tutions which are in distress, provided such authority is made a part of our permanent statute law and provided, further, that such authority is used only in cases of emergency. If such a function is to be performed by an agency of the Federal Government, we believe it should be vested in a permanent agency and should be permanent legislation in order to avoid the necessity for hurried enactment at a critical time. Moreover, only if the authority is made permanent will its very existence on our statute books engender that level of public confidence in our banks which will serve to prevent the very crises which give rise to the necessity for such financial assistance.

We considered the advisability of recommending that such authority be vested in the FDIC, but have concluded that a bank examining or insuring agency should not, at the same time, have the function and authority to become a stockholder in the very institutions which are examined or insured by it. We believe it is fairly apparent why a combination of such authorities and functions is inimical to a soundly supervised private banking system.

The letter from Mr. Dineen, relating to the purchase of preferred stock of insurance companies, concludes as follows:

In addition to loans and purchases of preferred stock, the Reconstruction Finance Corporation has aided over 100 insurance companies through direct collateral loans. These, however, serve only to improve the liquidity of a company. A loan will not help a company meet the statutory requirement that it maintain its capital unimpaired, since both the law and sound accounting require an insurer to establish a liability for borrowed money equal to the proceeds from any loan it may obtain. The preferred stock device permits increases in both capital and surplus; the stock is sold directly to the RFC or, where such an outright purchase is not possible under the powers of the RFC, is sold to a holding company created for the purpose, for a price and at a par value which will accomplish the desired result; if sold to a holding company, that entity then borrows the necessary funds from the RFC, pledging the preferred stock as collateral to its note. In either event, the plan contemplates that dividends on the preferred stock will enable the holding company to meet interest obligations on its note, or will be paid directly to the RFC if it is the stockholder of record.

For the reasons advanced we recommend that the Reconstruction Finance Corporation again be vested with authority to assist insurance companies through the preferred-stock medium. Today, in spite of inflation and the problems which that inflation has created in insurance, the business is generally sound and we look forward to the maintenance of that position. But no one can guarantee that our general economy-and with it the insurance businesswill not again be confronted with times of stress, whether these be the stresses of deflation or greater inflation. If that happens, it seems to us of the utmost importance that the RFC be empowered, as it was in the depression, to cope with the emergency through the preferred-stock device.

Through the wise use of its powers in the past, the Reconstruction Finance Corporation has kept intact many large and small units of the insurance business. In so doing, it has preserved that part of our private enterprise system, for, as we have shown, the alternative to any considerable default by private companies would most probably be a demand for a system of Government insurance. From a business point of view, it cannot be overlooked that, except for small remnants still outstanding, the many millions which the Reconstruction Finance Corporation advanced to the business as a consequence of the depression have all been repaid. Most important of all, the assistance so rendered was unobtainable from any other source, and if the RFC had not been empowered to act, the many tragic consequences to which we have referred would surely have followed.

Copies of these letters are attached hereto, and with the permission of the chairman, I should like to have them incorporated in the record of this hearing.

Mr. TALLE. Mr. Chairman, might I ask a question?

The CHAIRMAN. Mr. Talle.

Mr. TALLE. In the event that a bank borrows from the RFC, or rather sells to the RFC preferred voting stock, and later stands ready

to repay the loan or buy the stock back, is Reconstruction Finance Corporation willing to sell?

Mr. GOODLOE. Absolutely. As a matter of fact, we are urging the banks to retire their preferred stock and capital debentures as rapidly as possible. During last year's hearings before this committee you may recall that we put in the record, at that time, letters which we had addressed to the Chairman of the Federal Deposit Insurance Corporation, the Chairman of the Federal Reserve Board, and the Comptroller of the Currency saying that it was the desire of the Corporation to have the banks retire their preferred stocks as rapidly as possible and asking their cooperation in watching the banks under their supervision, urging them to do that whenever, in their opinion, the banks could justify doing it.

As you perhaps know, the increase in bank deposits during the last few years was so rapid and so large that the supervising authorities were a little reluctant, in many cases, to permit such retirements unless the capital was replaced by the issuance of common stock because they were anxious to preserve as favorable a ratio as they could between deposits and capital and surplus.

