vessels must be built to restrictive specifications in order to meet the needs of the Department of Defense, the Navy Department, and the Military Sea Transportation Service.

These figures were carefully decided upon. We analyzed our petroleum life requirements throughout the world and we determined that we should have a vessel of 25,000 deadweight tons capacity, that this ship should have a beam not exceeding 84 feet, that it should have a draft fully loaded not to exceed 32 feet, that it should have a sustained sea speed fully loaded of at least 18 knots.

The needs for these restrictive specifications are predicated upon the drafts in the various harbors, bearing in mind that we can't always expect to put our ship in principal harbors.

We may have to cramp our ship into restricted dock areas. We can't always expect that we can put a ship into a place where there is adequate storage capacity to take the fuels which we transport.

We feel that the speed requirement is most important in order to keep progress with the or in the area of antisubmarine warfare.

So the problem of building a ship to those specifications has been carefully explored. Shipbuilders have reliably informed me that such a ship is not only feasible, but practical, can be built within the money which we have estimated. I have been further informed that such a ship can be equipped with main propulsion machinery which, by technical operating modification, can be operated at a lower speed, at almost the same efficiency as it can be operated at the higher speed.

So I wish to assure the committee that the type of ship which we have specified is a type of ship which the military needs to fulfill its military commitments, and to go to a larger ship which would fit commercial requirements is opposed by the Navy Department.

Mr. MORSE. I assume that Secretary Thomas

The CHAIRMAN. Then Mr. Vinson says

Mr. Chairman, in view of the statement of the admiral which is so convincing, I don't think we should change the tonnage or the speed, which would follow the views of the Department in reference to it.

And the committee went on and approved it.

Mr. MORSE. I would assume that the Secretary conferred with other people in the Navy Department, presumably Admiral Denebrink, and I suggest that then the question is whether the admiral concurred in the letter signed by the Secretary.

The CHAIRMAN. Would you not say that this testimony given to the Members of Congress that passed upon this would have some bearing upon what they later say just this month that it is their intent that these are special-purpose ships, and the basis of making them special-purpose ships was this testimony, and there is a lot more here? But apparently there has either been a change of mind or Congress didn't understand what they meant by "special purposes.'

Mr. MORSE. I considered that, Mr. Chairman, when I made the opinion as general counsel. All of these tankers are tailormade ships. The CHAIRMAN. Tailor made for the Navy.

Mr. MORSE. Every ship that is built is tailor made, which would mean we insure 100 percent of the construction of every ship we take under consideration, Mr. Senator.

The CHAIRMAN. No, but I say there are certain special-purpose ships. That is why we put that provision in the act, and we have just appropriated money for special-purpose ships.

Mr. MORSE. All those ships.

The CHAIRMAN. Tailored to the needs of the Navy and not tailored for general purposes. That is the point I am making. I do not say that all ships are special purpose ships, but there has been a designation-it may be a loose one-between what is a usual designed ship

purely for commercial use, and also can be used by the Navy in certain circumstances, and also some of the special purpose ships of the Navy might be used for commercial purposes.

Now, we are breaking out into some Navy tugs, aren't we? They can be used for commercial purposes and yet we calssify them as special ships.

Mr. MORSE. I have a couple other points I would like to make, Mr. Senator.

The CHAIRMAN. And the roll-on and roll-off ship was tailormade for dry cargo.

Mr. MORSE. That was spelled out for us, and why these were not, I do not know. That is one convincing reason that I came to the conclusion that they were not special purpose.

Mr. PELLIGRINI. In the legislative history the roll-on and roll-off ship was used as an example of what a special purpose is.

The CHAIRMAN. As an example of special purpose. They did not designate or say that was the only one.

Mr. MORSE. At this time would it be appropriate to refer to a story I have frequently heard. When language from legislation is clear why turn to the confusing language of the legislative history.

The CHAIRMAN. That is all right, but we lots of times pass legislation in which the language is not clear.

A lot of lawyers make a living off that, but we try to make the language to conform with what we intended; and in this case there is no question in your mind what we intended, is there?

Leave the language out, is there any question in your mind what we intended?

Mr. MORSE. Not from the letters received from the Congressmen and yourself and the other Senators.

