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The CHAIRMAN. We are very happy to have with us this morning Mr. John D. Goodloe, Chairman of the Reconstruction Finance Cor poration.
Mr. Goodloe, we will be very pleased to have you proceed.
I may say at the outset that we should try to close the public hearings and start reading this bill in executive session, if at all possible, by Monday, so that we may be able to get action on it sometime next week.
You may proceed, Mr. Goodloe.
STATEMENT OF JOHN D. GOODLOE, CHAIRMAN, BOARD OF DIRECTORS, RECONSTRUCTION FINANCE CORPORATION
Mr. GOODLOE. Mr. Chairman, you will recall the thorough and extensive hearings on the Reconstruction Finance Corporation held by this committee in May and June of 1947. Under the provisions of the Reconstruction Finance Corporation Act as then in effect, the succession and the powers of the Reconstruction Finance Corporation would have expired on June 30, 1947. As the chairman of this committee stated in opening those hearings on May 19, 1947, it was the purpose of the hearings to obtain as much information as possible with respect to the creation of the Reconstruction Finance Corporation, how it was controlled by the Government and how it operated in order to determine just what powers the Reconstruction Finance Corporation should have.
Because of the many powers and responsibilities which had been granted to the Reconstruction Finance Corporation by numerous separate statutes designed to meet a variety of problems which had emerged over a period of 15 years including periods of economic depression, preparation for war, war, and postwar activities, the task facing this committee last year was a difficult and complex undertaking, which had not previously been attempted by the Congress. The work of this committee in May and June of last year resulted, for the first time, in a searching and informative survey of the basic powers and operations of the Reconstruction Finance Corporation, thus providing a reliable basis for determining whether the Reconstruction Finance Corporation should be extended beyond June 30, 1947, and, if so, with what powers and limitations. Following the hearings, this committee reported a bill-H. R. 3916-which, in substance, was enacted by the Congress and approved by the President on June 30, 1947. This enactment, which became Public Law 132, eliminated those powers of the Reconstruction Finance Corporation which were designed especially for use in time of war or preparation for war, repealed numerous provisions of law which had become obsolete, extended the succession and certain powers of the Reconstruction Finance Corporation until June 30, 1948, and brought together in one brief concise act substantially all of the provisions of law relating to the Reconstruction Finance Corporation.
In December 1947, a special subcommittee of the Senate Committee on Banking and Currency, with Senator Buck as chairman, commenced its hearings pursuant to Senate Resolution 132, Eightieth Congress, first session, which authorized and directed the Senate Committee on Banking and Currency or a duly authorized sub
committee thereof, to conduct a full and complete inquiry into the operations of the Reconstruction Finance Corporation and its subsidiaries and to report its findings together with recommendations for such legislation as it might deem advisable, at the earliest practicable date. With the valuable assistance of Mr. Lewis M. Stevens, who served as counsel and executive director, the subcommittee proceeded to make a thorough and objective study of the Reconstruction Finance Corporation and its operations. Public hearings were held in December 1947, and January 1948, and the committee filed its report, Senate Report No. 974, on March 10, 1948. At the same time Senator Buck, from the Committee on Banking and Currency, reported a bill (S. 2287) to amend the Reconstruction Finance Corporation Act, as amended, which passed the Senate on April 6, and is now under consideration before this committee.
It is my understanding that the primary purpose of my appearance here this morning is to describe the changes which S. 2287 would make in the existing law. Generally speaking, the Senate Committee on Banking and Currency adopted Public Law 132, enacted last year, as the basic framework for the Reconstruction Finance Corporation legislation. I think that it is fair to say that S. 2287 proposes very few changes of a fundamental nature. For the most part, it would add a few refinements to the existing act and would clarify some phases of Public Law 132 which needed clarification. Accordingly, I propose, in the remainder of this statement, to describe as clearly as I can the amendments adopted by the Senate in S. 2287.
Section 1: This section amends section 1 of the Reconstruction Finance Corporation Act, designating the existing provisions as subsection (a), and adding new subsections (b) and (c).
The existing provisions of section 1 provide for capital stock of the Corporation in the amount of $325,000,000. Under S. 2287, this would be reduced to $100,000,000.