Mr. TALLE. Do you recall any case in which a bank wanted to buy its stock back and the Reconstruction Finance Corporation required of that bank that it get the approval first of the State banking department of the State where the bank was located?

Mr. GOODLOE. I believe, sir, that that is a requirement in all cases. I am sure it is with respect to the national banks.

Mr. TALLE. Is that requirement a condition set-up by the Reconstruction Finance Corporation?

Mr. GOODLOE. I am not altogether clear as to whether that is a specific requirement of our loan transaction with the bank. As a practical matter, though, the result is the same.

In other words, the bank, before it retires its capital notes with Reconstruction Finance Corporation, usually goes to the supervisory authority and comes to us with its approval. Or, if they do not get that approval, they rarely come to use. In those rare cases where they come to us without that approval we then take the matter up with the supervisory authority for the purpose of ascertaining if that bank can and should, in its best interest, retire the capital stock without jeopardizing its situation. If so, we are very glad to have it retired.

On the other hand, if it is going to jeopardize its situation, the supervising authority would be opposed to it, and I would say that in nearly all cases its views would prevail.

Mr. TALLE. Might I have a letter on that stating whether that is a standard requirement by the RFC?

Mr. GOODLOE. Certainly.

Mr. TALLE. A letter for the record.

Mr. GOODLOE. Certainly.

(The letter above referred to is as follows:)

RECONSTRUCTION FINANCE CORPORATION,

Washington, April 22, 1948.

Hon. JESSE P. WOLCOTT,

Chairman, House Committee on Banking and Currency,

Washington, D. C.

DEAR MR. WOLCOTT: With respect to the question that Congressman Talle asked me at the hearing this morning whether Reconstruction Finance Corporation in

all cases requires the consent or approval of the supervisory authorities to the redemption or retirement of capital notes, debentures, or preferred stock held by this Corporation, you are advised as follows:

The approval of the Comptroller of the Currency with respect to national banks is set forth in the articles of association of national banks to meet the requirements of section 51b, chapter 2, title 12, U. S. C. A., which reads in part "and such stock shall be subject to retirement in such manner and upon such conditions as may be provided in the articles of association with the approval of the Comptroller of the Currency."

With reference to insured nonmember State banks, retirements and redemptions are controlled by subparagraph (4) of paragraph (v) of section 264, chapter 3, title 12, U. S. C. A. (statutory provisions relating to Federal Deposit Insurance Corporation which reads in part "and no insured State nonmember bank (except a District bank) without such consent shall reduce the amount or retire any part of its common or preferred capital stock or retire any part of its capital notes or debentures," the consent referred to being the consent of the Federal Deposit Insurance Corporation.

With reference to State member banks, the extent of the control exercised by the Federal reserve bank depends upon whether such condition was imposed by the Federal reserve bank at the time the State bank was admitted to membership. The result is that in all except a few instances, approval of the Federal Reserve bank is a condition precedent to the retirement of preferred stock or the redemption of debentures or capital notes.

With reference to the approval of the State supervisory authorities as a condition precedent to making retirements, you are advised that the rule is determined by the statutory provisions of the respective States and the interpretation placed thereon by the State supervisory authorities.

In several of the States in the early days of the preferred stock program the position was taken by some State supervisory authorities that since a retirement of preferred stock was equivalent to a reduction of capital stock that such retirements could not be made without an amendment to the charter of the bank in connection with each retirement. In most of the States the position is now taken by the State supervisory authorities that retirements and redemptions can be effected only after approval of the State supervisory authorities. With kind personal regards,

Sincerely yours,

JOHN D. GOODLOE, Chairman.

Mr. TALLE. Also, may I ask you if you will restate what you stated earlier—namely, that you require of some banks that they issue additional common stock in the same amount as the preferred stock that you hold when the RFC stock is retired through purchase by these banks?

Mr. GOODLOE. No, I did not mean to imply that Reconstruction Finance Corporation required that, but that in many instances the State supervising authority, or the Comptroller of the Currency, with respect to a national bank, will permit them to retire their preferred stock to RFC only if they sell enough common stock to make up the difference in the capital structure.

