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broker does not have a large amount of capital. He makes loans from the limited amounts of capital on hand and sells those loans, or, in the old days, he used to go to the bank and borrow money on his notes, putting up the mortgages as collateral for his notes, and as he sold the mortgages he was able to pay off his notes. But under present conditions the banks are not making such loans to the extent that they used to do it, and they probably will not again do it until they have overcome the present situation, which makes it very difficult for the private mortgage broker of limited capital to do business. The fact of the case is that under the Federal reserve system the banks have become less inclined to make real-estate loans rather than more inclined. I had the privilege of coming down here and representing Mr. Hurlburt of the Illinois Bank of Chicago, the Marshall Field Bank, at the time that bill was under consideration as the Aldrich bill originally, and later when it actually went through, and one of the arguments that was made was that because the banks would be able to rediscount a considerable amount of collateral notes secured by collateral they would feel freer to make noneligible loans because they knew at least part of their assets were thoroughly liquid.

In practice that has not proved to be true. The banker, having been enabled by the Federal reserve act to rediscount a substantial amount of his paper, instead of being inclined to make more real estate loans to people than before, has practically taken the position, as every borrower knows, that they want eligible collateral, and the banks generally in my city, and I know that is true in New York, are refusing to make loans except on eligible collateral, that is, collateral eligible for discount at the Federal reserve banks. Under the Steagall bill, which has just been passed, it is provided in section 10 that in certain cases, until March 3, 1933, with institutions of less than $5,000,000, where there is no other collateral available, that they may loan on promisory notes secured to the satisfaction of such Federal reserve bank, which apparently enables a bank to regard notes secured by mortgage paper as eligible under those provisions, but there is no reason why sound mortgages should be relegated to the cat and dog provision under the Steagall Act. They are a sound investment, and there should be an institution where they can in normal times continuously be rediscounted. Personally I see no reason why the mortgage broker, and this represents the views of the officers of the National Association of Real Estate Boards, but I have not had time to discuss it generally-I see no reason why a provision should not be made in this bill by enlargement to take care of the mortgage broker under this bill by a provision, for instance, that there should be eligible for rediscount at this bank, in addition to mortgages, notes taken by member banks secured only or exclusively by eligible home loan mortgages. If that were done, it would mean-and this is in reply to your question, Mr. Chairman, as to what this could do for the individual mortgagee-it would mean that the individual mortgagee or the mortgage broker could take his mortgage for $10,000 to his bank, a member of this institution, and he could borrow $5,000, so that on that $10,000 mortgage, if the amendment that I suggest were made, that bank in turn could rediscount it with the Federal home loan bank for the sum of $5,000, because it would be not less than 50 per cent of the underlying collateral. The bank would have all of its money back, instead of

half of it, and the Federal loan bank would be secured as contemplated by the act now, and the broker would have gotten out 50 per cent of his investment as contemplated by the act.

Mr. REILLY. His bank would have to be a member of this organization.

Mr. MACCHESNEY. And, in turn, the Federal loan bank that we propose to set up would have 3-name paper instead of 2-name paper, namely, the signer of the mortgage, the broker, and the banker, so that it would increase the strength of the collateral and at the same time widen the base and give relief to the individual mortgagee which you spoke of yesterday, and I make this suggestion in order to meet that view, and you will find that suggestion following the Chairman's suggestion that something of that kind perhaps ought to be considered.

I checked through the Senate hearings, and I find at page 626 of part 3 a statement submitted by John A. Cutchins, of Richmond, Va., in which he says:

On pages 14 and 15, under the heading "Advances to members," it seems to me that there are several amendments which might well be considered, especially from the viewpoint of the home loan bank as a permanent part of our financial structure. Without attempting to supply the language necessary to carry into full effect the suggestions I shall make, it would seem to me advisable that instead of the original term of eight years or more, as indicated in line 5, on page 15, that there should be an original term of not more than 15 years, and I feel that there could be added to that paragraph a clause somewhat as follows: "or 90 per cent of the amount of the mortgage, should such amount be less than 60 per cent of the unpaid principal of the home-mortgage loan."

