Full text of The Banking Reform Act of 1971 : Hearings Before the Committee on Banking and Currency, House of Representatives, Ninety-Second Congress, First Session, on H.R. 5700, H.R. 3287, H.R. 7440 (1971) : Part 1, April 20, 21, 22, 23, 26, 27, 1971

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THE BANKING REFORM ACT OF 197i
HEARINGS
BEFORE THE

C0MMPTEE 0 1 BANKING AND CU&RENCY
HOUSE OF REPRESENTATIVES
NINETY-SECOND CONGRESS
FIRST SESSION
ON

H.R. 5700
A BHiL TO PROHIBIT CERTAIN CONFLICTS OF INTEREST AND ENCOURAGE COMPETITION IN THE BANKING INDUSTRY AND RELATED
FIELDS, TO PROVIDE FOR RESTRICTIONS AND DISCLOSURES WITH
RESPECT TO $ERTAIN LOANS, TO PROHIBIT BROKERED DEPOSITS IN
BANKS AND OTHER FINANCIAL INSTITUTIONS, TO PROHIBIT THE USE
OW GIVEAWAYS IN THE SOLICITATION OF DEPOSITS, TO PERMIT FULL
DEPOSIT INSURANCE FOR GOVERNMENT DEPOSITORS, AND FOR
OTHER PURPOSES

H.R. 3287
A BIL& T p PROHIBIT FEDERALLY INSURED BANKS FROM MAKING
LOANS TO PROVIDE FOR THE PURCHASE OF BANK STOCK, AND FOR
OTHER PURPOSES

H.R. 7440
A BIM* TO CLARIFY THE AUTHORITY OF THE FEDERAL HOME LOAN
BANS: BOARD TO REGULATE CONFLICTS OF INTEREST IN THE OPERATION OF INSURED SAVINGS AND LOAN ASSOCIATIONS, AND FOR
OTHER PURPOSES

PART 1
APRIL 20, 21, 22, 23, 26, 27, 1971

Printed for the use of the
Committee on Banking and Currency*




THE BANKING REFORM ACT OF 1971
HEARINGS
BEFORE THE

COMMITTEE ON BANKING AND CURRENCY
HOUSE OF REPRESENTATIVES
NINETY-SECOND CONGRESS
FIRST SESSION
ON

H.R. 5700
A BILL TO PROHIBIT CERTAIN CONFLICTS OF INTEREST AND ENCOURAGE COMPETITION IN THE BANKING INDUSTRY AND RELATED
FIELDS, TO PROVIDE FOR RESTRICTIONS AND DISCLOSURES WITH
RESPECT TO CERTAIN LOANS, TO PROHIBIT BROKERED DEPOSITS IN
BANKS AND OTHER FINANCIAL INSTITUTIONS, TO PROHIBIT THE USE
OF GIVEAWAYS IN THE SOLICITATION OF DEPOSITS, TO PERMIT FULL
DEPOSIT INSURANCE FOR GOVERNMENT DEPOSITORS, AND FOR
OTHER PURPOSES

H.R. 3287
A BILL TO PROHIBIT FEDERALLY INSURED BANKS FROM MAKING
LOANS TO PROVIDE FOR THE PURCHASE OF BANK STOCK, AND FOR
OTHER PURPOSES

H.R. 7440
A BILL TO CLARIFY THE AUTHORITY OF THE FEDERAL HOME LOAN
BANK BOARD TO REGULATE CONFLICTS OF INTEREST IN THE OPERATION OF INSURED SAVINGS AND LOAN ASSOCIATIONS, AND FOR
OTHER PURPOSES

PART 1
APRIL 20, 21, 22, 23, 26, 27, 1971
Printed for the use of the
Committee on Banking and Currency

U.S.
60-299




GOVERNMENT PRINTING OFFICE
WASHINGTON : 1971

COMMITTEE ON BANKING AND CURRENCY
WRIGHT PATMAN, Texas, Chairman
WILLIAM B. WIDNALL, New Jersey
WILLIAM A. BARRETT, Pennsylvania
LEONOR K. (MRS. JOHNB.) SULLIVAN, FLORENCE P. DWYER, New Jersey
ALBERT W. JOHNSON, Pennsylvania
Missouri
J. WILLIAM STANTON, Ohio
HENRY S. REUSS, Wisconsin
BENJAMIN B. BLACKBURN, Georgia
THOMAS L. ASHLEY, Ohio
GARRY BROWN, Michigan
WILLIAM S. MOORHEAD, Pennsylvania
LAWRENCE G. WILLIAMS, Pennsylvania
ROBERT G. STEPHENS, JR., Georgia
CHALMERS P. WYLIE, Ohio
FERNAND J. ST GERMAIN, Rhode Island
MARGARET M. HECKLER, Massachusetts
HENRY B. GONZALEZ, Texas
PHILIP M. CRANE, Illinois
JOSEPH G. MINISH, New Jersey
JOHN H. ROUSSELOT, California
RICHARD T. HANNA, California
STEWART B. McKINNEY, Connecticut
TOM S. GETTYS, South Carolina
NORMAN F. LENT, New York
FRANK ANNUNZIO, Illinois
BILL ARCHER, Texas
THOMAS M. REES, California
BILL FRENZEL, Minnesota
TOM BEVILL, Alabama
CHARLES H. GRIFFIN, Mississippi
JAMES M. HANLEY, New York
FRANK J. BRASCO, New York
BILL CHAPPELL, JR., Florida
EDWARD I. KOCH, New York
WILLIAM R. COTTER, Connecticut
PARREN J. MITCHELL, Maryland




PAUL NELSON, Clerk and Staff Director
CURTIS A. PRINS, Chief

Investigator

BENET D. GELLMAN, Counsel

JOSEPH C. LEWIS, Professional Staff Member
GARY TABAK, Counsel

ORMAN S. FINK, Minority Staff Member
(II)

CONTENTS
(The same table of contents appears in parts 1 and 2)
Hearings held on—
April 20, 1971
April 21, 1971
April 22, 1971
April 23, 1971
April 26, 1971 _
_
_ _ _ _ _ _ ___
April 27, 1971
April 28, 1971
April 29, 1971
April 30, 1971
May 3, 1971
May 4, 1971
Text of—
H.R. 5700
H.R. 3287
_
__
H.R. 7440

1
113
173
227
267
387
453
569
657
741
837
1
9
14

STATEMENTS

Bryan, John William, Granite State Bank, and the Bank of Arlington,
Granite Falls, Wash
Burns, Hon. Arthur F., Chairman, Board of Governors, Federal Reserve
System
Camp, Hon. William B., Comptroller of the Currency
Carlson, Donald M., president, Independent Bankers Association of
America; accompanied by Rod L. Parsch, chairman, Federal Legislative
Committee
Darnell, Prof. Jerome C, associate professor of business administration,
University of Colorado
Dooley, Prof. Peter C, University of Saskatchewan
Farrar, Prof. Donald E., senior fellow, University of Pennsylvania Law
School, Center for the Study of Financial Institutions
Fey, John T., president, National Life Insurance Co., Montpelier, Vt., on
behalf of the American Life Convention and the Life Insurance Association of America; accompanied by Bruce P. Hayden, vice president,
Connecticut General Life Insurance Co., Hartford, Conn.; and Thomas
F. Murray, senior vice president and chief investment officer, The
Equitable Life Assurance Society of the United States
Green, Sampson, chairman, Activists, Inc.; accompanied by Father John
Martinez, cochairman, housing committee, Activists, Inc., Baltimore,
Md
Groos, Ernest, Jr., president, Groos National Bank, San Antonio, Tex
Hamilton, John S., Jr., vice president and general counsel, American
Mutual Insurance Alliance; accompanied by James P. Allen, Jr., vice
president, Liberty Mutual Insurance Co
Herbert, Edward, senior vice president, First National Bank, Montgomery,
Ala., on behalf of Robert Morris Associates, National Association of
Bank Loan and Credit Officers
Herman, Prof. Edward S., Wharton School of Finance, University of
Pennsylvania
Hinrichs, Dr. Harley H., The Saver Incentives Premium Industry Committee; accompanied by John F. Daly, International Silver Co.; William
M. Dalton, W. M. Dalton & Associates; Larry O. Edwards, Lincoln
Rochester Trust Co.; and Neil Kanney, Grace China Co
Hovde, Donald I., Madison, Wis., chairman, Realtor's Washington Committee, National Association of Real Estate Boards
(ni)




675
276
129
592
396
417
388

474
321
821
490
624
227
677
464

IV
Jackson, Philip C, vice president, Mortgage Bankers Association of
America; accompanied by Walter F. Terry III, vice president, James
W. Rouse & Co., Columbia, Md
.
Levine, Milton E., chairman of the board, Meyers Pollock Robbins, Inc.,
New York, N.Y
McDonald, Angus, consultant to the Mid-West Electric Consumers
Association
McLaren, Hon. Richard W., Assistant Attorney General for Antitrust,
Department of Justice; accompanied by Donald I. Baker, chief, Office
of Policy Planning
Martin, Hon. Preston, Chairman, Federal Home Loan Bank Board; accompanied by Arthur W. Leibold, Jr., General Counsel
Meyer, John M., Jr., chairman of the board, Morgan Guaranty Trust Co.
of New York
Oberg, Dr. Harold S., vice president, Arthur Lipper Corp., New York,
N.Y
Renchard, William S., president, The New York Clearing House Association, and chairman of the board, Chemical Bank, New York, N.Y.;
accompanied by Richard S. Simmons, counsel
Rockefeller, David, chairman of the board, Chase Manhattan Bank;
accompanied by Herbert T. Patterson, president, Chase Manhattan;
and Ray C. Haberkern, counsel
Scott, Tom B., Jr., chairman, Legislative Committee, United States
Savings and Loan League; accompanied by Stephen Slipher, legislative
director; and Arthur Edge worth, Washington counsel
Smith, Richard B., Commissioner, Securities and Exchange Commission;
accompanied by Prof. Donald E. Farrar, University of Pennsylvania;
and Philip A. Loomis, General Counsel, SEC
Sommer, Clifford C, president, American Bankers Association; accompanied by Richard P. Brown, president, ABA Trust Division; and
B. Finley Vinson, chairman, ABA Federal Legislative Committee
Stastny, John A., president, National Association of Home Builders;
accompanied by George C. Martin, vice president and treasurer, Louisville, Ky
Swift, Harlan J., past president, National Association of Mutual Savings
Banks, and chairman of the NAMSB Committee on Relations With
Federal Supervisory Authorities; accompanied by Edward P. Clark,
past president of NAMSB; and P. James Riordan, general counsel
Vance, Prof. Stanley C, H. T. Miner professor of business administration,
Graduate School of Management and Business, University of Oregon,
Eugene, Oreg
Ward, Alan S., Director, Bureau of Competition, Federal Trade Commission
Wille, Hon. Frank, Chairman, Federal Deposit Insurance Corporation. _

468
347
236
838
37
796
676
605
746
179
114
575
453
657
173
136
25

ADDITIONAL INFORMATION SUBMITTED FOR THE RECORD

Annunzio, Hon. Frank, submission of letter and statement of Donald M.
Graham, chairman of the board of directors, Continental Illinois National Bank and Trust Co., Chicago, 111., relating to H.R. 5700 and the
committee staff report on sales of Penn Central stock (part V)
Axelrod, Irving M., Big Bonus Stamp Co., Houston, Tex., letter dated
April 21, 1971
Battle, William C, president, Premium Advertising Association of America,
Inc., New York, N. Y., letter dated April 29, 1971
• Begich, Hon. Nick, a Representative in Congress from the State of Alaska:
Letters to Hon. Wright Patman:
April 9, 1971
April 5, 1971, with attached letter from Eric E. Wohlforth, commissioner, Department of Revenue, State of Alaska, dated
March 30, 1971
Berle, Rudolph, P., Berle & Berle, New York, N. Y., letter dated April 22,
1971, re H.R. 5700 with attachment on proposed amendment No. 5
prepared by the National Association of Mutual Savings Banks
Bodine, William H., president, Savings Association League of New York
State, Scarsdale, N.Y., letter dated April 13, 1971
Bright, Edgar, Jr., Standard Mortgage Corp., New Orleans, La., letter
dated May 6, 1971—




861
737
733
110
109
673
739
552

Building Industry Association of California, Los Angeles, Calif., resolution
adopted March 30, 1971, supporting H.R. 18676 introduced in the 91st Page
Congress
566
Burns, Hon. Arthur F.:
Response to questions of:
Chairman Patman
286, 314, 316
Hon. Parren J. Mitchell
304
Hon. Henry S. Reuss
293
Hon. William B. Widnall
964
Hon. Lawrence G. Williams
301
Camp, Hon. William B.:
Prepared statement
130
Response to questions of Chairman Patman
169
Carlson, Donald M., prepared statement on H.R. 5700
597
Caton, Richard B., vice president and manager, loan administration,
Stockton, Whatley, Davin& Co., Jacksonville, Fla., letter dated April 30,
1971
559
Cederberg, Hon. Elford A., a Representative in Congress from the State
of Michigan:
Statement on H.R. 3242 and H.R. 5700
363
Attached articles to statement:
"Small Banks Go Under, and Authorities Assail Role of Money
Brokers/' from the Wall Street Journal
364
"Times Reporters Unearth the Story Behind the Story," with
accompanying article, "Shadow Syndicate Seen Lurking in
Background of Bank Failures," from the Bay City Times,
June 28, 1970
368
Chase, Goodwin, president, Pacific National Bank of Washington, Tacoma,
Wash., letter dated April 5, 1971
570
Clark, Edward P., president, Arlington Five Cents Savings Bank, Arlington, Mass., letter to Hon. Leonor K. Sullivan, dated May 5, 1971
699
Cooper, W. M., letter date May 5, 1971
552
Crow, Trammell, Dallas, Tex., letter dated April 20, 1971
563
Dalton, William M., president, W. M. Dalton& Associates, Inc., statement- 724
Daly, John F., International Silver Co., statement
723
Darnell, Prof. Jerome C :
Prepared statement
400
Response to questions of Hon. Stewart B. McKinney
450
Deane, Disque D., New York, N.Y., letter dated May 4, 1971
556
Dooley, Prof. Peter C :
Prepared statement with an attached study entitled, "The Interlocking
Directorate"
421
Response to questions of:
Hon. William A. Barrett
447
Hon. Stewart B. McKinney
449
Dwyer, William J., Jr., Mount Kisco, N.Y., letter dated May 3, 1971
563
Edwards, Larry O., vice president in charge of marketing, Lincoln Rochester
Trust Co., Rochester, N.Y., statement
726
Fey, John T.:
Prepared statement
480
Response to questions of:
Hon. Margart M. Heckler
528
Hon. William B. Widnall
509
Gilliland, John A., first vice president, Stockton, Whatley, Davin & Co.,
Jacksonville, Fla., letter dated May 5, 1971___ _
551
Graham, Donald M., chairman of the board of directors, Continental
Illinois National Bank & Trust Co., Chicago, 111.:
Letter to Hon. Frank Annunzio, dated May 4, 1971
861
Statement relating to H.R. 5700 and the committee staff report on
sales of Penn Central stock (part V)
862
Green, Sampon:
Letter from Hon. Preston Martin, Chairman, Federal Home Loan
Bank Board, dated February 18, 1971
380
Submission of studies prepared by Activist, Inc., Baltimore, Md.:
"A Conspiracy to Defraud and Exploit Homebuyers: The Story
of Jefferson Federal Savings and Loan"
325
"Communities Under Siege"
334
"Two Blocks on Mount Holly Street"
323
Greene, Raleigh, chairman, Committee on Legislation, National League of
Insured Savings Associations, statement
187




VI
Griebel, Richard H., president, Lehigh Valley Industries, Inc., New York,
N.Y., letter dated May 5, 1971, with excerpts from statements of Hon.
William B. Camp, Comptroller of the Currency; Hon. Preston Martin,
Chairman, Federal Home Loan Bank Board; and Hon. Frank Wille,
Chairman, Federal Deposit Insurance Corporation
734
Gross, Jenard M., chairman of the Legislative Committee, National Apartment Association, statement
502
Hallowell, Burton C, Tufts University, Medford, Mass., letter dated
April 26, 1971
561
Hamel, John F., New York, N.Y., letter dated April 28, 1971, with attached commentary of sections 20 and 21 of H.R. 5700
354
Hamilton, John S., Jr.:
Prepared statement
492
Response to questions of Hon. Margaret M. Heckler
527
Hayden, Bruce P., vice president, Connecticut General Life Insurance Co.,
response to question of Hon. Thomas L. Ashley
515
Henderson, S. T., executive vice president, Home Realty and Management
Co., Charlotte, N.C., letter dated May 12, 1971
555
Henri, Joseph R., Commissioner, Department of Administration, State of
Alaska, letter dated April 13, 1971
110
Herbert, Edward, prepared statement
625
Herman, Prof. Edward S.:
Prepared statement
231
Summary of conflict of interest study on savings and loan associations
entitled, ''Conflict of Interest Reform"
254
Hinrichs, Dr. Harley H., prepared statement with attached partial list of
firms in the premium industry
681
Hovde, Donald L:
Prepared statement
467
"The Future Largest Landlords in America," article from Fortune
Magazine, July 1970
536
Hume, Kenneth C, president, Alaska State Bank, Anchorage, Alaska,
letter dated May 11, 1971
110
Jackson, Philip C, letter with attachment to Hon. Thomas L. Ashley,
dated April 30, 1971
544
Kaiser, Edgar F., chairman of the board, Kaiser Industries Corp., Oakland, 741
Calif., statement
Kanney, Neil, president, Grace China Co., South Hackensack, N.J., statement
729
Kenney, Thomas J., Baltimore, Md., letter with attachments to Hon.
Wright Patman, dated April 27, 1971, replying to certain aspects of study
submitted by Activists, Inc., of Baltimore, Md
342
Klein, Michael J., vice president, J. P. Cabot, Inc., New York, N.Y.,
statement
373
Kling, Herbert R., director, Central National Bank, Canajoharie, Fultonville, N.Y., letters dated:
January 25, 1971
572
February 8, 1971
573
Levine, Milton E., prepared statement
352
Lipper, Arthur, III, president, Arthur Lipper Corp., letters dated May 17,
1971, to:
Hon. Henry S. Reuss
704
Hon. John H. Rousselot
710
McDonald, Angus:
Letter to Chairman Wright Patman, dated April 28, 1971
266d
List of power company executives who may have conflicts of interest
in theirfinancialcorporate directorships
244
Prepared statement
239
McLaren, Hon. Richard W., response to questions of Hon. William A.
Barrett
847
Manges, Clinton, stockholder, Groos National Bank, San Antonio, Tex.
with attachments:
Statement on H.R. 5700
823
Letter from Lloyd M. Bentsen to Hon. Wm. B. Camp, Comptroller
of the Currency, dated March 24,1971
827
Letter from TimTimmins, Dallas, Tex., dated January 21, 1971
827




VII
Martin, Hon. Preston:
Letter to Speaker Carl Albert dated April 17, 1971, with attached
draft and section-by-section analysis of proposed bill: Housing Page
Institutions Modernization Act of 1971
84
Prepared statements:
Discussion of Housing Institutions Modernization Act of 1971 __
78
H.R. 5700 and H.R. 3287
40
Response to questions of:
Chairman Wright Patman
51
Hon. Leonor K. Sullivan
62, 63, 64, 66
Martin, George C , additional statement submitted in response to questions of Hon. Margaret M. Heckler
526
Mayo, Robert P., president, Federal Reserve Bank of Chicago, letter dated
April 12, 1971, expressing views on H.R. 5700
274
Melody, Lawrence J., vice president, Northland Mortgage Co., Minneapolis, Minn., letter dated May 11, 1971, with attached copy of letter
to Hon. Bill Frenzel commenting on section 14 of H.R. 5700
553
Meyer, John M., Jr.:
Appendix to statement: response to committee report, "The Penn
Central Failure and the Role of Financial Institutions," Part V
802
Response to questions of:
Chairman Wright Patman
805, 817
Hon. Stewart B. McKinney
814
Hon. William B. Widnall
807, 808
Miller, Stanley L., Port Chester, N.Y., letter dated April 23, 1971, with
attached analysis and commentary of sections 19 and 21 (a) of H.R. 5700__
358
Moody, Dan M., Jr., Houston, Tex., letter dated May 14, 1971
567
Myrick, Richard S., The Myrick Co., realtors, letter dated April 30, 1971__
562
National Association of Home Builders, response to questions of Hon.
Frank Annunzio
548
National Association of Small Business Investment Companies letter from
Charles M. Noone, general counsel, dated May 3, 1971
557
New York Clearing House Association, memorandum of comments on
H.R. 5700
609
Oberg, Dr. Harold S., response to questions of Hon. William B. Widnall__ 695, 697
Patman, Hon. Wright:
Exchange of correspondence with Hon. Arthur F. Burns, Chairman,
Federal Reserve Board
268-273
"Interlocking Directorships Between 10 Largest Life Insurance
Companies and Competing Financial Institutions—1971" (table)
285
"Interlocks Among 10 Largest Commercial Banks and 10 Largest Life
Insurance Companies—as of December 31. 1969" (table)
284
Letter from Robert P. Mayo, president, Federal Reserve Bank of
Chicago, dated April 12, 1971
274
Letters received from various small town banks concerning H.R. 5700:
Chase, Goodwin, president, Pacific National Bank of Washington,
Tacoma, Wash., dated April 5, 1971
570
Kling, Herbert A., director, Central National Bank, Fultonsville,
N.Y., dated:
January 25, 1971
572
February 8, 1971
573
Shapiro, Ernest M., Lewiston, Maine, dated March 18, 1971
573
Watson, William R., Peoria, 111., dated April 17, 1971
574
u
Mutual Savings Bank Investment Authority in Commercial Bank
Stock" (table)
692
Response to statement submitted by Donald M., Graham, chairman,
Continental Illinois National Bank and Trust Co., Chicago, 111
869
Survey of Interest Rate Calculations carried out by Federal Reserve
Board at request of Chairman Patman, along with covering letter
from Hon. J. L. Robertson, Vice Chairman, Board of Governors,
Federal Reserve System, dated April 30, 1971
940
"Ten Largest Life Insurance Companies and 10 Largest Commercial
Banks in United States—1970" (table)
283
Parsch, Rod L., chairman, Federal Legislative Committee, Independent
Bankers Association of America, submission of statement on H.R. 3287_ _ 600
Phalle, John de Saint, vice president, Paine, Webber, Jackson & Curtis,
Inc., New York, N.Y., letter dated May 3, 1971
563




vm
Pittman, Steuart L., counsel for Committee of Foreign-Owned Banks,
Washington, D.C., letter dated May 5, 1971, with attached enclosures
consisting of (A) suggested amendment to section 14 of H.R. 5700 and
(B) list of members
564
Proctor, Edward A., Jr., president, Proctor Homer Warren, Inc., Detroit,
Mich., letter dated May 17, 1971
566
Renchard, William S., attachment to statement entitled, "Memorandum of
Comments of the New York Clearing House Association on H.R. 5700"_ 609
Rockefeller, David:
Appendix to statement entitled, "Information Concerning Sales of
Penn Central Stock by the Chase Manhattan Bank During May
and June of 1970"
752
Response to questions of:
Chairman Wright Patman
759, 786, 787
Hon. Bill Chappell, Jr
775
Hon. James M. Hanley
775
Hon. Edward I. Koch
784
Hon. Robert G. Stephens, Jr
767
Hon. Leonor K. Sullivan
764
Hon. William B. Widnall
762
Rollings, R. C, president, Specialty Advertising Association International,
Chicago, 111., letter dated April 28, 1971
732
Ruby, Howard F., general partner, R & B Development Co., Los Angeles,
Calif., letter dated April 30, 1971
558
Ruffin, Peter B., Galbreath-Ruffin Corp., New York, N.Y., letter dated
April 27, 1971
561
Schnitzer, Kenneth, chairman of the board, Greenway Plaza—Century
Development Corp., letter dated May 13, 1971
566
Scott, Tom B., Jr.:
Response to questions of:
Hon. Henry B. Gonzalez
205
Hon. Leonor K. Sullivan
201
Supplemental statement with attached document entitled, "Officer's
Questionnaire"
182
Shapiro, Ernest M., Lewiston, Maine, letter dated March 18, 1971
573
Smith, James B., mortgage vice president, Equitable of Iowa, Des Moines,
Iowa, letter dated April 28, 1971
566
Smith, Melville H., president, D F S, Inc., Chadds Ford, Pa., letter dated
May 6, 1971
733
Smith, Richard B., prepared statement
118
Sommer, Clifford C :
Prepared statement
582
Response to questions of:
Hon. Frank Annunzio
650
Hon. Henry B. Gonzalez
646
Hon. John H. Rousselot
644
Stallard, Carton S., chairman of the board, Jersey Mortgage Co., Elizabeth,
N.J. letter dated May 17, 1971
567
Stastny, John A.:
"A Special Report—Equity Participation," report on survey conducted
by NAHB in June 1969
523
Correspondence between Federal Home Loan Bank Board and William
F. McKenna, general counsel, National League of Insured Savings
Association regarding Board's position on S. & L. loans which include
"equity participation"
462
Extract from NAHB Statement of Policy for 1971, adopted at annual
convention, January 20, 1971, Houston, Tex
462
Prepared statement
457
Resolutions on "equity participation" adopted at NAHB board of
directors meetings, 1969-70
461
Response to questions of:
Hon. Frank Annunzio
548
Hon. Margaret M. Heckler
523
Stern, Edgar B., Jr., president, Royal Street Corp., New Orleans, La.,
letter dated May 3, 1971
551




IX
Sullivan, Hon. Leonor K.:
Excerpt from House Conference Report 91-1781
Excerpts from the Congressional Record on H.R. 7440:
April 7, 1971
December 2, 1970
Relevant excerpts of letter received from the Federal Home Loan
Bank, dated December 11, 1970
Submission of table, "Baltimore—29 Savings and Loan Associations
and Their Interlocks"
Swalling, A. C , president, Matanuska Valley Bank, Anchorage, Alaska,
letter dated May 10, 1971
Swift, Harlan, J.:
Prepared statement
Response to request of Hon. John H. Rousselot
Submission of table, ''Savings Bank Activity in Premium Campaigns
in 1970"
Terry, Walter F., I l l :
Letter to Chairman Wright Patman, dated May 5, 1971
Prepared statement
Response to questions of Hon. William B. Widnall
Tweedy, Harold L., president, First Federal Savings & Loan Association
of Pittsburgh, letter to Hon. Thomas S. Gettys, dated April 30, 1971
Vance, Prof. Stanley C :
Prepared statement
Response to questions of Hon. Parren J. Mitchell
Viertel, Joseph, Presidential Realty Corp., White Plains, N. Y., letter dated
May 6, 1971
Venzke, E. W., Hennepin Federal Savings and Loan Association, Minneapolis, Minn., letter dated April 6, 1971
Ward, Alan S., prepared statement
Watson, William R., Peoria, 111., letter dated April 17, 1971
Whatley, Brown L., chairman of the board, Stockton, Whatley, Davin &
Co., Jacksonville, Fla., letter dated May 12, 1971
Wille, Hon. Frank:
Letter to Chairman Patman dated April 12, 1971, expressing views on
H.R. 3287
Prepared statement
Response to questions of:
Chairman Patman
Hon. Fernand J. St Germain
Williams, Hon. Lawrence G., submission of financial advertisement by
Pennzoil United, Inc
Wohlforth, Eric E., Commissioner, Department of Revenue, State of
Alaska, Juneau, letter dated March 30, 1971

23
15
18
21
382
110
663
711
715
548
472
508
560
174
220
552
738
138
574
555
36
27
48
102
154
109

APPENDIX

Adams, Gene D., president, The First National Bank, Seymour, Tex., letter
to Hon. Graham Purcell, dated April 15, 1971
Allen, R. S., president, Shoshone First National Bank, Cody, Wyo., letter
to Hon. Teno Roncalio, dated April 1, 1971
_*
Allen, Richard, president, Clear Lake Savings Association, Houston, Tex.,
letter dated May 6, 1971
Arthur, John M., Duquesne Light Co., Pittsburgh, Pa., letter dated April
15, 1971
i
Association of American Railroads, submission of statement
Bennett, Hon. Charles E., a Representative in Congress from the State of
Florida, submission of statement with attached copy of H.R. 583__^
Berle, Rudolf, P., Berle & Berle, New York, N.Y., letter with proposed
amendments, dated April 26, 1971
Binsfeld, Joseph J., senior vice president, attorney at law, Milwaukee
Federal Savings & Loan Association, Milwaukee, Wis., letter dated April
19, 1971
Bisselle, Morgan F., secretary-general counsel, Utica Mutual Insurance
Co., Utica, N.Y., letter to Hon. Alexander Pirnie, dated April 29, 1971__
Brereton, Harmar, vice president and general counsel, Eastman Kodak Co.,
Rochester, N.Y., letter dated May 19, 1971
Burns, Franklin L., president, the D/C. Burns Realty & Trust Co., Denver,
Colo., letter dated May 20, 1971




933
875
913
917
881
871
926
911
915
960
963

X

California Savings and Loan League, Pasadena, Calif., Franklin Hardinge,
Jr., executive vice president, submission of statement
^
883
Carlander, John, chairman of the board, the State Bank of Faribault,
Faribault, Minn., letter to Hon. Albert H. Quie, dated May 12, 1971___ 954
Chapman, Alger B., Jr., president, Shearson, Hammill & Co., Inc. and
Robert M. Gardiner, managing partner, Reynolds & Co. on behalf of the
Legislative Council of Association of Stock Exchange Firms, New York,
N.Y., and Investment Bankers Association of America, Washington,
D.C., letter dated May 21, 1971
962
Chisholm, John D., president, Olmsted County Bank & Trust Co., Rochester, Minn., statement
887
Coffey, J. A., president, the First National Bank of Sanger, Sanger, Tex.,
letter to Hon. Graham Purcell, dated April 15, 1971
934
Conference of State Bank Supervisors, submission of statement
876
''Corporate Directors Under Fire," article by Ephraim P. Smith, Ph. p.,
University of Rhode Island and Louis R. Desfosses, Ph. D., University
of Rhode Island, submitted by Hon. Fernand J. St Germain
890
Credit Union National Association, Inc., Washington, D.C., letter from
Evert S. Thomas, Jr., acting managing director, dated May 6, 1971
909
Crow, Trammell, Dallas, Tex., letter to Hon. Graham Purcell, dated April
14, 1971
938
Davis, Charles Lee, president, Texarkana Federal Savings & Loan Association, Texarkana, Ark., letter dated April 21, 1971
911
Davis, Hilton, general manager, legislative action, Chamber of Commerce
of the United States, Washington, D.C., letter dated May 5, 1971
918
Dixon, George H., president, First National Bank of Minneapolis, Minneapolis, Minn., letter to Hon. Bill Frenzel, dated April 27, 1971
901
Ellis, James H., Ellis, Holyoke & Co., Lincoln, Nebr., letter dated April 27,
1971
931
Elson, Gerald W., the Gerry Elson Agency, Inc., Brookfield, Mo., letter
dated April 23, 1971
916
Faust, Joseph, president, First National Bank of New Braunfels, New
Braunfels, Tex., letter dated April 22, 1971
901
Feagin, David A., president, The First State Bank, Colmesneil, Tex., letter
dated April 16, 1971
906
Floreen, David A., Atlantic Mutual Insurance Co. and Centennial Insurance Co., New York, N.Y., letter dated May 14, 1971
916
Getz, Bert A., Scottsdale, Ariz., letter dated April 6, 1971
931
Gilchrist, Charles W., Lee, Toomey & Kent, Washington, D.C., letter
dated May 4, 1971
929
Glaze, Robert E., of Trammell Crow, Dallas, Tex., letter to Hon. Graham
Purcell, dated April 15, 1971
938
Graham, Donald M., Continental Illinois National Bank & Trust Co.,
Chicago, 111., letter dated March 30, 1971
899
Gullander, W. P., president, National Association of Manufacturers, New
York, N.Y., letter dated May 7, 1971
918
Hagan, Hon. G. Elliott, a Representative in Congress from the State of
Georgia, letter dated April 22, 1971, with attached letter from John B.
Spiney, president, First Federal Savings & Loan Association of Swainsboro, Swainsboro, Ga
898
Hall, W. G., Citizens State Bank, Dickinson, Tex., letter dated April 5,
1971, with attached list of Texas bank failures and schedules of the
dollar losses
903
Hodges, Joe H., president, Abilene National Bank, Abilene, Tex., letter
to Hon. Graham Purcell, dated April 15, 1971
937
Holman, Bill, president, the First National Bank of Henrietta, Henrietta,
Tex., letter to Hon. Graham Purcell, dated April 15, 1971
932
Horton, Charles C, chairman, legislative committee, Rhode Island League
of Savings and Loan Associations, Providence, R.I., letter dated May 10,
1971
910
Jones, L. D., Jr., Seymour, Tex., letter to Hon. Graham Purcell, dated
April 20, 1971
933
Josch, Martin, Jr., vice president, the Huntington State Bank, Huntington,
Tex., letter to Hon. Graham Purcell, dated April 22, 1971
935
Kimberlin, Sam O., Jr., executive vice president, Texas Banking Association, Austin, Tex., letter to Hon. Graham Purcell, dated April 13, 1971__ 934
Lee, John F., executive vice president, New York Clearing House, New
York, N.Y., letter dated May 24, 1971, with proposed amendment to
section 19 of title 15 of the Banking Reform Act of 1971
959




XI
Leighton, Howard H., president, National Association of Insurance Agents,
Inc., Washington, D.C., letter dated May 14, 1971
Levine, Milton E., chairman of the board, Meyers Pollock Robbins, Inc.,
New York, N.Y., letter dated March 15, 1971
Lewis, A. J., chairman of the board, Jefferson State Bank, San Antonio,
Tex., letter to Hon. Henry B. Gonzalez, dated April 26, 1971
Lumsden, Arthur J., president, Greater Hartford Chamber of Commerce,
Hartford, Conn., letter dated May 19, 1971, with policy statement re
Banking Reform Act of 1971
MeAuliffe, William J., Jr., American Land Title Association, Washington,
D.C., letter dated May 3, 1971
Miracle, R, W., president, the Wyoming National Bank, Casper, Wyo.,
letter to Hon. Teno Roncalio, dated April 6, 1971
Nathan, Robert R., Robert R. Nathan Associates, Inc., Washington, D.C.,
letter dated March 29, 1971
National Association of Insurance Agents, Inc., Washington, D.C., letter
from Howard H. Leighton, president, dated May 14, 1971
Needham, Oran F., chairman and chief executive officer, the Millers
Mutual Fire Insurance Co. of Texas, Fort Worth, Tex., letter to Hon.
Graham Purcell, dated April 16, 1971
Orth, Frederick J., Unigard Insurance Group, Seattle, Wash., letter dated
April 22, 1971
Pittman, John H., president and cochairman, Commonwealth National
Bank, Dallas, Tex., letter to Hon. Graham Purcell, dated April 20, 1971__
Price, Hon. Robert D., a Representative in Congress from the State of
Texas, submission of statement
Purcell, Hon. Graham, a Representative in Congress from the State of
Texas, letter dated April 27, 1971, with attached letters
Quie, Hon. Albert H., a Representative in Congress from the State of
Minnesota, letter dated May 18, 1971
Ray, W. Wilson, president, First National Bank, Bridgeport, Tex., letter
to Hon. Graham Purcell, dated April 16, 1971
Rhode Island League of Savings and Loan Associations, letter dated
May 10, 1971, from Charles C. Horton, chairman, legislative committee._
Robertson, Hon. J. L., Vice Chairman, Board of Governors, Federal
Reserve System, letter dated April 30, 1971, with attached final tabulations of responses to committee's survey of interest calculations banks
use on loans
Roncalio, Hon. Teno, a Representative in Congress from the State of
Wyoming, statement
Attached letters to statement:
Allen, R. S., president, Shoshone First National Bank, Cody,
Wyo., dated April 1, 1971
Miracle, R. W., president, the Wyoming National Bank, Casper,
Wyo., dated April 6, 1971
Steadman, Oliver W., Steadman & Steadman, Cody, Wyo.,
dated March 31, 1971
Rushlow, B. C , chairman of the board, the National Bank of Northern
New York, Watertown, N.Y., letter dated March 25, 1971
St Germain, Hon. Fernand J., letter dated May 11,
1971, with attached
paper entitled, "Corporate Directors Under Fire'7
Sawyer, William P., president, Massachusetts Federal Savings Council,
Inc., statement re H.R. 5700
Shands, Ned, Jr., Peavy & Shands, Lufkin, Tex., letter to Members of
Congress from the State of Texas, dated April 19, 1971
Shuman, Charles B., Sullivan, 111., letter dated March 26, 1971
Spivey, John B., president, First Federal Savings & Loan Association of
Swainsboro, Swainsboro, Ga., letter dated April 14, 1971
Stathis, Gus, Gus Stathis Construction Co., Inc., Oak Lawn, 111., letter
dated May 13, 1971
Steadman, Oliver W., Steadman & Steadman, Cody, Wyo., letter to
Hon. Teno Roncalio, dated March 31, 1971
Stewart, Maco, Stewart Information Services Corp., Princeton, N.J.,
letter dated April 30, 1971
Still, Willard J., president, Southwest National Bank, Wichita Falls, Tex.,
letter to Hon. Graham Purcell, dated April 26, 1971
Talley, Jerry L., president, Grayson County State Bank, Sherman, Tex.,
letter to Hon. Graham Purcell, dated April 20, 1971
The First National Bank of Atlanta, submission of comments on H.R. 5700_




Page
914
925
906
961
923
874
899
914
937
917
934
872
932
954
932
910

940
874
875
874
876
900
890
882
939
900
898
924
876
922
939
936
955

XII
Thomas, Evert S., Jr., acting managing director, Credit Union National
Association, Inc., Washington, D.C., letter dated May 6, 1971
Tippett, Robert A., Tippett Land & Mortgage Co., Kennewick, Wash.,
letter dated April 29, 1971
Vander Zee, Harlan D., president, Hereford State Bank, Hereford, Tex.,
letter to Hon. Graham Purcell, dated April 23, 1971
Waggoner, Dick, City National Bank, Wichita Falls, Tex., letter to Hon.
Graham Purcell, dated April 19, 1971
Walden, Roland W., Midway National Bank of Grand Prairie, Grand
Prairie, Tex., letter to Hon. Graham Purcell, dated April 16, 1971
Wetzel, Carroll, Dechert Price & Rhoads, Philadelphia, Pa., letter dated
March 31, 1971
Wimmer, Ed, vice president, public relations director, National Federation
of Independent Business, Covington, Ky., letter dated April 16, 1971 __

909
924
936
933
937
899
920

TABLES

Baltimore—29 Savings and Loan Associations and Their Interlocks
Interlocking Directorships Between 10 Largest Life Insurance Companies
and Competing Financial Institutions—1971
.
Interlocks Among 10 Largest Commercial Banks and 10 Largest Life
Insurance Companies—as of December 31, 1969
Mutual Savings Bank Investment Authority in Commercial Bank Stock. _
Savings Bank Activity in Premium Campaigns in 1970
Ten Largest Life Insurance Companies and 10 Largest Commercial Banks
in United States—1970

382
285
284
692
715
283

CHART

Daily Sales of Penn Central Common Stock by Three Banking Institutions
During Period May 15, 1970 to June 19, 1970 (fold-in)
facing page

804

ORGANIZATIONS REPRESENTED AT HEARINGS

Government:
Comptroller of the Currency, U.S. Treasury
Department of Justice
Federal Deposit Insurance Corporation
Federal Home Loan Bank Board
Federal Reserve Board
Federal Trade Commission
Securities and Exchange Commission
Private:
Activists, Inc
American Bankers Association
American Life Convention
American Mutual Insurance Alliance
Arthur Lipper Corp
Chase Manhattan Bank
Independent Bankers Association of America
James W. Rouse Co
Life Insurance Association of America
Morgan Guaranty Trust Co
Mortgage Bankers Association of America
Myers Pollock Robbins, Inc
National Association of Home Builders
National Association of Mutual Savings Banks
National Association of Real Estate Boards
New York Clearing House Association
Robert Morris Associates
Saver Incentives Premium Industry Committee
United States Savings and Loan League




129
838
25
37
276
136
114
321
575
474
490
676
746
592
468
474
796
468
347
453
657
464
605
624
677
179

THE BANKING REFORM ACT OP 1971
TUESDAY, APRIL 20, 1971
HOUSE OF REPRESENTATIVES,
COMMITTEE ON BANKING AND CURRENCY,

Washvngton, D.C.
The committee met, pursuant to notice, at 10 a.m., in room 2128,
Rayburn House Office Building, Hon. Wright Patman (chairman)
presiding.
Present: Representatives Patman, Barrett, Sullivan, Reuss, Ashley,
Moorhead, Stephens, St Germain, Gonzalez, Hanna, Gettys, Annunzio,
Rees, Griffin, Hanley, Brasco, Chappell, Koch, Mitchell, Widnall,
Johnson, Stanton, Blackburn, Williams, Wylie, Heckler, Rousselot,
McKinney, Archer, and Frenzel.
The CHAIRMAN. The committee will please come to order.
I would like to announce that the Subcommittee on Small Business,
under the chairmanship of Congressman Stevens, ordered, reported,
favorably H.R. 4604, to increase lending ceilings for Small Business
Administration, referred back to the full committee. The full committee will take up this legislation at 10 a.m. on Thursday, April 22,
just prior to hearing the witnesses on H.R. 5700. It is not anticipated
we will have any need for discussion or controversy, and we would
like to dispose of it as quickly as we can, since there appears to be
no objection.
Today the committee begins hearings on H.R. 5700, the Banking
Reform Act of 1971, and H.R. 3287, a bill introduced by Congressman
Gonzalez to prohibit the use of bank loans to purchase bank stock.
(The text of H.R. 5700 and H.R. 3287 follows:)
\

[H.R. 5700, 92d Cong., first seas.]