The new subsection (b) calls upon the Reconstruction Finance Corporation to submit to the Congress an annual report of its operations, including a balance sheet, a statement of income and expense, an analysis of accumulated income or deficit, and a schedule showing the names of borrowers to whom the Corporation has extended financial assistance in the amount of $100,000 or more, whether in the form of a direct loan, a purchase of a participation, an agreement to participate, or a purchase of an investment or obligation. This subsection, in effect, requires the Reconstruction Finance Corporation to submit in somewhat different form substantially the same information as was submitted pursuant to law for the years prior to July 1, 1947. Subsection (b) contains an additional provision which requires the Corporation, beginning with the fiscal year ending June 30, 1948, to pay to the Treasury as an annual dividend the amount by which its accumulated net income exceeds $50,000,000. As set forth in Senate Report No. 974, the Senate Banking and Currency Committee concluded that the Corporation should be allowed to retain some of its accumulated net income to act as a buffer against future losses which might impair its capital, and that $50,000,000 is a reasonable amount for it to retain, since the Corporation had $1,331,000,000 outstanding on its various loan categories on June 30, 1947.
Section 2: This section amends section 2 of the Reconstruction Finance Corporation Act in the following respects:
1. The office of director of the Corporation is made a full-time position, whereas the present law provides only that each director shall devote his time "principally" to the business of the Corporation. As a matter of fact, the directors have devoted full time during the entire time I have been connected with the Corporation.
2. The terms of the present directors are extended to June 30, 1950, to make their terms of office coextensive with the Corporation's fiscal year.
3. Provision is made for staggering the terms of the directors beginning with July 1, 1950. Thereafter, the term of office would be 3 years instead of the present 2-year term.
4. It is provided that the President shall designate one of the directors as Chairman to serve for a period coextensive with his term as director.
Section 3. This section amends section 3 (a) of the Reconstruction Finance Corporation Act by extending the succession of the Corporation from June 30, 1948, to June 30, 1960, with the powers of the Corporation extended to June 30, 1958. The 12-year extension in succession was provided in order that the Corporation may be able to give assurance of extended employment to competent personnel, while the powers of the Corporation are limited to 1958 to insure that Congress will review the entire matter at that time.
A new provision in section 3 (a) is added to clarify the law with respect to the position of the Reconstruction Finance Corporation as a claimant in bankruptcy. Under recent United States Supreme Court decisions, it appears that the Reconstruction Finance Corporation may be entitled to the same priority in bankruptcy which is enjoyed by the United States. The amendment provides that the Reconstruction Finance Corporation shall not have this priority with respect to the recovery of funds advanced under its regular lending operations, but would be entitled to the priority with respect to obligations owed to the Reconstruction Finance Corporation as a result of its wartime activities under sections 5d (1) and 5d (2) of the Reconstruction Finance Corporation Act; certain sections of the Smaller War Plants Corporation Act; section 2 (e) of the Emergency Price Control Act of 1942; the Surplus Property Act of 1944; sections 11 and 12 of the Veterans' Emergency Housing Act of 1946, and section 403 of the Sixth Supplemental National Defense Appropriation Act, which relates to renegotiation of war contracts.
Section 4. This section amends section 4 of the Reconstruction Finance Corporation Act which, as you know, relates to the Corporation's basic lending powers. The statement of purposes, as set forth in the introduction to subsection (a) of section 4 is amended by adding the phrase "to encourage small business" in order to make it perfectly clear that the Reconstruction Finance Corporation aid is intended to be available to small business.
Mr. PATMAN. Which paragraph did you refer to, Mr. Goodloe, having reference to small business?
Mr. GOODLOE. Section 4 (1), page 6.
Mr. PATMAN. Mr. Chairman, may I ask about this particular section?
The CHAIRMAN. Yes.
Mr. PATMAN. When the Smaller War Plants Corporation was dissolved, the lending powers went to the Reconstrutcion Finance Corporation, did they not, Mr. Goodloe?
Mr. GOODLOE. That is correct, sir.
Mr. PATMAN. And the other powers went to the Department of Foreign and Domestic Commerce, or to the Commerce Department? Mr. GOODLOE. They went to the Commerce Department.
Mr. PATMAN. Did you get any of the personnel, Mr. Goodloe, from the Smaller War Plants Corporation?
Mr. GOODLOE. Yes; we got a limited amount of personnel. We got not only the lending functions of the Smaller War Plants Corporation, we got the small business purchase priority with respect to surplus property which was originally provided under section 18 (e) of the Surplus Property Act.
Mr. PATMAN. Yes. Now, as to the staff which went to the Department of Commerce, do you not think it logically belong in the Reconstruction Finance Corporation, so that you might coordinate your efforts in some way?
