Insurance companies, savings banks, and building and loan associations. The insurance companies and savings banks, for reasons that are best known to themselves, I think for prudential reasons, will have nothing to do with the system. The building and loan associations as a whole have had very little to do with the system. That is to say, if my information is not incorrect, 85 percent of building and loan associations of this country are not in the slightest degree interested in this system, are not affiliated with it.

Senator COUZENS. Is it not true, Mr. Hennessy, that some money was obtained from the Federal home-loan system that went to pay out money that the building and loan associations had rather than to sustain mortgages?

Mr. HENNESSY. That is true and I am speaking now with some knowledge of the operations of this bank system in the largest district in the United States. I come from the so-called "second district", where there are more home-loan mortgages than in all the rest, or at least as many I think as in all the rest of the continental United States. That statement is based, I believe, on estimates made by the late chairman of the Federal Home Loan Bank Board. I heard him make a statement equivalent to that.

At any rate, in that territory the loans that have been made by the Federal home-loan bank at Newark, the largest bank in the system, have been made largely, as I am informed-I hope this committee, with the powers at its command, may get the exact facts to building and loan institutions that were distressed because they needed the money to pay it over to banking institutions from whom they had borrowed funds, or were distressed because they were unable to meet the demands of their withdrawing shareholders. I assert that the great bulk of the funds loaned have not been employed for the purpose designed by you gentlemen when you passed this act; that is to say, for the encouragement of home ownership, or of home building or for the relief of distressed home owners. Generally, the money has been used for the purpose of enabling certain shareholders of these institutions to withdraw their funds and leave the remaining shareholders in the position of having to rely upon depleted resources out of which their claims might be paid.

Senator COUZENS. Have you any information of any other bank outside of the Newark bank? I have heard the statement about the Newark bank. Do you know of any other bank which has used their loans for that purpose?

Mr. HENNESSY. I am not in a position to say of my own knowledge, Senator Couzens, as to that. I am informed, however, that that is true of other banks in the system. I am particularly informed it is true of the bank at Des Moines.

Senator BULKLEY. Were these institutions in position to have refused to permit these withdrawals that you speak of?

Mr. HENNESSY. Absolutely. Under the theory of most State laws, Senator, there is provision that withdrawals may be deferred, and it is to the interest of the men who remain, of those who must remain, that such provision should be resorted to. In other words, I am quite sure this committee will agree it is an evil principle when men seek to withdraw from a mutual membership corporation that

the institution should be permitted to pledge its best resources in such ratio as is required under this act, in order to obtain money to pay out to persons who have no further interest in the maintenance of the institution and who leave only depleted resources for the satisfaction of the people who remain.

Senator BULKLEY. I believe you are right about that. Now, as to the other point, the obligations of these institutions, of lending financial institutions: Were they in position to defer those payments? Mr. HENNESSY. I am not quite sure, Senator, I get the meaning of that question.

Senator BULKLEY. You say the loans that the building and loan associations, the members of the home-loan bank have received from the home-loan bank, were used to pay for the borrowings and to permit their depositors to withdraw. We have just discussed the withdrawas by depositors. Now I am asking about the other purpose, the repayment of advances previously made by other financial institutions. Were the building and loan associations in position to have deferred those payments if they had not had the relief from the home-loan bank?

Mr. HENNESSY. The existence of the home-loan bank, Mr. Chairman, did not modify or change that situation in the slightest degree. As a matter of fact, the testimony that you are receiving as to the pressure upon home owners for the payment of their mortgages and so forth is very greatly exaggerated, in my opinion. I am speaking with some knowledge of what is happening in the savings banks in New York City, what is happening in the insurance companies, what is happening in the title guaranty companies, and what is happening in the savings and loan associations.

Senator BULKLEY. Yes, but let me put this question to you: If the institutions which had loaned money to the building and loan associations had pressed for payment and the building and loan had not had the home-loan bank to go to, would they not have been compelled to put more pressure on the home owners than they did? Mr. HENNESSY. I cannot see that point, Senator, with great respect, for the reason that I cannot see

Senator BULKLEY (interposing). I am only asking a question. I do not make any assertion on it.