Then he says, skipping two or three paragraphs that are not material to this point:

I think there should be added, to the class of paper eligible for rediscount, short-term credits to banks on customer paper, based on real estate holdings, and it might be well to consider whether or not, even at this time, an enlargement of the scope of this rediscount privilege should not be provided; that is to say, it might be most helpful to business generally and to the operation of commercial banks to enable them to rediscount paper on small stores, say upto $10,000 of mortgage loan, which might not be in the class that would appeal either to the large insurance companies or to similar investors.

So far as an enlargement of the paper secured exclusively by home loan mortgages eligible for rediscount under the terms of the bill is concerned, we are prepared to say that we favor that enlargement in order to take care of the mortgage broker under those conditions. Mr. REILLY. Will you submit an amendment to the committee? Mr. MACCHESNEY. In exact language?

Mr. REILLY. Yes.

Mr. MACCHESNEY. Yes; I will be glad to do so.

With reference to the question of tax exemption, which is the second notation I have here as to the inquiries that you made, the language of the bill, of course, provides that there shall be tax exemption, and in order to bring that about there are two statements made, first that they shall be regarded as instrumentalities of the Government, and, second, that the bank shall be a depositary.

In response to an inquiry from Mr. Monks, of the Guardian Trust Co. of Cleveland, objecting to the fact that it was to be made an additional depositary, Senator Watson called attention to the fact that it was necessary in order to justify the statement that they

were to be governmental securities, instrumentalities of Government, and that he did not think that the banks would be harmed by that provision.

Of course, as to whether these securities should be tax exempt or not is a matter, first of policy, and second of practical fact. As to the policy, that policy was determined, so far as the public announcement of the bill was concerned, by the President of the United States, who favored tax exemption because he felt that as a practical matter, as I understand it, that without tax exemption at this time the bonds could probably not be sold in sufficiently large quantities. Mr. Luce can perhaps give the background of that better than I can, but I understand that it was fully discussed and it was felt that in order to float these securities and to make them attractive it was necessary at this time to make them tax exempt, and that inasmuch as we are faced now with a great emergency in a crisis, and inasmuch as we are setting up an institution which, private in form, is public in nature, the Government would be justified in giving this aid.

There was a question that was raised in the Senate hearing which I perhaps ought to dispose of here, and that was the question under section 11, which was dealt with on page 39 of part 1 of the Senate hearings, as to whether this carried with it exemption from taxation of the mortgages rediscounted. I do not understand that that is true. Certainly there is no intention on your part that it should be true, and I do not believe from the reading of the bill that it is true, because these mortgages are discounted and not sold and therefore the title does not pass, and I can not see how the taxexemption profit would carry over.

Of course, the whole question of tax exemption leading to probably somewhat extravagant expenditures because of the large amounts of money available for public purposes has been discussed widely, and one of the things that everybody has to consider these days is the cutting down of public expenditures, municipal, State and Federal. Nevertheless the esssential thing is to get this under way and establish this situation, and the tax exemption for securities of this kind, it seems to me, is much more justified than tax exemption of securities issued, for instance, for public works or things of that kind which carry securities in large amounts, municipal, State and Government, whereas this goes into an operating bank and the plan itself contemplates a gradual retirement by the Government of its money, so that the only support the Government is going to continue to give to it will be this tax-exempt privilege.

Mr. REILLY. This bill is based upon the Federal reserve act, I take it?

Mr. MACCHESNEY. Yes.

Mr. REILLY. The Federal reserve act provides that the Government gets some profit?

Mr. MACCHESNEY. I am going to deal with that next, the return on the Government's capital. So far as I know, and I speak for the officers of the National Association who are here, and we have discussed this matter very carefully-personally I see no reason, if the Government is going to advance up to $150,000,000, why the Government should not receive precisely the same dividend returns while that money is in there as the private investor. Personally I favor

it, and I think our people would have no objection to it, and I certainly would not quarrel with the committee if they were to strike out the provision which provides that no dividends shall be paid to the Government but that dividends shall be paid on all other stock. You will find that in section 5, subsection (k), on page 10 of the bill, reading as follows:

No dividends shall be paid on stock subscribed for by the United States, but all other stock of any Federal home loan bank shall share in dividend distributions without preference.

As far as I am concerned, as I say, I would not quarrel with the committee if they should amend that section to provide that all stockholders, including the United States Government, shall share in dividend distributions without preference.

I think that answers your question, Mr. Chairman.

Mr. REILLY. Yes.

Mr. MACCHESNEY. The fourth question of which I made a note is that the language with respect to the instrumentalities of Government is put in there to specifically lay the foundation for the tax exemption which I have already discussed.

