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Mr. BODFISH. We have signed no consents in our own association unless the man was unemployed or merited relief. If he is just a chiseler we see to it that he pays his obligation.

The CHAIRMAN. You may proceed.

Mr. BODFISH. I believe we had gone on to title II, and we hope the committee will strike that from the bill rather than establish national mortgage associations to roam up and down the land, because it is the considered judgment that you will regret it if you do it.

Senator GORE. It parallels pretty much the joint-stock land banks, doesn't it?

Mr. BODFISH. There is nobody who can organize one except one who has a lot of mortgages or some New York title company.

You have to have $5,000,000 of capital.

Now, passing to the Federal Savings & Loan Insurance Corporation

The CHAIRMAN (interposing). That is title III, isn't it?

Mr. BODFISH. Yes, sir. The first amendment I want to bring to the attention of the committee is on page 21, lines 16 to 22. We propose to strike out that paragraph and insert, instead of it, the following language

Senator WAGNER (interposing). Are you connected in an official capacity?

Mr. BODFISH. I left my duties in Chicago, not only in the Northwestern University but my business connections at the time when the original home loan bank act was drafted, and had some part in setting it up. I was a member of the original board.

Senator WAGNER. You were a member of that board ?

Mr. BODFISH. I was the only Democratic member, and I am very happy to be back in Chicago.

The CHAIRMAN. You may proceed.

Mr. BODFISH. Gentlemen of the committee, this Federal Savings & Loan Insurance Corporation plan is a very important and vital thing. There was some difference of opinion on it, but we have decided that on account of the flow of savings away from the longterm investment institutions, such as ours, that we will have to have some sort of similar protection just in order to answer the public psychology until we get back to normal functioning. Checks that come back from withdrawing shareholders quite frequently now in increasing numbers come from savings deposits of insured banks or postal savings. So we have the unwitting fact of guaranteed bank deposits pulling funds away from the long-term investment field and putting them into commercial bank vaults, where they are inactive at the present time. We hope this will tend to bring the flow back and help to furnish money for home financing.

Senator GORE. I have not read the bill, Mr. Bodfish, and I wish you would tell me what is the point in this.

Mr. BODFISH. I do not know whether I better tell you about it or not.

Senator GORE. Well, I have my suspicions.

Mr. BODFISH. It is to establish for the thrift and home-financing institutions a Government corporation similar to that provided for banks in insuring the repayment to investors within a reasonable time. In other words, the proposal is that building and loan asso

nerves.

ciations, such as care to, will contribute an annual premium to a common fund, such premium to be sufficient to more than cover any experienced losses we have had.

Senator GORE. Would there be any reason why they could not organize and go ahead without being federally placed ? Pardon my

Mr. BODFISH. Well, Senator Gore, that is a hard question. I think they could. As a matter of fact, one State has done it-Massachusetts. It has organized a State guaranty of building and loan investments.

Senator GORE. Has it succeeded?
Mr. BODFISH. It was just organized 3 or 4 months ago.

Senator GORE. Why not admit that there is something left in the universe that a State can do? It is a rather violent assumption, no doubt.

Mr. BODFISH. Well, Senator Gore

Senator GORE (continuing). I see you still have some remnants of your democracy left.

Mr. BODFISH. My mother was a Cleveland, and that is the kind of democracy I think.

Senator GORE. Well, we will get off together some time and have a

talk.

Mr. BODFISH. I should like to make this statement in fairness to both of our previous remarks. There are two theories about recovery. One is that natural forces can do it and the other is that the Government can do it. We have embarked upon a plan that the Government shall do it, and we are encouraged so far.

Senator GORE. Well, I am afraid you are getting away from the old landmarks now. Isn't this a sort of Government necromancy, and isn't it undertaking to do everything! Won't every other agency in the country be like those mammals that have rudimentary muscles, when they cease to use them they cease to function!

Senator WAGNER. Mr. Bodfish, are there any economists who seriously believe that in March a year ago we should have sat down and done nothing by way of stopping the situation?

Senator GORE. But if you go back to an earlier time and make a better start, and there never had been created the conditions that you have to adapt yourself to, it would be different. If a man stabs himself in the breast, of course, he needs medical attention.