A BILL To prohibit certain conflicts of interest and encourage competition in the banking
industry and related fields, to provide for restrictions and disclosures with respect to
certain loans, to prohibit brokered deposits in banks and other financial institutions, to
prohibit the use of giveaways in the solicitation of deposits, to permit full deposit insurance for government depositors, and for other purposes

Be it enacted by the Senate and House of Representatives of the United States
of America in Congress assembled, That this Act may be cited as the "Banking
Reform Act of 1971".
INTERLOCKING RELATIONSHIPS AND RELATED MATTEBS

SEC. 2. The Federal Deposit Insurance Act is amended by adding at the end
thereof the following new sections:
"SEC. 23. (a) Except as provided in subsection (b) of this section, a person who
is a director, trustee, officer, or employee of an insured bank may not at the same
time be a director, trustee, officer, or employee of—
" (1) any other insured bank;
(1)




"(2) any insured institution as defined in section 401 of the National
Housing Act;
" (3) any Federal credit union;
" (4) any insurance company;
"(5) any company which is a bank holding company as defined in the
Bank Holding Company Act of 1956, a savings and loan holding company
as defined in section 408 of the National Housing Act, or a (subsidiary of a
bank holding company or a savings and loan holding company;
"(6) any broker or dealer registered under the Securities Exchange Act of
1934, or be a proprietor or general partner of any such broker or dealer; or
"(7) in the case of a company with which such insured bank has a substantial and continuing business relationship, any (A) title company, (B)
company engaged in the business of appraising property, or (O) company
which provides service in connection with the closing of real estate transac*
tions.
" (b) An individual may hold any number of positions as director, trustee, officer,
or employee of any number of companies if one of the companies is a bank holding company as defined in the Bank Holding Company Act of 1956 and all the
rest of them are subsidiaries of that holding company.
"SEC. 24. No—
"(1) insured bank;
" (2) officer or director of an insured bank; or
" (3) member of the immediate family of an officer or director of an insured
bank
shall directly or indirectly control any (A) title company, (B) company engaged
in the business of appraising property, or (C) company which provides service in
connection with the closing of real estate transactions.
"SEC. 25. A person who is a trustee, director, officer, or employee of an insured
bank may not at the same time perform legal services, in connection with a loan
or other business transaction with such insured bank, for or on behalf of any
person."
SEC. 3. Title IV of the National Housing Act is amended by adding at the end
thereof the following new sections :
"SEC. 411. (a) Except as provided in subsection (b) of this section, a person
who is a director, trustee, officer, or employee of an insured institution may not
at the same time be a director, trustee, officer, or employee of
" (1) any other insured institution ;
"(2) any insured bank as defined in section 3 of the Federal Deposit Insurance Act:
" (3) any Federal credit union;
"(4) any insurance company ;
"(5) any company which is a bank holding company as defined in the
Bank Holding Company Act of 1956, a savings and loan holding company
as defined in section 408 of the National Housing Act, or a subsidiary of a
bank holding company or a savings and loan holding company;
"(6) any broker or dealer registered under the Securities Exchange Act
of 1934, or be a principal or a general partner of any such broker or dealer;
or
"(7) in the case of a company with which such insured institution has a
substantial and continuing business relationship, any (A) title company,
(B) company engaged in the business of appraising property, or (C) company which provides service in connection with the closing of real estate
transactions.
"(b) An individual may hold any number of positions as director, trustee,
officer, or employee of any number of companies within any given group of companies if one of the companies is a savings and loan holding company as defined
in section 408 of the National Housing Act and all the rest of them are subsidiaries
of that holding company.
"SEC. 412. No—
" (1) insured institution;
" (2) officer or director of an insured institution; or
" (3) member of the immediate family of an officer or director of an insured
institution
shall directly or indirectly control any (A) title company, (B) company engaged
in the business of appraising property, or (C) company which provides service
in connection with the closing of real estate transactions.




"SEC. 413. A person who is a trustee, director, officer, or employee of an insured
institution may not at the same time perform legal services, in connection with a
loan or other business transaction with such insured institution, for or on behalf
of any person."
SEC. 4. (a) Except as provided in subsection (b) of this section, a person who is
a trustee, director, officer, or employee of a mutual savings bank other than an
insured bank may not at the same time be a director, trustee, officer, or employee
of
(1) any other mutual savings bank which is not an insured bank;
(2) any insured bank as defined in section 3 of the Federal Deposit
Insurance Act;
(3) any insured institution as defined in section 401 of the National
Housing Act;
(4) any Federal credit union;
(5) (any insurance company;
(6) any company which is a bank holding company as defined in the
Bank Holding Company Act of 1956, a savings and loan holding company
as defined in section 408 of the National Housing Act, or a subsidiary of a
bank holding company or a savings and loan holding company;
(7) any broker or dealer registered under the Securities Exchange Act
of 1934, or be a principal or a general partner of any such broker or dealer;
or
(8) in the case of a company with Which such mutual savings bank has a
substantial and continuing business relationship, any (A) title, company,
(B) company engaged in the business of appraising property, or (O) company which provides service in connection with the closing of real estate
transactions.
(b) An individual may hold any number of positions as director, trustee,
officer, or employee of any number of companies within any given group of companies if one of the companies is either a bank holding company as defined
in the Bank Holding Company Act of 1956 or a savings and loan holding company as defined in section 408 of the National Housing Act and all the rest of
them are subsidiaries of that holding company.
SEC. 5. No—
(1) mutual savings bank other than an insured bank;
(2) officer or director of a mutual savings bank other than an insured
bank; or
(3) member of the immediate; family of an officer or director of a mutual
savings bank other than an insured bank
shall directly or indirectly control any (A) title company, (B) company engaged
in the business of appraising property, or (C) company which provides service
in connection with the closing of real estate transactions.
SEC. 6. A person who is a trustee, director, officer, or employee of a mutual
savings bank miay not at the same time perform legal services, in connection
with a loan or other business transaction with such mutual savings blank, for
or on behalf of any person.
SEC. 7. A person who is a director, trustee, officer, or employee of a financial
institution may not at the same time serve on the board of directors of any
corporation with respect to which such financial institution manages an employee welfare or pension benefit plan. For the purposes of the preceding sentence, the term "financial institution" refers to
(1) any mutual savings bank which is not an insured bank;
(2) any insured bank as defined in section 3 of the Federal Deposit Insurance Act;
(3) any insured institution as defined in section 401 of the National
Housing Act;
(4) any company which is a bank holding company as defined in the
Bank Holding Company Act of 1956, a savings and loan holding company
as defined in section 408 of the National Housing Act, or a subsidiary of
a bank holding company or a savings and loan holding company;
(5) any Federal credit union;
(6) any insurance company; or
(7) any broker or dealer registered under the Securities Exchange Act
of 1934.




SEC. 8. (a) Except as provided in subsection (b), a director, trustee, officer,
or employee of a financial institution may not at the same time serve as an
officer or director of any other corporation with respect to which such financial
institution holds in the aggregate, with power to vote, more than 5 per centum
of any class of stock of such corporation. For the purposes of the preceding
sentence, the term "financial institution" refers to
(1) any mutual savings bank which is not an insured bank;
(2) any insured bank as defined in section 3 of the Federal Deposit Insurance Act;
(3) any insured institution as defined in section 401 of the National
Housing Act;
(4) any company which is a bank holding company as defined in the
Biank Holding Company Act of 1956, a savings and loan holding company
as defined in section 408 of the National Housing Act, or a subsidiary of a
bank holding company or a savings and loan holding company;
(5) any Federal credit union;
(6) any insurance company; or
(7) any broker or dealer registered under the Securities Exchange Act
of 1934.
(b) An individual may hold any number of positions as director, trustee,
officer, or employee of any number of companies within any given group of
companies if one of the companies is either a bank holding company as defined
in the Bank Holding Company Act of 1956 or a savings and loan holding company
as defined in section 408 of the National Housing Act and all the rest of them
are subsidiaries of that holding company.
SEC. 9. (a) Except as provided in subsection (b), a person who is a director,
trustee, officer, or employee of any insured bank as defined by section 3 of the
Federal Deposit Insurance Act, any insured institution as defined in section 401
of the National Housing Act, or any mutual savings bank not an insured bank
may not at the same time serve on the board of directors of any corporation with
which such insured bank, insured institution, or mutual savings bank has a substantial and continuing relationship with respect to the making of loans, discounts, or extensions of credit. For the purposes of the preceding sentence, that
which constitutes a "substantial and continuing relationship" shall be determined
(1) by the Federal Reserve Board in the case of an insured bank and a mutual
savings bank not an insured bank and (2) by the Federal Home Loan Bank
Board in the case of an insured institution.
(b) An individual may hold any number of positions as director, trustee, officer, or employee of any number of companies within any given group of companies if one of the companies is either a bank holding company as defined in
the Bank Holding Company Act of 1956, a savings and loan holding company
as defined in section 408 of the National Housing Act and all the rest of them
are subsidiaries of that holding company.
SEC. 10. No mutual savings bank shall own stock in—
(1) any insured bank as defined in section 3 of the Federal Deposit Insurance Act;
(2) any insured institution as defined in section 401 of the National Housing Act;
(3) any insurance company;
(4) any company which is a bank holding company as defined in the Bank
Holding Company Act of 1956, a savings and loan holding company as defined in section 408 of the National Housing Act, or a subsidiary of a bank
holding company or a savings and loan holding company;
(5) any broker or dealer registered under the Securities Exchange Act
of 1934.
SEC. 11. (a) Chapter 11 of title 18 of the United States Code is amended b$
adding at the end thereof the following new section:
"§225. Influencing certain banking and related matters
"(a) Whoever, without the consent of his (1) corporation in the case of an
officer or director, (2) principal in the case of an agent, or (3) employer in the
case of an employee, solicits, accepts, or agrees to accept any substantial benefit
from a financial institution under an agreement or understanding that such
benefit will influence his conduct with respect to the affairs between such financial institution and such corporation, principal, or employer, as the case may
be, shall be fined not more than $10,000 or imprisoned not more than one year,
or both.




"(b) A financial institution which, without the consent of (1) a corporation in
the case of an officer or director, (2) a principal in the case of an agent, or (3)
an employer in the case of an employee, confers, or offers or agrees to confer, any
substantial benefit upon such officer, director, agent, or employee, with the intent to influence his conduct with respect to the affairs between such financial
institution and such corporation, principal, or employer, as the case may be, shall
be fined not more than $25,000.
"(c) For the purposes of this section, the term 'financial institution' refers to
" (1) any mutual savings bank which is not an insured bank;
"(2) any insured bank as defined in section 3 of the Federal Deposit Insurance Act;
"(3) any insured institution as defined in section 401 of the National
Housing Act;
"(4) any company which is a bank holding company as defined in the
Bank Holding Company Act of 1956, a saving and loan holding company as
defined in section 408 of the National Housing Act, or a subsidiary of a bank
holding company or a savings and loan holding company;
'' (5) any Federal credit union;
" (6) any insurance company; or
"(7) any broker or dealer registered under the Securities Exchange Act
of 1934."
(b) The chapter analysis of such chapter is amended by inserting immediately
below the item relating to section 224 the following new item :
"225. Influencing certain banking and related matters."

SEC. 12. Section 7 of the Federal Deposit Insurance Act is amended by adding
at the end thereof the following new subsection:
"(k) With respect to the aggregate of all securities (other than Government
securities) it holds a fiduciary capacity, each insured bank shall submit annually to the Corporation—
"(1) a list indicating the name, class, value, and number held of each
security;
"(2) a report indicating the extent to which it has authority to exercise
voting rights with respect to each security; and
"(3) a report indicating the manner in which it has exercised proxies, if
at all, with respect to voting rights in connection with each security.
For the purpose of the preceding sentence, the term 'fiduciary capacity' refers
to the position of trustee, executor, administrator, guardian, or any other position occupied by a bank in which it manages money or property for the benefit
of others. The Corporation iShall make available for public inspection the contents of all lists and reports filed under this subsection."
SEC. 13. 'The Federal Deposit Insurance Act, as amended by section 2 of this
Act, is further amended by adding at the end thereof the following new section:
'*SEC. 26. With respect to the aggregate of all securities it holds in a fiduciary
capacity, no insured bank shall hold
" (1) in connection with any one corporation, more than 10 per centum of
any class of stock for which a registration statement has ibeen filed under
the Securities Act of 1933; or
"(2) bank stock which it has itself issued or stock which has been issued
by its parent company.
For the purposes of the preceding sentence, the term 'fiduciary capacity' refers
to the position of trustee, executor, administrator, guardian, or any other position occupied by a bank in which it manages money or property for the benefit of
others."
RESTRICTIONS AND DISCLOSURES WITH RESPECT TO LOANS

SEC. 14. (a) For the purposes of this section—
(1) The term "lender" means any—
(A) insured bank as defined in section 3 of the Federal Deposit Insur*
ance Act;
(B) insured institution as defined in section 401 of the National Housing
Act;
(C) company which is a bank holding company as defined in the Bank
Holding Company Act of 1956, a savings and loan holding company as defined in isection 408 of the National Housing Act, or a subsidiary of a bank
holding company or a savings and loan holding company ;
60-299—71—pt. 1




2

(D) mutual savings bank which is not an insured bank ; or
(E) any insurance company.
(2) The term "equity participation" refers to—
(A) an ownership interest in any property or enterprise; or
(B) any right to any payment or credit which is proportionate to or
contingent upon the net or gross income from any property or enterprise,
including but not limited to
(i) a share in the profits, income, or earnings from a business enterprise
of the borrower;
(ii) warrants entitling the lender to purchase stock of the borrower at
certain prices; or
(iii) shadow warrants entitling the lender to compensation based upon
changes in the market price of the borrower's stock over a specified period.
(b) No lender may accept any equity participation in consideration of the
making of any loan.
(c) Any lender which acquires an equity participation from a borrower in
violation of this chapter shall, upon demand, assign all its right, title, and
interest therein to the borrower and in addition be liable to the borrower in
an amount equal to twice the fair market value of the equity participation at the
time of its creation or at the time of demand, whichever is higher, and shall in
addition be liable to the borrower for his reasonable attorney's fees and costs
of suit as determined by the court in any action to enforce the liability created
by this section. Any such action may be brought in any district court of the
United States regardless of the amount in controversy, or in any other court
of competent jurisdiction, within six year's after the date on which the liability
arises.
(d) Whoever willfully violates the provisions of subsection (b) of this section,
or willfully and knowingly participates in any such violation, shall be fined not
more than $100,000 or imprisoned not more than one year, or both.
SEC. 15. The Federal Deposit Insurance Act, as amended by section 2 and
section 13 of this Act, is further amended by adding at the end thereof the following new sections:
"SEC. 27. (a) Each insured bank shall report to the Corporation on the
nature and amount of all loans, discounts, or other extensions of credit which
it makes to any of its directors, trustees, officers, or employees or to any
member of the immediate family of any such director, trustee, officer, or employee.
"(b) The Corporation shall make available to the public the information contained in the reports submitted under subsection (a) of this section.
"(c) No insured bank shall make any loan, discount, or other extension of
credit to any agent, trustee, nominee, or other person acting in a fiduciary
capacity without the prior condition that the identity of the person receiving
the beneficial interest of such loan, discount, or extension of credit shall at all
times be revealed to the bank.
"SEC. 28. No insured bank shall make any loan, discount, or other extension
of credit to any corporation with respect to which 5 per centum of the total
outstanding shares of any class of stock is owned in the aggregate by the directors, trustees, officers, or employees, or the members of their immediate families^
of such insured bank."
SEC. 16. Title IV of the National Housing Act, as amended by section 3 of
this Act, is further amended by inserting at the end thereof the following new
sections:
"SEC. 414. (a) Each insured institution shall report to the Federal Home
Loan Bank Board on the nature and amount of all loans, discounts, or other
extensions of credit which it makes to any of its directors, trustees, officers, or
employees or to any member of the immediate family of any such director,
trustee, officer, or employee.
"(b) The Federal Home Loan Bank Board shall make available to the public
the information contained in the reports submitted under subsection (a) of
this section.
"(c) No insured institution shall make any loan, discount, or other extension
of credit to any agent, trustee, nominee, or other person acting in a fiduciary
capacity without the prior condition that the identity of the person receiving
the beneficial interest of such loan, discount, or extension of credit shall at
all times be revealed to the institution.
"SEC. 415. No insured institution shall make any loan, discount, or other
extension of credit to any corporation with respect to which 5 per centum of




the total outstanding shares of any class of stock is owned in the aggregate
by the directors, trustees, officers, or employees, or the members of their immediate families, of such insured institution."
SEC. 17. (a) Each mutual savings bank other than an insured bank shall
report to the Federal Deposit Insurance Corporation the nature and amount
of all loans, discounts, or other extensions of credit which it makes to any of its
directors, trustees, officers, or employees or to any member of the immediate
family of any such director, trustee, officer, or employee.
(b) The Federal Deposit Insurance Corporation shall make available to the
public the information contained in the reports submitted under subsection (,a)
of this section.
(c) No mutual savings bank shall make any loan, discount, or other extension
of credit to any agent, trustee, nominee, or other person acting in a fiduciary
capacity without the prior condition that the identity of the person receiving
the beneficial interest of such loan, discount, or extension of credit shall at all
times be revealed to the institution.
SEC. 18. No mutual savings bank shall make any loan, discount, or other
extension of credit to any corporation with respect to which 5 per centum of
the total outstanding shares of any class of stock is owned in the aggregate
by the directors, trustees, officers, or employees, or the members of their immediate families, of such insured institution.
BROKERED DEPOSITS PROHIBITED

SEC. 19. Subsection (g) of section 18 of the Federal Deposit Insurance Act
(12 U.S.C. 1828(g)) is amended by striking out the next to last sentence thereof,
relating to penalties for violations of such subsection, by inserting " ( 1 ) " at
the beginning thereof, and by adding thereto the following paragraphs:
"(2) No insured bank or officer, director, agent, or substantial stockholder
thereof may pay or agree to pay a broker, finder, or other person compensation
for obtaining a deposit for such bank. For the purposes of this paragraph, any
payment made by any other person to induce the placing of ,a deposit in a
bank shall be deemed to be a payment of compensaton by the bank if the bank
had or reasonably should have had knowledge of such ,a payment when it accepted
the deposit.
"(3) Any violation by an insured bank of the provisions of this subsection or
of regulations issued hereunder shall subject the bank to a penalty of not
more than 10 per centum of the amount of the deposit to which the violation
relates. The Corporation may recover the penalty, by suit or otherwise, for its
own use, together with the costs and expenses of the recovery.
"(4) For the purposes of this subsection, the term 'payment of interest'
includes an agreement to pay interest and includes payments to the depositor or
any other person directly or indirectly made by any officer, director, agent,
or substantial stockholder of the bank in which the deposit is made if the bank
had or reasonably should have had knowledge of the agreement or payment
when it accepted the deposit. The Board of Directors shall by regulation prescribe
definitions of the terms 'payment of compensation' and 'substantial stockholder'
and shall prescribe such further definitions of 'payment of interest' as it may
deem appropriate for the purposes of this subsection. The Board of Directors
shall prescribe such rules and regulations as it may deem necessary to effectuate
the purposes of this subsection and prevent evasions thereof."
SEC. 20. Section 5B of the Federal Home Loan Bank Act (12 U.S.C. 1425b) is
amended (1) by inserting " ( a ) " after "SEC. 5B." and (2) by adding at the end
thereof the following:
"(b) No member which is an insured institution as defined in section 401 (a)
of the National Housing Act and no officer, director, agent, or substantial
stockholder thereof shall pay or agree to pay a broker, finder, or other person
compensation for obtaining funds to be deposited or invested in such member
(hereinafter in this section referred to as deposits). For the purposes of this
paragraph, any payment made by any other person to induce the placing of a
deposit in such a member shall be deemed to be a payment of such compensation
by the member if the member had or reasonably should have had knowledge of
such a payment when it accepted the deposit.
"(c) Any violation by a member of the provisions of this subsection or of
regulations issued hereunder shall subject the member to a penalty of not
more than 10 per centum of the amount of the deposit to which the violation




8
relates. The Board may recover the penalty, by suit or otherwise, for the use
of the Federal Savings and Loan Insurance Corporation, together with the costs
and expenses of the recovery.
"(d) For the purposes of this section, the term 'payment of interest, or
dividends' includes an agreement to pay interest or dividends and includes
payments to the depositor or investor or any other person directly or indirectly
made by any officer, director, agent, or substantial stockholder of the member
in which the deposit is made if the member had or reasonably should have had
knowledge of the agreement or payment when it accepted the deposit. The Board
shall by regulation prescribe definitions of the terms 'payment of compensation'
and 'substantial stockholder' and shall prescribe such further definitions of
'payment of interest or dividends' as it may deem appropriate for the purposes
of this section. The Board shall prescribe such rules and regulations as it may
deem necessary to effectuate the purposes of this section and prevent evasions
thereof."
SEC. 21. (a) Chapter 11 of title 18 of the United States Code as amended by
section 11 of this Act is further amended by adding at the end thereof the
following new section:
"§ 226. Obtaining funds for deposit or investment in certain banks
"Whoever, directly or indirectly, knowingly asks, demands, exacts, solicits,
seeks, accepts, receives, or agrees to receive from any insured bank as defined
in section 3 of the Federal Deposit Insurance Act or any insured institution
as defined in section 401 of the National Housing Act anything of value for
himself or for any other person or entity in return for obtaining or assisting
in obtaining funds of another for deposit or investment in such insured bank
or insured institution shall be fined not more than $10,000 or imprisoned not
more than one year, or both."
(b) The chapter analysis of such chapter is amended by inserting immediately
below the item relating to section 225 the following new item:
"226. Obtaining funds for deposit or investment in certain banks."
CERTAIN GIVEAWAYS PROHIBITED

SEC. 22. Section 18(g) of the Federal Deposit Insurance Act (12 U.S.C.
1828(g)) is amended by adding at the end thereof the following: "Except for
the payment of interest on deposits subject to limitation under this section,
no insured bank may offer or deliver any merchandise or any certificate, stamp,
ticket, or other obligation or memorandum which is or may be redeemable in
merchandise, money, or credit as an inducement to any person to make or add
to any deposit."
SEC. 23. Section 5B(a) of the Federal Home Loan Bank Act (12 U.S.C. 1425b)
is amended by adding at the end thereof the following: "Except in the case
of interest or dividends subject to limitation under this section, no member
may offer or deliver any merchandise or any certificate, stamp, ticket, or othei
obligation or memorandum which is or may be redeemable in merchandise,
money, or credit as an inducement to any person to make, open, or add to any
deposit or account."
SEC. 24. Except for the payment of ordinary interest or dividends, no mutual
savings bank not an insured institution may offer or deliver any merchandise
or any certificate, stamp, ticket, or other obligation or memorandum which is
or may be redeemable in merchandise, money, or credit as an inducement to
any person to make or add to any deposit.
FULL DEPOSIT INSURANCE FOR PUBLIC UNITS

SEC. 25. The Federal Deposit Insurance Act is amended—
(1) in subsection (m) of section 3 (32 U.S.C. 1813(m)), by inserting
immediately after "depositor" in the first sentence the following: "(other
than a depositor referred to in the third sentence of this subsection)":
(2) in subsection (i) of section 7 (12 U.S.C. 1817(i)), by striking out
"Trust" and inserting in lieu thereof the following: "Except with respect
to trust funds which are owned by a depositor referred to in paragraph (2)
of section 11 (a) of this Act, trust"; and
(3) in subsection (a) of section 11 (12 U.S.C. 1821(a)), by inserting "(1)"
immediately after "(a)", by striking out "The" in the last sentence and in-




9
seating in lieu thereof the following: "Except as provided in paragraph (2),
the", and by inserting at the end of such subsection the following:
"(2) (A) Notwithstanding any limitation in this Act or in any other provision
of law relating to the amount of deposit insurance available for the account of
any one depositor, in the case of a depositor who is an officer, employee, or agent
of the United States, of any State of the United States, of the District of Columbia, of any territory of the United States, of Puerto Rico, of the Virgin Islands,
of any county, of any municipality, or of any subdivision thereof having official
custody of public funds and lawfully investing the same in an insured bank, his
deposit shall be insured for the full aggregate amount of such deposit.
"(B) The Corporation may limit the aggregate amount of funds that may be
deposited in insured banks by any depositor referred to in subparagraph (A) of
this paragraph."
SEC. 26. Title IV of the National Housing Act is amended—
(1) in section 401 (b) (12 U.S.C. 1724(b)), by striking out "Funds" in
the third sentence and inserting in lieu thereof the following: "Except in
the case of an insured member referred to in the preceding sentence, funds";
(2) in section 405(a) (12 U.S.C. 1728(a)), by inserting after "except
that no member or investor" the following: "(other than a member or
investor referred to in subsection ( d ) ) " ; and
(3) by adding at the end of section 405 (12 U.S.C. 1728), the following
new subsection:
" ( d ) ( l ) Notwithstanding any limitation in this subchaser or in any other
provision of law relating to the amount of deposit insurance available for any
one account, in the case of an insured member who is an officer, employee, or
agent of the United States, of any State of the United States, of the District
of Columbia, of any territory of the United States, of Puerto Rico, of the
Virgin Islands, of any county, of any municipality, or of any subdivision thereof
having official custody of public funds and lawfully investing the same in an
insured institution, the account of such insured member shall be insured for the
full aggregate amount of such account.
"(2) The Corporation may limit the aggregate amount of funds that may be
invested in insured institutions by any insured member referred to in paragraph (1) of this subsection."
SEC. 27. (a) Except as otherwise specified in this section, the provisions of
this Act become effective upon enactment.
(b) Sections 4, 5, 6, 7, 8, 9, and 10 and the amendments made by sections 2,
3, and 13 become effective on the first day of the fourth calendar year which
begins after the date of enactment.
[H.R. 3287, 92d Cong., first sess.]
A BILL To prohibit federally insured banks from making loans to provide for the purchase
of bank stock and for other purposes

Be it enacted by the Senate and House of Representatives of the United States
of America in Congress assembled, That section 18 of the Federal Deposit Insurance Act (12 U.S.C. 1828) is amended by adding at the end thereof the following new subsection:
"(k) No insured bank shall make any loan, discount, or extension of credit
to provide for the purchase of stocks, bonds, debentures, or other obligations
of any bank."
The CHAIRMAN. The proposals embodied in H.E. 5700 are based on

several years of thorough study and investigation of various problems
in the field of banking and finance. Many of these proposals, as we will
find out during the course of these hearings, have been endorsed by various agencies of the Federal Government, experts in the field of banking
and finance, and even some members of the banking community.
This legislation seeks to achieve two basic goals: (1) The enhancement of competition among financial institutions and the reduction of concentrations of economic power within the financial
community; and (2) the elimination of certain serious conflict-of-




10
interest situations which have been allowed to continue because of
existing practices carried on by financial institutions.
The bill coversfivebasic areas:
(1) Certain interlocking relationships among financial institutions,
and between them and other corporations;
(2) Certain restrictions and disclosures in connection with loans
made by financial institutions;
(3) The problem of brokered deposits, which has caused a number
of bank failures in recent years;
(4) The practice of offering gifts to potential depositors by financial institutions in order to attract deposits;
(5) Expanding insurance coverage on the deposits of public funds
in insured banks and savings and loan associations to 100 percent.
These proposals cover a wide variety of complex economic, legal,
and practical problems. Some of the problems dealt with here have
been explored in detail in several studies carried out by this committee,
as well as work done by various individual experts, commissions, and
agencies. These matters, such as the inadequacy of present laws regulating interlocking relationships among competing financial institutions,
adequate disclosure of investments by bank trust departments and the
problem of brokered deposits, have been investigated to the extent that
there is a general agreement that existing law must be strengthened.
There is also general agreement on how to go about accomplishing this.
It seems to me that in the areas that have been explored in depth over a
long period of time this committee and this Congress should be able
to produce effective legislation without further delay.
For example, in a study carried out in 1967 by the Domestic Finance
Subcommittee of this committee, it was revealed that 48 leading commercial banks in 10 major metropolitan areas had 572 officer and director interlocks with other financial institutions including other commercial banks, mutual savings banks, savings and loan associations,
and insurance companies. This was more than 10 interlocks per bank.
Recent statistics confirm similar interlocking patterns among these
actual and potential competitors for savings, loans, pension fund management, and other services. Such relationships among competitors
in other fields have been largely prohibited for more than 50 years.
In another area, trust departments of commercial banks, until this
committee undertook a thorough investigation of their size and investments in 1968, almost nothing was known about them. This study revealed that at that time, there were more than $250 billion in
trust assets in about 3,100 commercial banks. Just the top 50 banks
held over 70 percent of this total, or $176 billion. Only 19 banks held
over 50 percent of all trust assets.
Subsequent studies by the Federal bank supervisory agencies and the
Securities and Exchange Commission reveal that as of late 1969 the
total assets in bank trust departments had risen to over $280 billion.
Bank trust department assets are the largest single element of all
institutional investor assets, representing about 38 percent of the total.
The next largest is life insurance companies with $190 billion or about
26 percent of the total of $143 billion.
While there has for years been public disclosure of the investment
assets of two of the largest types of institutional investors—insurance
companies and mutual funds—there is no such disclosure for bank
trust departments, the largest institutional investor. There is grow-




11
ing agreement among those who have studied this field that there
should be such a disclosure.
As for the problem of brokered deposits, the Federal Deposit Insurance Corporation has acknowledged that they have been an important cause of a large number of bank failures in recent years. In
this area, too, some kind of strict regulation is clearly required.
Other issues raised by this legislation, while extremely important
are relatively new, and thus have not received detailed examination
over a long period of time. However, they have created problems in
recent years that demand consideration of our committee and a
decision as to whether legislation should be enacted and, if so, what
form it should take. These issues, such as the question of prohibiting
or limiting gifts by financial institutions in order to attract deposits,
the problem of equity participation by lending institutions, strong
regulatory legislation involving the operations of the trust departments of banks, including limitations on certain relationships between
banks and nonfinancial institutions, certain conflict of interest issues
involving various financial institutions, and 100 percent insurance of
public funds, should be explored carefully by the committee during
these hearings, keeping in mind that the legislative proposals embodied
in H.R. 5700 are an attempt at a reasonable solution to the problems raised. The legislative proposals in these areas are not necessarily the final solution to the problems raised. We should carefully
consider all alternatives proposed so that we can solve these problems
without creating too many new ones.
Before we hear from our first witnesses, let me point out that we
have tried to schedule witnesses presenting as wide a point of view as
possible. An unusually large number of groups and experts have
requested to testify so that we have had to schedule hearings on 12 of
the next 15 days. In order to cover the ground fairly and completely
we will also have to meet on several days during the afternoon. The
only alternative to this procedure would have been to extend these
hearings over many more weeks. However, this would have precluded
the committee considering other important issues that it must take up
during this session of Congress. Therefore, I ask the committee to bear
with the Chair in trying to expedite these hearings so that everyone
will be given a fair opportunity to present their views to the committee.
Our first witnesses on the legislation before us are the Honorable
Frank Wille, Chairman of the Federal Deposit Insurance Corporation,
and the Honorable Preston Martin, Chairman of the Federal Home
Loan Bank Board. Gentlemen, we appreciate your taking the time
to appear before the committee today on these bills and we are sure
that your contribution during consideration of them will be extremely
helpful.
Let me just say that at the request of Mr. Martin's office, the members
of the committee have been sent copies of the proposed legislation
entitled the Housing Institutions Modernization Act of 1971. The
proposed legislation has not yet been referred to this committee, but
when it is, we will give it proper consideration. It obviously would
be inappropriate to take up this proposal during consideration of
H.R. 5700.
I will ask Mr. Wille to present his statement first and then we will
hear from Mr. Martin, after which we will have questions from the
committee members.




12
Mrs. SULLIVAN. Mr. Chairman.
The CHAIRMAN. Mrs. Sullivan.
Mrs. SULLIVAN. Mr. Chairman, may I make a short statement ?
The CHAIRMAN. Yes.
Mrs. SULLIVAN. Mr.

