impressed, in the testimony brought out before the Commission, with the difficulty of a bondholder or a committee tracing through the different bookkeeping accounts of a city and keeping its finger on the money that was collected for the purpose of paying the bonds. I think one witness said that it took not only an expert accountant who was familiar with the city's affairs, but a superb diplomat to do so. He said it was very difficult to get sufficient definite information to make out a case in court. Mr. WILCOX. I disagree with him. It is not difficult at all. Mr. WILCOX. Yes, sir. It is not difficult to trace out the municipal funds, because the law of every State that I know anything of and certainly it has been affirmed by the Supreme Court of the United States--is that where a municipality has funds in its hands, and it is in default in the payment of its bonds, the court has no discretion but must grant a mandamus action to force the city to turn over the funds to the first bondholder who comes in with a mandamus; and it does not make any difference what the money is collected for, if it has got the money in its hands, it has got to pay it out. It is a very easy matter to get the money if the city treasurer has got it in his hands. It is not a difficult matter. You do not have to trace it out through the bookkeeping entries. All that you have to do is to show that the municipality has the money and is in default, and the demand has been made for it and refused. I can assure you that there is no difficulty, because I have had the unfortunate experience of having to represent these municipalities in mandamus actions, where they were brought to recover tax moneys that were in the nands of the city treasurer, and I never knew of them failing to get it yet. That part is not difficult. These bondholders' committees sometimes like to make their clients think that it has been awfully difficult, so that they can charge enormous fees for what they did; but it is not, as a matter of fact, a difficult job for them to get the money. Mr. MAPES. Well, certainly the statement of the report of the Securities Commission is quite to the contrary. Mr. WILCOX. Well, I disagree with the Commission if they say that it is hard to get the money, if the municipality has the money in its treasury, that it is hard to get it out of their hands, because my experience has been just exactly the opposite. It is difficult to do this and probably the Commission said, and probably what the Commission had in mind is, that it is difficult to get the money collected and into the hands of the city treasurer, if the municipality thinks that the tax rate is too high, because it is a mighty difficult matter to make a taxpayer pay taxes on his property when he thinks that the tax is excessive. Mr. MAPES. I did not so understand the Commission. I understood the Commission to say that even where the levy has been raised for the purpose of raising money to refund the bonds, to refinance the bonds, to pay the bonds, that in the mixing of the funds, and the shifting of them by the city authorities from one fund to another, that it is quite difficult, and, in some cases, almost impossible, to segregate those funds, so that the court can find that the city has got money in its treasury-and although it may have an abundance of money in its treasury, generally-but so that the court can find it has got money in its treasury for this particular purpose. Mr. WILCOX. That might be true in some States. I cannot say that it is not. It might be, under the laws of some States, that it may be possible for the city treasurer or city officials to transfer their accounts in such manner as to confuse the records and make it difficult to find, but that, after all, is a matter for the courts to handle under the law of that particular State, and I do not know that there is anything that we can do about it here. That is a matter which is covered by the laws of the particular States. It is a matter for the courts to work out. If I go into the court and bring a suit to recover some money, and if I experience some difficulty in getting it, that, after all, is a procedural matter in the courts, and I do not think that we can do anything about it in this bill. Mr. MAPES. You do not think that we can reach it? Mr. WILCOX. This bill cannot reach a situation of that sort, and ought not to, if it could, because, after all, that is a function for the courts to perform, and I think, for one, that it ought to remain where it is, in the hands of the courts. I do not believe in encroaching upon that function of the courts, in matters of this kind, or with this kind of legislation, or any other, for that matter, and, as I said before, I do not think that this bill ought to undertake to vest in the Securities and Exchange-I have the utmost confidence in them-but, as a matter of governmental policy, as a matter of principle, I do not think that this bill, or any other bill, ought to undertake to set up any Federal agency to determine what is or is not a fair settlement. That is a matter for negotiation between the parties. If this bill is passed, as I understand it, the bond holders' committee will be required to submit to the Securities and Exchange Commission a proposed agreement that they are about to enter into for the adjustment of the debt, and the Securities and Exchange Commission will be charged with the responsibility of seeing to it that the interests of the bondholders have been conserved and protected; that they have been notified fully of what is about to be done; and that they have been given full opportunity to object to it, and that the committee has not overreached them and has not taken advantage of the people whom they are supposed to represent. Now, that ought to be the responsibility of the Commission, and that is about as far as the Commission ought to go. Mr. WOLVERTON. Mr. Chairman. The CHAIRMAN. Mr. Wolverton. Mr. WOLVERTON. May I ask if the opinion just expressed applies only to municipal obligations, or all of the field that this bill endeavors to cover? Mr. WILCOX. I