First of all, I want to make a clear distinction between the problems of secrecy and the problems of title III. It is perfectly legal for an American to borrow abroad on more favorable margin than in this country. There is no need for such an American to be secretive about it. I have not been secretive about it. I think we have to make a distinction between avoidance of laws, which is sanctioned in this country, and evasion, which is illegal. I, for example, can avoid income taxes by doing certain things curtailing capital gains and investing in oil and things of that sort. We must make a distinction between the avoidance of a law and the evasion of a law, which involves tax evasion, insider trading, and the concealment of capital gains. There is no connection, I respectfully submit, between secrecy and the margin problems. One does not have to be secretive to borrow abroad. I haven't been for many years.

The House committee and the SEC suggested that title III could help against foreign takeover threats. They suggested that there have been certain cases where U.S. companies had been taken over with financing from foreign loans; that there is a danger that those foreign loans will be called in, that the borrower will default, and that anonymous and perhaps unsavory foreigners would get control of U.S. companies. With margin requirements affecting American borrowers this wouldn't be a problem-as it is claimed.

I think it is very easy to visualize circumstances where a foreigner would lend an American money within the requirements of U.S. margin laws and still the American could default and still the foreigner could take over an American company. It doesn't seem to me that the margin laws are the way to handle takeover problems. This is a very complex area that I think has to be treated in another way.

Therefore, I think the main argument for enacting title III really boils down to this. Margin regulations are a good thing. I agree on this, that margin regulations are a good thing, and I think most people agree. Therefore, the argument goes, if we can extend margin regulations, that is an even better thing. Therefore, there is a presumption that any American who is borrowing abroad is destabilizing our stock market, and therefore he should be controlled. This is the presumption that I want to rebut.

There is no factual evidence whatsoever on what Americans are borrowing abroad, what margin they use when they borrow abroad. We have absolutely no figures now. I haven't seen one number referred to in any of the previous testimony.

We will, if the rest of this bill goes through, have figures in a couple of years. Meanwhile, without any demonstrated need for this bill, without any evidence that American borrowers are indeed destabilizing the U.S. markets, the suggestion is made that we should enact another law. Margin laws, as you know, are extremely complicated. Regulation T, which applies to broker/dealers, covers over 38 pages. It seems to me additional laws should not be enacted unless there is a demonstrated need for them, and there is not now sufficient data to show such a need.

I further submit that, when such data does become available in a couple of years under the secrecy law, it may very well show that Americans borrowings abroad are not destabilizing the stock marketthat they are doing the market more good than harm.

In the first place, most Swiss banks lend on 50-percent margin. To be sure, 50-percent margin is lower than the margin permitted in this country, which is now 65 percent. A while ago it was 80 percent. But it is not that much different from the margins in this country, which are often as low as 50 percent.

You have heard lurid examples of banks lending people money on 80-, 90-percent margin, but you know as well as I do that the only banks that get big are banks that make prudent loans. You have seen the market decline lately, and I think you must realize that a prudent lender would insist on a 50-percent margin.

Secondly, a number of banks now are avoiding loans to Americans that do not conform to our margin requirements.

Thirdly, there is not really very much of an inducement for unsophisticated investors to open Swiss bank accounts. For one reason, it is against the law for American brokers, bankers, or anyone else connected with collateral loans to introduce any American to a foreigner who gives them more advantageous lending than can be done in this country. It is clearly unlawful for an American to arrange more attractive credit than can be obtained in this country. So only the most sophisticated people are likely to be involved in foreign

countries.

Let me talk for a moment about the damage that restrictions on this borrowing can do. I can talk about some hard facts now, that is, my own account, my own investment operation. If this law is enacted, it will severely curtail that operation, which I submit is good for the country. My operation is basically a hedged operation. What do I mean by a hedged operation? A hedged account is an account where I own stocks long and I also own them short. What do I mean by long and short? A long position is a position where you buy a stock, you hold it, and eventually you sell it. If it goes up, you make some money, and if it goes down, you lose some money. A short is just the reverse. You sell the stock before you buy it. So if it goes down, you make money, and if it goes up, you lose money. How can you sell a stock before you buy it? How can you sell it before you can get it?