Chairman, in view of the fact that the bill I
introduced, H.R. 7440, dealing with sayings and loan conflicts of
interest, was not specifically mentioned in the committee notice last
week listing bills being considered in these hearings, I would like the
record to show that it definitely is before us as one of the "related
matters" referred to in the committee notice of April 15.1 believe that
what happened last year on an amendment of mine to the housing
bill which was identical to the text of H.R. 7440 was an important
factor in your preparation of the much broader bill you have introduced, H.R. 5700, and the scheduling of these hearings on conflict of
interest situations in all thrift institutions.
As you recall, Mr. Chairman, when we were working on the 1970
Housing Act, I called the committee's attention to the recommendations of the Ad Hoc Subcommittee on Home Financing Practices and
Procedures which had spotlighted some of the conflict of interest
abuses which we had uncovered among a few savings and loans here
in Washington during our investigation. I pointed out that the Home
Loan Bank Board had testified it did not have all the authority it
said it would need under the law to carry out the reforms we had
recommended.
The language I offered last year was prepared for me, as a bill drafting service, by the technicians of the Board whom I asked to write
exactly what they felt was necessary as an amendment to the law to
give the Board the authority our subcommittee wanted it to have.
This committee agreed to that language, and it was in the housing
bill as reported. The Home Loan Bank Board itself neither supported
nor opposed this provision. When the housing bill was before the
House, on one of the few occasions I was not present in the last Congress, a substitute for my amendment was offered by Mr. Brasco, supported by Mr. Widnall and others, which was supposed to
be clearer, easier to understand and more precise than my
amendment, and it was adopted. After the housing bill went
to conference, the Home Loan Bank Board then reported that the
substitute amendment adopted on the House floor was inadequate
and unacceptable. At the same time, the Board supplied the conferees with a draft of new language it said it wanted and needed.
That new language was unacceptable to me because it left out some
of the major provisions of the legislation the Board's technicians had
previously drafted to enable the Board to carry out the Ad Hoc Subcommittee's recommendations.
In the conference on the housing bill, the Senate conferees said
they had held no hearings on the conflict of interest issue and were
not prepared to act on this matter at that time, but Senator Sparkman said 'his committee would hold hearings on it in this Congress,
and you, Mr. Chairman, said you would also schedule hearings in
our committee, which you have now done. The statement of managers
on the part of the House then added that both the House and Senate
conferees felt the Home Loan Bank Board already has more authority
to regulate conflict of interest situations than it has attempted to use,




13
and should vigorously utilize its existing powers to cope with abuses in
this field. That is the history of this issue.
Mr. Chairman, I want to make it clear that in introducing H.E. 7440
earlier this month I was not attempting to take anything away from
your bill, H.R. 5700, which, as I said, goes much further than my bill.
H.R. 5700 would prohibit by law the things my bill would give the
Home Loan Bank Board additional discretionary authority to regulate. Furthermore, your bill applies to all lending institutions—banks,
credit unions, et cetera, as well as to savings and loans. So the question
before us will be whether we allow the regulatory agencies to set the
policies on conflict of interest situations or whether we spell out in
the law itself exactly what arrangements are illegal. I think both
approaches should be pursued in these hearings so that we will have the
information we need in order to make informed judgments.
The CHAIRMAN. Have youfinished?
Mrs. SULLIVAN. I just want to ask unanimous consent that H.E. 7440
and the background documentation that I have just talked about goes
into the record at this point, to explain what the bill does and why
I feel that it should be considered in these hearings. I therefore ask
such unanimous consent.
The CHAIRMAN. If I understand your request it is that you are
giving notice that you will submit this as an amendment to H.R. 5700,
in other words, H.R.. 5700 deals with it specifically, and you want to
have an alternative that the Federal Home Loan Bank Board deal
with it by regulation ?
Mrs. SULLIVAN. That is right. Yours wTould do it by law, mine by
regulation.
The CHAIRMAN. Why don't you just wait until the time comes and
offer it as a substitute ?
Mrs. SULLIVAN. Mr. Chairman, I think that while we are having
hearings on the subject, both regulatory methods should be pursued,
one which spells out prohibitions in the law and the other by permitting the regulatory agency to issue appropriate regulations.
The CHAIRMAN. It woiild be all right to discuss it and ask questions
about it, but you will offer it at the proper time as a substitute if you
decide, or as an amendment ?
Mrs. SULLIVAN. If that is decided, yes; only I think at the beginning
of the hearing
The CHAIRMAN. Your bill was introduced, I believe, at the last day
before the recess, wasn't it?
Mrs. SULLIVAN. That is right, April 6, right before the recess.
The CHAIRMAN. I am not sure all Members are acquainted with it.
Did you furnish them a copy of the bill ?
Mrs. SULLIVAN. It was in the Congressional Record with an explanation of what the bill did.
The CHAIRMAN. Personally I have no objection. It would require
unanimous consent.
Is there objection to the consideration of this bill along with the
other?
(No response.)
The CHAIRMAN. Without objection, it is so ordered.
Mrs. SULLIVAN. Thank you, Mr. Chairman.
(The following material was submitted by Mrs. Sullivan for inclusion in the record at this point, consisting of the text of H.R. 7440,




14
excerpts from the Congressional Record of April 7, 1971, and December 2,1970, relevant excerpts from a letter of December 11, 1970, from
the Federal Home Loan Bank Board, and an excerpt from House Conference Report 91-1784:)
[H.R. 7440, 92d Cong., first sess.]
A BILL To clarify and expand the authority of the Federal Home Loan Bank Board to
regulate conflicts of interest in the operation of insured savings and loan associations,
and for other purposes

Be it enacted ty the Senate and House of Representatives of the United
States of America in Congress assembled, That section 17 of the Federal Home
Loan Bank Act is amended by adding at the end thereof the following new subsection :
"(c) (1) The Federal Home Loan Bank Board (hereinafter referred to as
the Board) is directed, to such extent as it may deem necessary or appropriate
in the public interest or for the protection of members, investors, or borrowers,
or the Federal Savings and Loan Insurance Corporation, to regulate relationships, including without limitation on the generality of the foregoing business,
financial, or other transactions, between—
" (A) a member and another member ;
"(B) a member or an affiliated person of such member or of another member and an investor in or borrower from any such member or another
member;
"(C) a member and an affiliated person of such member or of another
member;
"(D) a member or an affiliated person of a member, or an investor in
or borrower from a member or an affiliated person, and a person from
or through which services are or may be rendered (i) to such member or
another member, (ii) to an affiliated person of such member or of another
member, except where no member is involved and all affiliated persons
involved are individuals, or (iii) to an investor in or borrower from a member or an affiliated person of a member; or
"(E) an affiliated person of a member and an affiliated person of such
member or of another member, where the relationship involves or may
involve any relationship described in subparagraphs (A) through (D)
above.
"(2) The authority conferred by paragraph (1) of this subsection shall include authority to regulate with respect to the providing, under circumstances
set forth in subparagraph (D) of such paragraph, of appraisal or valuation
services or other services, including, without limitation by or on the foregoing,
standards and requirements with respect to such services &nd with respect to
qualifications for and conduct of persons providing or eligible to provide such
services. In or in connection with the exercise of authority under this paragraph
the Board is authorized to make provision for registers or rosters of eligible
persons and for involuntary or other removal of persons therefrom.
"(3) In or in connection with the exercise of any function vested in or exercisable by the Board under this Act or otherwise, the Board (which term is used
in this paragraph includes the Federal Savings and Loan Insurance Corporation) is authorized (A) to act through any corporate or other agency or instrumentality of the United States and utilize services, facilities, and personnel
thereof, and any such agency or instrumentality is authorized to provide the
same as requested by the Board, (B) to make payment therefor, and (C) to
impose and collect fees and charges for the provision by the Board of Services,
facilities, or personnel to any person, and for purposes of this subsection the
references in the last two sentences of subsection (b) of section 5B as now in
effect to penalties shall be deemed to be references to such fees and charges. Any
such payment or collection may be in advance or by reimbursement or otherwise.
"(4) As used in this subsection—
"(A) the term 'affiliated person' means—
"(i) a director, officer, employee, or controlling person of a member,
or an attorney regularly serving, or a member or associate of a firm
regularly serving, a member in the capacity of attorney-at-law;
"(ii) a member of the immediate family of any individual referred
to in clause (i) above;




15
"(iii) a partnership in which any individual referred to in clause (i)
or (ii) above is a general or limited partner;
"(iv) a corporation in which stock carrying 10 per centum or more
of the voting rights is directly or indirectly owned or controlled by any
one or more of the persons referred to in (i) through (iii) above, either
alone or in concert; or
"(v) any person or class of persons with respect to which there is
outstanding a determination by the Board by regulation or otherwise
that it is necessary or appropriate in the public interest or for the
protection of members, investors, or borrowers or the Federal Savings
and Loan Insurance Corporation that such person or class be treated
as an affiliated person, but the term 'affiliated person' as used in this
subsection and the term 'controlling person' as so used shall not include
any person or class of persons with respect to which there is outstanding
a determination by the Board by regulation or otherwise that the
exclusion of such person or class from the meaning of the term 'affiliated
person' or the term 'controlling person' as so used is not inconsistent
with the protection aforesaid and is necessary or appropriate in the
public interest;
"(B) the term 'controlling person' means any person who, alone or in
concert with another or others, directly or indirectly has the right to vote,
whether by stock ownership or control, proxy holding, or otherwise, or any
combination thereof, more than 25 per centum of the voting rights in a
corporation;
" (C) the term 'firm' includes, without limitation on its generality, artificial
persons and groups or organizations of persons;
"(D) the term 'investor' and 'borrower' respectively include prospective
investors and prospective borrowers;
"(E) the term 'member' includes any institution, any of the deposits,
share, or accounts of which have any insurance by the Federal Savings and
Loan Insurance Corporation and, to 1such extent and only to such extent
as the Board may provide, includes the Federal Home Loan Mortgage
Corporation;
"(F) the term 'person' includes, without limitation on its generality,
individuals and artificial persons and groups or organizations of persons;
"(G) the term 'regulate' or any derivative thereof includes prohibition;
and
"(H) the term 'services' includes, without limitation on its generality,
appraisal or valuation services, legal services, title services, title insurance,
hazard insurance, credit insurance, and other insurance, settlement services,
escrow services, and trustee services.
"(5) The provisions of subsection (f) of section 5A and of subsections (b)
and (c) of Section 5B, all as now in effect, are extended to include this subsection, and for purposes of this sentence the references in said subsections to
those sections shall include this subsection, the references in said subsection
(f) to provisions of the National Housing Act shall be deemed to be references
to those provisions as now in effect, and the references in said subsections
(b) and (c) to institutions and nonmember institutions shall include members and shall include affiliated persons. In implementing or carrying out
provisions of this subsection the Board may make classifications on the basis
of the nature, characteristics, or location of members or affiliated persons
or of investors therein or borrowers therefrom or on such other basis or bases
as the Board may deem desirable in the public interest."
[From the Congressional Record, Apr. 7, 1971]
REGULATION OF CONFLICT OF INTEREST SITUATIONS IN INSURED SAVINGS AND
LOAN ASSOCIATIONS

(By Hon. Leonor K. Sullivan, of Missouri, in the House of Representatives,
Wednesday, April 7, 1971)
Mrs. SULLIVAN. Mr. Speaker, following the Easter recess, the House Committee on Banking and Currency will be holding hearings on a broad range of
issues involving conflict of interest situations in all types of federally insured




16
financial institutions. In anticipation of those hearings, I am today reintroducing as a separate bill a measure which I sponsored last year as an amendment to the housing and urban development bill to clarify and expand the
authority of the Federal Home Loan Bank Board to regulate conflict of interest
situations in insured savings and loan institutions.
This same proposal was agreed to in the committee last year as an amendment of mine to H.R. 19436, the Housing and Urban Development Act of 1970.
but was drastically changed on the House floor and was subsequently dropped
in conference after the chairmen of the House and Senate Banking and Currency Committees expressed a willingness and intention to hold hearings in
their respective committees in this session on the issues raised by my amendment as originally offered.
GREW OUT OF AD HOO SUBCOMMITTEE INVESTIGATION AND REPORT

My amendment last year on conflict of interest situations involving some
savings and loans and their officials was one of a number of legislative proposals resulting from an investigation and report made by an ad hoc subcommittee on home financing practices and procedures created early in the
last Congress by the Committee on Banking and Currency following disclosures of widespread victimization and low- and moderate-income families in
the District of Columbia in the purchase of homes at terribly inflated prices
from speculators, financed to a large degree by one insured savings and loan
institution. Several of the legislative recommendations of the ad hoc subcommittee were enacted as part of the Housing and Urban Development Act of
1,970, which was signed December 31, 1970, as Public Law 91-009, but the
proposal on conflict of interest situations, as I said, was not included in the
final version of the bill.
Approximately a month ago, Chairman WRIGHT PATMAN, of the Committee on
Banking and Currency, introduced, with eight cosponsors, a bill, H.R. 5700, which
would prohibit by law numerous practices engaged in by officials of not only
savings and loans but also banks and related institutions which are described
in the bill as conflicts of interest. Chairman PATMAN has scheduled hearings on
the subject matter of that bill and any similar bills following the Easter recess
of the House.
Therefore, in order to have my original proposal formally before the committee for those hearings, I am reintroducing it today as a separate bill. Instead
of prohibiting by statute a wide range of conflict-of-interest situations which
have arisen in savings and loan management activities, my bill clarifies and
expands existing authority of the Federal Home Loan Bank Board to issue regulations covering these activities. This was the general approach taken by the ad
hoc subcommittee in its report, which was printed in the CONGRESSIONAL RECORD
of July 31,1970, at pages E7227 through E7236.
DISPOSITION OF AD HOC SUBCOMMITTEE RECOMMENDATIONS

The ad hoc subcommittee in the 91st Congress, of which I was chairman,
included the following additional Members: the gentlemen from New York,

Representatives JAMES M. HANLEY and FRANK J. BRASCO, and the gentleman

from Kansas, Representative CHESTER L. MIZE, and until his resignation from the
Committee on Banking and Currency to accept election to the Committee on
Armed Services, the gentleman from Maryland, J. GLENN BEALL, Jr. Senator
BEALL, participated in our hearings and investigation but not in the drafting of
the final report. The report was signed by all of the other Members.
Among concrete legislative results of our study were the adoption by Congress
of changes in the law to provide for regulation by the Federal Home Loan Bank
Board of all insured savings and loans in the District of Columbia whether or
not federally chartered, thus closing a serious loophole in the regulatory
machinery; and extending to all insured savings and loans the protection of the
criminal code provisions against false claims previously accorded only to federally chartered savings and loans.
A third ad hoc subcommittee proposal, calling for the establishment in the
Department of Housing and Urban Development of an office of Special Assistant
to the Secretary to advise and assist nonprofit organizations in sponsoring housing projects and programs, was also included in the Housing and Urban Development Act of 1970.




17
However, several of our recommendations were not agreed to in the full Committee last year and have therefore not yet been enacted. One would prohibit,
except under very limited circumstances, the use of straw parties in residential
real estate transactions; others dealt with appraisals, settlement practices, and
the disclosure on all deeds in federally related transactions of the actual consideration paid and the interest of the parties thereon. I intend to pursue these
issues in connection with housing legislation coming before the Committee in this
Congress. I think they are essential reforms.
FEDERAL HOME LOAN BANK BOARD WOULD SET STANDARDS

The bill which I have introduced today, Mr. Speaker, is intended to give to
the Federal Home Loan Bank Board the clear statutory authority to carry out,
through issuance of appropriate regulations, the following recommendations of
the report of the ad hoc Subcommittee on Home Financing Practices and
Procedures.
First, expansion of the definition of "conflicts of interest" for directors, officers, and employees of savings and loan associations, regulating their own involvement in the business of real estate for their personal gain through the use
of their own or other savings and loan associations;
Second, additional and more realistic limitations on "single borrower" loans.
These regulations should set firm limits on the portion of an association's total
assets and the number of loans that can be made to single borrowers.
Third, establishment of criteria for the qualification of appraisers and the
assignment of responsibility for faulty appraisals.
Fourth, regulation of the interest of directors, officers, and employees of savings
and loan associations in title companies, settlement houses, appraisal organizations, and similar institutions who do business with savings and loans.
Mr. Speaker, the language of my bill is technical and legalistic, and has been
described as too hard to understand. If it needs improvement on that score, I
would certainly have no objection to changes, but not at the expense of destroying the effectiveness of the bill. I asked the technical experts in the Home Loan
Bank Board who deal in this field of regulatory law to draft the kind of language
necessary to give the Federal Home Loan Bank Board authority it maintained it
does not now fully possess to carry out the ad hoc subcommittee recommendations
on conflicts of interest. The Board itself did not support this language last year;
in fact, it took no position one way or another on this section of H.R. 19436 until
after it was amended on the House floor and, in my opinion as well as the Board's
opinion, made completely meaningless. While the housing bill was in conference,
the Board then came forward with some different language which it said was
needed and which it would support, but the conferees decided to postpone the
matter until this year.
The Board's belated amendment seemed to me to be much weaker than
my original section. Hence, in the forthcoming hearings, I hope the Board will
be prepared to tell us in detail why it objects to any specific provisions of my
bill which its own version would change. In that way, we can get to the bottom
of just what the problems really are in achieving effective regulation to prevent
conflict of interest situations which could victimize savers in the association,
or those who borrow from it, or the Federal Savings and Loan Insurance Corporation, which is usually the ultimate victim of any serious management abuses
in insured institutions.
TEXT OF BILL

Although its language will, I am sure, be virtually incomprehensible to most
laymen, I include herewith, for the information of the Members who are interested, the text of the bill I have today introduced on savings and loan conflict-of-interest situation, as follows:
(The text of H.R. 7440 appears on p. 14)
TECHNICAL EXPLANATION OF H.R. 7440

The following technical data on the above bill was given to me, Mr. Speaker, by
the experts who drafted this language:
Paragraph (1) provides general authority in the Board to regulate the situations in which conflicts of interest most frequently appear or are likely to ap-




18
pear. This regulatory authority clarifies any existing regulatory authority with
respect to institutions insured by the Federal Savings and Loan Insurance Corporation and expands such regulatory authority to embrace Federal Home Loan
Bank member institutions as well.
The regulatory authority under this paragraph is limited, however, in that
it applies only to the relationships and transactions referred to in the paragraph.
It does not extend, for example, to relationships or transactions between individuals (such as directors of the same association or a director of one and a
director of another) where no member or insured institution is involved.
Under paragraph (5) of the new subsection, which extends to the new subsection certain existing provisions of the Act, the Board would have authority
to impose and collect penalties of as much as $100 a day on any member
or insured institution, or affiliated person, who violated any rule imposed
under paragraph (1).
Subdivision (D) of paragraph (1) is designed to grant clear regulatory authority where services, such as appraisal services, title services, and settlement services, are rendered to member or insured institutions or affiliates thereof, or to investors therein or borrowers therefrom. Paragraph (2) implements
this authority by expressly authorizing the Board to regulate the providing of
appraisal and other services, including the providing of standards and requirements for such services and for the qualifications and conduct of persons rendering the services. In this connection the Board would be authorized to provide for
registers or rosters of eligible persons and for removal of persons therefrom.
Paragraph (3) authorizes the Board to obtain assistance from other agencies
or instrumentalities of the United States and to impose user fees or charges. Assistance from other agencies and instrumentalities may especially be needed to
make available to the Board the benefit of the expertise of other agencies, such
as the Federal Housing Administration and the Veterans Administration, which
have had long experience in thefieldof appraisals and related activities.
{ Paragraph (4) supplies definitions. Paragraph (5) extends to the new
statutory provisions implementing and enforcement provisions already existing
in other sections of the Federal Home Loan Bank Act and contains other implementing provisions.
[From the Congressional Record, Dec. 2, 1970]
AMENDMENT OFFERED BY MR. BRASCO TO THE AMENDMENT IN THE NATURE
OF A SUBSTITUTE OFFERED BY MR. STEPHENS

Mr. BRASCO. Mr. Chairman, I offer an amendment to the amendment in the
nature of a substitute.
The Clerk read as follows:
"Amendment offered by Mr. Brasco to the amendment in the nature of a
substitute offered by Mr. Stephens: At page 106, line 11, strike all that
follows down through page 111, line 25, and substitute in lieu thereof the following llanguage:
" 'SEC. 913. Section 17 of the Federal Home Loan Bank Act (12 USC § 1437)
is amended by adding at the end thereof the following new subsection:
"*"(c) The Federal Home Loan Bank Board (hereinafter referred to as
the Board) is directed, to such extent as it may deem necessary and appropriate to maintain the safety and soundness of any member institution in the
conduct of such member institution's business, or for the protection of the
Federal Savings and Loan Insurance Corporation, to regulate or prohibit any
director, officer, employee of, or attorney or appraiser for, or any other person
occupying a fiduciary relationship with, any member institution from engaging
or participating in any business or financial transaction conducted on behalf of
or involving any such member or other financial institution which would result
in a conflict of his own personal financial interests with those of the member
institution which he serves, including the authority to use its supervisory agents
to examine any member institution with respect to those conflict of interest
situations which are not specifically limited or prohibited by regulation and to
take appropriate action, when circumstances so warrant, to prevent, circumscribe, or eliminate such situations." ' "
Mr. BRASCO (during the reading). Mr. Chairman, I ask unanimous consent
that the amendment be considered as read, and printed in the RECORD.




19
The CHAIRMAN. I S there objection to the request of the gentleman from New
York?
Mr. BLACKBURN. Mr. Chairman, I object.
The CHAIRMAN. Objection is heard.
The Clerk proceeded to read the amendment.
Mr. BLACKBURN. Mr. Chairman, I withdraw my objection to the request of
the gentleman from New York.
The CHAIRMAN. IS there objection to the request of the gentleman from
New York ?
There was no objection.
Mr. BRASCO. Mr. Chairman, my amendment would substitute language for
the language of the so-called Sullivan amendment contained in section 913
of the Stephens substitute, on page 100 beginning with line 11.
Before I begin to explain my amendment, I certainly want to take this opportunity to pay great tribute to the gentlewoman from Missouri, the Honorable Leonor K. Sullivan, with whom I have had the honor to serve on the
Committee on Banking and Currency and more specifically in this instance the
honor to serve as a member of the Ad Hoc Subcommittee on Home Financing
Practices and Procedures, which the gentlewoman chaired.
This ad hoc subcommittee held hearings over several months. The hearings
brought to light many nefarious activities which had been and perhaps still
are going on concerning the few "bad apples" in the savings and loan association industry. Further, the hearings indicated that these "bad apples" had
taken unfair advantage of people's savings in savings and loan associations to
the extent that they were making speculative loans the benefits of which accrued to insiders, with the detriment, of course, falling on the unsuspecting
home purchaser.
As a result, Mr. Chairman, of the recent inquiry made by this ad hoc subcommittee the gentlewoman from Missouri (Mrs. Sullivan) proposed an
amendment, which is the amendment in question, section 913 of the Stephens
substitute. It is basically directed at ferreting out conflicts of interest in the
savings and loan association industry so that we can put a handle on this
unfair practice and get the situation back to normal.
I hasten to add that I certainly join with the gentlewoman from Missouri
(Mrs. Sullivan) as indeed do all the other members of the ad hoc subcommittee, in seeking this same resolution of the problem; namely, cutting out
conflicts of interest in this area.
When this language w^as drafted it was generally assumed it would do the
job in question. However, I am informed at this time that the language does
have very broad implications—'broad insofar as they may exceed the legitimate purpose of prohibiting conflict-of-interest situations within the savings
and loan industry. For example, the language now contained in section 813
would allow the Home Loan Bank Board to inquire into transactions between
a board member of a savings and loan institution and another individual,
said transaction having absolutely nothing to do with the board member's
activity as a member of a savings and loan institution.
To illustrate more specifically, existing language could be construed to allow
the Home Loan Bank Board to secure all books, papers, documents, and records
involving transactions between a savings and loan director of a board who happens to be a retail merchant besides, and his relationship as a retail merchant
with a supplier of goods to his retail establishment without bringing into play
his activities as a board member at all.
Mr. Chairman, I do not believe that it was the author's intent or my intent
to give to the Home Loan Bank Board this broad authority. My amendment would
do, I believe, exactly what we on the ad hoc subcommittee wanted to do, what
Mrs. Sullivan wants to do, and what I understand the full committee wants
to do, that is, very simply give to the Federal Home Loan Bank Board, the authority to prohibit any director, officer, employee of or attorney or appraiser from
engaging in or participating in any business or financial transaction conducted
on behalf of a savings and loan association which would result in a conflict of
interest.
The CHAIRMAN. The time of the gentleman has expired.
(By unanimous consent, at the request of Mr. Holifield, Mr. Brasco was allowed to proceed for 5 additional minutes.)
Mr. BRASCO. AS I indicated, Mr. Chairman, I believe this amendment, if enacted, would accomplish these purposes.




20
I direct the attention of the Members to section 913 on page 106 of the Stephens substitute or in the original bill, page 121, Sec. 911.1 would ask them to take
a very brief look at that section in terms of its definitions, its broad implications,
and the fact that I believe it is not as concise or as intelligible as the language
in my amendment, which I believe is concise and simplified and which does exactly
what the committee intended it to do.
Mr. DEB WIN SKI. Will the gentleman yield for a question?
Mr. BKASCO. I certainly do.

Mr. DERWINSKI. May I say in the process of asking the question that I think
the gentleman has a very sound amendment and I support it wholeheartedly.
Would the gentleman permit me to say that in effect what he does also is to
have the Congress spell out more distinctly the intention of Congress for the
officials and agencies to interpret. In effect he has a more precise and workable
amendment than the existing language.
Mr. BRASCO. Yes. I tried to indicate that when I indicated I believed that the
language as it now exists is too broad and too vague.
Mr. DERWINSKI. I believe the gentleman has a sound amendment and I urge its
adoption.
Mr. HOLIFIELD. Will the gentleman yield?
Mr. BRASCO. I certainly do yield.
Mr. HOLIFIELD. I have tried to understand this. I am accustomed to reading bills,
and I tried to understand section 911 in the original bill. I tried to get others
to explain it to me, also, but I could not get an explanation that made it clear
in my mind. I think the gentleman's language clarifies it. It put the responsibility on the Home Loan Bank Board to make the necessary rules and regulations.
I say this with some knowledge, because I was chairman of the subcommittee that investigated the Home Loan Bank Board several years ago, and I served
on another committee that the gentleman from California (Mr. Moss) was
chairman of. One thing we found out was that the Home Loan Bank Board at
that time was far beyond its statutory authority and got into matters which
were extraneous and completely without any relationship to the regulatory
powers that were given to it. I will say under the present administrator, as far
as I know I have had no complaints from the savings and loan people or other
people in my district in respect to the present savings and loan administrator of
the Home Loan Bank Board.
I commend the gentleman for his amendment and state that I intend to support
it.
Mr. BRASCO. I thank the gentleman.
Mr. WIDNALL. Mr. Chairman, will the gentleman yield ?
Mr. BRASCO. I shall be happy to yield to the distinguished gentleman from
New Jersey.
Mr. WIDNALL. I think this is a very fine amendment. I certainly hope it will
be approved by the committee. I believe the minority approves what the gentleman is trying to do. The situation badly needed clarification and it will do
exactly the job that was intended in the first place.
Mr. BARRETT. Mr. Chairman, will the gentleman yield?
Mr. BRASCO. I yield to the distinguished chairman of the subcommittee.
Mr. BARRETT. I would certainly like to be for the amendment, but I do think
thait the distinguished gentlewoman from Missouri (Mrs. Sullivan) has put an
awful lot of work into this section 913 and deserves our support. I have not read
any language as yet that in my opinion -provides better conflict-of-interest
protection.
It seems as though the other side here is for it. However, I certainly would like
to see this offered at another time when we can analyze it more clearly.
Mr. BRASCO. I do not wish to put words in the mouth of the gentlemtan, but I
think the gentleman from California (Mr. Holifield) said he could not analyze
the (present language in the bill very clearly. I understood him to isay that the
language in my amendment was much more concise and understanding.
Mr. HOLIFIELD. Mr. Chairman, will the gentleman yield?
Mr. BRASCO. I yield to the gentleman from California.
Mr. HOLIFIELD. That was the intent I had in mind.
The CHAIRMAN. The question is on the amendment offered by the gentleman
from New York (Mr. Brasco) to the amendment in the nature of a substitute
offered by the gentleman from Georgia (Mr. Stephens).
The amendment to the amendment in the nature of a substitute was agreed to.




21
[Relevant excerpts from letter of Dec. 11,1970]
FEDERAL HOME LOAN BANK BOARD,

Washington, D.C., December 11,1970.
Hon.

JOHN SPARKMAN,

Chairman, Committee on Banking and Currency,
U.S. Senate.
DEAR MR. CHAIRMAN : This is in response to staff request for the views of the
Board regarding the provisions of S. 4368 which affect savings and loan
associations.
With regard to Senate-passed S. 4368, the Board favors the enactment of section 1008 thereof, and favors the enactment of section 1007 thereof with an
amendment. The text of this amendment is the first attachment to this letter and
the reasons for the amendment are discussed below.
With regard to House-passed S. 4368, the Board favors (the enactment of sections 809, 810, 811, 813 and 817 thereof. The Board takes no position regarding the
enactment of section 821 thereof; the Board suggests a technical amendment to
section 821 should the conferees wish to adopt section 821. The Board opposes
the enactment of section 814 thereof. The Board opposes the enactment of section
812 as written, but recommends the enactment of a substitute amendment to
section 812. The text of this amendment is attached as the second attachment
to this letter and the reasons for this amendment are discussed below.
The discussion below relates only to those sections as to which differences
exist between the House and Senate versions of S. 4368.
Sec. 812. of House version. (Brasco Amendment) Conflicts of Interest and Related Matters. Section 812 is an amendment to section 17 of the Federal Home
Loan Bank Act and was offered in place of section 911 of H.R. 19436 as reported
(Sullivan Amendment). Section 812 was offered for the stated purpose of providing the Board certain authority over conflicts of interest, but at the same time
insuring that such authority was not too broad and was clearly stated, since
it was feared that the Sullivan Amendment was too broad and unclear. The
Board opposes the enactment of section 812 for the following reasons:
First. Section 812 reaches only "any director, officer, employee of, or any
other person occupying a fiduciary relationship with, any member institution".
It does not reach the families of those persons or corporations or partnerships
in which they have an interest. Nor does section 812 apply to member institutions
themselves. Thus, any regulations issued by the Board under this section may
be easily evaded.
Second. Section 812 contains no enforcement provisions, and no existing
statute would afford adequate enforcement authority with respect to the section, (a) The Board's existing enforcement authority as to institutions which
are Federal savings and loans associations or FSLIC-insured institutions would
not enable the Board to reach the individuals which section 812 would authorize
the Board to regulate, (b) The existing enforcement provisions with respect
to officers and directors of Federal and insured institutions are limited to cases
involving personal dishonesty, which is not the thrust of section 812. (c) There
are no existing enforcement provisions which would enable the Board to reach
individuals connected with Federal Home Loan Bank member institutions that
are not Federal savings and loan associations or insured by the FSLIC.
Third. The phrase "to use its supervisory agents" in section 812 implies that
the Board's supervisory agents must personally conduct the examinations. Any
such procedure would be administratively unworkable.
Fourth. The standard for the Board's regulatory action is too narrow in that:
(a) Under section 812 the Board may regulate "to maintain the safety and
soundness of any member institution in the conduct of such member institution's
business, or for the Federal Savings and Loan Insurance Corporation". There
is no mention of protection of the interests of savers, investors, or borrowers.
(b) The Board must deem its regulatory action "necessary and appropriate".
As a technical matter, this phrase, as opposed to "necessary or appropriate",
implies excessively close restriction of authority.
Fifth. The range of transactions with which section 812 deals is extremely
narrow. These are transactions "which would result in a conflict of his own
personal financial interest with those of the member institution". Thus, section
812 would not cover, for example, tie-ins with insurance agencies, building
60-299—71—pt. 1
3




22
supply companies and the like. Here the conflict is between the director's personal financial interest and the interests of the borrower.
While any particular objection of those listed above might not render section
812 unacceptable, the Board believes that their cumulative effect is such that
section 812, as written, should not be enacted.
Attached as the second attachment to this letter is an amendment to section
812 which the Board believes will meet the principal objections to the Sullivan
amendment and at the same time avoids the problems of the Brasco amendment
discussed above. Although the Board's amendment is similar to the Sullivan
amendment in a number of respects, there are several differences between them.
These differences, which have a substantial cumulative effect, are as follows:
First. Paragraph (1) of the Sullivan amendment authorizes the Board to regulate "to such extent as it may deem necessary or appropriate in the public interest or for the protection of members, investors, or borrowers, or the Federal Savings and Loan Insurance Corporation". The Board's amendment deletes
the broad phrase "in the public interest".
Second. Paragraph (1) of the Sullivan amendment authorizes the Board to
"regulate relationships, including without limitation on the generality of the
foregoing business, financial or other transactions". The Board amendment employs the phrase "business, financial, ownership, or organizational relationships
or transactions". This second phrase substitutes a specific statement of the exact
transactions and relationships intended to be covered in place of the more
general and open-ended statement found in the first phrase.
Third. Paragraph (1) of the Sullivan amendment contains a long and highly
technical description of the persons covered by its provisions. The Board's
amendment substitutes a much shorter and clearer description. It also eliminates
a number of persons from its coverage who are covered in the Sullivan amendment. This restriction in coverage is sufficiently great that the Board may at
some future time find it needful to seek further legislation. The Board believes,
however, that its proposed amendment covers those major situations which are
most likely to require regulation in the near future. The Board would prefer to
operate at the present time with a more restricted authority, and to propose
extensions of that authority at a later date if experience should demonstrate
the need therefor.
Fourth. Paragraph (1) of the Board's amendment employs the phrase "investors or borrowers in their capacity as such investors or borrowers", whereas
paragraph (1) of the Sullivan amendment uses the phrase "investors or borrowers" without qualification. The qualifying phrase is intended to emphasize
and make clear that the Board's authority under section 812 extends only to
those interests of borrowers and investors which relate to them as such.
Fifth. Paragraph (2) of the Sullivan amendment is deleted in its entirety.
Sixth. The elaborate definitional section contained in paragraph (4) of the
Sullivan amendment is completely deleted except for three technical definitions
considered necessary for precision and the elimination of evasion. The definition
of "investors" and "borrowers" as including prospective investors and borrowers
appears essential if the Board is to be able, for example, to deal with the situation in which a loan not yet made is conditioned upon the purchase of insurance
or building materials from srpeeific companies.
Seventh. The final sentence of paragraph (5) of the Sullivan amendment is
completely deleted. This sentence reads, "In implementing or carrying out the
provisions of this subsection the Board may make classifications on the basis of
the nature, characteristics, or location of members or affiliated persons or of
investors therein or borrowers therefrom or on such other basis or bases as the
Board may deem desirable in the public interest."
Eighth. The remainder of paragraph (5)' and all of paragraph (3) of the
Sullivan amendment (with minor technical changes) are transferred to the
Board's 'amendment, and appear as new paragraphs (2) and (3), respectively.
New paragraph (2) makes provision for enforcement, and new paragraph (3)
authorizes the Board to charge user fees for services rendered and to obtain
the assistance of other government agencies in implementing the amendment.
(The minor technical changes in new paragraph (3) add the word "information" to subdivision® (A) and (C) thereof and the phrase "or in connection
with any similar action rendered by the Board to any such agency or instrumentality" to subdivision (B) thereof. The Board believes that these changes
are desirable in the interests of clarity and efficiency of its internal administration. These changes are of a housekeeping nature and would have no effect on
the savings and loan indsntry.




23
Except as to section 812 of S. 4368 as passed by the House, the Board has
been informally advised by the Office of Management and Budget that, from
the standpoint of the program of the President, there is no objection to the
submission of this report. As to said section 812, time does not permit the ascertainment of the relationship of this report or of our suggested substitute amendment to the program of the President.
If the committee of conference has any questions regarding the views of the
Board, please do not hesitate to contact us.
Sincerely yours,
PRESTON MARTIN, Chairman.
ATTACHMENT NO. 2

Section 812 of S. 4368 as passed by the House is amended to read as follows :
SEC. 812. Section 17 of the Federal Home Loan Bank is amended by adding at
the end thereof the following new subsection:
"(c) (1) The Federal Home Loan Bank Board (hereinafter referred to as the
Board) is authorized, to such extent as it may deem necessary or appropriate
for the protection of members, investors or borrowers in their capacity as such
investors or borrowers, or the Federal Savings and Loan Insurance Corporation,
to regulate or prohibit business, financial, ownership, or organizational relationships or transactions (A) between (i) a member or affiliated person and (ii)
any other member or affiliated person, or (B) between (i) a member or an affiliated person thereof and (ii) an investor in such member or affiliated person,
a borrower from such member or affiliated person, or a person from or through
which services may be rendered to such affiliated person, investor, or borrower.
As used in this subsection, 'affiliated peson' means an affiliated person of any
member, 'investor' and 'borrower' include prospective investors and prospective
borrowers, and 'member' includes any institution any accounts, deposits, or
shares of which have any insurance by said Corporation and includes, but only
to such extent as the Board may provide, the Federal Home Loan Mortgage
Corporation.
"(2) The provisions of subsection (f) of section 5A and of subsections (b)
and (c) of section 5B, all as shown in effect, are extended to include this subsection, and for purposes of this sentence the references in said subsections to those
sections shall include this subsection, the references in said subsection (f) to
provisions of the National Housing Act shall be deemed to be references to those
provisions as now in effect, and the references in said subsections (b) and (c)
to institutions and nonmember institutions shall include members and shall include affiliated persons.
"(3) In or in connection with the exercise of any function vested in or exercisable by the Board under this Act or otherwise, the Board (which term as
used in this paragraph includes the Federal Savings and Loan Insurance Corporation) is authorized (A) to act through any corporate or other agency or instrumentality of the United States and utilize information services, facilities, and
personnel thereof, and any such agency or instrumentality is authorized to provide the same as requested by the Board, (B) to make payment therefor, and
any expenses under (A) or (B) hereof or in connection with any similar action
rendered by the Board to any such agency or instrumentality shall not be considered as administrative expense, and (C) to impose and collect fees and charges
for the provision by the Board of information, services, facilities or personnel
to any person, and for purposes of this subsection the references in the last two
sentences of subsection (b) of section 5B as now in effect to penalties shall be
deemed to be references to such fees and charges. Any such payment or collection
may be in advance or by reimbursement or otherwise."
[Excerpt from House Conference Report 91-1781]

(Conference Report on H.R. 19436, Housing and Urban Development Act of 1970)
FEDERAL HOME LOAN BANK BOARD CONFLICT-OF-INTEREST AUTHORITY

The House bill contained a provision not in the Senate amendment clarifying
the authority of the Federal Home Loan Bank Board to regulate insured savings and loan associations with respect to situations in which conflicts of interest
are likely to appear. No such provision is contained in the conference substitute.
The conferees believe the Home Loan Bank Board has considerable authority




24
to regulate matters regarding conflict-of-interest situations involving savings and
loan associations and agree to postpone consideration of additional authority
until next year, when appropriate hearings can be held. The conferees further
believe that the Board should more vigorously apply its existing authority.

Mr. WIDNALL. Mr. Chairman.
The CHAIRMAN. Mr. Widnall.
Mr. WIDNALL. This morning we commence hearings on the Banking
Ueform Act of 1971 and related matters. The bill as it has been presented for consideration is very broad in its coverage and the impression I have at this point is that it would, if enacted in this form, necessitate some massive reorganizations of American business methods
both in banking and other industries. There is, of course, the series of
staff reports developed over the last few years which suggest that some
changes would be desirable. Still I think it is a grave responsibility
which we face, for despite the fact that present practices afford opportunities for abuses, and despite the fact we have uncovered a few instances where unscrupulous people have availed themselves of these
opportunities, I persevere in my confidence in the American people
and question whether all should be restricted as a price for controlling
the few. For these reasons I hope we will approach this measure objectively in a sincere effort to find the most appropriate ways of improving on methods of operation which have developed the strongest
and most vital economy in the world. These hearings must not degenerate into a forum to castigate the sophisticated leaders of business,
nor should we generate any smokescreens to conceal wrongdoing.
Differentiating between right and wrong is not a partisan matter and
I trust that we can work together, as we have so often in the past to
develop a sound bill.
In so doing, I hope our inquiry will develop information which goes
beyond the actual context of our bill. I think it will be essential to do
so in order for our endeavors to be balanced and complement to the
maximum efforts of others. For example, H.R. 5700 proposes Federa]
standards in some areas which have hitherto been reserved to the
States. Before supporting such provisions I would like to know something more than I do about why this is necessary—-and whether Federal standards would strengthen or weaken future State efforts at
supervision. I am likewise concerned about the implications such action would have on the dual banking concept. Is this a forerunner to
full federalization of banking ? Would this be desirable ? Mr. Chairman, I don't raise these questions idly. They are the kind of questions to which I think we must address ourselves as we consider the
means to correct abuses which are proposed in this bill.
There is another aspect of this problem which I think we must consider in all seriousness, namely to what extent are the abuses which
have been uncovered already outlawed and as a natural corollary thereto have these abuses occurred as a result of some shortcomings in supervisory functions ?
Obviously the answers to these questions will have a direct bearing
on the need for, and on the form of, new legislation.
There are 26 provisos in H.R. 5700 and they raise more questions
of this type than time permits me to recite at this point. However, I
think what I have said will illustrate the broad concerns we must
address ourselves to in consideration of this measure.