have restricted it, Mr. Wolverton, to municipalities, because that is the only field I know anything about. I am not familiar with the other fields. Mr. WOLVERTON. As a matter of policy. Mr. WILCOX. As a matter of policy, I think, where it is an interstate transaction, although I have not sufficient knowledge to discuss it with you intelligently, I should think where a bondholders' committee is set up to represent the bondholder in some great real-estate trust, on one of these big office buildings, and the bondholders are scattered throughout the county, I think that the same regulations ought to apply, ought to be in effect, and that there ought to be an agency here in Washington to see to it that, in those interstate transactions, that the committee itself is actually performing its duties toward the people whom it assumes to represent. Mr. WOLVERTON. You do not think that it should be extended to the question of having the right to pass upon whether it is a good settlement or a bad settlement? Mr. WILCOX. No. That is just fundamental with me, Mr. Wolverton. I think where men can negotiate for themselves, that they ought to be permitted to do so. I think that the Commission ought to do this: If I have set myself up as a representative of bondholders, and I represent you in this transaction, and I have agreed with the mortgagee that I will accept 50 cents for you on the dollar, I think the Commission ought to see to it that I have notified you of the full facts in the case and given you an opportunity to agree to what I have done, or that you have agreed to what I have done. Mr. WOLVERTON. Well, the policy that you are speaking favorably of, at the present time, seems to me to be the policy that was adopted by the Congress in the adoption of the original Securities Act. Under the terms of that act we sought to make available to investors all possible information. Mr. WILCOX. Yes. We could not tell them whether it was a good bond or not. We simply gave them the information. We did not advise them to buy or not to buy. Mr. WOLVERTON. That is just what I was about to say. That is all that is done. It makes available to possible investors the information upon which they are to exercise their judgment, but, under the provisions as outlined in this bill, it would seem to me that the Securities Commission is required to go much further, and they must look into and obtain all of the facts that are pertinent, but then the Commission has in addition a certain responsibility in passing upon the bona fides of the transaction. Mr. WILCOX. Well, probably the bona fides of it is all right, but I do not think that it is fair to the Commission, in the first place, for them to be required to determine that my representative has gotten for me all that he can get for me. They have to set themselves up as a court to do that; but they can do this: They can see to it that my representative has acted in good faith; that he has not double-crossed men, and he has given me all of the information at his command, and secured my approval for what he has been doing. Now, they can do that, and they ought to do that. There ought to be an agency of that sort. It seems to me utterly ridiculous that we go to all of the trouble that we do about the organization of a little national bank, and leave these bondholders' committees absolutely free to do as they please. If 5 or 6 or 10 men in my community want to organize a little national bank, with $100,000 capital, and put their own money into it, to deal with their own neighbors, for the upbuilding of their own community, they have to come to Washington and get a charter. They have to submit themselves regularly to examination. Their loans are gone over by inspectors, and everything that is then done is subject to the scrutiny of the Federal Government. Why? Because this little bank is going to handle other people's money. There possibly may be $500,000 deposited there of other people's money, and we require the most careful scrutiny of everything that they do, and properly so, because they are handling other people's money. Now, we go to all of that expense in that case, and then over here is a committee representing, we will say, the bondholders of the city of Detroit, because Detroit went in default. There was a $400,000,000 institution. Now, there was a committee that set themselves up to represent $400,000,000 worth of bonds, to handle millions of dollars of taxes, tax collections, and to accept adjustments of a $400,000,000 debt, and there was not a soul in the world to see to it that the folks' money that they were handling was properly protected, and yet, with a little $100,000 bank, we make them get a charter and we go through everything that they do with a fine toothed comb, because they are propably handling $500,000 of other people's money. It just seems to me a weak point in the whole structure that we leave these institutions unregulated, with nobody to scrutinize what they do. I do not think that we ought to go to the extent of having an institution in Washington to say that when an adjustment has been begun to pass upon whether or not it is a good trade. I think that men ought to be free to make their own trades, and the Government ought not to act as wet nurses for them and try to tell them when they have got a good transaction, whether they have got a good transaction or not. Mr. PETTENGILL. Mr. Wilcox, however desirable it may be, which I do not admit, to have the Commission pass upon whether the settlement is a good settlement, whether the debt is a municipal or private debt, is that not entirely beyond the point, because this bill is based upon the interstate commerce and the bankruptcy clauses. The power to determine whether the settlement should be approved is based upon the bankruptcy clause, which is a judicial power which cannot be conferred upon a commission. So, it seems to me that in answer to the point as to whether the debt is municipal, or anything else, we cannot confer upon the Commission the power to determine whether the settlement is a good settlement or not. |