I have a couple of other points I would like to make, Mr. Chairman. My first point is if one of the large, well-established tanker operators sought to borrow the money from the banks, they could do so even without any charter or any mortgage insurance. The lending would be made upon the financial strength of the borrower.

It is, therefore, obvious that the lending institutions are concerned here not so much with the Navy charter or the mortgage insurance as they are with the financial stability and operating background of these applicants.

Point 2: It is a fact that large tanker operators and other people also have financed through banks and insurance companies the construction of many big tankers solely upon the collateral of long-term charters to the oil companies.

From this it will be seen that a long-term charter, instead of being a liability as intimated in these hearings, is a bankable asset.

The CHAIRMAN. But, Mr. Morse, in that case would not the longterm charters to the oil company, the terms of the charters, be the collateral and in this case they are restricted to $5?

Mr. MORSE. I think you will find that the rates have been less than $5 in most of these commercial charters.

The CHAIRMAN. But it could be a time when it could be above $5, could it not?

Mr. MORSE. Yes, I agree. I am not being critical of the $5.

The CHAIRMAN. We tried to get it down to where there was some flexibility.

Mr. MORSE. Point 3: It is human nature for people to try and ge as much as they can for themselves, and I am being realistic, not criti cal, when I say that the applicants for mortgage aid want 100 percent insurance.

I would be less than fair to you if I failed to state that part of the reason for these applicants' failure to go all out to finance these tankers on 90 percent insurance is in part due to statements emanating from the Hill indicating that these tankers are special purpose vesse and are entitled to 100 percent insurance.

If I were an applicant, I also would hold off in the hope of getting 100 percent instead of 90 percent.

The CHAIRMAN. Now, wait a minute. Let's stop right there We have not said that anybody should get 100 percent or 90 percent, statements from the Hill. We said that our intention was that these were special purpose ships, and, therefore, as such that they might be entitled, in the discretion of the Maritime Administration, to 100 percent. That is all we have said.

Mr. MORSE. Yes, I have appreciation for that, but the result is substantially the same.

The CHAIRMAN. I do not know the result, but we said we intended these to be special purpose ships, and if they were designated as such. they would then be entitled within the discretion of the Maritime Administration to 100 percent; but that it is your decision to make, not

us.

Mr. MORSE. Presumably

The CHAIRMAN. I have not said any applicant should get 100 percent insurance. I do not know whether they should get 100 percent or 90 percent; but I do know we intended these to be specia purpose ships. That is your job at that end, incidentally as an arm of Congresss and not an executive agency.

Mr. MORSE. Also, of course, Mr. Senator, you would be, I think. somewhat critical of me if they are determined to be special purpose and I were to say, nevertheless I will insure only for 90 percent.

Point 4: I do not want to be placed in the position in which some other agencies of the Government find themselves in being criticized by GAO and the Congress for failing to protect the interest of the Government.

I consider that my duty in the present instance is to act as a prudent businessman. Despite our mutual desire to get new ship construction, I am sure this committee would not want me to take action not clearly within the framework of title XI.

This involves two questions: (1) Are these special-purpose vessels: and (2) what net worth and minimum working capital requirements are necessary to protect the Government?

It is my sincere belief that the vessels are not special-purpose vessels. All vessels are custom tailored, It has been said to me that they are long for their length, wide for their width, and deep for ther draft.

No other solid basis exists for calling them special purpose, and we have Mr. McMullen here who can give you the details of other tankers in commercial operation which are comparable as to speed, length, draft, deadweight, pumping systems, and so forth. In tha regard, I respectfully call to your attention that the American Burea of Shipping purports only to be a classification society, not an organ

ation to design ships or to determine whether they are or are not pecial-purpose vessels.

As to net worth and working capital requirements, it is to be noted at many of the applicants originally contemplated that they would ithdraw their entire equity during the first 10 years thereby leaving s, as mortgage insurer, without protection at the end of the 10-year

erm.

In other words, under their proposals they were free to run at the ad of 10 years and leave us holding the bag. I do not favor any such rogram. I have established reasonable regulations along those lines protect the Government, to protect the applicants from milking the enture during the first 10 years against their own best interests and O assure the Government that the owner will have an equity interest the venture during the life of the mortgage, thereby assuring that he owner will continue to look out for the operation of the vessel fter the termination of the Navy charter.