The answer is that the broker borrows it from people who own it. The broker either borrows it from other of his customers, who have given that broker permission to lend it out, or he borrows it from investment trusts. There is a great financial advantage in investment trusts lending stocks out for short sales, and there is no risk to them. Therefore, I am borrowing not strictly to inflate the market by buying stocks. I am borrowing in part to buy stocks, but in part also to sell stocks, so while I'm inflating the market buying, I am deflating the market at the same time by selling short. There is an offset.

This is a case where U.S. margin regulations have not dealt with the matter. The Federal Reserve Board requires the same margin requirements for short sales as long purchases. They make no distinction between a hedged account, such as mine, and any other account. That is why I go to Switzerland. I go to Switzerland to borrow money in order to sell stocks short.

Now what specific benefits does this have to the country? First of all, as I just mentioned, I think it is a stabilizing element in the market. I don't inflate the price of stocks when they are going up, and because of the profits I make on the short side when they are going

First of all, I want to make a clear distinction between the problems of secrecy and the problems of title III. It is perfectly legal for an American to borrow abroad on more favorable margin than in this country. There is no need for such an American to be secretive about it. I have not been secretive about it. I think we have to make a distinction between avoidance of laws, which is sanctioned in this country, and evasion, which is illegal. I, for example, can avoid income taxes by doing certain things curtailing capital gains and investing in oil and things of that sort. We must make a distinction between the avoidance of a law and the evasion of a law, which involves tax evasion, insider trading, and the concealment of capital gains. There is no connection, I respect fully submit, between secrecy and the margin problems. One does not have to be secretive to borrow abroad. I haven't been for many years.

The House committee and the SEC suggested that title III could help against foreign takeover threats. They suggested that there have been certain cases where U.S. companies had been taken over with financing from foreign loans; that there is a danger that those foreign loans will be called in, that the borrower will default, and that anonymous and perhaps unsavory foreigners would get control of U.S. companies. With margin requirements affecting American borrowers. this wouldn't be a problem-as it is claimed.

I think it is very easy to visualize circumstances where a foreigner would lend an American money within the requirements of U.S. margin laws and still the American could default and still the foreigner could take over an American company. It doesn't seem to me that the margin laws are the way to handle takeover problems. This is a very complex area that I think has to be treated in another way.

Therefore, I think the main argument for enacting title III really boils down to this. Margin regulations are a good thing. I agree on this, that margin regulations are a good thing, and I think most people agree. Therefore, the argument goes, if we can extend margin regulations, that is an even better thing. Therefore, there is a presumption that any American who is borrowing abroad is destabilizing our stock market, and therefore he should be controlled. This is the presumption that I want to rebut.

There is no factual evidence whatsoever on what Americans are borrowing abroad, what margin they use when they borrow abroad. We have absolutely no figures now. I haven't seen one number referred to in any of the previous testimony.

We will, if the rest of this bill goes through, have figures in a couple of years. Meanwhile, without any demonstrated need for this bill, without any evidence that American borrowers are indeed destabiliz ing the U.S. markets, the suggestion is made that we should enact another law. Margin laws, as you know, are extremely complicated. Regulation T, which applies to broker/dealers, covers over 38 pages. It seems to me additional laws should not be enacted unless there is a demonstrated need for them, and there is not now sufficient data to show such a need.

I further submit that, when such data does become available in a couple of years under the secrecy law, it may very well show that Americans borrowings abroad are not destabilizing the stock marketthat they are doing the market more good than harm.

In the first place, most Swiss banks lend on 50-percent margin. To be sure, 50-percent margin is lower than the margin permitted in this country, which is now 65 percent. A while ago it was 80 percent. But it is not that much different from the margins in this country, which are often as low as 50 percent.

You have heard lurid examples of banks lending people money on 80-, 90-percent margin, but you know as well as I do that the only banks that get big are banks that make prudent loans. You have seen the market decline lately, and I think you must realize that a prudent lender would insist on a 50-percent margin.

Secondly, a number of banks now are avoiding loans to Americans that do not conform to our margin requirements.

Thirdly, there is not really very much of an inducement for unsophisticated investors to open Swiss bank accounts. For one reason, it is against the law for American brokers, bankers, or anyone else connected with collateral loans to introduce any American to a foreigner who gives them more advantageous lending than can be done in this country. It is clearly unlawful for an American to arrange more attractive credit than can be obtained in this country. So only the most sophisticated people are likely to be involved in foreign

countries.