Mr. TALLE. And that condition has grown out of the fact that deposits have multiplied so rapidly?

Mr. GOODLOE. That is my understanding; yes.

It might be well to insert at this point in the record a letter I wrote to Mr. Fink on April 4, 1948, which has a tabulation showing the progress made since last June, when this committee looked into it, with reference to the liquidation of the RFC's investment in preferred stock, debentures, and capital notes of banks, and also a form of letter which we have recently sent to a great many of the banks which still have outstanding preferred stock, and on the basis of our records, the banks ought to be in a position to make a substantial retirement. I would like to insert both of those letters in the record.

75015-48- -2

Mr. TALLE. I ask unanimous consent, Mr. Chairman, for the insertion of those letters in the record.

The CHAIRMAN. Without objection, that will be done.

(The letters above referred to are as follows:)

Mr. ORMAN FINK,

House Committee on Banking and Currency,

House Office Building, Washington, D. C.

APRIL 1, 1948.

DEAR ORMAN: In our recent telephone conversation you will recall you evidenced considerable interest in the progress that had been made since last June in the liquidation of RFC's investment in preferred stock, debentures, and capital notes of banks and I explained to you the steps we had taken in connection with the supervisory authorities. Enclosed is a little summary report which I think shows that substantial progress has been made.

APRIL 12, 1948.

Mr. ORMAN S. FINK,

House Committee on Banking and Currency,

House Office Building, Washington, D. C.

DEAR ORMAN: Suplementing my letter to you of April 1 regarding the liqui dation of RFC's preferred stock, debentures, and capital notes of banks, this is to advise that we have decided to send to quite a number of such banks a letter in substantially the following form:

"In conection with the program to strengthen the capital structure of the banks of the Nation in 1934, this Corporation purchased $ debentures of your institution. Our records indicate that $

bentures on

was paid on account of the deand that no further redemptions have been made by you. "We are cognizant of the fact that you have set up a $ reserve for the redemption of the debentures, which mature on We feel, however, that the time is opportune to give consideration to a program to effect the redemption of these debentures and earnestly suggest that you contact the Federal Deposit Insurance Corporation and the State banking department for the purpose of ascertaining their requirements for the redemption of the debentures held by this Corporation.

"We shall appreciate receiving your reaction to this suggestion, together with an outline of any plans formulated or proposed by your institution looking to the redemption of your debentures."

Sincerely yours,

Mr. MCMILLEN. May I ask a question?
The CHAIRMAN. Mr. McMillen.

JOHN D. GOODLOE, Chairman.

Mr. McMILLEN. What is the phraseology of the limitations of the Reconstruction Finance Corporation, in purchasing this preferred stock? What is the real limitation there? How is it described?

Mr. GOODLOE. The original statutory provision, as I recall it, authorized us to buy preferred stock in banks or insurance companies only if the Secretary of the Treasury certified that the institution needed adidtional capital, either to continue or to reorganize.

Mr. McMILLEN. Do you not think that greater care should be taken in the use of that authority so that it is used only for strictly emergency purposes, such as it was before, and that that should be definitely stated?

Mr. GOODLOE. Absolutely. As a matter of fact, the original authority was given during the national banking crisis back in the early thirties and was an emergency power at the outset, and was so phrased.

I do not recall any instances in which we have been called upon to purchase preferred stock or capital debentures in banks for a good many years, and only one with reference to an insurance company in the last 7 or 8 years. So it is a stand-by power which is intended to be used, and would only be used, in the event of an emergency of

some sort.

The CHAIRMAN. You may proceed, Mr. Goodloe.

Mr. GOODLOE. Paragraph (3) of subsection (a) of section 4, which authorizes RFC to make loans to aid in financing public projects, would be amended to permit the extension of such aid to States as well as to municipalities and subdivisions of States, as is presently provided in the section.

The provisions of the present subsection (b), which state the restrictions and limitations upon RFC loans, remain as they are, but are redesignated subsection (b) (1) and new subsections (2), (3), and (4) are added. Subsection (2) provides that RFC loans except catastrophe loans-shall bear an interest rate reasonably calculated to enable the Corporation to operate without a loss. It also provides