Mr. HENNESSY. My answer is that I think that is an erroneous assumption; that is to say, if you are making that assumption, for this reason: If I am a distressed home owner and am unable to pay because I have no job, which is the trouble with 99 out of a hundred of distressed home owners, there is no use for you as the savings and loan association to bring any pressure to bear upon me unless you want my property. In 9 cases out of 10 the money lenders do not want the property, and therefore they extend reasonable consideration to every worthy person. That is going on all over this country. It is not only in New York; it is everywhere, in building and loan associations, in savings banks, and in insurance and title companies.

Senator COUZENS. I think Mr. Hennessy is quite right about that point, about paying off these banks. Every agency the Government sets up, such as the R.F.C. and the home-loan bank, is imposed upon by institutions or persons of power. One bank that I know of took a million and a quarter from the R.F.C. and they took all of their

collateral. They did it under the pressure of another bank that they owed a million dollars to, and they paid off the bank and left all of the depositors high and dry with their collateral gone. So that when we set up these agencies we have got to be cautious if the purpose for which they are set up is really protected. I agree that that has been done, just as the Senator from Ohio said, or that Mr. Hennessy said, and I think supported by the Senator from Ohio, that they have used pressure upon banks in the building and loan associations to get the money from the home-loan bank to pay themselves off instead of the home owners.

Senator BULKLEY. There is not any doubt about that.

Mr. HENNESSY. I have certain instances of that kind within my own personal knowledge, but I think if this committee today would require the Federal home-loan banks in the different districts to make report to you in such form as you might require, you will be able to definitely establish whether the sort of conclusion that I have arrived at is a correct one or not. My further point, however, is this, that the money that has been loaned by these Federal home-loan banks so far, has largely and almost exclusively been money out of the United States Treasury. It is not money, as designed by this act in the first place, that would be raised by institutions joining the system, putting up their quota of capital, then depositing mortgages, which would then be the basis of bond issues. If I am correctly informed, there have been no bonds issued, and the reason for it, which has a very grave bearing, I think, on this bill before you now, is that there is no market for such bonds.

Senator BARKLEY. Is your organization eligible for membership in the home-loan bank?

Mr. HENNESSY. Absolutely.

Senator BARKLEY. You have not taken advantage of it?

Mr. HENNESSY. No, sir. If my information is correct, out of 300 institutions in New York State there are not over 12 that have taken advantage of it.

Senator BARKLEY. Does that include all building and loan associations?

Mr. HENNESSY. In New York State; yes, sir. There are no insurance companies and no savings banks that have taken advantage of it in the State.

Senator BARKLEY. What territory does your district cover?

Mr. HENNESSY. It takes in the States of New York and New Jersey, Puerto Rico and the Virgin Islands. Just why we are tied up with the Virgin Islands I do not know.

Senator BARKLEY. It is an association of ideas, probably. Mr. HENNESSY. If so, it is an erroneous association, Senator. Senator COUZENS. I think that most people who have observed the developments after the home-loan bank bill was introduced and up to the present time will agree that the strongest promoters of it were the beneficiaries under the act, and we were, just as Mr. Hennessy says, carried away with the use of the word "home", which is a very inspiring word.

Senator BARKLEY. Of course, the same thing does not exist in the whole country. Take New Jersey and New York: If only 12 of your organizations in New York have taken advantage of it, there must have been a good many more in New Jersey.

Mr. HENNESSY. Oh, yes.

Mr. RUSSELL. The enabling legislation was just passed in New York only a few weeks ago, and Mr. Hennessy is well acquainted with that fact. They could not possibly have taken advantage of it until that was done.

Mr. HENNESSY. May I answer that?

Senator BULKLEY. Please answer that, yes.

Mr. HENNESSY. I think the gentleman is in error, because the solicitors of this bank-they have employed traveling solicitors to solicit people to come into the system, because there was no spontaneous demand for it-have been in the State of New York for months undertaking to get people to join as nonmember borrowers, which they are entitled to do under this act. And I heard the gentleman who has just spoken, in an address before a legislative committee in my State capital only a few weeks ago, dwell with almost tearful eloquence on the fact that a number of our associations in that State had borrowed money as nonmember borrowers of this system, and if the legislature did not pass this enabling act, why, his bank would just have to call the money.