Let me talk for a moment about the damage that restrictions on this borrowing can do. I can talk about some hard facts now, that is, my own account, my own investment operation. If this law is enacted, it will severely curtail that operation, which I submit is good for the country. My operation is basically a hedged operation. What do I mean by a hedged operation? A hedged account is an account where I own stocks long and I also own them short. What do I mean by long and short? A long position is a position where you buy a stock, you hold it, and eventually you sell it. If it goes up, you make some money, and if it goes down, you lose some money. A short is just the reverse. You sell the stock before you buy it. So if it goes down, you make money, and if it goes up, you lose money. How can you sell a stock before you buy it? How can you sell it before you can get it?

The answer is that the broker borrows it from people who own it. The broker either borrows it from other of his customers, who have given that broker permission to lend it out, or he borrows it from investment trusts. There is a great financial advantage in investment trusts lending stocks out for short sales, and there is no risk to them. Therefore, I am borrowing not strictly to inflate the market by buying stocks. I am borrowing in part to buy stocks, but in part also to sell stocks, so while I'm inflating the market buying, I am deflating the market at the same time by selling short. There is an offset.

This is a case where U.S. margin regulations have not dealt with the matter. The Federal Reserve Board requires the same margin requirements for short sales as long purchases. They make no distinction between a hedged account, such as mine, and any other account. That is why I go to Switzerland. I go to Switzerland to borrow money in order to sell stocks short.

Now what specific benefits does this have to the country? First of all, as I just mentioned, I think it is a stabilizing element in the market. I don't inflate the price of stocks when they are going up, and because of the profits I make on the short side when they are going

down, I am not called in on any loans and forced to sell in a declining market.

Second, it helps the balance of payments. I am borrowing from foreigners, foreign money is coming into this country and is being deployed in the United States.

Third, I am adding to the liquidity of our markets, because I am handling more funds-I am buying and selling more stocks-than I could here. Therefore, there are more transactions. This is an important element in our market.

Fourth, I think I am improving the efficiency of our stock market. By that I mean to say I am a professional investor, hopefully an expert, and what I am doing is I think helping to push stocks in the direction of where they fundamentally ought to sell. I think that this has a lot of benefit for the economy. If stocks sell at their fundamentals, those companies that are sound have an easier time attracting capital and personnel.

Another advantage of this is the commissions I generate. I generate more commissions for member firms. Brokers in New York, as you know, at this point need more commissions desperately.

Another point that is very important. As a result of the Swiss operation, I have paid more income taxes than I otherwise would. Therefore, the U.S. Government, the government of New York City and New York State have benefited in a way they would not otherwise have benefited.

The final advantage is sort of an intangible one, and that is the matter of communications. I visit Switzerland, I talk with a lot of bankers, and as a result of my activities, these bankers, I think, have a better understanding of our markets and are more inclined to invest in our markets than they otherwise would.

Getting at the broader picture, I think that also, although I know really nothing about other Americans having accounts in Switzerland, we must say this. To the extent that Americans borrow abroad, they are indeed helping the balance of payments. Now, you might say, yes, helping the balance of payments is a very fine thing, but if they are violating our margin laws to do it, then that is a more-than-offsetting

evil.

I ask you this question. By and large they are borrowing on a 50 percent margin versus anywhere from 50 to 80 percent in this country. Isn't that a sufficiently stable loan to consider the more favorable balance of payments as a net benefit?

Another point I want to make is I think title III violates international law. It seems to me and many lawyers that Americans have a right-it is almost an inalienable right-to take advantage of foreign laws within foreign jurisdictions if by so taking advantage of them there is no demonstrable and material disadvantage to this countrythere is no harm done to the welfare of this country.

There are many examples of this. Corporations have shipping companies under Panamanian flags to avail themselves of lower labor costs. Similarly, U.S. manufacturers assemble goods abroad to take advantage of wages and hours that do not conform with U.S. law at all. Many U.S. corporations have tax havens in Bermuda and in the Netherlands Antilles, and they are perfectly legal.

What I say is that I, too, should have the right to take advantage of foreign laws unless it can be demonstrated that what I am doing,