25
Mr. Chairman, should it develop from our inquiries that abuses in
our financial institutions are widespread, or even that opportunities
for abuses are flagrant, then I think we will all be agreed in our
determination to take corrective action. As we commence these hearings I hope that you and the other members share my determination
to approach the subject with caution, an open mind, a willingness to
consider alternative solutions, and a determination to make this
legislation a constructive measure which strengthens the banking and
commerce of our Nation.
Mr. WILLIAMS. Will the gentleman yield ?
The CHAIRMAN. What is your request ?
Mr. WILLIAMS. I would like to have the record show that the statements made by the chairman regarding the necessity for the provisions of H.R. 5700 are not shared by me.
In my opinion, after a very careful study of H.E. 5700, I believe
we should entitle this bill not the Banking Reform Act of 1971, but
the Banking Destruction Act of 1971.
Thank you.
The CHAIRMAN. There are always honest differences of opinion.
Mr. Wille, you may proceed.
STATEMENT OF HON. PRANK WILLE, CHAIRMAN, FEDERAL
DEPOSIT INSURANCE CORPORATION

Mr. WILLE. Mr. Chairman, in accordance with the committee's request, I appear today on behalf of the Federal Deposit Insurance
Corporation to testify on H.R. 5700, a bill sponsored by you and
eight other members of the committee. The Corporation welcomes this
opportunity to discuss the bill.
I do not propose at this time to read my prepared statement in full.
However, there are approximately four pages at the beginning which
are a summary, and I would appreciate the opportunity of reading
that summary and turning the microphone over to Mr. Martin.
The CHAIRMAN. Without objection, so ordered.
Mr. WILLE. The Federal Deposit Insurance Corporation supports
the concept of increased control over interlocking directorates between competing financial institutions. The potential anticompetitive
effects of such interlocks warrant prohibition. But lacking sufficient
empirical data on the extent of such interlocks between smaller financial institutions, we prefer that the unequivocal prohibitions of H.E.
5700 not be adopted. Instead, the prohibitions now contained in section
8 of the Clayton Act should be broadened to prohibit such interlocks
between banks, savings and loan associations, and similar financial
institutions within a defined geographic area—which should approximate more exactly the area of local competition than the present provision—whether or not such institutions are insured by the Federal
Deposit Insurance Corporation of the Federal Savings and Loan
Insurance Corporation. In addition, if such interlocks were prohibited
generally within a statutorily defined geographic area, the three Federal bank regulatory agencies and the Federal Home Loan Bank
Board should be given administrative flexibility (a) to extend the
prohibition to similar relationships involving a financial institution




26

located beyond the defined area, if an agency found that the existence
of an interlocking relationship might tend to lessen competition substantially, that is, between banks or other financial institutions which
were actual or potential competitors in a national market; and (b)
to permit exceptions to the general prohibition, even within the defined
area, if the appropriate regulatory agency found that the existence
of such an interlocking relationship was the result of common stock
ownership or a scarcity of experienced financial talent within the
area.
With respect to the provisions of H.R. 5700 prohibiting so-called
"equity kickers," the Corporation's limited experience to date with
the use of equity participations by insured State nonmember banks
indicates no reason why, as a supervisory matter, this financial practice
should be banned at the present time. We are aware, however, that
other considerations of public policy are involved and that these considerations might well lead to a legislative judgment that equity participations should be prohibited generally. If such a legislative judgment is reached, the coverage of section 14 should in fairness be expanded to include certain other types of lending institutions which
compete with those presently listed and specific exceptions for equity
participations in small business investment companies and limited
profit housing and community development corporations should be
included.
We support the committee's efforts to regulate insider loans but
feel that the proper vehicle for such regulation exists through the
enactment of legislation along the lines proposed by H.E. 7440, introduced by Mrs. Sullivan—or as proposed by the amendment which Mr.
Brasco offered to the Housing and Urban Development Act of 1970—
that would permit the appropriate regulatory agency to deal with
the problem administratively.
As I indicated on March 9 when I testified before this committee,
the Corporation supports a statutory prohibition against the receipt
of brokered deposits. We continue to believe that violation of the
prohibition should not be made a crime; that any civil penalty should
be applied to the broker as well as to the financial institution receiving the deposits; and that authority should be given to the appropriate regulatory agency to remove or fine, administratively, anyone
receiving or arranging for the receipt of such deposits on behalf of
a financial institution.
The Corporation, on the other hand, does not favor the enactment
of legislation that would categorically prohibit "giveaways" to attract deposits. Our reasons for that position are explained on pages
18 through 20 of my prepared statement.
Finally, the Corporation wishes to withdraw its past opposition to
100 percent insurance of public funds. Any such change in insurance
coverage would raise, however, a number of serious interrelated problems in which Government agencies other than the Corporation—
such as the Treasury, the three Federal bank regulatory agencies, and
the Federal Home Loan Bank Board at the Federal level and virtually
all governmental units at the State and local level—have an interest.
Speaking solely for the Corporation, we interpose no objection to
the concept of 100 percent insurance of public funds, but we strongly




2.7
recommend that any statutory mandate include (a) a limitation that
such insurance, in the case of States and political subdivisions, extend only to the funds of public units within the State in which the
financial institution is located; (b) a requirement that the aggregate
amount of public funds that could be deposited in banks or savings
and loan associations be limited in relation to such criteria as liquidity,
total deposits, and capital and that the Corporation and the Federal
Savings and Loan Insurance Corporation prescribe uniform restrictions with respect to such limitations; and (c) a requirement that the
maximum rates of interest or dividends payable on comparable deposits be the same for all banks and savings and loan associations.
The Corporation wishes to note that it is now in the process of drafting amendments to the Federal Deposit Insurance Act, most of which
are technical in nature. One of these amendments would make more
effective the Corporation's present cease-and-desist power by authorizing an administrative proceeding for the prompt removal or fining
of any director or officer who violated a cease-and-desist order which
had become final or which was the subject of a written agreement between the bank and the Corporation. In view of our belief that such
a modification would assist the appropriate regulatory agency in correcting some of the problems with which H.R. 5700 in concerned, the
committee may wish to consider including one or more of these amendments in any revised version of H.R. 5700 that may be reported out
of committee.
I would also like to state that the Federal Deposit Insurance Corporation has sent to the Chair a letter under date of April 12, opposing
for the reasons therein stated, the enactment of H.R. 3287 in its present
form. I stand ready to discuss that position in greater detail.
The CHAIRMAN. YOU asked unanimous request to do that, you want
to insert Mr. Gonzalez' letter ?
Mr. WELLE. I would appreciate having the Corporation's letter on
Mr. Gonzalez' bill appended to my prepared statement, sir.
The CHAIRMAN. All right, sir.
(The complete text of Mr. Wille's prepared statement and the letter
referred to follow:)
PREPARED STATEMENT OF HON. FRANK WILLE, CHAIRMAN, FEDERAL DEPOSIT
INSURANCE CORPORATION
OPENING SUMMARY

In accordance with the Committee's request, I appear today on behalf of the
Federa.1 Deposit Insurance Corporation to testify on H.R. 5700, a bill sponsored
by nine of the Committee's members. The Corporation welcomes this opportunity
to discuss the bill. Let me begin by summarizing our basic position.
We support the concept of increased control over interlocking directorates be^
tween competing financial institutions. The potential anticompetitive effects of
such interlocks warrant prohibition. But lacking sufficient empirical data on the
extent of such interlocks between smaller financial institutions, we prefer that
the unequivocal prohibitions of H.R. 5700 not be adopted. Instead, the prohibitions now contained in section 8 of the Clayton Act should be broadened to
prohibit such interlocks between banks, savings and loan associations, and similar
financial institutions within a defined geographic area—which should approximate more exactly the area of local competition than the present provision—
whether or no* such institutions are insured by the Federal Deposit Insurance
Corporation or the Federal Savings and Loam Insurance Corporation. In addition, if such interlocks were prohibited generally within a statutorily defined




28
geographic area, the three Federal bank regulatory agencies and the Federal Home
Loan Bank Board should be given administrative flexibility (a) to extend the
prohibition to similar relationships involving a financial institution located
beyond the defined area, if an agency found that the existence of an interlocking
relationship might tend to lessen competition substantially, e.g., between banks
or other financial institutions which were actual or potential competitors in a
national market; and (b) to permit exceptions to the general prohibition, even
within the defined area, if the appropriate regulatory agency found that the
existence of such an interlocking relationship was the result of common stock
ownership or a scarcity of experienced financial talent within the area.
(With respect to the provisions of H.R. 5700 prohibiting so-called "equity
kickers," the Corporation's limited experience to date with the use of equity
participations by insured State nonmember banks indicates no reason why, as
a supervisory matter, this financial practice should be banned at the present
time. We are aware, however, that other considerations of public policy are
involved and that these considerations might well lead to a legislative judgment
that equity participations should be prohibited generally. If such a legislative
judgment is reached, the coverage of section 14 should in fairness be expanded
to include certain other types of lending institutions which compete with those
presently listed and specific exceptions for equity participations in small business
investment companies and limited profit housing and community development
corporations should be included.
We support the Committee's efforts to regulate insider loans but feel that the
proper vehicle for such regulation exists through the enactment of legislation
along the lines proposed by H.R. 7440, introduced by Mrs. Sullivan—or as proposed by the amendment which Mr. Brasco offered to the Housing and Urban
Development Act of 1970—that would permit the appropriate regulatory agency
to deal with the problem administratively.
As I indicated on March 9 when I testified before this Committee, the Corporation supports a statutory prohibition against the receipt of brokered deposits.
We continue to believe that violation of the prohibition should not be made
a crime; that any civil penalty should be applied to the broker as well as to
the financial institution receiving the deposits; and that authority should be
given to the (appropriate regulatory agency to remove or fine, administratively,
anyone receiving or arranging for the receipt of such deposits on behalf of a
financial institution.
The Corporation, on the other hand, does not favor the enactment of legislation that would categorically prohibit "giveaways" to attract deposits.
Finally, the Corporation wishes to withdraw its past opposition to 100 percent
insurance of public funds. Any such change in insurance coverage would raise,
however, a number of serious and interrelated problems in which Government
agencies other than the Corporation have an interest. Speaking solely for the
Corporation, we interpose no objection to the concept of 100 percent insurance
of public funds, but we strongly recommend that any statutory mandate include
(a) a limitation that such insurance, in the case of States and political subdivisions, extend only to the funds of public units within the State in which
the financial institution is located; (b) a requirement that the aggregate amount
of funds that could be deposited in banks or savings and loan associations be
limited in relation to such criteria as liquidity, total deposits, and capital and
that the Corporation and the Federal Savings and Loan Insurance Corporation
prescribe uniform restrictions with respect to such limitations; and (c) a
requirement that the maximum rates of interest or dividends payable on
comparable deposits be the same for all banks and savings and loan associations.
Before commenting in greater detail on the bill's provisions, the Corporation
wishes to note that it is now in the process of drafting amendments to the
Federal Deposit Insurance Act, most of which are technical in nature. One
of these amendments would make more effective the Corporation's present
cease-and-desist power by authorizing an administrative proceeding for the
prompt removal or fining of any director or officer who violated a cease-and-desist
order which had become final or which was the subject of a written agreement
between the bank and the Corporation. In view of our belief that such a modification would assist the appropriate regulatory agency in correcting some of
the problems with which H.R. 5700 is concerned, the Committee may wish to
consider including one or more of these amendments in any revised version of
H.R. 5700 that may be reported out of Committee.
I would now like to discuss certain of the Corporation's views in greater detail.




29
INTERLOCKING RELATIONSHIPS

Turning first to interlocking relationships, sections 2 through 9 of H.R. 5700
contain a variety of proposed prohibitions. None of them would be limited to
the geographic area of actual or potential competition; it appears that they would
apply nationwide. Moreover, they are broadly written and would apply across
the board to all institutions and organizations covered, unless the institutions
involved were owned by a registered holding company. We believe that prohibitions of this breadth are unnecessary and inappropriate in many interlock
situations.
Insofar as the holding company exemption is concerned, we make two observations. First, because there are 16 States in which holding companies are
restricted or prohibited, the exemption would not be available to banks and
other financial institutions in those States even if such institutions were subject to similar control through common stock ownership. Second, by proposing
to accord an exemption for holding companies, the bill presupposes—and we
agree—that not all of the interlocking relationships described are anticompetitive. We hope that to the extent new statutes are enacted which seek to
restrict interlocking relationships, a similar exception could be devised for
common control situations in which the acquisition of the controlling stock in
question was not anticompetitive at the time of acquisition.
Under sections 2, 3, and 4, a person who was a director, trustee, officer, or
employee of an insured bank, an insured institution, or a noninsured mutual
savings bank would be prohibited from serving at the same time as a director,
trustee, officer, or employee of certain other specified financial institutions, of
insurance companies, holding companies or subsidiaries thereof, or securities
brokers or dealers, or of certain companies engaged in the business of providing
title insurance, appraising property, or providing services in connection with the
closing of real estate transactions.
While we are concerned about the potential anticompetitive effects of the
types of interlocking relationships which sections 2, 3, and 4 would proscribe,
we are also concerned about the effect which such prohibitions could have on
small financial institutions in small communities.
On balance, we prefer that the prohibitions presently contained in section 8(a)
of the Clayton Act be broadened. That section, as you know, does not currently
extend to nonmember banks, savings and loan associations, and other financial
institutions not federally insured. We would retain the exception in section 8(a)
for financial institutions located in a different geographic area, broadening, however, the present geographic coverage tio extend to the common area in which such
institutions may establish offices, i.e., the area of actual or potential local competition. In addition, we recommend that tthe appropriate regulatory agency be
given authority to proscribe interlocking relationships even beyond such a defined
area if the agency found that the existence of such a relationship might tend to
lessen competition substantially. We further believe that consideration should be
given to the desirability of permitting the appropriate regulatory agency to allow
interlocking relationships even within the defined area where the agency found
that the existence of such an interlocking relationship was the result of common
control through stock ownership or the result of a scarcity of experienced financial
talent within the area.
In opting for this more flexible administrative approach, we are not unmindful
of the studies on interlocking relationships undertaken by the staff of the Subcommittee on Domestic Finance. Insofar as here pertinent, the first study was
concerned with the 300 largest commercial banks in the United States, and the
later two with 48 and 49 banks, respectively, in 10 major financial centers. The
studies therefore tell us little about the several thousand other and smaller banks
not surveyed. The administrative, as opposed to a prohibitory, approach would
accord the appropriate regulatory agency with desirable flexibility to deal with
particular factual situations that warrant an exception.
Further, on the matter of financial institutions covered by sections 2, 3, and 4,
I would like to point out that at least three other types of financial institutions
which lend money to the public might logically ,be included in any list of proscribed
interlocks. These would include sales and retail finance companies, factors, and
mortgage companies.
Section 9 of the bill would prohibit interlocking relationships with corporations
as to which a financial institution has substantial and continuing loan relationships. This again is an area where empirical data, particularly for smaller finan-




30
cial institutions, is lacking. The proposed prohibition, however, appears to be
too restrictive in light of what we believe to be common banking practice. The
problems we have encountered in this area stem not from interlocking relationships as such, but from such items as excessive loans, loans to borrowers with
poor credit standing, and loans made on preferential terms. We believe that a more
refined tool for regulating loan transactions could be developed by amending
our cease-and-desist and removal powers under sections 8(b) and 8(e) of the
Federal Deposit Insurance Act along the lines I recommended on March 9. These
could then be used to make more effective our general supervisory authority
over the lending practices of insured nonmember banks.
Section 8 of the bill would prohibit interlocking relationships between any
financial institution and any corporation more than 5 percent oif any class of
the stock of which was held with power to vote by the financial institution. The
potential for violation of this prohibition, even inadvertently, is substantial. For
example, a bank holding less than 5 percent of the stock of a particular corporation one day might the next find itself controlling the vote of more than 5 percent by virtue of being named executor of an estate containing siuch stock. The
bank's fiduciary duty to the estate in question might well dictate not disposing
of the stock, and it also might well be inappropriate in the circumstances to
require the officer, director, or employee involved to resign from or be discharged by the bank. Another situation is one in which a bank acquires more
than 5 percent of the stock of a corporation through foreclosure. The provisions
of section 8 would require the bank to divest itself of this stock immediately or
eliminate the interlocking relationship. Again, this points up the desirability
for a more flexible approach than the bill would provide.
Section 10 relates to mutual savings banks' holding stock in other financial
institutions. We believe this prohibition should apply only in those cases -where
interlocking relationships would be similarly prohibited; that is, where there
exists a substantial potential for competition between the institutions in question.
EQUITY PARTICIPATIONS PROHIBITED

Section 14 of the bill would prohibit insured banks, institutions insured by
the Federal Savings and Loan Insurance Corporation, bank or savings and loan
holding companies and their subsidiaries, noninsured mutual savings banks,
and insurance companies from accepting so-called "equity kickers'' in consideration of the making of loans.
The use of the equity participation, frequently called the "equity kicker,"
appears to be a comparatively recent phenomenon, at least in the field of banking. The practice has numerous variations, such as percentages of net profits,
gross sales, or increases! in the market price of the borrower's stock. Those institutions which use it claim that it is a hedge against inflation, that it permits
lower interest rates on related loans, and that it provides an appropriate return
to the lender where borrowers are not well-capitalized from non-bank sources.
It is, moreover, a growing practice for financial institutions, as sponsors, to take
an equity participation in smiall business investment companies and a variety o/
limited profit housing and community development corporations.
A recent survey of large national banks conducted by the Comptroller of the
Currency disclosed that 42 national banks reported "equity kicker" loans totaling $159 million, but that those loans accounted for less than three-tenths of
1 percent of the total loan volume of the 502 banks surveyed.
In an effort to determine the extent to which insured State nonmember banks
are or have engaged in the practice and whether the acceptance of equity participations has ever presented a supervisory problem for the Corporation, the
Corporation recently surveyed each of its 14 Regional Directors. That survey
disclosed that insured State nonmember banks make very limited use of equity
participations and that their use has been no cause up to the present time for
supervisory concern.
The Corporation recognizes that the indiscriminate acceptance of equity participations by an insured bank could have adverse effects upon the bank's financial condition. The expectation of a share in the anticipated profits of a borrower
might influence the attitude of a bank's management toward making such a loan
at all and could influence the banks to forsake normal business risks for those
of a more speculative nature.
The Corporation's experience to date, however, does not indicate that these
potentially adverse effects have occurred. Accordingly, from a purely supervisory




31
point of view, there appears to be no reason at the present time for the blanket
prohibition contained in H.R. 5700.
The Corporation is aware of the fact that the interest of the bill's sponsors in
prohibiting the acceptance of equity participations is prompted by considerations other than those solely related to the financial condition of lenders. They
have stated their belief, for example, that lenders should not become involved
in the control of nonbanking businesses through the acceptance of equity participations; that equity participations which are to be liquidated through money
payments in excess of principal and interest on related loans may lead to the
failure of certain borrowers; that equity participations in one borrower's business may lead to decisions not to lend to a competior of that borrower; and that
the acceptance of equity participations runs counter to the philosophy underlying the 1970 amendments to the Bank Holding Company Act of 1956, that
banking and commerce should be separated and that potentially anticompetitive
practices in the allocation of credit within the Nation's economy should be controlled.
These considerations might well lead to a legislative judgment that equity
participations should be prohibited generally. If such a legislative judgment is
reached, the coverage of the prohibition should in fairness be expanded to include
noninsured commercial banks, building and loan associations, savings and loan
associations, homestead associations (including cooperative banks), and other
organizations engaged in the business of making or placing loans, all of which
compete with the lending institutions already named in section 14.
"INSIDER" LOANS AND DISCLOSURE OF "INSIDER" LOANS

In my testimony before this Committee on March 9, 1971 relating to recent
bank closings, I noted the Corporation's experience with problems of bank soundness and safety related to the abuse of "insider" loans and affirmed the Corporation's interest in preventing such abuses.
Directors, officers, and employees frequently promote business for banks by
bringing their own business and that of corporations which they influence or
control to the bank. Such "insider" loans are not inherently harmful to the
bank. H.R. 5700 would nevertheless prohibit loans to those corporations if 5
percent or more of any class of stock was owned, in the aggregate, by directors,
trustees, officers, employees, or members of their immediate families.
We have mo empirical data that leads us to believe that a significant portion
of loans to such corporations is of poor credit quality. Our experience leads
us to conclude that most such loans are repaid in a timely manner and benefit
both the borrower and lender. From the standpoint of the safety and soundness
of the bank, what is important is a careful and thorough credit analysis of the
loan application and the ability to deny the loan if the analysis shows the
corporation to be a poor credit risk, not the fact that 5 percent or more of the
stock is owned by "insiders."
In addition to a thorough credit analysis, the bank should avoid giving preferential terms on a loan to someone simply because he is an "insider." Even
if credit quality is good, preferential terms to an "insider" benefit that borrower at the expense of the financial institution and its shareholders. As we
read H.R. 5700, preferential terms on loans to "insiders" would not be
prohibited.
Since a thorough credit analysis involves a great many interrelated factors,
many of which require decisions based on experience and good judgment, and
since methods for giving preferential terms are numerous and frequently ingenious, the Corporation feels that a statutory prohibition based on an arbitrary
percentage would be inappropriate.
The bill would also require banks to report to the Corporation, and the Corporation to make available to the public, the nature and amount of all loans
to directors, officers, employees, and members of their immediate families. The
purpose of public disclosure would seem better served by requiring disclosure
to be made to the stockholders of the financial institution rather than to Federal regulatory agencies.
As an alternative approach to the problem of "insider" loans proposed by sections 15-18 of the bill, your Committee and the Congress might wish to consider expanding the disclosure requirements of the Securities Exchange Act
of 1934 so that they would apply to banks having fewer than 500 shareholders.
Pursuant to the provisions of section 12 of that Act, and with respect to pub-




32
licly owned State banks registered with this Corporation or the Board of Governors of the Federal Reserve System, regulations prescribed by those two agencies require extensions of credit to bank management to be disclosed publicly
unless such extensions are made in the ordinary course of business, are made
on substantially the same terms (including interest rates and collateral) as
those prevailing at the time for comparable transactions with other persons, at
no time exceed the lesser of 10 percent of the equity capital accounts of the bank
or $10 million, and do not involve more than the normal risk of collectability
or present other unfavorable features.
When I appeared before your Committee on March 9, Mrs. Sullivan requested
the Corporation's thoughts on extending to insured banks the provisions of her
proposed amendment to the "Housing and Urban Development Act of 1970"
which would have provided the Federal Home Loan Bank Board authority to
treat administratively the question of "insider" loans in federally insured savings and loan associations. We believe that the approach of Mrs. Sullivan and
Mr. Brasco could resolve the problem of "insider" loans without creating
additional ancillary problems, and we support their suggestion that administrative authortiy to regulate "insider" loans and other conflicts of interest be
given to the three Federal bank regulatory agencies and to the Federal Home
Loan Bank Board. We intend to submit to them and to the Committee as soon
as possible specific language which in our judgment would provide these agencies
with the necessary authority.
BROKERED DEPOSITS PROHIBITED

Sections 19 and 20 of the bill would prohibit any bank insured by the Federal
Deposit Insurance Corporation and any institution insured by the Federal
Savings and Loan Insurance Corporation (or any officer, director, agent, or
substantial stockholder thereof) from accepting so-called "brokered deposits."
The Corporation's Board of Directors and the Federal Home Loan Bank Board
would be authorized to prescribe such rules and regulations as they might deem
necessary to effectuate the purposes of the prohibition and to prevent evasions
thereof. Any violation of the prohibition or of regulations issued pursuant thereto
would subject the offending bank or institution to a penalty of not more than
10 percent of the amount of the deposit to which the violation related. Moreover,
under the terms of section 21 of the bill, whoever knowingly asked, demanded,
exacted, solicited, sought, accepted, received, or agreed to receive from any
insured bank or institution anything of value for himself or for any other person
or entity in return for obtaining or assisting in obtaining funds of another for
deposit could be fined not more than $10,000 or imprisoned not more than one
year, or both.
Brokered deposits, which the bill proposes to prohibit, are deposits placed in
a bank pursuant to an arrangement with a money broker, finder, or other person
and for which the depositor receives a premium over and above the interest
legally authorized to be paid by the bank on his deposit. Their receipt and misuse
by insured banks have posed a continuing supervisory problem to the Corporation.
Nine of the 34 insured banks which failed during the period from January 1,
1960 through December 31, 1968 had brokered deposits of $22,342,500, out of a
total deposit liability of $78,205,167. In eight of the 20 bank failures occurring
from January 1, 1969 to date, the misuse of brokered deposits was a major contributing factor to the closing of the banks. In all of these cases, the receipt of
brokered deposits facilitated improper loans to officers, directors, or owners
of the closed banks (or to their affiliated interests) or to borrowers outside the
banks' normal lending areas, the collectability of which was sufficiently in question to lead eventually to the closing of the banks.
In some instances, the receipt and misuse of brokered deposits have involved
banks in financial difficulties short of closing. In most cases of difficulty, loans
are linked to the brokered deposits in the sense that the deposits are placed only
if certain loans are made. Brokered deposits, however, since they are not made
by the borrower, cannot be used to offset the loan in the event the borrower
defaults. Moreover, since most brokered deposits are placed at approximately
the same time and are therefore subject to withdrawal on approximately the
same date, a bank entering into such a "package" transaction may have to sell
other assets in order to meet withdrawals unless it carefully matches deposit and
loan maturities. Thus, the bank receiving and misusing brokered deposits may
find itself saddled with bad loans or with a liquidity problem, or both, when the




33
deposits are withdrawn from the bank. Almost all of these linked-loan transactions, then, contain potentials which can be extremely hazardous to the bank
involved, particularly smaller banks. At the same time, because of the speed
with which such transactions are entered into, they are difficult to supervise
adequately in a timely way.
Last August, in an effort to determine the extent of "money brokering" activities in the Nation's banking system and to learn why banks attempt to obtain
brokered deposits, the three Federal bank regulatory agencies transmitted a
special questionnaire to all insured banks which called for the reporting of certain activities engaged in as of July 31, 1970. The questionnaire asked, first,
whether the banks had brokered deposits as of July 31,1970 and, second, whether
they had made loans linked to these deposits.
Even though our analysis of the answers to the questionnaire disclosed that
the number of banks receiving brokered deposits is small in relation to the total
number of insured banks and that the dollar amount of brokered deposits appears
to be minimal when compared with the total deposit figure for all insured banks
in the country, the Corporation is not convinced that any essential banking
service is performed through "money brokering" activities that could not be
performed in some other way. The difficulties that a bank may experience
through the misuse of brokered deposits by a bank management which makes
poor loans with those deposits or is insensitive to the needs for matching deposit and loan maturities far outweigh any benefits which might flow from the
use of brokered deposits.
For these reasons, the Corporation favors the enactment of legislation along
the lines proposed by sections 19 and 20 of the bill that would prohibit the
receipt by insured banks and certain other institutions of brokered deposits.
We suggest, however, that any proscriptive legislation enacted in this area (a)
not make violation of the prohibition a crime, as proposed by section 21 of the
bill, since that form of punishment seems to us to be too severe; (b) apply a
civil penalty for violation of the prohibition, such as a fine, to the broker as
well as to the bank or other institution receiving the deposits, since they are
both equally at fault in the misuse of brokered deposits; and (c) authorize
an administrative proceeding for the prompt removal or fining of any director,
officer, or employee who receives or arranges for the receipt of brokered deposits
on behalf of an insured bank or other insured financial institution, since personal
responsibility for a bank's deteriorating financial condition is likely to produce a
greater degree of self-enforcement.
GIVEAWAYS

Tight-money conditions during recent years have increased competition among
financial institutions for funds, encouraging, in turn, the greater use of promotional campaigns. Constrained by interest-rate ceilings, banks have been persuaded to compete for funds through premium offers primarily because withdrawals by a large number of depositors could have impaired their liquidity
positions and might have necessitated the sale at depreciated values of bankowned securities or other assets.
Promotional "giveaways" can serve as an effective means for encouraging
thrift. They can also be useful in promoting goodwill among customers and in
promoting the opening of new institutions or new branches. Bank and savings
and loan association customers seem to like them, although many managements
and retailers oppose the practice. Moreover, while numerous "giveaway" campaigns by different institutions in geographic proximity may result in the
"churning" of accounts by smaller depositors, we have reason to believe that
the dollar retention rate is high enough, nevertheless, to make such campaigns
worthwhile to the institutions that engage in the practice.
According to the Corporation's Regional Directors, the use of promotional
campaigns by insured banks varies from FDIC Region to FDIC Region. The
extent of the practice is limited in most places, but large banks in major
metropolitan areas appear to make fairly widespread use of the practice. The
survey showed rather unequivocally that the use of "giveaway" campaigns
has not resulted in supervisory problems.
Existing regulations of the Corporation now prohibit the payment of interest
on demand deposits by insured nonmember banks and prescribe maximum rates
of interest or dividends that may be paid on time and savings deposits by




34
insured nonmember commercial and mutual savings banks. As a supplement to
those regulations, the Corporation adopted a statement of policy, most recently
reissued in February 1970, announcing that, in applying those regulations, a
premium given to a depositor—whether in the form of merchandise, credit, or
cash—will be regarded ,as an advertising or promotional expense rather than
as a payment of interest or dividends if the premium is given to a new depositor,
is not given on a recurring basis, and the value of the premium (or in the case
of articles of merchandise, the wholesale cost excluding shipping and packaging
costs) does not exceed $5.00 except that, if the amount of the deposit is $5,000
or more, the wholesale cost of the premium may be not more than $10.00. This
policy is enforced by our review of invoices and by our investigation of the
complaints of competitors who call abuses to our attention. The Board of
Governors of the Federal Reserve System and the Federal Home Loan Bank
Board have adopted similar statements of policy, while the Comptroller of the
Currency permits national banks to offer such premiums if they are "nominal"
in value.
For all of these reasons, the Corporation opposes the enactment of legislation
that would categorically prohibit the types of giveaways now permitted by
agency regulation.
FULL DEPOSIT INSURANCE FOR PUBLIC UNITS

Sections 25 and 26 of the bill would amend the Federal Deposit Insurance
Act and Title IV of the National Housing Act to require the Corporation and
the Federal Savings and Loan Insurance Corporation to insure the deposits and
accounts of public units for the full aggregate amount of such deposits or
accounts, rather than to the maximum amount of $20,000 currently provided
for other depositors. They would permit the two agencies to limit the aggregate
amount of funds that could be deposited in insured banks or invested in institutions insured by the Federal Savings and Loan Insurance Corporation.
According to the bill's sponsors, the theory underlying the proposal for full
insurance of public deposits or accounts is that, as bank failures have "increased,"
a number of public units have suffered substantial losses, with the result that
Federal, State, and local governments have had to increase taxes to recoup
these losses. Without at this point enlisting arguments for or against the proposal, the Corporation wishes only to state that this theory is not supported
by the evidence.
The Corporation recently completed a study of public deposits, recoveries,
and losses in the 50 banks which closed from January 1, 1960 to December 31,
1970. Those 50 banks had 270 public depositors with a total of $37,224,130.16 on
deposit. As of year-end 1970, the public units involved had recovered 98.3 percent, or $36,595,750.84, of such deposits in one way or another. An additional
$553,791.63 has been or will be recovered through liquidating dividends paid by
the FDIC, thereby resulting in a total recovery of 99.8 percent and an estimated
net loss of only $74,587.69 to all public depositors in the 50 banks. We believe
this evidence clearly refutes the argument that a number of such public units
have suffered substantial losses in cases where deposits were not secured or
where the deposits of a closed bank were not assumed 100 percent by another
institution. It is possible, of course, that recovery of their deposits was delayed
and a source of inconvenience. We have no knowledge, however, that Federal,
State or local taxes had to be increased to recoup losses resulting from bank
failures.
In reevaluating its position with respect to the enactment of legislation that
would provide full insurance protection for public deposits or accounts, the
Corporation believes that some of the arguments it had advanced in opposition
to such proposals are no longer convincing. There is little evidence, for example,
to support the argument that a system of limited insurance causes depositors
or share account holders (other than the largest ones) to select their depositories
only after considering the management characteristics and capital adequacy of
the various financial institutions immediately available to them or to support
the argument that such a system imposes disciplinary restraint upon bankers
who might otherwise succumb to presumed competitive or economic pressures
which might develop as a result of the enactment of legislation providing full protection. Moreover, there may indeed be a basis for differentiating between public
depositors and other depositors or share account holders in determining the




35
amount of insurance coverage that should be applicable to their deposits, since
public deposits represent deposits by the taxpaying public, which has no direct
voice in the selection of the depository.
In an effort to determine the impact that full insurance protection for deposits
of public units might have upon the FDTC's deposit insurance fund, the Corporation, as a supplement to its recent study of public deposits, recoveries, and
losses in the 50 banks which closed during the period from January 1, 1960 to
December 31, 1970, estimated the additional disbursements, recoveries, and losses
which would have resulted if 100 percent insurance for public deposits had been
applicable during that same period. In arriving at our estimates, we assumed that
full payments would have been made to all public depositors in the 50 closed
banks during the period studied and that the Corporation would have been subrogated to their rights (against assets being liquidated. We found that the Corporation would have been required to disburse additional sums totaling $20,546,534.41, and that total recoveries to the Corporation on account of such disbursements would have amounted to $14,630,782.68. These figures produce an additional net estimated loss to the Corporation of $5,915,751.73 for the 11-year period.
The study would tend to indicate that the deposit insurance fund would not be
unduly burdened if legislation providing full insurance for deposits of public
units were enacted.
In reevaluating its position with respect to the enactment of legislation that
would provide full insurance protection for deposits of public units, the Corporation also recognizes that other issues, such as the proposed legislation's potential effect on pledging requirements, deserve careful consideration.
Approximately 30 States require the pledging of securities by banks against
State deposits and deposits by political subdivisions. Similarly, Federal statutes
require that United States Government deposits in banks be secured by the pledge
of Government obligations or certain other securities. In large part, deposits of
State and local governments in States requiring the pledging of securities against
those deposits are secured by obligations of State and local governments- To
the extent that full insurance protection for public deposits might influence some
States to repeal their pledging requirements, and to the extent that repealing
those requirements might induce some banks—which are by far the largest holders of municipal securities—to dispose of a portion of the municipal securities in
their portfolios, the enactment of legislation providing full insurance coverage
for public deposits could have a disruption impact on the market for obligations
of State and local governments, many of which already are experiencing substantial difficulties in obtaining adequate financing for essential services. It is conceivable, also, that the alternative investments made with the funds freed by
the repeal of pledging requirements could run counter to the monetary policy
being pursued at the time by the Board of Governors of the Federal Reserve
System.
Your Committee and the Congress are also likely to hear arguments that the
enactment of legislation providing full insurance for deposits of public units
would give savings and loan associations a competitive advantage over banks,
since savings and loan associations have generally been permitted to pay higher
rates of interest or dividends than banks have been permitted to pay and
therefore would be able to attract more public deposits because of the differential.
As your Committee knows, however, under their existing flexible interestrate authority—pursuant to which different rates on different classes of deposits can be prescribed—the Corporation, the Board of Governors of the Federal Reserve System, and the Federal Home Loan Bank Board could act to
''equalize" the rates paid by banks and savings and loan associations. Therefore, these arguments would be significant only if that authority were permitted
to expire or if the agencies adopted differing regulations.
After reexamining its position and weighing all of these considerations, the
Corporation wishes to withdraw its past objection to 100 percent insurance
of public funds and to interpose no objection to the enactment of legislation along
the lines proposed by sections 25 and 26 of the bill. It strongly recommends,
however, that these sections of the bill be amended so as to (a) limit such
insurance, in the case of States and political subdivisions, to the funds of public
units within the State in which the financial institution is located; (b) require
that the aggregate amount of funds that could be deposited in banks or savings
and loan associations be limited in relation to such criteria as liquidity, total
deposits, and capital and that the Corporation and the Federal Savings and Loan




36
Insurance Corporation prescribe uniform restrictions with respect to such
limitations; and (c) require that the maximum rates of interest or dividends
payable on comparable deposits be the same for all banks and savings and loan
associations.
FEDERAL DEPOSIT INSURANCE CORPORATION,

Washington, D.C., April 12,1971.
Hon. WRIGHT PATMAN,

Chairman, Committee on Banking and Currency,
House of Representatives, Washington, D.C.
DEAR MR. CHAIRMAN : This is in response to your letter of February 8, 1971,
in which you requested the views of the Corporation on H.R. 3287, 92nd Congress, a bill "To prohibit federally insured banks from making loans to provide
for the purchase of bank stock, and for other purposes." The bill would amend
section 18 of the Federal Deposit Insurance Act (12 U.S.C. 1828) by adding a
new subsection " ( k ) " thereto. The new subsection would prohibit an insured
bank from making any loan, discount, or extension of credit to provide for the
purchase of stocks, bonds, debentures or other obligations of any bank.
This Corporation, as a result of the exercise of its bank supervisory functions, recognizes the possibilities of abuse that may arise from bank loans to
finance the purchase of stock in other banks. We are not convinced, however, that
these possible abuses are justification for the enactment of legislation that
would entirely preclude insured banks from engaging in bank stock purchase
loans.
Were H.R. 3287 to be enacted in its present form, essential and legitimate
means of financing bank stock purchases would be foreclosed. Thus, less affluent
groups could be denied the financial assistance from an outside bank that
might be necessary to organize and maintain their own local community bank.
Groups in sparsely populated areas of the country, where the organization
and maintenance of a financial institution may be contingent upon the assistance of other established financial institutions, could find such assistance increasingly difficult to obtain.
Enactment of H.R. 3287 would also limit the feasibility of supervisory procedures frequently used in rehabilitating problem banks. Corrective action in
such cases often involves the infusion of new capital by existing or new owners,
and this new capital can frequently be obtained on short notice only through
a loan by another insured bank to purchasers of capital stock or capital debentures issued by the problem bank.
Finally, enactment of H.R. 3287 could limit the application of Section 13 (e)
of the Federal Deposit Insurance Act which allows this Corporation to assist
the assumption of deposits in a closed insured bank by a newly organized insured bank. In some instances the group organizing such a new bank must borrow on one or two days' notice a portion of the amount needed to capitalize
the new bank. Borrowing the necessary funds from another insured bank is the
usual practice, but this would be prohibited by the language of the pending bill.
In view of these undesirable effects of a complete prohibition on extensions
of credit by an insured bank to finance the purchase of stocks, bonds or de«
bentures of another bank, the Corporation believes that it would be preferable
for any legislation in this area to address itself to the actual abuses sought
to be curbed rather than to a complete prohibition.
To correct abuses that might arise from the speculative aspect of some bank
stock purchase loans, remedial legislation might take the form of an authorization for the appropriate banking agency to promulgate regulations with respect to such loans that might, for example, prohibit 100 percent financing
of such purchases by insured banks and require the purchaser to provide a
significant portion of the funds necessary for the acquisition being considered.
Such regulations might also include a prohibition against the extension of credit
on terms more favorable than those usually charged for financing the purchase
of non-bank securities or on terms which explicitly or implicitly require the
deposit of bank funds with the lending institution.
As I indicated to your Committee during the course of my testimony on
March 9, 1971, changes in the remedies available to the regulatory agencies
when a cease-and-desist order is violated would materially assist the agencies
in curbing a variety of unsafe and unsound banking practices, including those
that might arise following a change of control financed by bank stock purchase
loans extended by another bank. Section 7 of the Federal Deposit Insurance
Act, as you know, requires the president or other chief executive officer of an




37
insured bank to report a change in control of the bank to the appropriate banking agency promptly after he has knowledge of such a change. Alerted by this
report, the bank regulatory agencies review closely, through regular and special
examinations, any changes in management policy that might follow. A change
in the cease-anid-desist remedies available to the agencies could significantly assist
the Corporation in taking timely and effective action where changes in management policy indicate that prompt correction is required.
While the Corporation could support legislation along the lines I have suggested, it would oppose the enactment of H.R. 3287 in its present form.
Sincerely,
FRANK WILLE, Chairman.