Point 5: During yesterday's testimony it was stated that the yards ould not consider participating in the financing of these tankers. I cannot believe that these yards have never either waived their rofit or deferred receiving their profit on a job in order to construct vessel. I am not suggesting that the yard should not realize a asonable profit.

I am suggesting it is not unrealistic to ask them to defer taking out eir profit-for example, in interest-bearing preferred stock callable uring the first 5 years of the charter.

Mr. Strohmeier was in my office one day at which time he said he would be criticized by the Government if he aided in the financing of hese tankers. I stated to him at that time, and it is my firm coniction, that the yards would not be subject to criticism if they do ot take an unreasonable profit for the construction and aid in financng these these tankers. It would be a simple matter to segregate he charges made by the yard for financial aid from the charge made or the construction work.

The CHAIRMAN. Do you suggest that they participate in this, that hey participate for 20 years on the mortgage side?

Mr. MORSE. No; I do not think it is necessary.

The CHAIRMAN. If they participate, how are they going to do so? They are going to have to take it out of their profit.

Mr. MORSE. I am not suggesting that it is unrealistic that they efer.

The CHAIRMAN. In other words, whatever profit they make on the hip they would not take that on completion or charge that; they ould take that profit and spread it out over a period of time? Mr. MORSE. Up to 5 years, sir.

The CHAIRMAN. Up to 5 years?

Mr. MORSE. Yes, sir.

The CHAIRMAN. Then if you are running their business on the heory that they are going to have this profit, then they would have Ogo out and borrow money to take the place of the profit which is oing to be part of their business.

Mr. MORSE. That does not necessarily follow.

The CHAIRMAN. Not if it is a great company and has a big reserve; you defer something for 5 years, you are going to have to borrow omething to take its place.

Mr. MORSE. That is right, but they never got back all their investment in the venture except the profit.

I also told him that they would be subject to criticism if they take an unreasonable profit even though they have no participation in the financing.

It seems odd to me that these companies should feel that they may never assist their clients financially. Where would General Motors and Ford be if they had not set up organizations to finance the purchase of automobiles and other equipment.

The CHAIRMAN. That does not necessarily follow. There may be some people who criticize them for doing so.

Mr. MORSE. Maybe. Let us get down to the crux of this problem namely, whether we issue 90 percent insurance or 100 percent insurance and that gets down to the simple question whether the owner will collateralize the uninsured 10 percent himself or whether the Government will do so by increasing the mortgage insurance from 90 to 100 percent.

Assuming the tanker costs $8 million, it means that the mortgage may not exceed $7 million; namely, 87% percent of the cost of the tanker. If we were to insure 90 percent of the mortgage, we would be insuring $6,300,000, leaving $700,000 uninsured which the owner would have to collateralize in some manner.

This he could do by putting that much additional equity into the venture. Seemingly, these owners do not wish to make this additional investment.

Alternatively, I believe it not impossible for these owners to collateralize this $700,000 through bank borrowings and purchase of Government bonds, and I am advised that the cost to the owner whether collateralizing in this manner or obtaining 100 percent insurance would not be substantially greater.

The CHAIRMAN. That is the overall cost in your opinion would not be greater?

Mr. MORSE. Yes, sir.

The truth of the matter is that most of these applicants are coming in with thin equity investments. We would not have these problems today if the applicants were in position to make more substantial equity investments.

Furthermore, it is my understanding and belief that whether these charters are profitable or unprofitable does not fundamentally turn on the question whether we will insure 100 percent of the mortgage. The required payout to the owner would be substantially the same in either alternative.

The CHAIRMAN. I do not think that there is any disagreement that whether there be 90 or 100 percent is going to determine what the profit on the operation is going to be in the end.

Mr. MORSE. That is correct.

The CHAIRMAN. What we are dealing with is whether we can get this program started at 90 or 100 percent.

Mr. MORSE. I agree with you.

The CHAIRMAN. I am sure if I could go out and get a 75-percent mortgage or a 50-percent mortgage, that would not make any differ