Mr. REILLY. Have you given consideration to the fact that there might be something written in on that point after that to apprise the buyer as to just what that means?

Mr. MACCHESNEY. Well, now, let me say this. Of course, the people in this country have suffered terribly in depreciation of securities. I happen to be a trustee, among other institutions, of an institution that has approximately $1,000,000 of endowment. That endowment was invested by a finance committee consisting of a member of one of the leading investment houses of the United States, a leading banker of Chicago, a leading stock broker, and the head of one of the great industrial corporations of America, as well as a lawyer of some experience. Those investments show that the stocks have depreciated in value over a 24 months period of 75 per cent, that the bonds bought for that endowment fund have depreciated 42 per cent, and that the average depreciation of the investments of that fund of approximately $1,000,000 is 40 per cent under that kind of management.

I can take one of the great universities of the country, with approximately $75,000,000 of endowment, and point out to you that its shrinkage of investment prior to 1929 was less than 1 per cent, that on January 1, 1930, the shrinkage of investment was 3.5 per cent, that on January 1, 1931, the shrinkage of investment was 8.5 per cent, and that on January 1, 1932, its investment had shrunk 39.5 per cent.

Now, gentlemen, under those conditions, the fact that people have invested in Federal land bank securities and something of that kind and that those securities have shrunk in value is not surprising, and I do not think it necessarily shows that there is something wrong

about that.

Mr. REILLY. But that is not the question. Certainly they have shrunk, but the fact is that bankers have sold these bonds by particularly calling to the buyers' attention that they were Government instrumentalities, and by giving the people the idea that the Government was back of them.

Mr. MACCHESNEY. My experience has been, and I have had a good deal of it, that the average bond salesman does not know much about the bonds he is selling, and does not know what the language of the bill is upon which the securities are issued.

Mr. REILLY. What impression would an ordinary buyer get from an inscription or a legend, "Governmental instrumentality?"

Mr. MACCHESNEY. That does not ordinarily show on the bond. Mr. REILLY. I think it does.

Mr. MACCHESNEY. I think not. Anyway, Mr. Chairman, may I say this, that the word "Federal," if you get down to that, used in those cases, and here also, gives much more of an impression to the uninitiated and uninformed buyer. As a matter of fact, no honest banker, no intelligent bond man would pass these on as Government securities.

Mr. REILLY. Could not something be written in that bond, so that the man who reads it would know what he was getting?

Mr. MACCHESNEY. I would want to consult with the very competent draftsman who drafted this bill, but it might be possible to say— may I turn to that section there?

Mr. O'BRIEN. I do not think that, if you are going to do that, you ought to put it in the instrumentalities provision.

Mr. MACCHESNEY. Section 11, page 23, lines 16, 17, 18, 19, and 20, reads:

The bonds and debentures issued by each Federal home loan bank shall be deemed and held to be instrumentalities of the Government of the United States, and as such they and the income derived therefrom shall be exempt from Federal, State, municipal, and local taxation.

I have not considered what the effect would be upon the constitutionality of the tax exemption, but waiving that question for the moment as between lawyers, it might be possible to add a phrase there that they are not guaranteed by the Government and do not carry the direct obligation thereof. I do not think that that would affect it; I do not believe a statement that such is the fact would affect the constitutionality of it, but I have not gone into it. Have you, Mr. O'Brien?

Mr. O'BRIEN. If you wish to carry out Chairman Reilly's suggestion, why do you not put a provision in the section which deals with the issuance of bonds, prohibiting there being, on the face of the bond, any statement to the effect that the United States does guarantee the bonds or any statement reasonably calculated to convey that impression?

Mr. MACCHESNEY. That can be done, although I do not like the "reasonably calculated to convey that impression," because that is a very dangerous thing.

Mr. REILLY. Is it necesary to put that on the bond at all?
Mr. MACCHESNEY. No. You can provide-

Mr. REILLY. I may be mistaken, but my information is that that is right on those bonds, Federal land bank bonds and other bonds. Mr. MACCHESNEY. It is not on the outside of the bond.

Mr. REILLY. But, Mr. Witness, the sellers called the buyers' attention to the fact that they are Government instrumentalities in order to sell them. I have in mind one case where a man bought several thousand of these bonds from his bank and he was given the impres

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