The CHAIRMAN. All right, Mr. Martin.
STATEMENT OF HON. PRESTON MARTIN, CHAIRMAN, FEDERAL
HOME LOAN BANK BOARD; ACCOMPANIED BY ARTHUR W.
LEIBOLD, JR., GENERAL COUNSEL
Mr. MARTIN. Mr. Chairman and members of the committee, I appreciate the opportunity to appear before you to discuss the many
important issues raised by the bills under the committee's consideration.
Mr. Carl Kamp, Jr., and Mr. Thomas Hal Clarke are here. We
appreciate the opportunity to discuss the many important issues raised
by the bills under the committee's consideration.
May I begin by stating that our Board shares the objectives that are
implicit and explicit in H.B. 5700 and the other legislative matters.
To save the committee's time, I will summarize my statement which
the committee has on H.E. 5700. I will begin on page 2.
The Board reiterates its previously expressed view that brokered
deposits are frequently associated with unsafe and unsound operations
and recent experience has confirmed our view. The Board has had for
some time a comprehensive regulation, section 563.25 of its rules and
regulations for insurance of accounts, which closely regulates the use
of these deposits. Although the Board's experience with brokered deposits is more limited than that of the banking agencies, the Board's experience does not justify an absolute prohibition against brokered
deposits. Bather, the Board's experience points to two conclusions—
that brokered deposits may be useful and proper in some cases and
that the use of these deposits must be strictly controlled. The Board
would therefore favor legislation which would control these deposits
more stringently than at present, but which would not ban them conpletely. For example, the Board would support a statutory ban on the
use of brokered deposits in those cases in which the receipt of the
deposit is tied to the granting of a loan.
Sections 22, 23, and 24 of H.R. 5700 deal with the practice of giveaways. It is not entirely clear to the Board whether the intention of
these sections is to prohibit only certain types of giveaways. The Board
presently has authority to regulate the so-called premiums and has
issued regulations on two recent occasions implementing that authority. In one case these regulations were issued jointly with other financial supervisory agencies and more recently a second regulation has
been issued—not a regulation, but a memorandum implementing this
authority.
It is the view of the Board that its present authority is adequate to
control any aibuses in this area. The Board coordinates the issuance
and modification of its giveaway regulations with the other financial
60-299—71—pt. 1




4

38
agencies. I t appears to the Board that the present authority and regulations carry out the intent of sections 22-24 of H.E. 5700. There
have been no major problems associated with giveaways.
The Board does not support sections 25 and 26 of H.E. 5700 relating
to 100 percent insurance of public funds deposited in insured banks
and savings and loan associations. The Board has a very limited experience with this kind of deposit, since it is not possible for them to
be placed in saving and loan associations. But we raise the question
whether if this legislation pertaining to insurance of public funds is
enacted, whether this committee and the Congress will be subjected
to strong requests, if not pressures, from other groups who want the
same preference for large deposits, for example, charities, nonprofit
institutions, pension funds, and the like.
With respect to equity participations, the Board believes that any
prohibition of this practice would be undesirable for housing reasons.
During a protracted period of tight money, such as we have just been
through, the equity participation is simply a device for rationing a
very limited supply of funds and can be viewed as an alternative in
part to raising interest rates. It appears to us that life insurance companies and other lenders would not have made certain mortgage loans,
during the period of tight money without the inducement of equity
participations and that many of these institutions would have put an
even larger percent of their funds into nonresidential equity outlays.
Thus, the use of equity participation has kept more funds in the
housing markets, thereby reducing rents below what they would otherwise have been.
It should be noted that a ban on equity participation in mortgage
loans would not automatically mean that more credit would be available for non-participation mortgage loans. It is highly likely that
money would simply leave the mortgage market altogether.
The Board takes the view that equity participations in the mortgage
area are still relatively new, that experience with them is limited, and
that there is no evidence up to now of an adverse impact in their use.
The Board intends to observe their use and to keep itself informed on
the impact of equity participation in the future. We intend to keep an
open mind on the subject and would not hesitate ito recommend changes
in the Home Owners' Loan Act which presently is interpreted to prevent equity participations by Federal savings and loan associations.
We could not ask for such authority at this time. We know these equity
participation loans may carry an element of risk. The degree of that
element is uncertain to us. We would prefer to meet the question of
risk with the write-down powers that we will be asking the Congress
for in the Housing Institutions Modernization Act of 1971, section
401 of that act, and these are the so-called write-down powers for assets in which losses can be proved to have occurred.
With respect to interlocking relationships and restrictions on and
disclosure regarding loans, the Board suggests a different approach
from that embodied in H.E. 5700. This suggestion is borne of the
Board's quite extensive experience in these areas and its current activities in adopting regulatory controls applicable to these matters.
The committee will recollect that late last July the Board proposed
a comprehensive set of regulations dealing with disclosures and conflicts of interest, subjects which are generally the same as the issues
raised in H.E. 5700. These proposals were the subject of an unprece-




39

dented volume of public comment. The committee will also recall that
these public comments raised a series of extremely difficult and complex technical and administrative problems, totally aside from any
underlying questions of policy and philosophy.
In November of last year the Board adopted two of the proposed
regulations, substantially modified, and a new statement of policy on
conflicts of interest—these went to the selection of the depositor and
the conditions for loans by the institutions we supervise—the statement of policy and the new regulation, Mr. Chairman, are attached
to the statement. I won't take the committee's time there.
In the last few days, the Board, sent to the Federal Begister for
comment a major portion of the initial proposed regulations as redrafted. A copy of these proposed regulations is attached. The Board
believes that, if you will examine these new proposals carefully, you
will see the impact in this area. I won't take the committee's time to
enumerate the many kinds of transactions and relationships that are
covered. They are in the attached proposed regulation.
The regulations show, we believe, the complexity and the difficulty
of formulating fair, workable, and absolutely enforcible rules in
this area. All of this experience leads the Board to three major
conclusions:
(1) It is not possible to deal with this area properly by means of
rigid statutory formulae.
(2) If regulation in the area is to be effective, an enforcement
mechanism must be set up which is clearly designated and which is
sufficiently flexible to cope with all efforts at evasion and avoidance.
Furthermore, such regulations must be comprehensive and the statutory authority likewise comprehensive.
In section 203 of the proposed Modernization Act of 1971 we ask
for congressional empowerment to reach insured institutions and
member institutions in the name of comprehensibility.
(3) If regulation in this area of conflict of interest is to be fair,
particularly from the standpoint of preserving competitive equality
among financial institutions to which the chairman alluded in his
opening statement, it will be necessary to set up a procedure for coordination among the various financial agencies and to require, as
nearly as may be possible, uniformity of regulatory standards.
The Board understands that the administration is developing a
legislative proposal which would provide the financial supervisory
agencies with general regulatory authority to promulgate specific
regulations tailored to prevent those interlocking relationships which
have proven to be the basis of abuse. The proposal would require
consultation among these agencies in the issuance of these regulations.
I want to emphasize that the Board fully concurs in the objectives
of these pieces of legislation. Our new proposed regulations indicate
that the Board shares many of the concerns that the committee has.
They indicate that the Board is actively involved in this area. If there
are any differences between the view of the Board and the provisions
of H.R. 5700 and the other legislation here, these differences are ones
of approach and technique, not of basic purpose.
Section 402 of our proposed Modernization Act is a case in point.
Here we ask for authority to examine the affiliates of institutions bearing a 25 percent ownership relationship rather than the present one.
I am sure that after the exposure of the ideas which this hearing is
designed to accomplish, and the extensive array of witnesses to which




40
the chairman has alluded, a concensus can be reached as to how to
attack these problems.
We know that, related to this question mergers may tend to create
problems as to size, as to competition, as to the boards of directors,
and section 404 of our proposed Modernization Act is an effort to get
clarifying language so that the board will have authority over—comprehensive authority over—State charter to State charter mergers.
That concludes my statement, Mr. Chairman. I appreciate your
courtesy and your presence.
(Mr. Martin's prepared statement follows:)
PEEPABED STATEMENT OF PRESTON MARTIN, CHAIRMAN, FEDERAL HOME LOAN
BANK BOARD, REGARDING H.R. 5700 AND H.R. 3287

Mr. Chairman and Members of the Committee, I appreciate the opportunity
to appear before you to discuss the many important issues raised by the bills
under the Committee's consideration.
H.R. 3287 would amend section 18 of the Federal Deposit Insurance Act to
prohibit insured banks from making loans to provide for the purchase of securities of any bank.
H.R. 5700 (The "Banking Reform Act of 1971") is designed to accomplish
five principal purposes: (1) controlling certain interlocking relationships among
financial institutions and between them and other businesses; (2) making certain restrictions and requiring certain disclosures in connection with loans made
by financial institutions; (3) prohibiting brokered deposits; (4) controlling
giveaways; and (5) expanding insurance coverage on deposits of public funds
in insured banks and savings and loan associations to 100 per cent.
Federal savings and loan associations are generally without authority to
make the type of loans proscribed by H.R. 3287, since their lending is directed
toward housing. The authority of state-chartered savings and loan associations
is parallel to the authority of Federal associations in this respect. The Board
would therefore defer to the views of the banking agencies on H.R. 3287.
The Board does not support sections 25 and 26 of H.R. 5700 relating to 100 per
cent insurance of public funds deposited in insured banks and savings and loan
associations.
The Board has previously expressed the view that brokered deposits are frequently associated with unsafe and unsound operations and recent experience
has confirmed this view. The Board has had for sometime a comprehensive regulation, section 563.25 of its Rules and Regulations for Insurance of Accounts,
which closely regulates the use of these deposits. Although the Board's experience with brokered deposits is more limited than that of the banking agencies,
the Board's experience does not justify an absolute prohibition against brokered
deposits. Rather, the Board's experience points to two conclusions—that brokered deposits may be useful and proper in some cases and that the use of these
deposits must be strictly controlled. The Board would therefore favor legislation
which would control these deposits more stringently than at present, but which
would not ban them completely. For example, the Board would support a
statutory ban on the use of brokered deposits in those cases in which the receipt
of the deposit is tied to the granting of a loan.
Sections 22, 23 and 24 of H.R. 5700 deal with the practice of giveaways. It is
not entirely clear to the Board whether the intention of these sections is to prohibit completely every form of giveaway or to prohibit only certain types of giveaways. The Board presently has authority to regulate giveaways and has issued
regulations implementing that authority. It is the view of the Board that its
present authority is adequate to control any abuses in this area. The Board coordinates the issuance and modification of its giveaway regulations with the
other financial agencies. It appears to the Board that the present authority and
regulations carry out the intent of sections 22-24 of H.R. 5700.
With respect to equity participations, the Board believes that any prohibition
of this practice would be undesirable. It is, of course, understandable that the
borrower of funds dislikes the insistence of lending institutions on equity participation. However, it is our impression that equity participation reflect economic
forces that would be difficult to suppress. One such force is the longer-run trend
toward equity participation by many financial institutions in a wide variety of
areas. Many financial institutions can, to at least a limited degree, own property,
common stock, or bonds that provide equity participation through a conversion




41
privilege or through warrants. Financial institutions view such direct or indirect
equity holdings as a desirable form of diversification that can raise overall returns in the long-run and provide some hedge against inflation. Given the option
of these types of equity participation open to many lenders, it is understandable
that they should seek out similar equity opportunities in the mortgage market.
Secondly, during a protracted period of tight money, such as we had through
early 1970, the equity participation is simply a device for rationing a very limited
supply of funds and can be viewed as an alternative, in part, to raising the interest rate. It appears that life insurance companies would not have made certain
mortgage loans during the period of tight money without the inducement of
equity participation and would have put an even larger percentage of their funds
into non-residential equity outlets. Thus, the use of equity participations has
kept some funds in the housing markets, thereby reducing prices and rents below what they would otherwise have been.
It should be noted that a ban on equity participation in mortgage loans would
not automatically mean that more credit would be available for straight mortgage loans. It is highly likely that money would simply leave the mortgage market
altogether.
The Board takes the view that equity participations in the mortgage area are
still relatively new, that experience with them is limited, and that there is no
evidence up to now of an adverse impact in their use. The Board intends to observe their use and to keep itself informed on the impact of equity participation
in the future. We intend to keep an open mind on the subject and would not hesitate to recommend changes in the Home Owners' Loan Act which presently is
interpreted to prevent equity participations by Federal savings and loan
associations.
With respect to interlocking relationships and restrictions on and disclosure
regarding loaias, the Board suggests a different approach from that embodied in
H.R. 5700. This suggestion is born of the Board's quite extensive experience in
these areas and its current activities in adopting regulatory controls applicable
to these matters.
The Committee will recollect that late last July the Board proposed a comprehensive set of regulations dealing with disclosures and conflicts of interest,
subjects which are generally the same as the issues raised in H.R. 5700. These
proposals were the subject of an unprecedented volume of public comment. The
Committee will also recall that these public comments raised a series of extremely difficult and complex technical and administrative problems, totally aside
from any underlying questions of policy and philosophy.
In November of last year the Board adopted two of the proposed regulations,
substantially modified, and a new Statement of Policy on conflicts of interest.
Attached for your information are copies of these regulations and the Statement
of Policy, along with a cover letter from me to all insured institutions. You will
note from my cover letter that further action on the proposals was promised.
In the last few days, the Board sent to the Federal Register for comment a
major portion of the initial proposed regulations as redrafted. A copy of these
proposed regulations is attached. The Board believes that, if you will examine
these new proposals carefully, you will see the complexity and difficulty of
formulating fair, workable, and adequately enforceable rules in these areas. All
of this experience leads the Board to three major conclusions :
(1) It is not possible to deal with this area properly by means of rigid statutory formulae and inflexible general prohibitions of the type embodied in H.R.
5700. The underlying reality is too subtle and varied.
(2) If regulation in the area is to be effective, an enforcement mechanism must
be set up which is clearly designated and which is sufficiently flexible to cope
with all efforts at evasion and avoidance.
(3) If regulation in this area is to be fair, particularly from the standpoint
of preserving competitive equality among financial institutions, it will be necessary to set up a procedure for coordination among the various financial agencies
and to require, as nearly as may be possible, uniformity of regulatory standards.
The Board understands that the Administration is developing a legislative
proposal which would provide the financial supervisory agencies with general
regulatory authority to promulgate specific regulations tailored to prevent those
interlocking relationships which have proven to form the basis of abuse. The
proposal would require consultation among these agencies in the issuance of
these regulations.
I should like to conclude by emphasizing that the Board fully concurs in the
purposes intended to be achieved by H.R. 5700. The Board's proposed regulations
indicate that the Board shares many of the same concerns that this Committee




42
has, and that the Board is actively involved in this area. If there are any differences between the views of the Board and the provisions of H.R. 5700 in this
regard, these differences are simply ones of approach and technique rather than
of basic purpose. I am sure that, after the exposure of ideas which this hearing
is designed to accomplish, a common agreement can be reached.
The Office of Management and Budget had advised that, from the standpoint
of the program of the President, there is no objection to the submission of this
statement.
FEDERAL HOME LOAN BANK BOARD,

Washington, D.C., November 19,1970.
To: The Management of Each Insured Institution.
Subject: Conflict of Interest Regulations.
Transmitted is a copy of the Board's policy statement on this subject, § 571.7,
and final regulation amendments adding new §§ 563.34 and 563.35. These regulation amendments adopted on November 19, 1970 will be effective December 28,
1970. Prior to this effective date, the Office of Examinations and Supervision will
issue implementing instructions for these regulations.
The policy expressed in § 571.7 is basic to the continued viability and public
acceptance of the industry in contemporary society. The practices and conditions
there defined will continue to receive vigorous supervisory attention.
The package of regulation amendments proposed on July 21, 1970 has been the
subject of voluminous public comments. These have raised difficult and complex
questions and the Board has therefore decided to implement the proposed regulations sequentially. Each stage will occur whenever the Board believes that all the
questions relating to a given portion of the July 21 proposals have been resolved
to its satisfaction. Hence, you may expect further action by the Board on the
July 21 proposals. Unfortunately, timing cannot be predicted now.
Depositary relationships are treated in § 563.34. These relationships, both present and future, will be subject to alteration or disapproval only when harm to
the institution, or the realistic possibility of such harm, might arise. If management chooses among banks solely on the basis of objective criteria, § 563.34 will
have no effect other than routine reporting.
You will appreciate the objectives that § 563.35 is designed to reach. These are
to minimize borrower charges and to maximize his freedom of choice. On the
supply side, the regulation should foster the competition among alternative suppliers fundamental to our business system. Some changes in existing business
practices are called for but the equities which will result should far outweigh the
costs involved.
PRESTON MARTIN.

FEDERAL HOME LOAN BANK BOARD
No. 70-427
Date: November 19,1970.
TITLE 12—BANKS AND BANKING
CHAPTER V—FEDERAL HOME LOAN BANK BOARD
SUBCHAPTER D—FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION

Part 563—Operations
Part 571—Statements of Policy
AMENDMENTS RELATING TO CONFLICTS OF INTEREST

Resolved, That, notice and public procedure having been duly afforded (35 F.R.
12216) and all relevant material presented or available having been considered
by it, the Federal Home Loan Bank Board, upon the basis of such consideration,
determines that it is advisable to amend Parts 563 and 571 of the Rules and
Regulations for Insurance of Accounts (12 OFR Parts 563, 571) for the following
purposes: (1) regulating the depositary arrangements of insured institutions:
(2) regulating the provisions of certain services to borrowers from insured institutions; and (3) clarifying the policy of the Board regarding conflicts of interest. Accordingly, said Parts 563 and 571 are amended as follows, effective December 28,1970:
1. Part 563 is amended by adding at the end therof new § § 563.34 and 563.35
(reserving § 563.33 for future use), to read as follows :




43
§ 563.34 Selection of depositary.
(a) Except with the prior written approval of the Corporation no insured
institution may establish a depositary arrangement with a depositary on or
after December 28, 1970, of which any officer, director, employee, attorney regularly serving the institution in the capacity of attorney at law, or the spouse of
any such officer, director, employee or attorney is an officer, partner, director,
or trustee, or owner of 10 percent or more of such depositary's stock. Any such
depositary arrangement existing prior to December 28, 1970, may be continued
unless disapproved by the Corporation.
(b) Any request for such Corporation approval shall be filed with a Supervisory Agent of the Corporation at the Federal Home Loan Bank of the district
in which the institution is located. In taking action with respect to depositary
arrangements, including disapproval of existing arrangements, the Corporation
will consider the size of the depositary relative to the deposits maintained by
the institution, the amount of the deposits relative to the size of the institution,
the degree of the interlocking relationships, and any other factor which is or may
be detrimental to the institution or investors or depositors therein or borrowers
therefrom.
§ 563.35 Certain conditions prohibited.
(a) No insured institution or director, officer, or employee thereof may grant
any loan or extend any other service of the institution on the prior condition,
agreement, or understanding that the borrower contract for any of the following with any specific firm, agency, or person :
(1) insurance (except insurance or a guaranty provided by a government
agency) ;
(2) building materials;
(3) legal services, including title examination, and escrow and abstract
services; and
(4) services of a real estate agent or broker.
(b) The prohibition contained in subparagraph (1) of paragraph (a) of this
section shall not be construed to prohibit an insured institution from refusing
to grant a loan or extend any other service if the borrower wishes to contract,
in connection with such loan or service, with a particular company, firm, agency,
or person whose services, in such connection, are believed by the insured institution, on reasonable grounds, to afford it insufficient protection.
(c) The prohibition contained in subparagraph (3) of paragraph (a) of this
section shall not be construed to prohibit the insured institution from requiring
the borrower to pay an initial loan charge to reimburse the institution for legal
services rendered to it by an attorney selected by the institution in connection
with the processing and closing of a loan.
2. Part 571 is amended by revising § 571.7 to read as follows:
§ 571.7 Conflicts of interest.
(a) The Board has a paramount interest in the prevention and elimination
of practices and conditions which adversely affect: the interests of members
in insured institutions; the soundness of such institutions; the provision of
economical home financing for the nation; and the accomplishment of the other
purposes of Title IV of the National Housing Act, as amended.
(b) Among the practices and conditions which have such adverse effects are
conflicts between the accomplishment of the purposes of Title IV set forth in
paragraph (a) and the personal financial interests of directors, officers, and
other affiliated persons of insured institutions. Conflicts of this type which have
demonstrably resulted in such adverse effects are considered by the Board to be
inherently unsafe and unsound practices and conditions. The Board accordingly
holds that each director, officer, or other affiliated person of an insured institution has a fundamental duty to avoid placing himself in a position which creates,
or which leads to or could lead to, a conflict of interest or appearance of a conflict of interest having such adverse effects.
(c) The Board recognizes that it is impossible to define every practice or
condition which falls within the broad concept of objectionable conflict of interest. The Board has nevertheless issued various regulations to limit or prohibit
certain conflicts of interest to reflect its conclusion that the conflicts so limited
or prohibited are especially inimical to the accomplishment of the purposes of
Title IV. However, the omission by the Board to specifically limit or prohibit
other conflicts of interest should not be interpreted as tacit approval thereof.
The Board or its Supervisory Agents will continue to examine those conflict-ofinterest situations which are not specifically limited or prohibited under the




44
regulations and will, when circumstances so warrant, take appropriate action
to prevent, circumscribe or eliminate such situations.
(Sees. 402, 403, 407, 48 Stat. 1256, 1257, 1260, as amended; 12 U.S.C. 1725,
1726, 1730. Reorg. Plan No. 3 of 1947, 12 F.R. 4981, 3 CFR, 1943-48 Comp.,
p.1071)
JACK CARTER,

Secretary.

[12 CFR Part 563]
FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION
PROPOSED AMENDMENTS RELATING TO CONFLICTS OF INTEREST

Resolved, That the Federal Home Loan Bank Board considers it advisable to
amend the Rules and Regulations for Insurance of Accounts (12 CFR Chapter V,
Subchapter D) by amending part 563 for the purposes of regulating certain
transactions among insured institutions and affiliated persons of such institutions.
Accordingly, the Board proposes to amend said Rules and Regulations for Insurance of Accounts as follows:
1. Amend Part 563 by adding, immediately after § 563.32 thereof, new § 563.33
to read as follows:
§ 563.33 Transaction with affiliated persons.
(a) Scope of section. This section shall apply to all insured institutions, as defined in § 561.1 of this subchapter. However, to the extent that any provision of
this section may be inconsistent with any provision of § 584.3 relating to transactions between a subsidiary insured institution of a savings and loan holding company and an "affiliate" (as defined in § 583.15 of this chapter), the provision contained in such § 584.3 shall control.
(b) Definitions. For the purposes of this section—
(1) Affiliated person. The term "affiliated person" means:
(1) Any director, officer, or employee of an insured institution, any attorney
regularly serving the institution in the capacity of attorney at law, or any person who controls an insured institution;
(ii) Any member of the immediate family of any of the persons enumerated in
subdivision (i) of this subparagraph;
(iii) Any company which is controlled by any of the persons enumerated in
subdivision (i) or (ii) of this subparagraph, Provided however, That a service
corporation is not an affliated person except to the extent specifically designated
as such.
(2) Bank. The term "Bank" means a Federal Home Loan Bank.
(3) Board. The term "Board" means the Federal Home Loan Bank Board or
one or more of its officials who has been duly authorized by the Federal Home
Loan Bank Board to act in its behalf.
(4) Company. The term "company" means any corporation, partnership, trust,
joint stock company, or similar organization, but does not include (i) the Corporation, (ii) any Bank, or (iii) any company the majority of the shares of
which is owned by (a) the United States or any State, (6) an officer of the
United States or any State in his official capacity, or (c) or an instrumentality
of the United States or any State.
(5) Control. A person shall be deemed to have control of
(i) an insured institution if the person directly or indirectly or acting in concert with one or more other persons, owns, controls, or holds with power to
vote, or holds proxies representing, more than 10 percent of the voting shares of
such insured institutions, or controls in any manner the election of a majority
of the directors of such institutions;
(ii) any other company if the person directly or indirectly or acting in concert with one or more other persons, or through one or more subsidiaries, owns,
controls, or holds with power to vote, or holds proxies representing, more than 10
percent of the voting shares or rights of such other company, or controls in any
manner the election or appointment of a majority of the directors or trustees of
such other company, or is a general partner in or has contributed more than 10
percent of the capital of such other company;
(iii) a trust if the person is a trustee thereof: or
(iv) an insured institution or any other company if the Corporation determines that such person directly or indirectly exercises a controlling influence
over the management or policies of such institution or other company.
(6) Corporation. The term "Corporation" means the Federal Savings and
Loan Insurance Corporation.




45
(7) Director. The term "director" means any director of a corporation or
any individual who performs similar functions in respect of any company, including a trustee under a trust.
(8) Employee. The term "employee" means any employee other than an
officer or director.
(9) Immediate family. The term "immediate family" means (i) father,
mother, son, daughter, brother or sister (whether by the full or half blood or
by way of adoption) and (ii) husband or wife, or the husband or wife of any
of the persons enumerated in subdivision (i) of this subparagraph.
(10) Officer. The term "officer" means the chairman of the board, president,
vice president, treasurer, secretary, or comptroller of any company, or any other
person who participates in its major policy decisions.
(11) Person. The term "person" means an individual or company.
(12) Subsidiary. The term "subsidiary" of a person means any company which
is controlled by such person, or by a company which is a subsidiary of such
person.
(13) Supervisory Agent. The term "Supervisory Agent" means (i) the President of the Bank of the Federal Home Loan Bank district in which the insured
institution has its principal office, or (ii) any other person who is specifically
authorized by the Corporation to act in its behalf in the administration of this
subchapter.
(c) Prohibited transactions. No insured institution shall directly or
indirectly:
(1) Invest any of its funds in the stock, bonds, debentures, notes, or other
obligations of any affiliated person;
(2) Accept the stock, bonds, debentures, notes, or other obligations of any
affiliated person (including a service corporation) as collateral security for any
loan or extension of credit made by such institution ;
(3) Purchase securities or other assets or obligations under repurchase
agreement from any affiliated person (including a service corporation) ;
(4) Make any loan, discount, or extension of credit to
(i) Any affiliated person except:
(a) in a transaction authorized by subparagraph (8) of this paragraph; or
(6) a real estate loan on the security of a first lien on a home (as defined in
§ 541.10-2 of this chapter) or a combination of home and business property (as
defined in § 541.11 of this chapter) owned and occupied by s,uch affiliated person; or
(c) a loan for the purpose of alteration, repair, or improvement of a home (as
defined in § 541.10-2 of this chapter) or a combination of home and business
property (as defined in § 541.11 of this chapter) owned and occupied by such
affiliated person; or
(d) a loan for the purpose of financing a mobile home (as defined in § 545.7-1
of this chapter), secured by mobile hiome chattel paper (as defined in § 545.7-1 of
this chapter), such mobile home to be owned and occupied by such affiliated
person; or
(e) a loan secured in full by shares, savings accounts or deposits maintained
by such affiliated person in such insured institution ; or
(ii) Any third party on the security of any property acquired from any affiliated person, or with knowledge that the proceeds of any such loan, discount,
or extension of credit, or any part thereof, are to be paid over to or utilized for
the benefit of any affiliated person ;
(5) Guarantee the repayment of or maintain any compensating balance for
any loan or extension of credit granted to any affiliated person (including a
service corporaton) by any third party ;
(6) Make to any affiliated person other than an employee any loan at a rate
or with terms more favorable than the prevailing market rate or terms;
(7) Pay to an affiliated person (including a service corporation) to enter
into any agreement or understanding under which there is reason to believe that
such affiliated person is to receive from any other source: (i) any fee or other
compensation of any kind in connection with the procuring of any loan from
or by such insured institution; or (ii) any discount, rebate, or commission on
any initial loan charge paid by a borrower (or any other person) in connection
with the making of a loan: and
(8) Except with the prior written approval of the Corporation engage in any
transaction with any affiliated person involving the purpose, sale, or lease of
property or assets (except participating interests in mortgage loans to the extent authorized in this subchapter, but including any office building or any portion thereof or any land on which to erect an office building).




46
(d) Corporation approval. (1) Basis. The Corporation will not grant approval
under subparagraph (8) of paragraph (c) of this section if, in the opinion of
the Corporation, the terms of any such transactions by such institution would
be detrimental to the interests of its savings accountholders or to the insurance
risk of the Corporation with respect to such institution or would constitute an
unsafe or unsound practice.
(2) Approval ~by Supervisory Agent. The Supervisory Agent shall have authority to give prior written approval on behalf of the Corporation to any transaction, agreement, or understanding, or payment, requiring such approval under
subparagraph (8) of paragraph (c) of this section, and which is not given
approval under this section.
(3) Filing of applications. Applications for Corporation approval under subparagraph (8) of paragraph (c) of this section shall be in letter form and
shall contain a full and complete description of the subject matter of the application, including the consideration to be paid and the basic therefor. Copies of
pertinent contracts, agreements, or other documents shall be attached thereto.
Applications shall be filed with the Corporation by transmitting the original
and one copy to the Supervisory Agent, and one copy to the Director, Office
of Examinations and Supervision, Federal Home Loan Bank Board, 101 Indiana
Avenue, N.W. 20552.
(Sees. 402, 403, 407, 48 Stat. 1256, 1257, 1260, as amended; 12 U.S.C. 1725,
1726, 1730. Reorg. Plan No. 3 of 1947, 12 F.R. 4981, 3 CFR, 1943-48 Comp.,
p. 1071)
Resolved ftirther, That interested persons are invited to submit written data,
views, and arguments to the Office of the Secretary, Federal Home Loan Bank
Board, 101 Indiana Avenue, N.W., Washington, D.C. 20552, by June 18, 1971,
as to whether this proposal should be adopted, rejected, or modified. Written
material submitted will be available for public inspection at the above address
unless confidential treatment is requested or the material would not be made
available to the public or otherwise disclosed under § 505.6 of the General
Regulations of the Federal Home Loan Bank Board (12 CFR 505.6).

The CHAIRMAN. I would like to ask Mr. Wille a question or two,
and then ask Mr. Martin a few questions.
A commercial bank, Mr. Wille, can lend money anywhere in the
country. Of course, large commercial banks do lend money to customers all over the country. So do the big insurance companies and the
mutual savings banks. Savings and loan associations can now lend
money for projects within a 100 miles radius, which can in many cases
include several States.
I would like for you to answer this for the record when you get your
transcript. I will not take the time to ask for your reply.
How would your proposal work in regard to the many hundreds of
competing financial institutions that operate in large regions of the
country, even nationwide? I will submit for the record a number of
questions which I would like to have answered when you go over your
transcript.
Now, Mr. Martin, you bring up the question about more interest
through the kicker arrangements and through compensating balances,
and you believe that would, of course, encourage more homes to be
built and the more homes that are built the less rent is probably
charged, because there will be more competition.
But what you are actually saying, if I understand it correctly, is
that you believe that people who want to buy homes—that is part of
the environmental quality, we will say, that we must have—should pay
the same rate of interest that people pay who are compelled to go into
the^ marketplace in competition with everything to get that money.
It just happens I do not share your views. I think that the housing
industry is entirely in a different category, that the Government
should make it clear that money will be available for the construction
of residential housing for the purpose that I mentioned, environmental




47

quality, ana to give people a home—decent, stable home—in which
to live.
If we do what you have indicated, we would place a homeowner,
the would-be homeowner, in competition with a lot of people that he
couldn't compete with in order to get money. We would place him
in competition with the huge banks of the country that are not really
subject to usury laws, who can pay any amount of interest or they
can charge any amount of interest and big corporations can do the
same thing, because most usury laws apply to individuals only and
not corporations, and where it applies to corporations we can cross
a State line very easily in a taxicab and get the contract signed over
there. So you are in effect saying, if I am correct, that you want the
people who buy homes to get their money in competition with these
big concerns that are not restricted by interest, and besides, they get
tax deductions if they pay 12 percent for all effective purposes; it
costs them less than 6 percent.
So they are in a position of great advantage. They are also in
competition with the speculators who can pay high amounts of interest
for money, and they are in competition with the high-interest loan
companies that can pay any amount of money, and they are in competition with the gambling casinos.
Now, how can you expect homeowners to get an interest rate that
will enable them to buy homes in competition with the ones that
I have indicated, and remember now that the interest rates have
gone down probably about 1 percent, the last year or year and a
half on long-term loans. But if a person who goes into the market
today to buy a home, a $20,000 home, he must obligate himself not
only to pay that $20,000 but also over $30,000 interest on that loan.
In other words, more than $50,000. How do you justify your insistence that the homeowners must be in competition with the gambling
casinos and speculators and other people that I named, Mr. Martin?
Mr. MARTIN. Mr. Chairman, I share your concern that the homeowner is not able to compete. The homebuyer is not able to compete
with these other demanders of funds in a market.
I do not wish to mislead and indicate that the position of the Federal Home Loan Bank Board is that equity participation associated
with homeowner borrowing is a good thing. We are only asking for
a consideration of the facts regarding equity participation, and its
use during tight money periods.
The use of the equity participation has fallen off very dramatically
lately. We note that the equity participation was primarily used
by life insurance companies and pension funds in the building of
large housing projects during the recent tight money period, and
that the use has fallen off.
We simply would hate to see those projects deferred until tight
money ends, thus accelerating the contraction in housing during this
tight money period. We again are not asking for legislation to permit
Federal savings and loans to make this kind of piece of the action
lending.
The CHAIRMAN. Just one short question, and then I will yield to
Mr. Widnall.
The argument that you make applies not only to so-called equity
kickers, but to compensating balances, too, because that is another
way of getting more interest as you said awhile ago—you didn't




48

say more interest, but the way you had it in your statement was the
more money they made the more houses they would build and building
more houses, there would be more houses available for, rent and thus
the price of houses for rent would probably not be as high.
But that same argument could be used for compensating balances
too, couldn't it?
Mr. MARTIN. We had no position on compensating balances, since
this is more associated with banks than with savings and loans. We
defer to you and the banks on that.
The CHAIRMAN. I agree with you, it does relate to banks.
(The following are written questions submitted bj Chairman Patman to Mr. Wille, along with Mr. Wille's answers:)
Question 1. "Why not have a bill prohibiting bank loans where:
"{a) An insider is involved;
"(&) There is no payment of principal or final end of the payout of
the loan;
"(c) Loans are made at a lower than prevailing interest rate?"
Answer. A bill containing all three of the criteria stated might appear reasonable, but a clarification of terms would be required before such a prohibition
against "insider loans" could be effectively enforced. Assuming an appropriate
definition of "insider," how would the "prevailing interest rate" in (c) be
determined? Oould the condition in (b) be satisfied by a relatively insignificant payment at or prior to maturity? For purposes of the same condition, how
would formal repayment followed by a new extension of credit be treated? Would
the requirement apply regardless of the type or value of any collateral that might
be furnished?
The thrust of the prohibition in (b) would raise significant problems for
borrowers committed on demand loans or whose method of operation required
more-or-less continuous extension of loans for working capital. Moreover, demand loans and loans of short-term maturities permit the bank making them
to adjust the rates of interest when market conditions change, even though
continuous borrowings are expected and the borrower is completely credit-worthy.
The condition stated in (c), even if "prevailing interest rate" is adequately
defined, may already be a violation of State law in some States, or at least
a breach of fiduciary duty, if there is no business justification for the lower rate.
For State-chartered banks generally, the suggested prohibition might well raise
problems of consistency with any State law that was applicable.
These various considerations suggest further the wisdom of some administrative flexibility in the area of insider loans, rather than the inflexible
statutory formula originally contained in H.R. 5700.
Question 2. "While supporting the idea of strengthening provisions of existing
law regarding interlocks between various types of financial institutions, you
suggest that a defined geographic area be used. How would you define that geographic area?"
Answer. I would define the geographic area as that area of overlap in which
the various types of financial institutions named, or holding company affiliates
of such institutions, may establish offices under applicable provisions of State
or Federal law. For commercial banks and mutual savings banks whose principal officers are in New York City, for example, such a definition would bar interlocking relationships between such institutions and other financial institutions of the types named which are authorized to establish officers either in the
city of New York or in the counties of Nassau or Westchester, since New York
law permits such banks to branch or merge throughout New York City and to
branch, with one or more offices, into the counties of Nassau or Westchester.
The bar would apply even if the institutions involved had not actually established such offices. Under this kind of definition, the area in which interlocks
were prohibited would obviously vary, depending both upon the provisions of
State or Federal branching laws that applied and upon the institutional type
named in the prohibitory statue.
For the sake of simplicity, the Corporation would support a statewide prohibition barring interlocks between commercial banks, mutual savings banks,
savings and loan associations, and similar financial institutions. Federal savings
and loan associations are not bound by State laws and can branch statewide to-




49
day. One-third of the 50 States, moreover, permit statewide commercial bank
branching while a number of additional States permit bank holding companies to
operate statewide.
Another alternative, for a more densely populated area, would be to use the
Standard Metropolitan Statistical Area as the geographical area in which interlocks between Ufinancial institutions of the types named would be barred.
Question 3. A commercial bank can lend money anywhere in the country and,
of course, the large commercial tanks do lend money to customers all over the
country. So do the big insurance companies and mutual savings hanks. Savings
and loan associations can now lend money for projects within a 100-mile radius,
which can in many cases include several states. Hoto would your proposal work
in regard to the many hundreds of competing financial institutions that operate
in large regions of the country or even nationwide?"
Answer. The appropriate Federal bank regulatory agency could find that competition might be lessened substantially because of the existence of interlocking
relationships between the competing financial institutions named and could
administratively extend the general prohibition against interlocks with a statutorily defined geographic area to the institutions so involved in regional or national markets on a case-by-case basis.
The recommendation submitted by the Board of Governors of the Federal
Reserve System for prohibiting interlocks between all banks or other financial
institutions having over $1 billion in assets, regardless of where they are located,
might be an acceptable alternative to the approach I suggested during my testimony before your Committee on April 20, but it would not cover many interlocking relationships between institutions competing in regional, as opposed
to national, markets which cross State lines.
Question 4- "Over the years California savings and loan associations have
advertised for deposits in the East in competition with financial institutions
in the areas in which they advertise. Wouldn't this circumvent any geographic
area test you might devise?"
Answer. No. Under that part of the proposal which would authorize the
appropriate Federal bank regulatory agency to extend a general prohibition
against interlocking relationships within a defined geographic area to
similar relationships beyond that area if it found that the existence
of such relationships might have a substantial anticompetitive effect, the agency
could prohibit interlocking relationships between a California savings and loan
association and financial institutions headquartered or doing business in the
East if it found that competition for deposits or mortgage loans might be
substantially lessened as a result of the existence of an interlocking relationship.
Question 5. "According to a study done a couple of years ago, the Chase
Manhattan Bank in New York City had two director interlocks with the Travelers
Insurance Company of Hartford, Connecticut. These two institutions are not
located in the same geographic area, out both do substantial nationwide business
even though headquartered in different geographic area. How would your
proposal take care of this kind of problem?"
Answer. Again, the appropriate Federal bank regulatory agency could prohibit
the interlocking relationships to which the question refers if it found that their
existence might tend to lessen competition substantially in one or more "lines
of commerce" within a relevant geographic market.
Question 6. "This same study showed that the Chase Manhattan Bank had two
interlocking directorships with the First National Bank of Chicago, that city's
second largest bank and one of the ten largest in the United States. Would you
consider them competitors?
"How would you handle such a situation legislatively?"
"If so, shouldn't these interlocks be prohibited?
Answer. The Chase Manhattan Bank (National Association) and The First
National Bank of Chicago are, of course, substantial competitors for certain
types of banking business of many of the same potential customers. Interlocking
relationships between two such sizable institutions should therefore be prohibited.
Again, the interlocking relationships to which the question addresses itself could
be handled, as I suggested during my testimony before your Committee on
April 20, by the enactment of legislation that would, in addition to prohibiting
such relationships within a statutorily defined geographic area, also prohibit
such relationships where the appropriate Federal agency found that the existence
of such relationships might tend to lessen competition substantially, as, for
example, between banks or other financial institutions which were actual or
potential competitors in a national market.




50
Should the Congress decide, however, that a flat statutory prohibition against
such relationships is desirable, the interlocking relationships between Chase
and First National of Chicago could be prohibited by the enactment of legislation,
along the lines suggested by the Board of Governors of the Federal Reserve
Syetem, that would prohibit interlocks between all banks or other financial
institutions having over $1 billion in assets, regardless of where they are located.
Question 7. "In view of the rather substantial resources and income of FDIG,
are you presently giving any thought to recommendations for a reduction in
deposit insurance premiums or do you think they should fie maintained at their
present levels?"
Answer. Because of the Corporation's recent loss experience, the net assessment—i.e., the total assessment becoming due less the credits required by
statute—increased this past year. Because of this recent loss experience, the
Corporation is not currently considering recommending the enactment of
legislation that would reduce the net assessment payable by insured banks.
The Corporation reviews this question on a regular basis and may, of course,
recommend changes in the future in the level of deposit insurance assessments
depending on such factors as overall loss experience, the risks presented to the
Corporation's insurance fund, and changes in insurance coverage or methods
of regulation.
Question 8. "On page 8, you raised certain objections to prohibiting an interlocking directorship where a financial institution holds more than 5 percent
of the stock of a corporation with power to vote. It seems to me that your only
objection to this provision is that there is a subsanial area for violaion of this
provision through various contingencies unforeseen by the financial institutions.
An exception could be put into the bill for the types of contingencies you discuss, such as foreclosure on a loan and the receipt of stock by a bank trust
department named as executor in an estate. The purpose of this provision is to
reduce the possibility that a financial institution ivould gain control or undue
influence over another corporation through a combination of substantial stockholdings and director interlocks. It the problems you raise could be met by
certain exemptions in the Act, would you support this provision?"
Answer. Without reviewing the exact language of the proposal suggested, I can
express no opinion as to its merit or workability. The question does not indicate, for example, whether the revised proposal would prohibit interlocking
relationships during the period of retention of the stock in the two instances
cited, subsequent to receipt, or whether the prohibition would apply if the voting
of the stock by the financial institution could be directed only by a settlor, donor,
beneficiary or a co-fiduciaryMoreover, while administration of an estate is usually of short duration, many
such administrations are not. The question does not indicate how the revised proposal would apply in such instances.
Question 9. "On page 9 of your testimony, you state that there should be a
geographic area limitation on the prohibition of mutual savings banks holding
of stock in other financial institutions. It is not true that New York State law
prohibits mutual savings banks from owning any commercial bank stock regardless of any actual competitive situation between the mutual savings bank
and the bank whose stock the mutual savings bank might own? Has this created
any serious problems for the investment of funds by mutual savings banks in
New York?"
Answer. Section 235(26) (c) of the New York Banking Law specifically prohibits a New York mutual savings bank from investing in the stock of any bank,
trust company, national bank, or banking corporation headquartered in New
York State. The geographic limitation is derived from the definitions of these
terms contained in Section 2 of the New York Banking Law. The prohibition
has not, to my knowledge, created any serious problems for the investment of
funds by New York mutual savings banks.
Question 10. "Given the large number of securities that the public may invest
in, would a prohibition against mutual savings banks owning stock in other
financial institutions really be a substantial burden on their investment
programs?"
Answer. A prohibition against mutual savings banks' owning stock in other
financial institutions is not likely to interfere substantially with their investment programs. Such a prohibition, like others in the bill, raises the gen-




51
eral question, however, whether it is appropriate for Federal statutes to
restrict the investment powers of mutual savings banks, all of which are
State-chartered.
Question 11. "In your discussion of insider loans you state that from the
standpoint of safety and soundness, the important thing 'is a careful and
thorough credit analysis of the loan application and the ability to deny the
loan if the analysis shows the corporation is a poor credit risk, not the fact that
5 percent or more of the stock is owned by insiders.' However, wouldn't 'the
ability to deny the loan' be much less likely to exist if officers or directors of the
bank had a substantial interest in the firm seeking the loan?"
Answer. The ability to deny a loan would not necessarily be restricted merely
because directors or officers of the corporation seeking credit serve also as directors or officers of the bank to which the application for credit is made, since
such directors or officers frequently do not participate either in the discussions concerning the extension of credit or in the decision to extend the credit.
Such voluntary disqualifications are not uncommon among well-run banks, whose
directors and officers are sensitive to possible criticism from shareholders and
others.
I trust that my responses to these questions will be helpful to the Committee during its deliberations. If the Corporation can be of further assistance to
your Committee in any way, please do not hesitate to call upon me.