Mr. GOODLOE. Well, now, our efforts have been coordinated. We set up, just before or just after we got the functions of the Smaller War Plants, a Small Business Division in the Reconstruction Finance Corporation, headed by Mr. C. Y. Dodds, and that Division was given the primary responsibility of screening all small-business applications for loans; that to be done in addition to the regular work which is done in the agencies and in the Examining Division. That office has a representative with respect to those loans, who appears before our board in a role which probably could be best described as a “friend in court."
In other words, they are there as a special pleader for the smallbusiness applicant.
In addition, the Office of Small Business has handled the purchase priority with respect to surplus property.
With respect to both those functions, there has been maintained a very close liaison and coordination between the Office of Small Business in the Reconstruction Finance Corporation, the Office of Small Business in the Department of Commerce, and the Office of Small Business-I am not sure that is what it is called-in War Assets Administration.
Mr. PATMAN. Could that be improved upon, do you think, by further coordination of effort, or consolidation?
Mr. GOODLOE. I rather doubt it at this time. My understanding is that a very satisfactory job has been done in that respect. As you perhaps know, there is pending, I believe, legislation in the Congress to do away with substantially all of the priorities on surplus property effective June 30 next. The Senate bill, which this committee is discussing now, with reference to the Reconstruction Finance Corporation, likewise provides for the repeal of the small-business purchase priority which the Reconstruction Finance Corporation hast exercised in the past. So, with that function shortly going out of existence, I would not think that any changes in the organizational set-up would be necessary or wanted at this time. It may be that after that has settled down I might have a different point of view. Mr. PATMAN. The RFC contemplates making loans to small busi
ness as it has in the past, except that a higher margin will be required of the local bank, I believe.
Mr. GOODLOE. Yes. That provision to which you have reference, in the Senate bill, however, relates solely to deferred participation. In the past the bulk of the small-business loans have been made by local banks under an arrangement whereby they take 25 percent of the risk, make, administer, and service the loan, and we take a deferred participation, in most cases up to 75 percent.
Under the Senate bill, the maximum deferred participation we can take in a loan with a bank is 65 percent if the loan is $100,000 or less, 50 percent if the loan is in excess of $100,000.
Mr. PATMAN. Those are all the questions I wish to ask at this time, Mr. Chairman.
The CHAIRMAN. Very well. You may proceed, Mr. Goodloe.
Mr. GOODLOE. Subsection (a) (2), which provides for loans to financial institutions, would be expanded by the addition of a new provision which would restore to Reconstruction Finance Corporation the authority to buy the preferred stock of banks and insurance companies on certification by the Secretary of the Treasury that the bank or insurance company is in need of funds for capital purposes. The reasons why the Senate committee decided that this should be restored are clearly in its report as follows:
RFC used this power extensively during the depression of the thirties. At one time it had over $1,000,000,000 outstanding in such preferred stock issues. This has been reduced to a little under $150,000,000 (hearings, p. 221). It is apparent that this power was extremely useful in the rehabilitation of the banks during that period and the subcommittee feels that RFC should possess that power in the event that there should be a recurrence of those conditions.
Loans to banks and insurance companies are useful where those institutions are experiencing illiquidity of assets. Where those institutions are forced to write down the value of their assets, as occurred during the depression of the early thirties, the problem is one of solvency, not liquidity. In that situation a loan is of no assistance since the new cash is equaled by a new liability in the same amount. A purchase of preferred stock, on the other hand, permits an increase in the assets with no increase in liabilities.
It is intended by the committee that this power should be used in emergencies only. It is not a means by which those institutions can obtain equity financing in the usual sense, but a means whereby the Corporation can lend money in appropriate cases where aid in the form of a loan would not accomplish the desired purposes. RFC should have little occasion to use this power unless there should be a recurrence of the conditions which led to the use of the power in the past depression. The requirement of a certification by the Secretary of the Treasury should tend to prevent the exercise of this authority unless a real justification for its exercise is present.
It is my understanding that in deciding to restore to RFC the authority to purchase preferred stock of banks and insurance companies, the Senate committee relied heavily on the letter of the Federal Deposit Insurance Corporation to Lewis M. Stevens, chief counsel, RFC inquiry, dated January 13, 1948, and the letter of Mr. Robert E. Dineen, superintendent, State of New York Insurance Department, to Senator Buck, dated January 16, 1948.
The pertinent portion of the letter from the Federal Deposit Insurance Corporation reads as follows:
In response to your second question, we wish to state that it is the considered judgment of the Board of Directors of this Corporation that it is desirable to restore to the RFC the power to purchase preferred stock from financial insti