Now as a matter of fact, it is true that they were endeavoring before the enabling act to obtain nonmember borrowers, which they were entitled to do under the terms of the act. And so it is quite irrelevant, as it seems to me, for the counsel for the system to say that they did not have an enabling act until a few weeks ago.

Senator BARKLEY. Did you oppose the enactment of the enabling act in New York?

Mr. HENNESSY. I certainly did, sir.

Senator BARKLEY. You are just opposed to this whole scheme? Mr. HENNESSY. I have been consistently opposed to it.

Senator BULKLEY. Mr. Hennessy, do you express the opinion that this bill 1317 will afford no real relief to the home owner?

Mr. HENNESSY. I am entirely convinced of that, Senator, and since this is probably the most important thing before you, may I try briefly to state my reasons?

Senator BULKLEY. Yes; I wish you would.

Mr. HENNESSY. The scheme set up in this bill is this: In the first place, there is to be a corporation created within the home-loan bank system, the Home Owners Loan Corporation.

Senator COUZENS. More jobs?

Mr. HENNESSY. There are going to be more jobs, and another bureaucracy set up.

Senator BARKLEY. That is what we have been talking about for the last three years, giving people more jobs.

Mr. HENNESSY. Yes, sir. The trouble is the jobs do not always go to the right people.

Senator BARKLEY. You ought to make some change in that now. Mr. HENNESSY. I do not know of any home owners that have gotten jobs or who have been benefited by the jobs that have been handed out in this Federal home-loan bank system.

Senator COUZENS. They are mostly promoters.

Mr. HENNESSY. And may I say that I am neither in need of a job nor a candidate for any sort of a job myself.

This Home Owners Loan Corporation is to be capitalized by the United States Government at once by $200,000,000 out of the Public

Treasury, and then they are to be licensed to issue $2,000,000,000 worth of bonds, tax-exempt, and the interest whereon is to be guaranteed by the United States Government. I think you asked, Senator Barkley, the last witness why the Government of the United States should guarantee this interest. It is quite impossible for me to answer the question because I do not know any good reason.

But quite aside from that fact, I am convinced, as one who has had considerable contact with the bond market in New York City, both as a purchaser and seller of bonds, that these bonds will not sell in the market at any price that will make them useful for the purpose for which they are designed. The purpose aimed at is that with these bonds you are going to be able to buy mortgages from necessitous mortgagees in order to relieve necessitous mortgagors. In my opinion, mortgagors, whether they be savings banks where the trustees' first duty is to protect their depositors, or whether they be savings and loan associations, the first duty of whose directors is to protect the interests of the great majority who are the savers in the institution-there is no such institution that will sell any of its mortgages to this corporation at any discount unless it is a bad mortgage that the corporation ought not to buy in any circumstances. It will simply mean, in the last analysis, unloading upon this corporation, and indirectly upon the Government of the United States, the "cats and dogs " of the mortgage business in this country. It cannot mean anything else.

To illustrate: May I suppose you were president of one of these lending institutions having first regard to the interests of your depositors or shareholders, and you have a $5,000 mortgage upon the home of some distressed person who could not pay his interest or meet his obligations to your institution. Then this Home Owners' Corporation comes to you to buy that mortgage, and to offer you $4,500 for it. You might very well consider it, because you know a good deal more about this mortgage than the fellow who is trying to buy it from you. You might very well say, "Well, I will take $4,500. When do I get the money?" The answer is: "We'l, you do not get the money. You just get our bonds. They are good bonds. They are guaranteed as to interest payment by the Government of the United States."

Well, I think the first thought in your mind, Senator, will be, "What can I get for these bonds in the open market? What is likely to be the marketability of these bonds?" And I submit, after discussing this matter with some substantial people in New York City, that there is the gravest doubt that those bonds will have any substantial market at all as they are set up in this act. And if that be true, then this proposed system falls to the ground; it proves to be a futility.

Now may I say this-and I have given some reflection to this problem over a great many years; I have been some 45 years associated more or less officially with this home lending business-that the trouble with the distressed home owner today is something that you cannot correct by this type of legislation. My experience in dealing with that person-and I have dealt with quite a number of them is this: that his troubles are due to one of two causes: First, during the great real estate boom that extended in this country from