(The following are written questions submitted by Chairman
Patman to Mr. Martin, along with Mr. Martin's answers:)
Question No. 1. On page 6 of your statement, you say:
"(1) It is not possible to deal with this area [conflict of interest] properly by
means of rigid statutory formulae and inflexible and general prohibitions of the
type embodied in H.R. 5700. The underlying reality is too subtle and varied.
"(2) If regulation in the area is to be effective, an enforcement mechanism
must be set up which is clearly designated and which is sufficiently -flexible to
cope with all efforts at evasion and avoidance."
Would you consider your proposed conflict-of-interest regulations attached
to your statement as a sound approach to the problem of conflict of interest®
Answer. Yes. The Board is convinced that the sound approach is specific
regulations promulgated pursuant to general regulatory authority.
Question No. 2. Do you feel these proposals properly treat what you described
as an ''underlying reality [which] is too subtle and varied" f
Answer. The Board is not entirely convinced that these exact regulatory
proposals embody a "proper treatment"; it is for that reason that the proposals
have been issued for public comment. Nevertheless, the Board believes that
regulations along the lines or of the type proposed would constitute proper
treatment.
Question No. 3. If you want to see these proposals adopted as regulations,
why then wouldn't you want them to be adopted legislatively?
Answer. This question goes to the very heart of the matter. The Board does
not favor embodying in a statute provisions of the type found in its proposed
regulations. This is the case for two main reasons.
A. It will be noted that in order to make its regulations equitable the Board
has carved out exceptions to various general prohibitions. See, for example,
section 563.33(c) (4) (i) (a) — (e). In addition, the Board has made certain
transactions subject to prior approval rather than completely forbidden. See
section 563.33 (c) (8). Further, the Board has included certain persons within
the meaning of the term "affiliated person" who in actual fact are rarely, if
ever, the beneficiaries of conflict of interest transactions. The best example of
this is the ministerial employee. Nevertheless, it is also true that some employees,
such as appraisers, are frequently indispensible parties to improper transactions.
The best approach to this problem is for the Board to include employees as a
class within the term "affiliated person" and then to except some of them by
order, opinion, or further regulatory action.
This kind of highly detailed, carefully tailored rulemaking seems to the
Board to be exactly the sort of thing that should be dealt with in regulations and
not in statutes. It seems to the Board this is precisely the sort of problem that
administrative agencies were set up to handle. "A legislative body is at its best
in determining the direction of major policy, and in checking and supervising




52
administration. It is ill-suited for handling masses of detail, or applying to
shifting and continuing problems the ideas supplied by scientists or other professional advisers. Experience early proved the inability of Congress to prescribe
detailed schedules of rates for railroads, or to keep abreast of changing needs
concerning the level of import duties. Generally our legislative
bodies developed
the system of legislating only the main outlines of programs1 requiring constant
attention, and leaving to administrative agencies the tasks of working out
subsidiary policies. This system faciliated not merely the promulgation of law
through rules and regulations but the correlation of rule making with other
necessary activities as adjudication, investigating, prosecuting, and supervising."
Davis, Administrative Law, section 1.05.
B. Once a detailed statute is enacted, the activities of the persons subject
to the statute are altered. Some alternations are for the sake of compliance,
some for the sake of evasion. It then becomes necessary to amend the statute since
those who evade it mock both the law and those who comply with it. Statutory amendment however, is a lengthy and elaborate process, ill-suited for the
continuing surveillance and checking of efforts at evasion. "Although the choice
between legislative and administrative enunciation of policy is usually a choice
between two complex sets of cooperative arrangements by which many parts
of the governmental establishment contribute to policy formulation, the special
aptitudes and limitations of Congress and of the agencies bear on the problem.
Constant, continuing action can hardly be provided by the legislative process.—
The legislative process is especially qualified and the administrative process
is especially unfit for the determination of major policies that depend more upon
[political questions] than upon investigation, hearing and analysis." Davis,
Administrative Law, section 2.16.
The board submits that the type of questions dealt with in H.R. 5700, apart
from the general policy questions, are classically better suited to determination
by administrative regulation rather than legislative enactment.
Question No. 4- On page 3 you say, "With respect to equity participation, the
Board believes that any prohibition of this practice would be under sir abler
Do you recognize that the practice of equity participation puts savings and
loans associations into non-banking businesses and that in fact the practice is directly counter to the thrust of banlc holding company laws?
Answer. As indicated in the Board's testimony, Federal savings and loan associations are without power to employ the device of equity participations. As also
indicated in the Board's testimony, the Board does not favor at this time granting
this power to savings and loan associations.
Question No. 5. On page 3 you also say, "Financial institutions view1 such direct or indirect equity holdings as a desirable form of diversification that can
raise overall returns in the long run and provide some hedge against inflation.''
"Don't you recognize that
equity participation is itself highly inflationary since
it diminishes the ownerfs return and therefore forces him to increase the price
or the rental of the property?
Answer. The Board does not recognize that equity participation is hiarhly inflationary or even inflationary at all. It is true that an equity participation
may operate in some eases to increase the price or rental of the property since it
increases one of the factor costs in the production of the property. However,
these cases are quite rare since in most cases equity participations are on a residual basis and therefore do not enter into the factor cost. On the other hand, the
use of the participation enables properties to be produced which would not otherwise be produced. Hen?e, the participation increases supply and such an increase
has the effect of lowering prices, all other things being equal. Equity participations are sufficiently rare, and the data concerning them sufficiently scarce,
that it is unknown whether the price decrease due to increased supply is outweighed by the price increase due to the increase in factor costs. Certainly the
data do no sugsrest an inflationary impact of any conseomence. This lack of
data on which to base an informed legislative judgment is one of the reasons
why the Board believes that an absolute prohibition cannot be justified at this
time.
Question No. 6. Would you favor legislation which would cmfine equity participation to the term of the loan? (Since the issue essentially centers on construction loans, equity participation in this case would be of short duration.)
Answer. The meaning of this question is not clear. Since the property produces
no income during the construction state, it does not seem that an equity par-




53
ticipation could exist at that time. It would appear therefore that the legislation
suggested in the question is an indirect method of banning equity partcipations,
which the Board has already stated it does not favor.
Question No. 1. On page 4 you say, "It should be noted that a ban on equity
participation in mortgage loans would not automatically mean that more credit
ivould be available for straight mortgage loans. It is highly likely that money
would simply leave the mortgage market altogether."
Are you saying in effect that market interest rates and down payment arrangements are no longer acceptable to financial institutions and that in fact the effective interest rate on mortgage loans has to be far higher than the rate stated on the
loan contract f
Answer. The answer to the question depends on what is meant by the phrases
"market interest rates" and "effective interest rates". The effective cost of money
to the borrower and the effective return to the lender are based on many factors:
The amount of the down payment, the contractual interest rate, discounts, loan
fees, charges for services, the extent and frequency with which funds are disbursed, compensating balances and the like.
Under normal economic circumstances, it will be acceptable to the lender to
adjustment to the market, that is, to negotiate his effective return, by varying the
down payment arrangements, the contract interest rate and the loan fees. Under
abnormal circumstances, the lender will adjust by using additional variables.
Higher points will be charged, additional fees and charges will be required, disbursements will be less frequent and the like. Of course, the lender could decide,
not to employ any of these additional variables. In that case, the down payments
would increase and the contract interest rate would rise considerably.
Hence, the issue is not whether "interest rates and down payment arrangements
are no longer acceptable to financial institutions" and "whether the effective
interest rate on mortgage loans has to be far higher than the rate stated on the
loan contract". The issue is how many variables the lender will be allowed to use
in adjusting to the market. An equity participation is. in essence, another of
these variables. It may be that there are peculiar characteristics associated
with this variable that may render it unacceptable for use. It remains the view of
the Board, however, that such charactertistics have not been demonstrated.
Question No. 8. If you agree that the effective interest rate has to be much
higher, what rate do you think reasonable?
Answer. Not applicable in view of the previous answer. The Board does wish to
note, however, that it is probably not meaningful to speak of an interest rate as
"reasonable" or unreasonable in the abstract. An interest rate either reflects
the market or it does not. The Board regards efforts to suppress free market forces
in the determination of interest rates as tending to distort the allocation of resources at the expense of housing, which is a low priority investment to diversified
lenders.
Question No. 9. The attachments to your statement include a series of proposals
prohibiting conflict-of-interest situations among savings and loan associations.
The proposals are similar to provisions of H.R. 5100, but unlike the bill, the
proposals would achieve reform through expanded regulatory authority rather
than setting the changes in law.
The proposed restrictions are presented on page 4 of the Proposed Amendments
Relating to Conflicts of Interest.
The overriding question here is whether you would endorse putting the proposed
conflict of interest regulations in legislative form. Stated briefly, the proposals
would:
1. Prohibit savings and loan associations from investing in the obligations
of an affilitaed person (including members of their immediate families) or
accepting such obligations as collateral for a loan.
2. Prohibit any loan or extension of credit to affiliated persons except with
the written approval of the F8LIC. That approval can be given only if the terms
of the loan, in the opinion of the F8LIC, are not detrimental to the interests of
depositors or does not constitute an unsound insurance risk.
3. Prohibit affiliated persons from receiving any compensation in connection
with the granting of a loan by a savings and loan association.
4. Prohibit savings and loan associations from guaranteeing the repayment of
a loan or maintaining compensating balances to or for affiliated persons.
The proposals in some respects are far more restrictive than the provisions
of H.R. 5700 that go to loans to affiliated persons or members of their immediate
60-299—71—pt. 1




5

54
families. The bill would prevent banking institutions, including savings and
loan associations, from making loans to corporations where 5 percent or more
of any class of stock of the corporation is owned in the aggregate by the directors,
trustees, officers or employees or members of their immediate families.
It also requires the public disclosure of loans but does not prevent loans being
made to affiliated persons or members of their immediate families.
For all intents and purposes, section 11 of H.R. 5700 is identical with the
Federal Some Loan Board proposals prohibiting affiliated persons from receiving
compensation in connection with the procuring of any loan.
*Why wouldn't you want to see these proposals adopted in legislative form?
Answer. See answer to Question No. 3.
Question No. 10. On page 2 of your statement you say: "The Board would therefore favor legislation which would control these [brokered] deposits more stringently than at present, but wMch would not ban them completely. For example,
the Board would support a statutory ban on the use of brokered deposits in those
cases in which the receipt of the deposit 4s tied to the granting of a loan."
Would you favor amending H.R. 5700 to ban only those types of brokered
deposits?
Answer. As indicated, the Board would favor a ban on the link-financing
type of arrangement. The Board believes that in the drafting of such a ban the
phrase "directly or indirectly" should be employed in order <x> control efforts at
evasion. The answer to Question No. 11 indicates that the Board would consider
additional controls as well.
Question No. 11. What specific control do you want for other types of brokered
deposits?
Answer. As indicated in the oral testimony on April 20, the Board believes
that most of the problems with brokered deposits (aside from the link-financing
aspect) would be eliminated if the deposits took only the form of longer term
certificate deposits. As also indicated in the oral testimony, such a requirement
would tend to eliminate the "churning" or brokered deposits. The Board does
not necessarily "want" such a limitation but would not seriously object to it.
Question No. 12. If you acknowledge the need for more stringent control of
brokered deposits, why hasn't the Federal Home Loan Bank Board and/or the
F8LIC exercised it?
Answer. As indicated in the Board's testimony, brokered deposits as such
have not caused any serious supervisory problems in the savings and loan
industry. Henee, the Board dioes not "acknowledge the need for more stringent
control of brokered deposits" with respect to the savings and loan industry. The
Board's support for more stringent control is based on its observation of the
experience of the bank supervisory agencies.
Question No. IS. If the Federal Home Loan Bank Board and/or the FSLIC
lacks needed authority, why haven't they requested it long ago?
Answer. The Board does not believe that it lacks needed authority in this area.
The Board believes that its existing regulations have proven sufficient to control
abuses of brokered deposits within the savings and loan industry.
Question No. 14- There is nothing in your proposed conflict-of-interest regulations which goes to interlocking directorships among financial institutions. The
Federal Home Loan Bank Board's own investigation conducted by Irwin Friend
of the University of Pennsylvania leave* no doubt that such relationships are
anti-competitive by their very nature. The "Friend Report" states:
In 1965 approximately two out of three savings and loan associations had at
least one interlock with another financial institution, and one of the three had
at least one officer affiliated with another financial
institution....
A small Federal association in Louisiana is dominated by the control group of
a bank located across the street. . . . They run the association as if it were a
branch operation of the bank.
In a small town in Mississippi, four of the seven directors of a Federal association are officers and/or directors of the two local insured commercial banks. . . .
The association, which began operations in 1984, had total assets of less than
$3 million in June, 1968. . . . Its rate of growth was 0.25 percent as compared
with a 7 percent rate for all insured associations Mississippi.
In [a'] Texas association in which the loan eommittee was dominated by a
group of directors primarily interested in the local commercial bank, there is
evidence supporting the assertion of an examiner that these bank representatives




'used the association as a receptacle for the bank's bad real estate loans.'
The report goes on to site other examples, all of which clearly indicate that
interlocking directorships among financial institutions should be eliminated.
Do you agree?
Answer. No. The Board does not agree that all interlocking directorships among
financial institutions should be eliminated. The Board's basic position on this
subject is as follows :
A. As a general rule, the Board believes that management interlocks should
be eliminated as to financial institutions which compete with one another,
especially for savings.
B. Generally speaking, such interlocks will be found within certain geographic or product markets.
C. However, within those markets it will be found that in certain communities
the existing pool of financial talent is sufficiently small that exceptions will have
to be made in order not to do damage to the institutions and their customers.
D. The defining of the relevant geographic and product markets with respect
to each type and size of institution is a task of considerable difficulty. The same
is true regarding the definition of the communities whose existing pool of
financial talent is too small.
E. Hence, the Board believes, as it stated in the testimony on April 20, that the
control of interlocks can be accomplished best by administrative action operating
within general guidelines layed down by the Congress.
F. For the same reasons, as the Board also stated in the April 20 testimony,
the Board believes that the administration mechanism for the control of interlocks must include provision for prior consultation among the financial supervisory agencies.
G. Finally, the Board believes that, even in those communities where the
existing pool of financial talent is scarce, is abuses can be shown, supervisory
action to terminate the interlocks is in order.
Question No. 15. Do you insist that financial talent is so rare as to be confined
to a small, select group in many communities f
Answer. Yes.
Question No. 16. If you insist there's not enough financial talent to go around
and that the officers and directors of financial institutions in small and medium
size communities must be mutually shared, then you are admitting that these
financial institutions in many instances will continue to be a long way from fully
competing with each other.
Answer. The Board does not admit that these financial institutions will be
"a long way" from competing fully with one another. It must be acknowledged,
however, that the level of competition will not be as high as it otherwise might
be in all cases.
As indicated in the answer to Question 14, the Board believes that, even in
those communities where the existing pool of financial talent is scarce, if abuses
can be shown, supervisory action to terminate the interlocks is in order. At the
present time the Board's Office of Examinations and Supervision is developing an
expanded program of surveillance of interlocks among financial institutions, including interlocks in these communities. This program is designed, among other
reasons, to implement section 563.34 of the Board's regulations, a copy of
which was attached to the Board's April 20 testimony. Again, the Board believes
that this kind of administrative action is best suited to conrol in this area.
Question No. 17. On page 5 of your statement, you say: "In November of
last year the Board adopted two of the proposed regulations substantially
modified, and a new statement of policy on conflicts of interest. Attached for
your information are copies of these regulations...."
The regulation goes to conflict of interest [and] deals with depositories and
insider loans. Under the new regulations, savings and loans and affiliated persons
are prohibited from granting loans on the prior condition that the borrower
contract for insurance, legal or real estate services or the puchase of building materials with any specific firm or person.
How is it to be determined that a prior contract exists t
Answer. Initially, it should be noted that it is not necessary for the Board,
in order to prove a violation of section 563.35, to show that a prior contract exists.
It is only necessary to show an agreement or understanding, orally or in writing.
It should also be noted that section 563.35 deals with tying arrangements, the loan
being the "tying product" and the insurance, legal services, etc. being the "tied




56
product". Tying arrangements are per se violations of the anti-trust laws. See
International Salt Co., Inc. v. U.S., 332 U.S. 392,, 68 S. Ct. 12, 92 L. Fd. 20 (1947) ;
Northern Pacific Railway Co. v. U.S., 356 U.S. 1, 78 S. Ct. 514, 2 L. Ed. 2d 514
(1958). Hence, in enforcing section 563.35, the Board faces the same type of
evidentiary and investigative problems that the Antitrust Division faces in
dealing with other tying arrangements.
Perhaps the two most common methods of determining that a tying arrangement exists are as follows: First, a borrower who has been coerced complains
to the Board. Second, the Board's examiners will note during the course of
an examination that a very high percentage of the hazard insurance on the
properties securing loans made by the association has been written by a certain
agency or company; or that a high percentage of the association's files on construction loans show disbursements to certain suppliers of building materials;
and so forth. Thereafter, statistical evidence is collected and affidavits are obtained. Depending on the resourcefulness of the investigator, and the investigative resources available the resulting case can be quite overwhelming.
Question No. 18 In lieu of documentation, how can anyone really tell whether
a prior contract exists f
Answer. See previous answer.
Question No. 19. Aren't you really saying that this practice exists among
persons who are affiliated with savings and loans and operate real estate, legal
and 'building material firms? Savings and loan directors, for instance.
Answer. Yes.
Question No. 20. If it is ~bad to have prior contracts under these conditions,
isn't it also equally unacceptable to have post contracts with persons affiliated
with savings and loans and other businesses?
Answer. It is not clear what the term "post contracts" means. It is assumed
that the term is intended to refer to contracts and other dealings between the
association and its officers and directors and businesses owned by them. Such
dealings are of course frequently improper and dangerous and are forbidden or
restricted by state and Federal law and regulation. It will be noted that the
Board's proposed conflict of interest regulations are directed at these insider
transactions. It is not possible, and is probably not very useful or meaningful, to
attempt to decide whether tying arrangements are equally or more or less unacceptable than other types of insider transactions. In any event, the Board clearly
looks with disfavor on all such transactions and is actively engaged in subjecting
them to tighter regulatory control.
Question No. 21. On page 885 of the "Friend Report", the following statement is made:
"The most striking fact about the ancillary financial connections of savings
and loan management groups is their extraordinary degree of interlocking
relationship with commercial banks. While the banking business had long opposed
various forms of legislative assistance to the savings and loan industry, many
individual banks have quietly followed the alternative route, suggested by the
-famous dictum; 'If you can't beat 'em, join 'em.' A significant segment of the
savings and loan industry {conservatively, 20 percent) is under common control
with commercial banking interests, and a substantial number of individual
relationships suggest bank dominance in the partnership. The business performance of many bank-affiliated associations, often burdened with part-time management, has been below average; in a number of cases it is deficient in ways that
we would expect to result from capture by a competitor {high levels of cash
holdings, slow growth, unaggressive competitive efforts). Beyond this, the anticompetitive implications of savings and loan interlocks and common control
with commercial banks are so clear that a sizable number of such linkages would
appear vulnerable to antitrust attack on structural grounds alone. Regulation
has been seriously inadequate in this area and is in need of drastic overhauling."
Do you agree with this observation and if so what are you doing about it?
Answer. The Board agrees that management interlocks among competing
financial institutions can have serious anti-competitive effects. On November 19,
1970, the Board adopted finally a regulation (section 563.34) dealing with interlocks between banks and savings and loan associations. A copy of this regulation was appended to the Board's testimony on April 20. In a letter dated December 11, 1970 and addressed to the Committee of Conference on the Housing and
Urban Development Act of 1970 the Board supported legislation which would have
enabled the Board to further control management interlocks. Section 203 of




57
the Board's proposed Modernization Act would also convey authority which
could be employed to restrict management interlocks. In the Board's testimony on April 20, the Chairman noted that on the subject of interlocks the position of the Board differed from the position expressed in H.R. 5700 only as to
approach and technique not as to basic purpose.
The CHAIRMAN. Mr. Widna.ll.
Mr. WIDNALL. Thank you, Mr. Chairman.

Mr. Wille, on pages 16 and 17 of your statement you referred to a
questionnaire mailed last year to all insured banks which called for the
reporting of certain activities engaged in as of July 31, 1970. The
questionnaire asked, first, whether the banks had brokered deposits as
of July 31, 1970, and, second, whether they had made loans linked to
these deposits. Unfortunately, you don't give us the results.
It would be most helpful to the committee if you would give us these
results. Can you do that this morning ?
Mr. WILLE. These results were given in my testimony on March 9
with respect to closed banks. I will summarize them to the best of my
recollection this morning.
There were 264 banks, regardless of charter—that is national banks,
State member ba^ks, and State nonmember banks—out of approximately 14,000 banks in the country that reported some type of brokered
funds in their deposit structure. The total amount that was involved
was approximately $260 million out of a total deposit figure for all insured banks in the country of some $532 billion. Those figures will give
you a feel for the limited use of brokered funds in the Nation's banking
system at the present time.
Of course, the impact of these brokered funds varies with individual
institutions.
Mr. WIDNALL. Did you find any instances where you felt that there
had been an unwise practice in the operation of the institution because
of the receipt of brokered deposits ?
Mr. WILLE. Yes, sir: I think we have. Some of the banks that accepted deposits have either become "problem" banks or failed, say, in
the last 2 years or more. As a matter of fact, in the hearing on closed
banks. I indicated that eight banks out of the 20 that have failed since
January 1, 1969, had misused brokered deposits. If you go back further, there are other instances in which the misuse of brokered deposits
has been a major contributing factor in a bank failure.
This does not include banks that have developed problems because
of the misuse of brokered funds, i.e., banks which have not failed but
which are on the "problem" list.
Mr. WIDNALL. What would be the number of banks that have used
brokered deposits without any indication of problems ?
Mr. WILLE. Our analysis of the figures we got as of last July disclosed that approximately 20 percent of the 264 banks reporting brokered deposits did develop some serious problems but that 80 percent
of that number knew how or were able to handle the risks that were
involved in brokered deposits.
I might'say that most of the difficulties came in the smaller institutions around the country.
Mr. WIDNALL. On page 2 of your testimony you said that the "corporation's limited experience to date with the use of equity participations by insured State nonmember banks indicates no reason why"—




58
and I emphasize that—"as a supervisory matter, this financial practice should be banned at the present time."
Do you feel that you have gone into it enough to warrant an absolute statement on that?
Mr. WILLE. I think with regard to your question that the differing
jurisdiction of the three different Federal bank regulatory agencies
is relevant. The Comptroller regulates national banks, the Federal
Reserve Board regulates the Stat^-chartered banks that are members
of the System, and the Federal Deposit Insurance Corp. regulates
those remaining State banks that are not members of the Federal Reserve System. By and large, it is our belief that equity participations
have been used more extensively by national banks and by State member banks than by the State nonmember banks with which we are
familiar which are a good deal smaller.
But even if that is the case, the Comptroller's survey conducted last
3^ear indicated that very few national banks actually had equity participations, and that they accounted for less than 0.3 percent of all
their loans outstanding.
Mr. WIDNALL. Could you tell me what choice the institution would
have for their loans if they hadn't gone into equity participations?
What would they use that money for? What would they have been
forced to participate in in order to get some income for their own
institutions ?
Mr. WILLE. This goes to the question of why institutions seek
"equity kickers." Bankers who have discussed this indicate that they
believe that equity participations do provide them a hedge against
inflation, and that, in fact, where businesses are very thinly capitalized
from nonbank sources and the bank is the primary party financing
these businesses, equity participations provide the bank an appropriate
return where very little money of the entrepreneurs themselves is at
stake.
It is, some of them claim, a means of rationing credit in a very
tight-monev period, such as we have had over the last 3 years until
about last July. The claim is made that were it not for equity participations, interest rates stated in the loans would have been higher. That
is only repeating the comments that I think participating banks have
made.
The CHAIRMAN. Mr. Barrett.
Mr. BARRETT. Thank you, Mr. Chairman.
Mr. Wille, on the bottom of page 4 you say, "Turning first to interlocking relationships, sections 2 through 9 of H.R. 5700 contain a
variety of proposed prohibitions." You are talking about the interlocking director relationships. You have suggested broadening the
geographic coverage with a prohibition of interlocking relationships
to the common area within which such institutions may be established or may establish their offices, namely, the area of actual or
potential local competition.
This seems to me an extremely narrow definition for geographic
coverage. Since the big banks in San Francisco compete with the
banks in Chicago, and New York and elsewhere, to allow such interlocking relationships between the largest financial institutions which
together control the vast majority of lendable and investable assets;
how do you justify this ?




59
Mr. WILLE. Well, I think this goes to the purpose of the prohibition
on the interlocks. If the purpose is to maintain a more competitive
market which might otherwise not be the case if the interlock exists,
you have a question then as to what is the relevant market. If you
are dealing in terms of the smaller community, the area generally
for a bank is an area somewhat around its offices, particularly for
deposit functions.
Now, granted that loan functions for the major, largest banks in
the country are nationwide, and you will note that my suggestion as
to this provision would permit the relevant banking agency to extend
the prohibition that you have suggested to major institutions in the
national market which might be substantial, actual, or potential competitors in that market.
Mr. BARRETT. Well, I think you would rather use the word "require
to extend it" rather than "permit it to extend it"; wouldn't you ?
Mr. WILLE. I believe the problem here is one of determining whether
particular institutions are in competition in a given market. I think
that if that finding is made, yes, I would agree that interlocks should
be prohibited.
Mr. BARRETT. YOU further state in your statement that there should
be a geographic area limitation on the prohibition of mutual savings
banks holding of stock in other financial institutions. Is it not true
that New York State law prohibits mutual savings banks from owning any commercial bank stock regardless of any actual competitive
situation between a mutual savings bank and stock the mutual savings
bank might own? Has this created any serious problems in the investment funds by mutual savings banks in New York?
Mr. WILLE. I might say that your comment raises a problem that
Mr. Widnall alluded to in his very early remarks, that is, that some
of the Federal banking agencies, particularly the Federal Reserve
Board and ourselves, are the second regulator for many of these banks,
that is, those that are State-chartered banks subject to State law. It
is true that in New York there is a prohibition against the ownership
by mutual savings banks of stocks in commercial banks.
I would point out, however, that commercial banks, at least through
the holding company device in New York, and with appropriate regulatory approvals at both the State level and the Federal Reserve
Board level, can have affiliates statewide and therefore, I don't think
there is anything inconsistent in the statement before you.
Mr. BARRETT. That is all, Mr. Chairman.
The CHAIRMAN. Mr. Johnson.
Mr. JOHNSON. Thank you.
Mr. Wille, I am going to direct my questions to Mr. Martin because
I cross-examined you, if you recall, when you were here last.
I am interested in your statement, Mr. Martin, about brokerage
deposits, that they are not bad per se, and I take it that you feel that a
brokered deposit, even though a broker gets a commission for getting
a bank, let's say, $100,000 deposit, there is nothing wrong in that
transaction of the bank paying a broker a little fee for a deposit, providing that there is nothing sinister about the transaction; isn't that
just about what you have said in your statement ?
Mr. MARTIN. Yes. We are absolutely against any kind of tie-in, or,
as you say, any sinister or below the surface kind of arrangement. We




60

note that brokers are turning to the placement of funds in certificate
form which is of a longer term, 1 or more years. This seems to us to
remove another possibility for difficulties of a supervisory nature.
Mr. JOHNSON. The reason I am asking this question is because the
last time Mr. Wille was here I believe he stated he would favor eliminating the practice entirely. But it seems to me that there is nothing
inherently wrong with the broker deposit providing it is properly
regulated; there is no reason whv we can't permit brokered deposits,
yet lay down certain guidelines that if there is a tie-in it has to be on
record in the bank, or if there is a tie-in that money can't be withdrawn while the tie-in exists, or some other protective device.
There are certain safeguards, it seems to me, that can be written
into the law rather than destroy a business which is probably relatively lucrative to, let's say, people who are in the brokerage business.
I take it that is the way you feel about it ?
Mr. MARTIN. Yes. I take it our position is a little stronger in that
we would certainly accede to and support, should Congress decide on
absolute prohibition of brokerage funds, where there is any direct
or indirect tie-in on loans or other such transactions.
Mr. JOHNSON. NOW, turning to another subject, I notice the attempt
here to do away with kickbacks or equity participation demands by
lenders. I notice that the bill covers insurance companies.
Now, I don't recall—since I have been on this committee—any
attempts on the part of this committee to extend our jurisdiction to
insurance companies. When I was in law school the case of Paul v.
Virginia, decided way before the turn of the century, said insurance
was not commerce, but the Supreme Court has since overturned that
and said insurance is commerce.
But we on this committee generally legislate within the realm of
national banks or within the realm of federally insured banks. That
seems to be our jurisdiction.
Do you feel that itihis committee has jurisdiction to start regulating
insurance companies in their lending activities ?
Mr. MARTIN. I don't know that I am capable of answering your
question, Mr. Johnson. I would comment on it, though, if the chairman thinks it is appropriate, that since insurance companies have used
the equity participation more than any class of institutions, I would
think that might be the reason why they were so included.
The CHAIRMAN. I think they originated it. Of course, this is attached to the cost of money, interest rates.
We did have flood insurance, and we had crime insurance. We dealt
with insurance in many different ways. But it is not a part of the
jurisdiction that we have assumed as such. But where it relates to
something like interest rates, why I think it is within our jurisdiction.
Mr. JOHNSON. Well, that is debatable, Mr. Chairman. Of course,
if we can regulate insurance companies, they are the greatest offenders
in the conglomerate field and have billions of dollars controlling
industries all over the country. Maybe we are opening up a new can
of worms which we are to get into.
The CHAIRMAN. I suggest if the gentleman will present a bill we will
get right into it.




61
Mr. JOHNSON. Mr. Martin, I notice you say if we destroy the rights
of these lending institutions to engage in equity participation plans
that you might see mortgage money market dry up entirely. I notice
you have said that in your statement.
Do you want to embellish that a little ?
Mr. MARTIN. I certainly would, Mr. Johnson. I am afraid I gave a
needlessly restricted impression.
I only mean that it has been our observation that there were a number of housing projects announced in the tight money period which
we feel would not have been financed by life companies and the pension
funds without the equity participation, because equities were very
attractive to these institutions and they were accumulating equities at
the same time. They were not buying mortgage loans. They were not
without equities. They wrere completely out of the residential, singlefamily residential market. We just hate to see big project financing not
occur in the next tight money period.
Mr. JOHNSON. I thank you very much.
The CHAIRMAN. Mrs. Sullivan.
Mrs. SULLIVAN. Thank you, Mr. Chairman. I have questions for both
Mr. Martin and Mr, Wille. In order to get my questions asked, I would
appreciate it if you would just be brief now and then enlarge upon your
answers later, as you correct your testimony in the transcript.
Mr. Wille, I noticed your endorsement of the approach taken in my
bill of allowing wide administration discretion in regulating conflicts
of interest. My bill, as you know, applies only to the insured savings
and loans. Are you saying that we need a similar extension of power
to the FDIC to deal with conflict of interest situations in insured
banks, or do you now have all the power already which H.R. 7440
would give to Chairman Martin's agency ?
Mr. WILLE. AS I indicated on March 9, Mrs. Sullivan, our position
is that we do not have the authority at the present time. We believe
that proper regulatory authority would be beneficial and helpful in
this area, and of course it should be applicable as well to the Federal Eeserve Board which also regulates State banks.
Mrs. SULLIVAN. Thank you.
Mr. Martin, I understand from your testimony that you favor legislation giving stronger regulatory authority to the Home Loan Bank
Board rather than specifically prohibiting by law the things which
could be regulated by stronger authority; is that correct ?
Mr. MARTIN. Yes. In several of the sections of our proposed
Modernization Act we have asked for additional authority over certain classes of institutions so that the impact of regulation would fall
equally across the board on those institutions operating in various
forms which compete with each other across the country.
Mrs. SULLIVAN. Thank you.
Is there any question in your mind that the Home Loan Bank Board
needs additional authority by law to deal with and regulate, the kinds
of conflicts of interest which the ad hoc subcommittee of this committee described in our report ?
Mr. MARTIN. We feel that the move we have made in the regulatory
area are in the direction of correcting the abuses that the ad hoc subcommittee on home financing practices brought out last year. We




62

have been greatly guided by the testimony and the committee recommendations there.
Our request is for legislation, as I say, which would balance the impact of regulation rather than, for example, new expansive conflict
of interest powers over several institutions.
So I believe that there is a great deal of overlap between what we
have done since the committee report and since I testified here and
the transactions and relationships which the committee very properly
called our attention to.
(At the request of Mrs. Sullivan to expand his remarks, Mr. Martin
submitted the following supplemental information to the above
question:)
There is no question in my mind on this point; the Board needs additional
authority. In order to explain why this is so, it is necessary to describe briefly
the Board's existing authority in this area. This authority is seen most clearly
if one distinguishes among three types of savings and loan associations.
A. Federally Chartered Associations: Section 5 (a) of the Home Owner's
Loan Act of 1933, as amended (HOLA), grants the Board plenary regulatory
authority over federally chartered associations. It follows therefore that, with
respect to these associations, the Board has the full authority to issue any
regulations dealing with conflicts of interest or any other subject which are
reasonable in the Constitutional sense. It also follows that neither the July 28
draft, nor the December 11 draft, nor section 203 of the Board's proposed
"Modernization Act" would add anything to the scope of the Board's regulatory
authority with respect to Federally chartered associations.
B. State-Chartered Insured Associations: The Board's authority over statechartered insured associations stems from various provisions in Title IV of the
National Housing Act, as amended (NHA). The exact extent of the Board's
authority over state-chartered insured associations is the subject of some debate.
It is conceded on all sides that (1) the Board has some authority, stemming
from specific provisions of the National Housing Act, over state-chartered
associations and (2) that this authority is not as extensive as it is with respect
to federally chartered associations. Examples of these specific provisions are
various subsections of section 404 of the NHA authorizing the Board to promulgate regulations governing the payment of insurance premiums and establishment
of reserves by state-chartered insured associations.
The point on which there is not unanimity is the extent of the Board's regulatory authority over state-chartered insured associations. Tlie position of the'
Board on this point is that the Board now has the authority to regulate statechartered insured associations with respect to matters which affect (1) the
soundness of the FSLIC, (2) the .safety of insured institutions, (3) the interests
of depositors in insured institutions, (4) the provision of economical home
financing for the nation, and (5) the accomplishment of any of the other purposes
of Title IV of the NHA. In connection with this position several points need to
be stressed:
1. This regulatory authority is not as "general" as the Board's general regulatory authority over federally chartered associations, but is limited to matters
having a reasonably direct and demonstrable relationship to one or more of the
five factors mentioned above.
2. There is no clear and explicit grant in Title IV of the NHA of this regulatory
authority over state-chartered insured institutions. This grant of regulatory
authority is implied by reading together a number of provisions in Title IV and
consideration of the legislative history and purposes of the title, both as enacted
and amended from time to time. In addition, the scope of this regulatory
authority is not clearly stated in Title IV: no more explicit statutory guidance
is furnished to the Board than the five factors mentioned above. The basic
reason for the lack of clarity in the grant and scope of the Board's regulatory
authority over state-chartered insured institutions is the great haste in which
Title IV was enacted. The National Housing Act was a piece of emergency
legislation requested by President Roosevelt in 1934 and the entire Act (including
Title IV) was drafted, heard before committees of both Houses, debated, passed
and enacted in less than a few months.