Mr. BODFISH. I will make one onswer to that question and then will revert to our amendment. As an economist I think the Government had a distinct responsibility on March 4 because our principal problem was the weakest commercial banking system in the world, which had been developed largely by the Government and under Government sponsorship, and there was no other vehicle for stopping the situation which was developed.

Senator WAGNER. We had 15 million people out of work at the time.

Mr. BODFISH. That is true.

Senator WAGNER. And the resources of the most of them were gone.

Mr. BODFISH. If we had had a sound-credit structure in this country we would not have had half of that unemployment, in my judgment.

Senator GORE. You had 15 million unemployed, which was tragic, but you are developing a class of leaners on the Government which is no less tragic.

Senator WAGNER. I prefer guidance and assistance to going to the dole. We cannot let people starve.

Mr. BODFISH. That is true.
Senator WAGNER. And you should not permit that.
Mr. BODFISH. No; certainly not.
Senator COUZENS. Let us go on with our consideration of the bill.
The CHAIRMAN. Yes. Let us proceed.
Mr. BODFISH. On page 21 of the bill-

Senator GORE (interposing). I infer from that remark that Senator Couzens has no occasion to appeal to the dole.

Senator COUZENS. That is a violent assumption.

Mr. BODFISH. On page 21 of the bill, lines 16 to 22, we propose to strike out that section and insert the following language, and if I may I will read the language and then explain it. This relates to the management of the Federal Savings & Loan Insurance Corporation

Senator GOLDSBOROUGH (interposing). On page 21, section (b) ?

Mr. BODFISH. Yes. In the present bill it is placed in the Federal Home Loan Bank Board. That Board has a 21/2 billion dollar Home Owners' Loan Corporation on its hands. The Federal home-loan bank system, the Federal savings and home-loan system

Senator GORE (interposing). What was that?

Mr. BODFISH. The bill proposes that the management of this Federal Savings and Loan Insurance Corporation shall be placed in the hands of the Federal Home Loan Bank Board. That Board of five men already has the Federal home-loan bank system. This is a job in itself in my humble judgment.

Senator GORE. Have you ever considered the advisability of guaranteeing all open accounts on the part of merchants, by the Government?

Mr. BODFISH. Senator Gore, let me say that now our proposal is that that Board has already got more than it can carry. It has a 21,2 billion dollar relief operation which will run for years. They have the Federal home-loan bank system with 12 banks, with approximately 100 million dollars capital out. They have the Federal Savings and Loan Association. They have started about 300 of these associations very similar to the old

Senator GORE (interposing). To the little banking concerns with Federal charters.

Mr. BODFISH. Yes; our thought is that this guaranteeing of building and loan investments is a very delicate and vital thing. They must examine a large number of institutions, and they will have to see that these 2,000 or 4,000 are perfectly safe places for the public to put their money. We are going to insure their accounts up to $2,500 or $5,000. Our thought is that while the management of that thing should be tied in with the Federal Home Loan Bank Board, which runs the reserve credit of those institutions, that there should be a couple of men responsible to the Congress and the President of the United States to handle that business. Our suggested amendment is as follows:

The management of the Insurance Corporation shall be vested in a board of trustees consisting of three members, one of whom shall be the Chairman of the Federal Home Loan Bank Board and two of whom shall have had five years' experience in thrift and home-financing institutions and who shall be citizens of the United States to be appointed by the President of the United States by and with the advice and consent of the Senate. The President shall designate one of the appointed members as Chairman of the Trustees and not more than two members of the Trustees shall be members of the same political party. After this Act takes effect the President shall delegate one of the said appointed members of the Trustees for a term of three years and the other for a term of six years and their successors shall be appointed for terms of six years. Any vacancies shall be filled for the unexpired terms. Each appointed Trustee shall receive compensation at the rate of $10,000 per annum, payable monthly out of the funds of the Insurance Corporation, but the Chairman of the Federal Home Loan Bank Board shall not receive additional compensation for his services as a Trustee.

That follows the theory and thought and language largely of the management of the Federal Deposit Insurance Corporation covering the banks. We feel that that will tie in and still give this very important responsibility to a couple of outstanding citizens.

The next amendment I wish to offer is on page 23 of the bill

Senator GOLDSBOROUGH (interposing). That is in place of the figures “ $2,500 ”?