63
3, The lack of clarity and precision regarding the Board's authority over
state-chartered insured institutions has a number of effects:
(a) It is a potential source of litigation.
(&) It has a dampening effect on the Board's exercise of its statutory responsibilities, since it is reluctant to act in areas where its authority in unclear.
(c) The outcome of any litigation in this area is unpredictable. The arguments
regarding the extent of the Board's regulatory authority over state-chartered
insured institutions are very complex and sophisticated. Although the Board
feels confident that its position is correct, it would be turning its back to reality
if it did not acknowledge that a court which is highly conservative or lacking
in familiarity with financial regulatory matters might accept a contrary position.
The Board cannot, of course, select the forum in which the question might be
litigated, and it is reluctant to commit a major portion of its functions to such
a degree of uncertainty.
0. Member Institutions: The Board also has some regulatory authority over
state-chartered uninsured institutions which are members of the twelve Federal
Home Loan Banks. This authority stems from certain provisions of the Federal
Home Loan Bank Act. For example, the Board may regulate these institutions
with respect to the maximum rate of return they may pass on savings accounts,
and with respect to required holdings of liquid assets.
In considering the question of aditional authority another distinction must be
kept clearly in mind: The distinction between the scope or applicability of the
Board's authority and its enforceaMUty. Although the scope of the Board's
regulatory authority over Federal associations is greater than over insured
institutions, its enforcement authority is virtually identical with respect to the
two classes of institutions. In the case of plain members, the Board has no
enforcement powers, except the removal of a member from the System or the
denal of advances. Both of these are drastic, and in most cases probably fatal,,
tools which are unsuitable for enforcement against relatively minor civil
transgressions.
This discussion suggests two conclusions to the Board:
1. There must be a greater equalization of the treatment of the three types
of institutions from the standpoint of both regulatory applicability and enforce*
ment. My oral testimony on April 20 was directed to this point.
2. The authority of the Board with respect to state-chartered insured institutions must be clarified by explicit provisions.
Mrs. SULLIVAN. DO you feel you have carried your present legal au-

thority as far as it can go in this respect ?
Mr. MARTIN. NO. We have now issued three sets of regulations,
one in July, one in November and one very recently for comment. We
will continue to review both the findings of the ad hoc committee on
practices, and the volume of responses to the initial issuance of our
proposed regulations. We will continue to review the experience we
have in supervisory cases. I don't believe we have issued our last regulation.
(At the request of Mrs. Sullivan to expand his remarks, Mr. Martin
submitted the following supplemental information to the above
question:)
My response during the oral testimony on April 20 was flatly "No". As T
said on that occasion, "I don't believe we have issued our last regulation."
Nevertheless, because of the factors discussed above, it is simply impossible,
if the Board were to exercise its present authority to the maximum, for the resulting regulatory scheme to be equitable. Differing classes of institutions
would be subject to substantially different standards. It is therefore the view
of the Board that the question of whether the Board has stretched its present authority to the limit is largely irrelevant, and a suggestion that the Board do
so is a recommendaion for an unequal and hence unworkable system.
Mrs. STTLLTVAN. But you are doing that under the authority you now

have. This is why I asked whether you feel that authority as it now




64

exists is strong enough to allow you to meet the problem. I know you
have issued some regulations on conflicts of interest, but you had said
at one time that you do not have enough authority to issue stronger
regulation.
Mr. MARTIN. Yes, the Congresswoman is quite right, and again as she
pointed out in the introduction of H.K. 7440, the Home Loan Bank
Board is grateful for the additional authority embodied in legislation
as to amendments of the Housing Act last year, which we have also
implemented in areas such as Washington, D.C. savings and loans,
the very savings and loans which the subcommittee examined in some
detail as to certain classes of transactions.
I didn't mention that we have also moved into that area, thanks
to the legislation passed last year.
Mrs. SULLIVAN. I admit I was terribly disappointed last year when
the Board declined to take any position, one way or another, on the
conflict of interest amendment which I had offered and which was
incorporated in the committee's bill. What was the reason, if you can
tell me, why the Board was unable to reach a policy decision on that
legislation at that time ?
Mr. MARTIN. Well, Congresswoman, we worked on this very complex
issue of relationships and transactions, both economic and noneconomic, involving savers, borrowers, in some cases even certain kinds
of institutions, stockholders, suppliers of services to institutions, the
so-called infrastructure with which the institutions deal, and all the
other matters that your subcommittee brought out. We found repeatedly that Federal moves in this line would cut across what the
States were doing. These States have, as the gentlewoman knows, a
myriad and mosaic of approaches to the subject. It was as much as
anything the great difficulty in two areas which caused us to be late
in our recommendations to the committee. The recommendations were
forthcoming when we worked out as much as we could of the problems.
The two main areas, No. 1, that the State laws not be unduly
transgressed or interfered or set aside for all the reasons the committee is so familiar with; and second, that the issuance of regulations and/or the request for legislation and the granting of legislation would not unduly cut back the flows of mortgage funds, particularly to moderate- and low-income people who are grappling. But
the needs sometimes are contradictory, accelerating the flows of mortgage funds to low- and medium-income people, on the one hand,
and correcting abuses which are a conflict of interest, on the other
hand. These are extremely complex questions on which I respectfully
suggest we are making substantial progress.
(At the request of Mrs. Sullivan to expand his remarks, Mr. Martin
submitted the following supplemental information to the above
question:)
The best way to answer this question is to begin by briefly sketching in the
background on this matter.
In the latter part of May of last year the Board's staff received a request
for a drafting service from a member of the Committee's staff, Mr. Holstein.
The request was that the Board staff supply, at the earliest possible date, legislative language which would implement the 9 specific recommendations of the
Ad Hoc Subcommittee on House Financing Practices and Procedures, except
recommendations 6, 7 and 9. As the Board's staff understood the request, it
was for general language—general in the sense that it would cover all types




65
of institutions (Federals, state-chartered insured, and plain members)—general in the sense that it would cover not only the practices mentioned in the report and recommendations of the subcommittee but also similar practices and
variations on them—and general in the sense that the Board's enforcement
remedies would range from the lightest to the most severe.
As the Board's staff began the drafting, it soon discovered that, regardless
of whether the request was for general or specific language, only general
language could meet the request because of the variety of the recommendations
and the complexity of each.
On July 28 the Board's staff gave Mr. Holstein draft language dated the same
day along with a brief explanation of the language. The staff had informed the
Board of the request when it was received, and sent copies of the language to
the Board after the drafting had been completed. The Board did not, however, review and approve the language. The Board thought it inappropriate to do so,
since review and approval would have made the staff's draft into a formal legislative recommendation and the Board was not prepared at that point to make
a legislative recommendation in this broad and complex area without additional
time for study.
The July 28 draft was added (as section 911) to the Housing and Urban Development Act of 1970 (H.R. 19436), as reported by the House Banking and
Currency Committee. Section 911 became known popularly as the "Sullivan
Amendment". On December 3 the House passed H.R. 19436 and substituted the
so-called "Brasco Amendment" (as section 912) for section 911. In the few
days prior to the floor action on December 3 the Board received repeated and
insistent requests from various sources to take one or another positions with
respect to the "Sullivan Amendment", the "Brasco Amendment", and various
modifications of them. The Board declined to do so and finally communicated its
formal recommendation to the Committee of Conference in a letter to Chairman
Patman, dated December 11,1970.
The third question is basically why the Board declined to take a position
on or prior to December 3, but did take a position on December 11. The simple
answer is that as of December 3 the Board had not yet been able to resolve
the many difficult issues raised by the various proposals. It will be recalled that
throughout the second half of 1970 the Board had been continually wrestling
with the subject of conflicts of interest. On July 21 the Board sent to the Federal Register a substantial package of proposed regulations on this subject
and during August, September and October received an unprecedented volume
of public comment. In my oral reply to this third question I made reference to
two of the more difficult issues raised by these comments: The impact on state law
and the disruption of badly needed mortgage lending that might result from
regulatory action which was too severe or too quick. Other equally difficult
issues were also presented. On November 19 the Board adopted finally a part of
the original July proposal.
With this regulatory background—and therefore with a full appreciation of
the great difficulty of the problems in this area—the Board turned in late
November to a consideration of the various legislative proposals. An examination
of the Board's files indicates that by December 3 the Board had not yet been
able to resolve to its satisfaction all of the issues presented. Indeed, the Board's
files indicate that substantial presentations of data and alternatives were being
made to the Board by the staff as late as the morning of December 11.
Mrs. SULLIVAN. Mr. Martin, my time has expired, and I have five

more questions to ask you. They deal with H.E. 7440 and its predecessor last year on which the Board took no position, and with the
proposed amendment that the Board did recommend to the conferees
on December 11, and then with the provisions in a new bill that I
believe you are recommending this year. I want to know about its
weaknesses and its strengths and so forth. So I am going to submit
these five other questions to the reporter and I would like to have
your answers to them in detail, because that will give me a clearer
view of what you really want; right now I am not sure.
The CHAIRMAN. Without objection* it is so ordered.




66

(The following are written questions submitted by Mrs. Sullivan
to Mr. Martin, along with Mr. Martin's answers:)
1. Do you feel that the new bill you are offering is stronger or weaker than
H.R. 7440 in meeting the conflict of interest problem,?
Answer. H.R. 7440 is, as you know, identical to the July 28 draft prepared
by the Board's staff. There is no question that section 203 of the "Housing Institutions Modernization Act of 1971" is weaker than H.R. 7440 in meeting
the conflict of interest problem. There are, however, good reasons for this in
the Board's view. These reasons will be discussed in detail below.
2. I am certainly no expert legislative draftsman, hut I wonder why the section of your new bill which deals with conflicts of interest reads almost verbatim—at least the first part of it—to the substitute language adopted on the
House floor last year. Why is this language better than the language I have or
which the Board itself submitted to the conferees?
Answer. This question is, in effect, a request for a comparison of all the
various proposals on this subject to date. Such a comparison could be so technical and lengthy that it would obfuscate rather than elucidate. What follows
will therefore be confined to the essentials.
Analytically it is best to group H.R. 7440 with the December 11 draft to the
Conferees and to group the "Brasco Amendment" with section 203. The former
would convey on the Board general regulatory authority with respect to all
transactions and relationships among the persons named therein. Such transactions and relationships may or may not involve a conflict of interest. The latter
are limited specifically to conflicts of interest and to transactions.
A. H.R. 7440 and December 11 Draft
The principal difference between H.R. 7440 and the December 11 draft relates to the type of transactions and relationships covered. The main objection
which was voiced to H.R. 7440 was that it could be construed to cover transactions and relationships among the affiliates which were of a purely private
nature and had no bearing on the affairs of the institution. It was not the intent
of the staff members who drafted H.R. 7440 that such transactions be covered.
The December 11 draft represents an effort to eliminate the possibility of such
a construction.
In addition, the December 11 draft eliminates from regulatory coverage transactions and relationships among a number of persons covered by H.R. 7440. For
example, H.R. 7440 covers transactions among borrowers from and investors in
affiliated persons of different members. The December 11 draft does not cover
these transactions and relationships. The Board concluded, during the lengthy
deliberations mentioned earlier, that these relationships and transactions were
relatively peripheral to its concerns and that no firm case could be made that
these relationships and transactions caused harm to associations, or their
borrowers or investors in practice.
Further, the December 11 draft eliminated the second paragraph of H.R. 7440.
This paragraph contains two sentences. The first sentence makes clear that
the authority conveyed in the first paragraph includes authority to set appraisal
and appraiser standards. The second sentence authorized the Board to establish
rosters of appraisers and to remove persons from those rosters involuntarily.
The first sentence was eliminated as superfluous. The second sentence was eliminated because the Board concluded that the authority which would be granted
by it was excessive. The Board believed that such authority would have caused
the Board to enter unnecessarily an area traditionally regulated by the States
since the other authority in the appraisal area which H.R. 7440 would have
granted was sufficient.
Finally, the December 11 draft eliminated the phrase "in the public interest".
This matter is discussed below under Question No. 8
The other differences between H.R. 7440 and the December 11 draft are
insubstantial.
B. The i(Brasco Amendment" and section 203
The Board's several objections to the Brasco Amendment are specified in
the Board's December 11 letter to the Conferees (pp. 3-4). Section 203 is drafted
to eliminate all of these objections and contains a substantial grant of meaningful and workable regulatory authority. Nevertheless, section 203 is relatively
narrow in scope as compared to H.R. 7440 and the December 11 draft.




67
This narrowing is, frankly, the result of a decision made on practical and policy
grounds. It is the Board's judgment that a proposal having the scope of the December 11 draft probably does not command at this time sufficient general Congressional acceptance to secure its passage. The Board prefers some provision
in this area to no provision, and has carefully drafted section 203 to grant the
fundamental authority required but to avoid any substantial criticism regarding an excessive grant of authority.
It should be emphasized that it is the Board's view that any substantial
narrowing of section 203 would render it largely ineffective and that the Board
is firmly opposed to any such action.
3. How does your bill treat appraisers and appraisals compared to H.R. 7440 f
Answer. Basically, H.R. 7440 would grant the Board authority to make
and the regulations governing all transactions and relationships among
appraisers and the persons specified in subdivision (D) of paragraph (1) of the
subsection (c) intended to be added to secton 17 of the Federal Home Loan Bank
Act. The Board could enforce these regulations by means of the powers which
would be conveyed by paragraph (5). Paragraph (2) specifically mentions that
the regulatory power in paragraph (1) includes authority to establish appraiser
and appriasal standards. Paragraph (2) also provides authority to establish
rosters and to remove appraisers from the rosters involuntarily.
Section 203 covers appraisers performing services for a member institution.
This coverage would include appraisers who are employees of the member or
independent contractors. It would also cover appraisers rendering services to
the service corporation of a member because of the identity of interest between
the member and its service corporation. However, the member and its service
corporation is a substantially narrower group than the persons specified in
subdivision (D) referred to above.
Under section 203 the Board could establish appraiser and appraisal
standards since such standards are reasonable regulatory methods of preventing
conflict of interest situations. Under section 203, the appraisal practices would
have to result in a conflict of the appraiser's "financial interests with those of the
member." This criterion is met since faulty appraisals are contrary to the
financial interests of the member and since in the typical improper situation, the
appraiser would not have been hired unless it was agreed or understood that he
would misappraise the property.
4. Is there any difference between your proposed new bill, my bill, and the
bill which you submitted to the Conferees last December in the matter of enforcement powers f
Answer. No, except that H.R. 7440 authorizes the establishment of rosters
and the involuntary removal of persons therefrom. The other proposals would
not authorize this.
5. H.R. 7440 makes, as one of the purposes of the regulations to be adopted
by the Board, in dealing with conflict of interest situations, the necessity to
do something or other "in the public interest." It says the Board is directed
"to such extent as it may deem necessary or appropriate in the public interest
or for the protection of members, investors, or borrowers," or the F8LIC and
so on. Your bill leaves out the public interest aspect. Is there any reason to leave
out the public interest aspect, or—if we were to take your bill would you
object to the inclusion of the words "in the public interest?" I ask this because a
savings and loan may operate in such a way that it doesn't hurt its investors
or borrowers, but the conflict of interest situation may be very much against
the public interest. Isn't that true?
Answer. As noted, the addition of the phrase "in the public interest" would
strengthen those proposals from which it is omitted. Whether the phrase should
be added is, in the Board's view, a tactical judgment.
The CHAIRMAN. Mr. Stanton.
Mr. STANTON. Thank you, Mr. Chairman.

Gentlemen, I want to ask you both the same question. First, Mr.
Martin.
I read your testimony last night and basically you agree in principle
that we are all against conflict of interest and we are for increased
competition and so forth.
My first question is that while you agree in principle with H.E.
5700, you are opposed to the legislation that is now proposed ?




68
Mr. MARTIN. I would say that with regard to the conflict-of-interest
section we are, sir, yes.
Mr. STANTON. Would you further state that you honestly feel, and
in answer to Mrs. Sullivan's question that you have the authority now
within your organization to accomplish many of the goals of H.R. 5700
and therefore that new legislation might not be necessary.
Mr. MARTIN". I would say that we have much of the authority we
need. However, in sections 203 and 404 of the proposed Housing Institutions Modernization Act of 1971, we have asked for authority, as
I have stated before, in order to make a home equitable impact by our
regulations on different classes of institutions.
Mr. STANTON. Thank you.
Mr. Wille, would you say that—maybe the wrong word is "oppose,"
but do you find this legislation necessary ?
Mr. WILLE. We have a somewhat different situation at the Corporation than does the Federal Home Loan Bank Board. We are, as I
pointed out, the second regulator of the banks that we regularly examine, that is, State banks that are not members of the Federal Reserve System. There are, as Chairman Martin has pointed out, a myriad
of State law provisions that apply to these State-chartered institutions.
We do not have a general rulemaking authority over this conflictof-interest area as the Federal Home Loan Bank Board apparently
does have with regard to federally chartered savings and loan associations and may have as far as the insured State associations are concerned.
I think that the Board's experience in this area is most revealing,
that is, that this area is very complex. You really are dealing in individual judgments of people and their ethics and the way they conduct their business, and to draft in a statute all of the ramifications
and possibilities of which individuals are capable would be very difficult. That is why I think both he and I would agree that this is an
area for regulatory power rather than statutory mandates.
Mr. STANTON. Well, I certainly want to agree with you there in
principle, Mr. Wille, because when you get into the general subject,
especially of interlocking directorships of financial institutions, and
when you consider the medium and the small-sized towns and banks in
this particular country, and when fundamentally in principle you look
to a director of a bank—at least I always have—first of all as being an
outstanding individual in that community, one who is financially probably considerably well off, highly respected, and a leader in community
activities.
Mr. BARRETT. If the gentlemen would yield to me for a very quick
st at ement
Mr. STANTON. Sure.
Mr. BARRETT. I was asking Mrs. Sullivan before she terminated her
questioning whether she wou'ldnft ask you another question, to furnish
some of the information on the abuses of conflicts of interest in making loans to low and moderate income families. Would you be kind
enough ?
Mr. MARTIN. We would be glad to, Mr. Barrett.
Mr. BARRETT. Thank you.




69
Mr. STANTON. Mr. Wille, seeing you this morning brings to mind
that in my State of Ohio two situations have come to my attention over
the years. A bank receives its charter and builds a building and is ready
to open its doors, and then they don't have FDIC approval. In one
case the bank waited several weeks and this came at a time when the
board wasn't meeting or something and there was a real inconvenience.
The other case is where they issued a charter to another institution
and they were ready to open their doors and the FDIC, and rightfully so, wanted to ask some further questions and check into this
situation further. It seemed to me that in both cases the FDIC was
under pressure. The organizations were formed and they were ready
to open their doors, and you are more or less under a time pressure
in which to approve these applications.
I was wondering if in these particular instances it would not have
been better if you had FDIC approval as a condition to the granting
of a charter rather than have it come after ?
Mr. WILLE I know something of the situations to which you refer,
and I must say that fortunately they are rare, A State bank cannot
open, as you know, without the authority of its State supervisor,
whether or not it has FDIC insurance. It can open uninsured, of
course. In most States, the State supervisor requires as a condition
of opening that there be Federal insurance before the opening. That
kind of condition might have avoided some of the questions and problems to which you refer.
Mr. STANTON. This would be a State matter, then? They could
remedy the situation and change the law ?
Mr. WILLE. Yes; but I think in fairness I should point out that the
State supervisor himself was under a certain amount of pressure in
those cases.
The CHAIRMAN. Mr. Keuss.
Mr. EEUSS. I thank you, Mr. Chairman.
Let us talk about giveaways. Under existing law, banks can't pay
higher than zero interest on demand deposits, and whatever the going
rate is on time deposits, and savings and loans are similarly restricted. I
have always had some question in my mind about the justification of
this whole interest ceiling business, but until that is resolved the law
is as I have stated it.
That being so, I can't quite understand the willingness of you
gentlemen to allow institutions to add on to the ceiling rate a small
ham, large hams, ballpoint pens, clocks, or whatever nonsense they engage in. How do you justify that? Why are you willing to permit
giveaways which in a sense violate the ceilings? If you want to attack the ceilings directly, I will certainly listen to you, but it seems to
me rather odd to permit their violation. Who is first on the list ?
Mr. WILLE. I think that is the reason that the Federal regulatory
agencies have tried to keep to a nominal amount any type of premium
that might be given away^.
Mr. REUSS. Why permit a little pregnancy ? You either have a ceiling
or you don't and if you don't it seems to me that
Mr. WILLE. I think we are trying very hard to separate "giveaways"
from additional and illegal extra interest in the belief that there are
some legitimate uses for a "giveaway." The legitimate uses are to en60-299—71—pt. 1




6

70
courage thrift and to get an office going, if you like. I am not about to
say the use of "giveaways" should be a continuous, year-round practice or should involve items of substantial value.
Mr. EEUSS. Would it not encourgage thrift to pay 6 percent interest
on demand deposits or 12 percent on time deposits ?
Mr. WILLE. You are probably saying there are better incentives to
encourage thrift, and I wouldn't disagree with that.
Mr. REUSS. Yes.
Mr. WILLE. On the

other hand, the banks that have engaged in these
programs with premiums having valuves of relatively nominal
amounts find them to be attractive and the public does find them to
be something of an incentive to open an account and keep it there.
Mr. EEUSS. It seems to me "giveaways" violate the philosophy which
caused Congress to impose the zero ceiling on demand deposits and the
other ceilings on time deposits in the various institutions. Maybe Congress is all wet in doing that. It seems to me we are just kidding ourselves by imposing these ceilings, including the zero ceiling on demand
deposits, and then letting the institutions lure customers by these
"giveaways". In short, why shouldn't they stick to banking and savings
and loan and forget about the schlock ?
Mr. WILLE. I think any bank supervisor would be concerned if
they were to get into a general merchandising operation. In fact,
there is case law to the effect that that is not the business of banking. It has a bearing on the "giveaway" regulation the agencies have
promulgated. I think as a technical matter you will agree it isn't interest because the value of the usual "giveaway" is not related to the
amount of the deposit or its duration.
Mr. EEUSS. It is, however, a method of allowing one institution to
compete with another institution in attracting depositors ?
Mr. WILLE. I think there is no doubt about that, and it is related
to the presence of interest rate ceilings.
Mr. EEUSS. Maybe you can pursuade me, Mr. Martin.
Mr. MARTIN. I am not that egotistical, but I may be able to give
you some information about our constant struggle.
From a supervisor's point of view it is a headache, nuisance and
irritant. But from the point of view of competing for funds, we find
there are hundreds of institutions which are not paying the ceiling
rates but which are using giveaways.
Mr. EEUSS. May I say that wouldn't bother me. If a depositor
would sooner get schlock than money, he should have that right. But
when the interest goes up to the ceilings, I just don't follow your
logic, or Mr. Wille's logic, in insisting that we ought to let people
evade the ceiling. If the ceiling is valid, it shouldn't be evaded. If
it is invalid, we should do away with it, which I sometimes think
we should do.
Mr. MARTIN. What I am trying to say, in the analysis of marketing
practices in the savings and loan industry as well as in the analysis
of those interest rate financial monetary inducements for savings, we
have found in many easels these are the alternative means of bringing
in funds, that the small institution, particularly in the middle west
and the border south areas may use giveaways, although they are not
even contemplating paying the ceiling rate, and other institutions




71
when they advertise do not associate that in their advertising with
rates. It seems to me an alternative way of attracting savings.
Mr. KETTSS. AS long as the interest rate charge is below the ceiling,
is it not the business of Government to tell consumers whether they
should get paid in money or in goods, but when it hits the ceiling I
frankly don't understand your respective arguments that we should
allow evasion of the ceiling by the giving away of goods. That is
your position?
Mr. MARTIN. Yes, it is. I think it is an element of de minimis here.
A ballpoint pen or a $5 value item as to an average balance of $3,700
or something of that sort, is separable from the question of interest.
But we see that thing differently, I believe.
Mr. EEUSS. If it is all that different I shouldn't think it should
bother anybody to excise the de minimis.
The CHAIRMAN. Would you yield ?
Mr. EEUSS. I am through anyway.
The CHAIRMAN. In regard to not paying the ceiling, of course there
is not much argument there if they wanted to give enough to where
it would be the ceiling, but it would apply in all cases of demand deposits, because when the FDIC law came in and when a majority of
the Members of the House signed a petition that they would not adjourn until the FDIC Act was passed into law, why then of course
it was insisted that that phrase be put in there that it should be unlawful to pay interest on demand deposits, no penalty or anything
else, just unlawful. Then when a large depositor mentioned to his
banker I hear you are paying interest on these deposits, he said yes,
that is time deposits. Yours is demand.
Therefore, that is where that started and of course it didn't mean
anything hardly then. But now it amounts to billions of dollars a year.
So, I just wanted to suggest that the reason given by you gentlemen about the time deposits being the deposits that they are allowed
to pay up to a certain amount of interest as long as they do no give premiums that would make that excessive in the amount. Of course, there
is no argument on time deposits. But on demand deposits there is an
argument from the beginning. I don't see how you can justify even a
match or a lead pencil or anything else if it is a violation of the law.
I agree with Mr. Reuss on that.
Mr. WIDNALL. Would the gentleman yield to me ?
The CHAIRMAN. Yes, his time has expired. Then I think Mr. Williams is next.
Mr. WIDNALL. DO you have any kind of a cost accounting figure on
the quoted price of ia giveaway as compared to the cost of the giveaway? I notice that most of these items, while supposedly $5 items,
will cost the institution $1.25 or $1.75 or something like that. I would
just like to know what is actually being given away, from cost.
Mr, MARTIN. I think this depends on the degree of competition for
savings in a given market. I think in New York City, and Mr. Wille
can speak better to this than I, the mutual savings banks having some
difficulties with that market, competing against the huge banks in
Manhattan, have given away some things where the wholesale or manufacturers' price may have been used, as is appropriate under the joint
regulations that the various agencies have issued. But much that is




72

given away, of course, is nominal in value, and we would certainly
hate to see those kinds of nominal matters which are a type of good
will and public relations be stopped by any language adopted.
Mr. WIDNALL. Thank you.
Mr. CHAIRMAN. Mr. Williams.
Mr. WILLIAMS. I want to thank Mr. Wille and Mr. Martin for appearing here this morning.
We have had some talk about equity participation or equity kickers,
which are sometimes called a piece of the action. You have stated that
the reason for this practice, is tight money. On the other hand, I
believe there is additional reason, and that is the fact that any savings
and loan or any commercial bank that makes a loan, say in 1968, and
with continued inflation caused by continuing deficit spending, the
dollars which are paid back to that financial institution, say in 1973
are worth perhaps 70 percent of the dollar that was originally loaned
to them. Don't you agree this is one thing that has driven financial institutions into equity participation ?
Mr. WILLE. The statement that I presented to the committee does
include that point, that many bankers engaged in the practice consider
it to be a hedge against continued
Mr. WILLIAMS. What has happened, the policies of the Federal Government in deficit spending has produced a national debt of over $400
billion with an annual interest rate payment today of $261/2
billion annually, and it is going up from there. This has been the main
cause for inflation, and this has forced our financial institutions into
seeking to protect themselves by engaging in equity participation.
Going on to these giveaways, actually in the title of this bill we
state we are trying to encourage competition in the banking industry.
We have had a lot of talk here this morning about giveaways. As I
understand it, by regulation you are limited as to the value of these
giveaways.
Now, we can call them schlok, and we can say all corporations
should stop schlok advertising to sell their products and things of this
nature. Don't you agree that as long as we put a limit on the value of
these giveaways, or actually permit these financial institutions to
give away things of a certain value, nominal value, we are encouraging people to develop the habit of thrift saving ?
Mr. MARTIN. Yes; I think they definitely have that effect.
Mr. WILLIAMS. NOW, on the subject of public funds, Mr. Wille, in
your statement on page 3 you state that "approximately 30 States require the pledging of securities by banks against State deposits and
deposits by political subdivisions." You go on to state in most cases
these financial institutions are pledging State or municipal securities
or bonds. You further state that by doing away with this practice, in
these 30 States that are fully protecting public deposits, this could
have an adverse or disruptive impact in a market for municipal bonds
which are already in some difficulty.
So wouldn't it be much more logical for other States to take the
same steps that the 30 States have taken rather than just rule out
this practice altogether?
Mr. WILLE. That is certainly an alternative and one to which more
States are turning: either to impose pledging requirements where they
are not imposed or some substitute arrangement.




73

Mr. WILLIAMS. That would be a better solution to the problem.
I think incidentally, as far as the Sharpstown Bank failure was
concerned, which we discussed during your last appearance, that
actually it was weak State laws that played an important part in the
failure of that bank.
Mr. WILLE. Texas is one of the States that is not included in this
list of 30.
Mr. WILLIAMS. All right.
Mr. Martin, your statement indicates that you disagree with virtually every section of H.R. 5700 as it is presently written. I agree with
that position.
On page 5 of your statement you do say "with respect to interlocking relationships and restrictions on disclosure regarding loans, your
Board suggests a different approach," and on page 6, item one, you
further state "it is not possible to deal with this area properly by
means of rigid statutory formulas." Then you state that this should be
done by regulation which can be somewhat more flexible. This is your
position, is it not ?
Mr. MARTIN. Yes, sir.
Mr. WILLIAMS. And also,

Mr. Martin, in your proposed legislation
is there any connection between, one, your recommendation in your
proposed draft on conflicts and supervisory legislation; and two, your
recommendation regarding stock, Federal savings and loans?
Mr. MARTIN. Well, Mr. Williams, section 101 in our proposed Modernization Act deals with the issue involving a new kind of charter, a
Federal stock charter. The connection with conflict of interest is simply
this; under the present situation many times managers of mutual institutions find they are located in a growth urban area, that their
level of salary compensation becomes with that growth quite restrictive to them, and yet they have no way, however successfully they
manage the institution, to have any of the kinds of normal incentives
that are accorded managers of commercial banks or other institutions.
I would think that the pressure to engage practices, insurance and
other matters, that have been characterized as conflicts of interest,
would be removed if the normal incentives accorded managers of
stock institutions could be carried over to savings and loan associations.
Mr. WILLIAMS. Thank you, Mr. Martin.
Mr. BARRETT. Mr. Moorhead ?
Mr. MOORHEAD. Thank you, Mr. Chairman.
Mr. Wille, it has been customary to insist that an officer become
a member of the board of directors of the borrowing institution on
the theory that this gives the bank some information about the borrower that would be difficult to obtain otherwise. Do you think this
is a good and valid practice or do dangers inherent in this practice
outweigh the advantages ? I would think that a bank could get sufficient information from a borrower without actually having a man
on the board of directors.
Mr. WILLE. I don't know that the facts are as you state them
exactly in your question, Mr. Moorhead. But I would say that in a
particularly small or family-held, closely-held business, this might
be a way of gaining information. I would think it less likely as a
source of information in the publicly held corporations.




74

Mr. MOORHEAD. On page 7 and 8 you seem to oppose section 9 of the
bill which would prohibit interlocking relationships where there is
a borrower-lending relationship, is that correct?
Mr. WILLE. Yes, because I think it goes much further than probably the evil to which it is addressed. As we know, many banking institutions when they are started seek to get a board of directors that
has a community involvement and that will bring business to a newly
chartered bank. Frequently, it is their own business that they are
bringing to a bank or the business of their family companies or what
have you. I think that to look at this solely from the point of view
of the bank being in existence and then getting involved in the business of its directors is misleading. It frequently happens the other way
around. A bank director frequently is involved in the business first
and then becomes a bank director. The election of such businessmen
to a bank's board is encouraged by the regulatory agencies so the
bank jnay get the best qualified boards it can in a local community.
I would say certainly we cannot consider this by itself, the substantial and continuing loan relationship, to be sufficient to prohibit
the interlock to which this is addressed.
What is a source of concern is improper analysis of the credit
worthiness of a director's company after the bank comes into existence and is asked for a loan.
Mr. MOORHEAD. Then, are you saying that this is only a new bank
problem ?
Mr. WILLE. NO; what I am saying is that the prohibition in the
bill is broad enough to apply obviously to both situations, and from
that point it is too broad in our judgment and should not take the
form of a flat prohibition.
Mr. MOORHEAD. TO return to this matter of the giveaways, I understand that the banking authorities—I am talking about the Federal
banking authorities—have adopted "statements of policy." My question is, one, are they uniform; and two, are they binding on the institutions and have they been effective ?
Mr. WILLE. These regulations are uniform among the three agencies
that prescribe interest-rate ceilings. They are the Federal Reserve
Board, the FDIC, and the Federal Home Loan Bank Board. The
Comptroller, who regulates national banks, has a some what different
regulation limiting "giveaways" to those that are nominal in value,
and there is a certain administrative discretion in the interpretation
of the word "nominal." It is my understanding that his office takes
publicly the position that it is interpreting the word "nominal" in the
same way as the other three agencies. If so, there would be uniform
regulation.
Mr. MOORHEAD. IS there a regulation with respect to giveaways in
connection with demand deposits?
Mr. WILLE. AS other members of the committee have pointed out, any
interest on a demand deposit is prohibited by law. The "giveaway"
regulation of the three agencies is limited to savings deposits, and
therefore the use of "giveaways" to attract demand deposits wouldn't
run afoul of that regulation in any event.
Mr. MOORHEAD. I am not sure I understand. You can have giveaways without regulation on demand deposits or the other way around ?




75
Mr. WILLE. No, the three agencies have adopted in these policy statements limitations which would permit "giveaways" of nominal value,
but only in connection with savings deposits, not checking accounts,
Mr. MOORHEAD. So that is prohibited, the giveaways with checking
accounts?
Mr. WILLE. It would certainly raise a question without that kind of
regulatory agency statement, because of the complete prohibition on
interest on demand deposits.
Mr. MOORHEAD. On the question of brokered loans, I understand that
you, Mr. Wille, oppose it but you, Mr. Martin, do not oppose brokered
loans. Is there anything with respect to the institutions that you regulate that would indicate that brokered loans are all right for those
institutions but would not be all right for banks ? Are you suggesting
a double standard, or do you believe that
Mr. WILLE. If I could take that one first, it would seem to me that
the motivations of the two agencies here represented are exactly the
same, that we want to see a practice in which brokered funds are tied
into poor loans stopped or eliminated. The question of technique or
how you reach this problem is the one that divides us in our conclusion.
Our experience has been that a loan which is tied into a given
deposit can be a very difficult thing to prove. One of the purposes
of our survey last summer was to find out whether or not banking institutions had legitimate reasons other than tied-in loans to attract
deposits through a broker. We did not find such reasons from that
survey, and we did try to track down that question.
The experience of tlie Federal Home Loan Bank Board might have
led them to quite a different conclusion.
Mr. MOORHEAD. DO you care to comment ?
Mr. MARTIN. I think our experience has been different. Savings and
loan associations, as Chairman Patman pointed out, have a much
narrower geographic reach. While it is quite true that deposits tend
to be clustered around commercial bank offices, the ability to operate
nationwide in lending leads to compensating balances from other kinds
of deposits also, particularly the demand deposit.
Second, we have not had the impact upon failing institutions of the
tie-in loans associated with brokered funds that has been true in
banking, about which testimony has been rendered. So our experience
has been different. However, it does not take away our concern about
the abuses that can arise in brokered loans—pardon me, in brokered
funds. In obtaining savings via brokers we are still very concerned.
We feel it should be regulated very carefully. And we would support
a flat prohibition and strong language which would put the burden
of proof on management rather than upon the regulatory agency.
Mr. MOORHEAD. Thank you.
Thank you, Mr. Chairman.
The CHAIRMAN. The time of the gentleman has expired. Mr. Wylie.
Mr. WYLIE. Thank you, Mr. Chairman.
Mr. Martin, I would like to pursue that for just a moment.
On page 2 of your statement you indicate that the Board's experience
does not justify an absolute prohibition against deposits. Then you
say the Board would favor legislation which would control these
deposits more stringently than at present.




76

I have a copy of the letter which you have sent to the Speaker of
the House which transmitted the proposed legislation. Does this proposed legislation mention specific proposals with respect to brokered
deposits?
Mr. MARTIN. NO, the specific provisions of the Modernization Act
o to broaden investment and lending powers, go to the need to write
own certain assets, not governments but other kinds of assets. It
goes to, in some sections, the examination of affiliates of institutions.
It has a conflict-of-interest section, as I have already indicated. It
goes to a number of matters with regard to the Federal Home Loan
Mortgage Corporation, which we found, in 7 months of operation of
that Corporation, to be unduly restricted in certain ways.
But specifically, brokered funds, no. We are asking for the kind
of verification of our authority that the bank supervisory agencies
have as a matter of parity so that when there are losses, under section
401 of our proposed bill, we could take a banker supervisor-like
approach.
Mr. WYLIE. Well, what you are saying is that it wouldn't require
additional specific legislation, it would require a continuation of the
rulemaking authority that you now have ?
Mr. MARTIN. With regard just to brokered funds?

f

Mr. WYLIE. Yes,

sir.

Mr. MARTIN. I think our present authority on brokered funds is
adequate at this time. But we are again trying to recognize that: one,
there is a problem in such funds; and two, the kinds of problems the
bank regulatory authorities have testified to here are real and we recognize them and would not oppose legislation, let us say, in the interest
of their supervision.
Mr. WYLIE. I see, but you are not in a position to recommend any
specific legislation or you haven't addressed yourself to that ?
Mr. MARTIN. Not on that particular topic, because we don't have
the abuses to base
Mr. WYLIE. YOU have mentioned that brokered deposits might be
useful in certain cases. Could you give me an example or two where
they might be useful or proper ?
Mr. MARTIN. Yes; in our economy today there are great changes in
economic base. For example, an area may have a giant Government
contract awarded. Large contracts are awarded in certain sections of
the country and there is a need to accommodate housing in those sections. I am thinking of Mississippi and the award to Litton of a giant
contract for certain kinds of naval vessels. Now, that part of the
country happens to be one in which we have in the immediate area
only one small savings and loan association. There are a couple of
branches of other institutions some distance away. Carefully and properly done, the bringing in of certificate funds of, let us say, up to 5
years in staggered maturities in nature by that small institution will
enable it to accommodate the housing needs of the immediate area.
That is an example of the type we are thinking about, and we have
had experience in this.
Mr. WYLIE. Thank you very much.
Mr. Wille, the general tone of your statement, I think it is fair to
say, indicates a desire on the part of your corporation to maintain




77

a great deal of flexibility in handling potential abuses, interlocks,
broker deposits and giveaways; is that a fair statement?
Mr. WILLE. Yes; I thing that is a fair statement.
Mr. WYLIE. These hearings are allegedly being conducted because
of widespread abuses in these areas. Are you aware of any widespread
abuses ?
Mr. WILLE. We have at hand, of course, the three studies prepared
by the Subcommittee on Domestic Finance of this committee. We
point out in our statement that these are actually limited to the 300
largest banks in the country. We would say with regard to institutions subject to FDIC jurisdiction that where we notice a reason for
legislative action would be primarily in the area of competition between financial institutions in a given area, and that is one reason why
I have stated in our prepared statement here that we would recommend
a broadening of section 8 of the Clayton Act which does get at interlocks between financial institutions in a relatively limited market.
Mr. WYLIE. I think the crux of my question is really do you feel
that the present level of scrutiny which you have to administer is
adequate ?
Mr. WILLE. With regard to the area of examination and factfinding,
I don't think that there is any inhibition on our ability to get facts
that would lead to certain conclusions in the area of conflicts of interest or the effects of interlocks.
Regulatory authority to deal with some of these problems, however, is more limited and that is why we are seeking a broader authority and a more refined tool to deal with these things that our
examination might find as facts.
Mr. WYLIE. I see my time has expired.
I want to thank you both for an outstanding and articulate statement.
Mr. BARRETT (presiding). Thank you, Mr. Wylie.
Mr. Stephens.
Mr. STEPHENS. Thank you, Mr. Chairman.
I have studied the two statements, and I appreciate the criticisms
that have been made in these two statements. I agree with the facts
that you have found (about the statute that is proposed. That is the
reason I didn't cosponsor it because I thought it was making too many
minute judgments that we should not make in this committee. For
example, as I read the proposed statute we would make it a matter of
law that an interlocking directorate was in itself a conflict of interest.
I believe that same proposal was made by the Federal Home Loan Bank
Board directly to the industry of a savings and loan,
You came up after several conferences and a lot of letters with the
fact that you would prefer, and it would be infinitely preferred in the
industry, to say that interlocking directorates may be a conflict of
interest but let each one stand on its own merits. I feel that is the
criticism that I gather is coming from the two statements here by and
large, that you would prefer for Congress not to sav as a matter of
policy that this is wrong and that there is no flexibility whatsoever.
I would appreciate the criticism bringing forth that idea, because
I have opposed a categorical classification of this as a conflict of interest because somebody says it is. I think each item should stand on
its own.