Mr. BODFISH. Yes; the people who saved their money in building and loan associations are mainly the folks who decide on saving by means of a program of $10 or $25 or $50 a month in anticipation of a home purchase, or the accumulation of a fund for some proper purpose. Also, in many of our associations borrowers do not pay directly on their loans but accumulate share credits. That is true of Pennsylvania, New Jersey, and many other States. The share accounts are a real risk to the borrower because what he is doing is accumulating a sinking fund which will ultimately cancel out his loan.

There were some earlier conferences on this bill, and the banking commissioner of Pennsylvania thought, especially on account of the interest of the borrower, the insurance limit should be at least as much as $5,000. The most of our loans run from $3,500 to $4,000.

We therefore suggest that the surety amount be placed at $5,000 rather than at $2,500. I think there is some distinction in the insurance here that is decidedly real, and that $5,000 would be sufficient.

Senator COUZENS. What about the premium?

Mr. BODFISH. Senator, the way the bill is drawn there are enough premiums to pay 10 times the losses that have ever been experienced by all the building and loan associations put together. Of course the amount of premium we are suggesting should go on a true insurance basis. We feel institutions should pay an annual premium and altimately accumulate a 5-percent fund, and then the premium ceases. That comes up in the next amendment that I desire to suggest as a graded premium.

In other words, take the building and loan association in Canton, N. Y., Senator Wagner. It has accumulated about a 9-percent reserve over a period of 30 or 40 years. That means extremely prudent management of a cooperative institution. I do not mean a liquid reserve or secondary reserve; I mean a true surplus. Our thought is that that institution has provided a substantial amount of its own insurance. If it should be taken over by Mr. Broderick tomorrow morning there would be little possibility of the insurance company's having to underwrite any losses. Therefore we are proposing a lower premium for an institution that has more than a 5-percent real reserve, as determined by examination of the insurance corporation. We like to have an incentive to accumulate a substantial reserve. I think that would have been a sound principle to have embodied in the banking-insurance legislation. If you could have recognized an exceptionally strong bank and considered that it was not responsible for the situation as much as this much more risky institution down the street

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Senator WAGNER. Where you make an approval of a mortgage to the Home Owners' Loan Corporation and you do not get the full face value of the mortgage in the way of a return, and where you have got to reduce your principal, how do you handle that?

Mr. BODFISH. The associations the country over have accumulated, I would say, about a 242 to 3 percent real reserve, and we have had to take loans on H.O.L.C. bonds, inasmuch as we charge them out of these contingent reserves. That is what we build them up for.

Senator WAGNER. Yes; I do not criticize you at all. It is fortunate to have that reserve to meet contingencies.

Mr. BODFISH. We feel that the graded-premium idea recognizes good management and gives an incentive to the weaker institutions to build up their surplus position and that it is a sounder and more sensible proposition than the blanket plan provided in the bank proposal.

Senator WAGNER. And, as I understand it—perhaps you know more about it than I do—they set up no reserve of any kind, or a very slight one.

Mr. BODFISH. They do another interesting thing: They try to guarantee 50-percent mortgages conservatively made on one half of 1 percent per year. I think the results there are the most eloquent testimony in opposition to attempting to establish that guaranteed mortgage scheme. Here is the fundamental of money loaning that it violates: Under that set-up which is proposed here, when they make a mistake it goes on from the insurance corporation to the Government. Any time in history when we have people lending money and they get their remuneration from lending money and not collecting it back, they get into trouble. That is an exact common-sense proposition that they will dump that guaranteed mortgage scheme sooner or later. They have the responsibility of collecting it back at the end, because they get their capital by dumping it on to the insurance corporation, and you will get some rather fantastic loans.

The next amendment is on page 24, a very brief one, lines 7 and 8. The idea of this insurance, as Mr. Friedlander pointed out, is not to insure liquidity or payment on demand of an institution when it defaults. The only time insurance is paid is when the institution is taken over either by a court or some other public official. This proposal is that when it is taken over the investor who has a $5,000 account be given, out of the working capital of the Insurance Corporation, 10 percent right on the nose so that he has got something to satisfy him and tide him along. That is, to give him a debenture

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