78

As Mr. Wille points out, the study made of the banking industry
that was done under the supervision of this committee only covered
about 300 of the largest banks, and we are trying to put them all in
the same boot or make all fit the same shoe. When you say an interlocking directorate by itself is a conflict of interest or that this business of giveaways is wrong completely, then you are leaving no
discretion to the advisory boards and maybe we don't need any advisory
boards if we are going to pass on everything. That would mean all
you have to do is find out whether somebody does have an interlocking
directorate.
I prefer you find out if there is a conflict of interest, because we
can get so detailed in the committee that we forget people have to
make a living, they have to make profit and they have to supply the
purposes savings and loans were created for. We forget the whole
purpose of it is to help people to get homes and encourage thrift. The
same over control principal is true of the commercial banks. We tend
to want to regulate too much.
Thank you. I didn't have any questions. I guess I had answers,
didn't I?
Thank you.
Mr. BARRETT. Thank you, Mr. Stephens.
Mr. Rotisselot.
Mr. ROUSSELOT. Thank you, Mr. Chairman.
I notice we received ahead of time a letter directed to Speaker Carl
Albert and a bill proposed by Mr. Martin. I wonder, without objection,
if we can have this inserted in the record ?
Mr. BARRETT. That may be done also, and so ordered.
(The documents referred to follow:)
PREPARED STATEMENT OF HON. PRESTON MARTIN, CHAIRMAN, FEDERAL HOME
LOAN BANK BOARD
DISCUSSION OF HOUSING INSTITUTIONS MODERNIZATION ACT OF 1971

In the "Housing Institutions Modernization Act of 1971" the Federal Home
Loan Bank Board is proposing a series of measures designed to modernize the
structure and powers of this nation's major housing credit institutions. These
include savings and loan associations under Federal jurisdiction, the Federal
Home Loan Bank System, and the Federal Home Loan Mortgage Corporation.
The savings and loan industry, with backstops of the Federal Home Loan
Bank System and the Federal Home Loan Mortgage Corporation, is playing a
crucial role in meeting the ambitious housing goals mandated by the Housing
and Urban Development Act of 1968. By law and practice, savings and loan associations remain the only set of financial institutions almost totally committed
to serving housing. During 1970, savings and loan associations accounted for 50
percent of the net acquisition of all residential mortgages and 57 percent of
home mortgages as other large lenders withdrew from or reduced their contribution to thefinancingof housing.
This demonstrates, in the Board's opinion, that the long-run fulfillment of
housing goals depends upon the continued availability of funds for housing
through the savings and loan industry. This in turn requires that savings and
loan associations have a full range of tools for competing effectively in the
market place and that they have the power to raise and to lend money commensurate with their role.
Let me turn now to an analysis of the bill beginning with Title I.
Section 101 makes two amendments that broaden the sources of funds, especially in the form of capital, available to Federal associations. One change
would authorize the issuance of capital stock by Federal associations and, thus,




79
make it possible for Federal associations to operate under the stock form as is
now possible for state-chartered associations in many states. The Board would
be given the authority to provide adequate regulation of the use of this method
of operation. In the case of conversion from the mutual to the stock form, the
Board would impose conditions that would fully protect the legal rights of
account holders to issuance of stock arising from conversion. This is extremely
important, of course, since the stock issued as a result of conversion from the
mutual to the stock form has a monetary value. The account holders retain the
full value of their existing accounts as well as receiving stock incident to
conversion.
The right to issue capital stock can provide an important additional source
of funds to associations in capital deficit areas. Professors Brigham and Pettit
in their monograph on the "Effect of Structure on Performance in the Savings
and Loan Industry" show that even though little new equity capital is raised by
stock associations in the aggregate, it is primarily raised by associations located
in capital deficit areas from investors located in capital surplus areas. This is
a way of distributing funds across the country in an efficient manner to provide
housing.
In this industry, equity capital is very critical because of the leverage it provides for an increased deposit base. In 1969 the ratio of reserves and capital
to savings was 8.5 percent. This means that one dollar in new capital can support about $12 in new deposits. Since new capital cannot be raised by mutual
associations to support new savings, these capital dollars must be retained out
of profits. In periods of the greatest housing needs, retained earnings often tend
to be low and the amount of deposits that can be supported is limited. This
creates a vicious cycle.
If Federal associations had the option of operating under the stock form, then
in periods when savings growth was low and individuals were interested in
equities, these associations could sell common stock and compete in the equity
markets with other corporations. When interest rates came down, and savings
were increasing, they would have the capital basie to support these savings
regardless of their current retained earnings.
The stock method of raising capital is especially important in forestalling
supervisory action. One of the principal reasons for the weakness of associations and the need for supervisory action is the inadequacy of net worth to absorb writedowns of bad loans and foreclosed real estate. Low net worth has two
effects. It discourages associations from taking a more aggressive leadership
position in housing finance, and it decreases the flexibility and timing of corrective action between loss on loans and resulting default on savings accounts.
The ability of associations, through conversion from mutual to stock, to sell
debentures, participation certificates and new equity is directly related to their
ability to serve housing and savings needs. This Board intends to see that stock
associations use their power to raise money through stock issues as a means of
maintaining a strong net worth position commensurate with the risks that
they take.
The Board believes that the ability of Federal associations to choose to operate
in the stock form will facilitate the merger of many smaller associations that
are uneconomic but have built up an especially large net worth position as a
result of conservative practices and cannot realize their full equity in a merger
involving mutual associations. At the present time there are many small associations in certain areas of the country well in excess of the number that the market can effectively support and much greater than required for competition.
The merger of such associations would promote the effectiveness of the savings
and loan industry in serving the needs of housing and in competing with other
financial institutions.
The Board's position on stock associations has been influenced by a number
of considerations. One is that the Board now has in effect a moratorium on conversions of mutual to state-chartered stock associations. However, one of the
recommendations of the "Study of the Savings and Loan Industry," directed
by Professor Irwin Friend, is that this moratorium be ended and that regulations be issued setting forth procedures to ensure that account holders receive
their full legal rights to conversion profits and that insiders do not benefit at their
expense. If the Board follows this recommendation, the lack of authority for
Federal associations to operate under the stock form would result in a rapid
diminution in the number of Federally chartered savings and loan associations,
with adverse impact on the dual supervisory system.




80
The second consideration is the intensive study of the comparative performance
of stock and mutual associations by Professors Brigham and Pettit in the monograph cited above. This study indicated that the differences between the two
types of organization are not that great but that stock associations appear to
exhibit a faster rate of growth, are somewhat more profitable over the long
run, possibly have slightly lower cost ratios when other factors are held constant,
but show up as somewhat riskier than mutuals although factors other than
form of organization are far more important in determining risk. On balance,
the Board believes that these differences viewed as a whole argue that both
mutual and stock associations have a role to play.
1 would like to conclude the discussion on stock associations by noting that
the Board believes that both mutual and stock associations make vital contributions to serving the housing market. Both have their own strengths and
will undoubtedly play varying roles in different areas of the country.
I would like to refer briefly to the second amendment under Section 101
of this Act. This would permit the issuance of securities and accounts that
could have lesser priority upon liquidation than savings accounts. This would
be necessary to implement the authority above to issue capital stock and would
provide greater flexibility to associations in the type and variety of accounts
that they offer. This change would also supplement the statutory authority
which empowers the Board to allow Federal associations to issue notes, bonds,
and debentures and would put savings and loan associations on a competitive
footing with commercial banks.
I would like to turn now to Sections 102 through 105 of the Act. These would
broaden the lending and investment powers of savings and loan associations.
The Board believes that the savings and loan industry can make a maximum
contribution to housing goals only if it has broad powers to serve the full
spectrum of housing needs as they exist today. The Board has already made
many regulatory changes in lending powers of associations under existing
statutes, but they go only part of the way in meeting today's needs, which
include large urban renewal projects, new communities, and more tools for
rehabilitating and improving the present housing stock.
In part, some of these proposed changes reflect the philosophy of the Friend
Study. Professor Friend advocated the need for further diversification in
portfolio powers of savings and loan associations if they are to earn an adequate
return and be effective competitors for funds. The Federal Home Loan Bank
Board would prefer to emphasize diversification within the area of housing,
broadening the range of housing credit powers and permitting some modest
degree of investment in real property within prudent limits and where justified
by social needs. In the Board's view the savings and loan industry should remain
committed to serving housing, and statutory changes in portfolio powers at this
time should emphasize a broader and more effective participation in housing
needs.
Under Section 102 Federal associations would have broader powers with
respect to areas in which they can invest so as to promote urban renewal. The
Board would not have to follow the highly technical definitional provisions
of Section 110(c) of the Housing Act of 1949 with respect to urban renewal
areas. The Board would designate HUD urban renewal projects, locally designated community development projects and additional eligible areas in order to
promote investment by Federal associations that would forestall urban blight.
Section 102 would raise from 5 percent to 10 percent of assets the investment
that a Federal association could make in these areas in real property, interests
in real property, and obligations secured by first liens on such property. Section
102 would not change the 2 percent of asset limitation under this section applicable to real property and interests in real property located in these areas.
Section 103 would raise from $5,000 to $10,000 the limitation on the maximum
dollar amount of property improvement loans. This recognizes the impact of
inflation on such loans and broadens the role that associations can play in maintaining and improving the quality of the housing stock. It is far more economical
in the lon^-run to promote continued upkeep of existing housing than to replace
housing after it has become substandard.
Section 104 authorizes Federal associations to invest up to 3 percent of assets
directly in real property provided that it is located within one hundred miles
of thp association's home office or in the State in which such home office is located
and is primarily for residential usage. Federal associations would also be auth-




81
orized to warehouse land for development so as to facilitate projects such as
new communities.
In the Board's opinion these expanded investment powers are reasonably prudent, reflect the needs of today's housing markets, and serve important social
objectives. They provide opportunities for improving the rate of return on association portfolios in forms of investment that may have a fairly short turnover
period, and are an ideal complement to the traditional long-term mortgage.
Investment in real property and the warehousing of land development within
prudent limits would provide increased incentive to associations to participate
in large projects, including new communities. These are playing an increasingly
important role in total housing production because of the efficiency of providing
housing on a mass scale, the superior planning afforded by such projects, which
result in better amenities and facilities, and the contribution that such projects
can make toward providing housing for a broad range of economic groups.
Section 105 would amend the powers of associations to make package loans
for acquisition, development and improvement of land. This would permit associations to combine loans for the construction of housing as part of loans for
the acquisition and development of land, thus providing a single package loan
with uniform terms. In addition, such loans could be made up to 10 percent of
assets rather than as presently up to 5 percent of withdrawable accounts'. This
would be another important tool to permit savings and loan associations to
play an adequate role in the larger scale projects that are now becoming increasingly important
At this point I want to recognize explicitly that some of the new powers above
can increase the risk exposure of savings and loan associations although they
will also contribute to a higher portfolio yield. This is one reason why I put so
much stress in my discussion of Section 101 on the need for new sources of
capital to strengthen the net worth of savings and loan associations. In addition,
two other provisions of this bill have a bearing on the Board's ability to monitor
risks assumed by associations, and I will mention them out of sequence here.
Thus, Section 401 of Title IV would provide explicit power to the Federal
Savings and Loan Insurance Corporation to require such adjournments as it
deems necessary or appropriate in the amounts appearing in the books and
records of insured institutions in order that their financial condition and operations may be fairly stated. It has long been the position of the Board that the
Federal Savings and Loan Insurance Corporation already possesses the authority intended to be conveyed by Section 401 and the Board has long had a regulation implementing that authority. The Board believes, in views of the expansion
of lending authority intended to be accomplished by Title I of the proposed
legislation, that the possibility of challenge should be clearly foreclosed.
In addition, Section 402 in Title IV would allow for examination of affiliates
of insured institutions defined as involving 25 percent control by the insured
institution rather, than as presently, 50 percent. This would be comparable to
the 25 percent requirement in the Savings and Loan Holding Company Act provisions relating to control and would recognize the reality of control that exists
at an ownership share well below 50 percent. This change takes on special importance because the effective use of the new lending and investment authority
above commonly involves activity by affiliated persons and businesses. To insure
that this proposed lending and investment authority will be used safely, the
Board believes the expansion of its regulatory authority over affiliated persons
and businesses is desirable.
Let me turn now to Title II of the bill, which encompasses a variety of provisions. Section 201 would raise the number of members of the Federal Savings
and Loan Advisory Council, appointed by the Board, from six to nine so as to
bring in new members who could advise the Board on areas of responsibilities
assigned in recent years to the Federal Home Loan Bank Board. Section 202
would give jurisdiction over legal suits involving Federal Home Loan Banks to
the Federal courts, comparable to the jurisdiction of the Federal courts with
respect to the Federal Savings and Loan Insurance Corporation, Federal Home
Loan Mortgage Corporation, and Federal Reserve Banks.
Section 203 has three provisions that would (1) clarify the authority of the
Board to regulate conflicts of interest involving insured institutions and would
extend this authority over member institutions), (2) provide for enforcement
by making available the remedies under other acts administered by the Board,




82
and (3) authorize the Board to charge user fees and to utilize and to make
payments for services of other agencies.
As you may be aware, the Friend Study contained a very comprehensive
analysis of conflicts of interest, and the Board has already enacted regulations
to deal with these. However, the Board's ability to deal with conflicts of interest
depends very much on a clarification of its authority with respect to insured
state-chartered institutions and the extension of this authority to all member
institutions.
Section 204 would remedy the defects in Section 916 of the Housing and
Urban Development Act of 1970. Section 916 states that "Unpledged deposits
in the Bank for Savings and Loan Associations, Chicago, 111., maintained by an
institution which is a member of a Federal Home Loan Bank or is an insured
institution as defined in Section 401 (a) of the National Housing Act, shall be
considered assets for purposes of meeting the liquidity requirements of Section
5A(b) of the Federal Home Loan Bank Act. . . ." In commenting on an earlier
version of this, contained in Section 913 of the House bill, the Board stated its
objections. These included the following:
The liquidity resources of the Bank for Savings and Loian Associations cannot be compared with those of Federal Home Loan Banks. It could not borrow
from the Treasury, its obligations are not eligible for open-market purchase by
the Federal Reserve Banks or as security for advances by those banks as obligations of the Federal Home Loan Banks are, and there is no> provisions of
statute by which fiduciary, trust, or public funds under the control of the
United States could be invested in its obligations . . . The lack of deposit insurance and Federal Reserve memibership means that the Bank for Savings and
Loan Asisociationis is not under effective supervisory, regulatory, or enforcement
authority of any Federal agency. If it got into difficulties the Federal Deposit
Insurance Corporation could not render
with respect to it the financial assistance by loans or purchases of assets1 which that corporation is authorized to
render as to insured banks . . . The provisions of the Board's regulation as to
time deposits in insured banks are designed to restrain undue concentration of
deposits and to assure ready availability. Section 913 of H.R. 19436 is obviously
intended to escape those safeguards in the case of the Bank for Savings and
Loan Associations.
Section 204 has two paragraphs. One, would limit the applicability of Section
916 to members located in the State of Illinois, thus eliminating imbalances in
the distribution of mortgage funds that would result if member institutions in
other states made deposits in the Bank for Savings and Loan Associations. The
second paragraph would enable the Board to insure the full liquidity of the
reserves of institutions under its supervision.
Section 205 would allow Federal Home Loan Banks to have advances outstanding to a member institution up to twenty times the capital stock paid in
by that member institution. Currently, the ratio is limited to 12 to 1. The Board
believes, on the basis of experience, that the 12-to-l ratio acts as an excessive
restriction on the Board's power to provide adequate fundsi for mortgages under
certain conditions and that the 20-to-l ratio is justified on the basis of the
financial soundness of the Federal Home Loan Bank System.
Let me turn now to Title I I I of the bill having to do with the Federal Home
Loan Mortgage Corporation. As you know, the Federal Home Loan Mortgage
Corporation was created under the Emergency Home Finance Act of 1970 to
provide secondary mortgage market facilities and was capitalized with funds
from the twelve Federal Home Loan Banks. The proposals here reflect the
experience of the Corporation to date. They would improve the effectiveness of
the Corporation in its secondary market operations and, thus, further its mission
to provide greater liquidity to mortgages, enhance the flow of fundsi into mortgages, and promote the flow of funds from capital surplus to capital deficit
area®.
Section 301 would permit the Corporation to purchase &n interest in a whole
mortgage which it had sold and to purchase the whole of a mortgage where it
had sold an interest in it.
Section 302 would raise to 25 percent the 10 percent limitation contained in the
following paragraph "The Corporation may purchase a conventional mortgage
which was originated more than one year prior to the purchase date only if the
seller is currently engaged in mortgage lending or investing activities and if, as
a result thereof, the cumulative aggregate of the principal balances of all con-




83
ventional mortgages purchased by the 'Corporation which were originated more
thiae one year prior to the date of purchase does not exceed 10 percentum of the
cumulative aggregate of the principal balances of all conventional mortgages purchased by the Corporation." The increase in the limitation from 10 to 25 percent would improve the flexibility of the Corporation's secondary market
operations in conventional mortgages and would enhance the liquidity of conventional mortgages.
Section 303 Would allow the Corporation generally to purchase conventional
mortgages if the outstanding principal balance of the mortgage at the time of
purchase is no greater than 80 percent of the value of the property securing the
mortgage. The customary maximum limit on conventional home mortgages, under
statutes and regulations quite generally in effect, is 80 percent rather than
the 75 percent specified in the current wording of the statute. The Corporation
could continue to purchase mortgages with loan-to-value ratios in excess of 80
percent only under certain specified circumstances.
Section 304 would, in effect, authorize the Corporation to make forward
commitments on participations on mortgages. The Board believes that the ban
on such forward commitments serves no purpose and hinders the Corporation's
effectiveness.
Section 305 would provide that, subject to regulatory authority otherwise
applicable, obligations of the Corporation, except its stock shall be lawful investments and security for fiduciary, trust, and public funds whose investment or
deposit is under the control of the United States or its possessions, or under
the control of corporations incorporateid under the laws of the United States
or such possessions. This provides for a treatment of Corporation securities
comparable to that afforded securities of the Federal Home Loan Banks.
Section 306 would provide that authority comparable to that contained in sections 301-305 will be given to the Federal National Mortgage Association.
Finally, I would like to turn now to Title IV of the bill. I have already commented earlier on Sections 401 and 402.
Section 403 makes certain minor technical and clarifying changes with respect
to the Savings and Loan Holding Company Act provisions.
(Section 404 is an important provision that clarifies and codifieis the powers
of the Federal Home Loan Bank Board with respect to approval of savings and
loan mergers and provides for procedures comparable to that in the Bank
Merger Act for passing upon antitrust aspects of proposed mergers.
Mergers between savings and loan associations are presently subject to direct
challenge under antitrust laws without any consideration of the convenience
and needs of the community to be served as is presently permitted in the case
of bank mergers under the Bank Merger Act. This is a serious lack of symmetry
in treatment between the two major types of depoisitory institutions.
This section would remedy such asymmetry by providing for language similar
to that in the Bank Merger Act. The precise language would be that the Corporation shall not approve—
"(1) any proposed merger transaction which would result in a monopoly, or
which would be in furtherance of any combination or conspiracy to monopolize
or to attempt to monopolize any type of business in which insured institutions
engage in any part of the United States, or
"(2) any other proposed merger transaction whose effect in any section of the
country may be substantially to lessen competition, or to tend to create a monopoly, or which in any other manner would be in restraint of trade, unless it
finds that the anti-competitive effects of the proposed transaction are clearly outweighed in the public interest by the probable effect of the transaction in meeting
the convenience and needs of the community to be served.
In every case, the Corporation shall take into consideration the financial and
managerial resources and future prospects of the existing and proposed institutions, and the convenience and needs of the community to be served."
It is the intention of the Board, as it is now doing under its present Statements of Policy on Mergers, to evaluate the possible anti-competitive impact of
each merger in both savings and mortgage markets and to take into account close
competitors of savings and loan associations in each of these markets.
This section will provide for a report on the competitive factors involved from
the Attorney General and provide that the Attorney General be notified immediately in the case of approval. The merger shall not be consummated until 30




84
days after approval except in the existence of an emergency. This serves the objectives of antitrust and, at the same time, provides assurance to savings and
loan associations that, once a merger is consummated, a Department of Justice
suit would not subject it to the extremely complex process of unscrambling.
Turning to Section 405, this would clarify and amend provisions relating to
the Federal Savings and Loan Insurance Corporation. It would restate more
precisely the present rights of the Corporation and uninsured account holders
as a result of insurance settlement payments incident to the default in an insured
association.
This section would delete all reference to the Corporation paying the valid
creditor obligations of the defaulted association. The deleted language is both
ambiguous and superfluous since the Corporation in any event would be obligated
to pay all credits obligations of the defaulted association, out of such institution's assets, when it acts as a liquidating receiver.
This section also would add a sentence designed to avoid in the future unnecessary litigation of the type involved in past receiverships. This sentence is
also intended to make clear that the obligation to pay interest to the Corporation becomes a continuing liability of the insured association upon its default
even though the interest is not payable until payment or provision for payment
has been made with respect to the specified expenses and other creditor claims.
In order to achieve uniformity and consistency in the event of receiverships in
different States, such interest is to be paid to the Corporation at the rate based
on the average market yield on the Corporation's investment in obligations of, or
guaranteed as to principal and interest by, the United States.
This completes the analysis of the various provisions of the bill. Some of the
provisions are technical or involve relatively minor matters. However, many of
the provisions are obviously quite important in their impact on the structure
and operations of Savings and loan associations, the Federal Home Loan Bank
System, and the Federal Home Loan Mortgage Corporation. Taken as a whole,
they represent continued progress in improving the structure of the housing
credit mechanism and in providing additional assurance that this nation's housing goals can be met.
FEDERAL HOME LOAN BANK BOARD,

Washington, D.C., April 11, 1911.
Hon.

CARL ALBERT,

Speaker of the House of Representatives,
Washington, D.C.
DEAR MR. SPEAKER : I transmit herewith on behalf of the Federal Home Loan
Bank Board a draft of a proposed bill, "To amend laws relating to savings and
loan associations, to broaden their mortgage credit powers, and for other purposes," which has been tentatively entitled the "Housing Institutions Modernization Act of 1971."
Savings and loan associations supply the great majority of the credit required
to meet the Nation's housing needs. These private institutions are assisted in
the achievement of this enorous and vital social endeavor by this agency and the
public and quasi-public institutions under its supervision, namely, the Federal
Home Loan Banks and the Federal Savings and Loan Insurance Corporation.
They are also assisted by the Federal Home Loan Mortgage Corporation, a private, Federally chartered corporation whose board of directors consists of the
board members of this agency.
The Board has learned from the experience of the housing crisis from which
the Nation is now beginning to emerge that there are many needed improvements in the authority and functioning of these private, public, and quasi-public
institutions. The industry needs enhanced capabilities of raising equity capital
to sustain growth. It is the purpose of the proposed bill to accomplish these
improvements.
Title I would enable Federal savings and loan associations to provide additional funds to the housing markets by authorizing them to sell capital stock.
This title would also adjust the asset structure of Federal savings and loan associations by enabling them to make additional types of loans and investments.
These adjustments would have the effect of stimulating the housing sector and
providing financial stability to associations during economic downturns.
Title I I of the bill would clarify and expand the authority of the Board to




85
control certain undesirable practices and would make certain institutional
changes.
Title III would enaible the Federal Home Loan Mortgage Corporation to provide a broader, deeper, and more flexible secondary market in mortgages, and
would grant to the Federal National Mortgage Association the same new powers
which would be conferred on the Federal Home Loan Mortgage Corporation.
Title IV would add to the stability of savings and loan associations by expanding the examination authority of the Board and by restating the Board's
authority over mergers involving insured savings and loan associations so that
it would be comiparafole to the authority now granted to the banking agencies over
mergers involving insured banks. Finally, title IV would make a number of
clarifying iand technical amendments.
It would be appreciated if you would lay the proposed bill before the House
of Representatives. An identical bill has been transmitted to the President of
the Senate.
The Office of Management and Budget advises that there is no objection to the
transmittal of this legislation and that its enactment would be consistent with
the objectives of the Administration.
Sincerely,
PRESTON MARTIN,

Chairman.

A BILL To amend laws relating to savings and loan associations, to broaden their mortgage
credit powers, and for other purposes

Be it enacted by the Senate and House of Representatives of the United States
of America in Congress assembled, That this Act imay be cited as the "Housing
Institutions Modernization Act of 1971".
TITLE I—FEDERAL SAVINGS AND LOAN ASSOCIATIONS
ISSUANCE OF CAPITAL STOCK

SEC. 101. Section 5 of the Home Owners5 Loan Act of 1933 is amended (1)
by striking out in paragraph (1) of subsection (lb) "and all of which shall have
the same priority upon liquidation", and (2) by changing "except capital stock"
to "including capital stock" in paragraph (2) of subsection (b).
FINANCING IN URBAN AREAS

SEC. 102. The twelfth sentence of section 5(c) of the Home Owners' Loan Act
of 1933 is amended (1) by striking out "in subsection (a) of section 110 of the
Housing Act of 1949" and substituting therefor "by the Board"; and (2) by
striking out the figure "5" and inserting in lieu thereof the figure "10".
PROPERTY IMPROVEMENT LOANS

SEC. 103. Section 5(c) of the Home Owners' Loan Act of 1933 is amended by
striking out the figure "$5,000" in the founth and sixth sentences thereof and
inserting in lieu thereof the figure at each such place "$10,000".
REAL PROPERTY

SEC. 104. Subsection (c) of section 5 of the Home Owners' Loan Act of 1933 is
amended by adding to said subsection, immediately before the last paragraph
thereof, the following paragraph: "Without regard to any other provision of
this subsection, but subject to such prohibitions, limitations, conditions, and
restrictions as the Board may prescribe, an association may invest in real property, including interests in real property, located within one hundred miles of
its home office or within the State in which such home office is located, for the
purpose of acquiring, developing, and/or improving such property or interests
therein for primarily residential usage, and may hold, sell or otherwise dispose of,
lease, improve, and operate any such property or any interest therein, but an association shall not make any investment under this sentence in the acquisition of
real property or any interest therein if its aggregate outstanding investment
60-299—71—pt. 1




7

86
under this sentence (determined as prescribed by the Board), exclusive of any
investment which is or at the time of its making was otherwise authorized, would
thereupon exceed 3 per centum of its assets."
LOANS FOR CONSTRUCTION

SEC. 105. The paragraph added to subsection (c) of section 5 of the Home
Owners' Loan Act of 1933 by section 805 (c) of the Housing Act of 1959 is amended
(1) by substituting "10 per centum of assets" for "5 per centum of such withdrawable accounts", and (2) by substituting ", development, and/or improvement of land or interests therein" for "and development of land".
TITLE II—FEDERAL HOME LOAN BANK BOARD
FEDERAL SAVINGS AND LOAN ADVISORY COUNCIL

SEC. 201. Section 8a of the Federal Home Loan Bank Act is amended by substituting "nine" for "six".
SUITS INVOLVING FEDERAL HOME LOAN BANKS

SEC. 202. Section 12 of the Federal Home Loan Bank Act is amended by adding
at the end thereof a new subsection (c) as follows:
"(c) Notwithstanding section 1349 of title 28 of the United States Code or
any other provision of law, (1) each Federal Home Loan Bank shall be deemed
to be an agency included in sections 1345 and 1442 and the first sentence of section 2408 of said title 28; (2) all civil actions to which a Federal Home Loan
Bank is a party shall be deemed to arise under the laws of the United States,
and the district courts of the United States shall have original jurisdiction of all
such actions, without regard to amount or value; and (3) any civil or other action, case, or controversy in a court of a State, or in any court other than a
district court of the United States, to which a Federal Home Loan Bank is a
party, may at any time before the trial thereof be removed by such Bank, without the giving of any bond or security, to the district court of the United States
for the district (and the division, if any) embracing the place where the same
is pending, or, if there is no such district court, to the district court of the
United States for the district (and the division, if any) in which the principal
ofiice of such Bank is located, by following any procedure for removal of causes
in effect at the time of such removal. No attachment or execution shall be issued
against a Federal Home Loan Bank or any of its property before final judgment
in any State, Federal, or other court."
CONFLICTS OF INTEREST AND RELATED MATTERS

SEC. 203. Section 17 of the Federal Home Loan Bank Act is amended by
adding thereto the following new subsection:
"(c) (1) The Federal Home Loan Bank Board is authorized, to such extent
as it may deem necessary or appropriate to prevent materially adverse effects
as to any member, or for the protection of the Federal Savings and Loan
Insurance Corporation, to regulate or prohibit any member (which term as used
in this isubseection shall include any insured institution as defined in section
5A) or any director, officer, controlling person, or employee of, or any attorney
or appraiser for, or any person occupying a fiduciary relationship with, or any
other affiliated person of, any member from engaging or participating in any
business or financial transaction conducted on behalf of or involving any member or other financial institution which would result directly or indirectly in a
conflict of his or its financial interests with those of the member.
"(2) The provisions of subsection (f) of section 5A and of subsections (b)
and (c) of section 5B, all as now in effect, are extended to include this
subsection, and for purposes of this sentence the references in said subsections
to those sections shall include this subsection, the references in said subsection
(f) to provisions of the National Housing Act shall be deemed to be references
to those provisions as now in effect, and the references in said subsections (b) and
(c) to institutions and nonmember institutions shall include members and
shall include affiliated persons.




87
"(3) In or in connection with the exercise of any function vested in or exercisable by the Board under this Act or otherwise, the Board (which term
as used in this paragraph includes the Federal Savings and Loan Insurance
Corporation) is authorized (A) to act through any corporate or other agency
or instrumentality of the United States and utilize information, services, facilities, and personnel thereof, and any such agency or instrumentality is authorized to provide the same as requested by the Board, (B) to make payment
therefor, and any expense under (A) or (B) hereof or in connection with any
similar action rendered by the Board to any such agency or instrumentality shall
not be considered as administrative expense, and (C) to impose and collect
fees and charges for the provision by the Board of information, services, facilities
or personnel to any person, and for purposes of this subsection the references
in the last two sentences of subsection (b) of section 5B as now in effect to
penalties shall be deemed to be references to such fees and charges. Any such
payment or collection may be in advance or by reimbursement or otherwise."
ILLINOIS BANK FOB SAVINGS AND LOAN ASSOCIATIONS

SEC. 204. Section 916 of the Housing and Urban Development Act of 1970 is
amended by adding the following immediately before the period at the end
thereof: " : Provided, That after the date of enactment of this proviso, no deposits in such bank shall be considered assets for such purposes at any time
when (1) such member or insured institution does not have its principal office
in the State of Illinois (except that this requirement shall not apply to any
deposits held on such date by an institution which on such date is a member or
an insured institution as denned in this sentence, as long as such deposits are
held by such institution and no addition is made thereto), or (2) there is outstanding a determination by the Federal Home Loan Bank Board (A) that the
facilities or condition of such bank are not consistent with the liquidity of deposits in such bank, or (B) that it does not possess sufficient information to
make the determination specified in clause (A) above".
ADVANCES

SEC. 205. The Federal Home Loan Bank Act is amended by substituting
"twenty" for "twelve" in section 6(c) (2) (ii) thereof and in the first place that
it appears in section 10(c) thereof.
TITLE III—FEDERAL HOME LOAN MORTGAGE CORPORATION
EEPUBCHASE OF MOBTGAGES

SEC. 301. Paragraph (1) of subsection (a) of section 305 of the Federal Home
Loan Mortgage Corporation Act is amended by inserting after the period at the
end of the first sentence thereof, a new sentence as follows: "Where a mortgage
or an interest therein is sold by the Corporation, the Corporation may thereafter purchase such mortgage or an interest therein from any holder or owner."
PERCENTAGE LIMITATION ON 1 YEAR MORTGAGES

SEC. 302. Paragraph (2) of subsection (a) of section 305 of the Federal Home
Loan Mortgage Corporation Act is amended by striking out the figure "10" in
the third sentence thereof and inserting in lieu thereof the figure "25".
LOAN-TO-VALUE RATIO

SEC. 303. Paragraph (2) of subsection (a) of section 305 of the Federal Home
Loan Mortgage Corporation Act is amended by striking out the figure "75" in
the first sentence thereof in each place that it appears therein and by inserting
in lieu thereof the figure "80" in each such place.
COMMITMENTS

SEC. 304. Paragraph (2) of subsection (a) of section 305 of the Federal Home
Loan Mortgage Corporation Act is amended by deleting the second sentence
thereof.




ELIGIBILITY AS PUBLIC INVESTMENTS

SEC. 305. Section 303 of the Federal Home Loan Mortgage Corporation Act is
amended by adding a new subsection (f) at the end thereof as follows:
"(f) Subject to any regulatory authority otherwise applicable, obligations of
the Corporation and (to such extent as the Corporation may prescribe) other
securities of the Corporation except stock shall be lawful investments, and may
be accepted as security, for all fiduciary, trust, and public, private, or other
funds the investment or deposit of which shall be under the authority or control of the United States, the District of Columbia, the Commonwealth of Puerto
Rico, or any territory or possession of the United States, any public, private, or
other corporation incorporated by or under any law of any of the foregoing, any
county or municipality of any of the foregoing, any political subdivision of any
of the aforesaid, any court or any corporate or other agency or instrumentality
of any of the preceding, or any officer or officers, employee or employees, or agent
or agents of any of the above."
FEDERAL NATIONAL MORTGAGE ASSOCIATION

SEC. 306. Section 302(b) (2) of the National Housing Act is amended—
(1) by inserting after the period at the end of the first sentence thereof, a new
sentence as follows: "Where a mortgage or interest therein is sold by the corporation, the corporation may thereafter purchase such mortgage or an interest
therein from any holder or owner." ;
(2) by striking out the figure "10" in the fourth sentence thereof and inserting
in lieu thereof thefigure"25";
(3) by striking out the figure "75" in the second sentence thereof in each place
that it appears therein and by inserting in lieu thereof the figure "80" in each
such place; and
(4) by deleting the third sentence thereof.
TITLE IV—FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION
ADJUSTMENTS IN ASSETS

SEC. 401. Section 403 (b) of title IV of the National Housing Act is amended
by adding at the end thereof the following sentence: "The Corporation shall have
power to require such adjustments as it deems necessary or appropriate in the
amounts appearing in the books, records, reports, or other documents of insured
institutions in order that their financial condition or operations may be fairly
stated."
DEFINITION OF AFFILIATE

SEC. 402. Section 407(m) (1) of title IV of the National Housing Act is amended
by deleting the last sentence thereof and by adding the following sentence at
the end thereof: "For purposes of this subsection, the term 'affiliate' shall have
the same meaning given to it in section 408(a) of this title."
SAVINGS AND LOAN HOLDING COMPANIES

SEC. 403. Section 408(d) (4) of the National Housing Act, as amended, is further amended by striking out all which follows "(2)" and substituting therefor,
the following: "property previously owned, legally or beneficially, by any savings
and loan holding company or affiliate thereof, other than the parent holding
company of such service corporation or any affiliate of such holding company."
MERGERS

SEC. 404. Title IV of the National Housing Act is amended by adding at the
end thereof a new section as follows:
"SEC. 412. (a) Except with the prior written approval of the Corporation, no
insured institution shall—
" (1) merge or consolidate with any other institution;
"(2) assume liability to pay any deposits, share accounts, or similar liabilities
of any other institution;
"(3) transfer assets to any other institution in consideration of the assumption of liabilities for any portion of the deposits, share accounts, or similar
liabilities of such insured institution.




89
"(b) Notice of any proposed transaction for which approval is required
under subsection (a) (referred to hereafter in this section as a 'merger transaction') shall, unless the Corporation finds that it must act immediately in
order to prevent the probable failure of one of the institutions involved, be
published—
" (1) in a form approved by the Corporation,
" (2) in a form approved by the Corporation,
"(3) at appropriate intervals during a period at least as long as the period
allowed for furnishing a report under subsection (c) of this section, and
"(4) in a newspaper of general circulation in the community or communities
where the main offices of the institutions involved are located, or, if there is
no such newspaper in any such community, then in the newspaper of general
circulation published nearest thereto.
"(c) In the interests of uniform standards, before acting on any application
for approval of a merger transaction, the Corporation, unless it finds that it
must act immediately in order to prevent the probable failure of -one of the
institutions involved, shall request a report on the competitive factors involved
from the Attorney General. The report, or in the alternative a notification indicating that no report will be submitted, shall be furnished within thirty calendar days of the date on which the report is requested, or within ten calendar
days of such date if the Corporation advises the Attorney General that an
emergency exists requiring expeditious action.
"(d) The Corporation shall not approve—
"(1) any proposed merger transaction which would result in a monopoly, or
which would be in furtherance of any combination or conspiracy to monopolize
or to attempt to monopolize any type of business in which insured institutions
engage in any part of the United States, or
"(2) any other proposed merger transaction whose effect in any section of the
country may be substantially to lessen competition, or to tend to create a monopoly, or which in any other manner would be in restraint of trade, unless it finds
that the anticompetitive effects of the proposed transaction are clearly outweighed
in the public interest by the probable effect of the transaction in meeting the
convenience and needs of the community to be served.
In every case, the Corporation shall take into consideration the financial and
managerial resources and future prospects of the existing and proposed institutions, and the convenience and needs of the community to be served.
"(e) The Corporation shall immediately notify the Attorney General of any
approval by it pursuant to this subsection of a proposed merger transaction.
If the Corporation has found that it must act immediately to prevent the probable failure of one of the institutions involved and the report on the competitive
factors has been dispensed with, the transaction may be consummated immediately upon approval by the Corporation. If the Corporation has advised the Attorney General of the existence of an emergency requiring expeditious action
and has requested the report on the competitive factors within ten days, the
transaction may not be consummated before the fifth calendar day after the
date of approval by the Corporation. In all other cases, the transaction may not
b consummated before the thirtieth calendar day after the date of approval by
the Corporation.
'(f) (1) Any action brought under the antitrust laws arising out of a merger
transaction shall be commenced prior to the earliest time under subsection (e)
at which a merger transaction approved under subsection (d) might be consummated. The commencement of such an action shall stay the effectiveness of
the Corporation's approval unless the court shall otherwise specifically order. In
any such action, the court shall review de novo the issues presented.
"(2) In any judicial proceeding attacking a merger transaction approved
under subsection (d) on the ground that the merger transaction alone and of
itself constituted a violation of any antitrust laws other than section 2 of the
Act of July 2, 1890 (section 2 of the Sherman Antitrust Act, 15 U.S.O. 2), the
standards applied by the court shall be identical with those that the Corporation is directed to apply under subsection (d).
"(3) Upon the consummation of a merger transaction in compliance with this
section and after the termination of any antitrust litigation commenced within
the period prescribed in this subsection, or upon the termination of such period
if no such litigation is commenced therein, the transaction may not thereafter
be attacked in any judicial proceeding on the ground that it alone and of itself




90
constituted a violation of any antitrust laws other than section 2 of the Act of
July 2, 1890 (section 2 of the Sherman Antitrust Act, 15 U.S.C. 2), but nothing
in this section shall exempt any institution resulting from a merger transaction
from complying with the antitrust laws after the consummation of such transaction.
"(4) In any action brought under the antitrust laws arising out of a merger
transaction approved by the Corporation pursuant to this section, the Corporation, and any State supervisory agency having jurisdiction within the State
involved, may appear as & party of its own motion and as of right, and be
represented by its counsel.
"(g) The Corporation may make such rules and regulations as it may deem
necessary or appropriate for the purpose of carrying out the provisions of this
section.
"(h) For purposes of this section, the term 'antitrust laws' means the Act of
July 2, 1890 (the Sherman Antitrust Act, 15 U.S.C. 1-7), the Act of October 15,
1914 (the Clayton Act, 15 U.S.C. 12-27), and any other statutory provisions in
pari materia therewith."
PAYMENT OF INSURANCE

SEC. 405. Title IV of the National Housing Act is amended—
(1) by adding the following two sentences at the end of section 405(b)
thereof:
"The surrender and transfer to the Corporation of an insured account in any
institution in default shall subrogate the Corporation with respect to such insured account and all rights incident thereto, and the insured member shall
retain only those rights incident to any uninsured portion of his account. Upon
the payment of insurance by the Corporation to the insured members of the
institution in default, the Corporation shall become entitled to interest on the
withdrawable or repurchasiable amount of the accounts surrendered and transferred to it, computed at a rate determined by the Federal Savings and Loan
Insurance Corporation, as of the date of default, based upon the average market
yield on the Federal Savings and Loan Insurance Corporation's1 investments in
obligtions of, or guaranteed as to principal and interest by, the United States,
commencing upon the date of default and continuing until the date or dates on
which the Corporation's claim for the aggregate withdrawable or repurchasiable
amount of all such accounth is paid in full by the conservator, receiver, or other
legal custodian of such institution: Provided, That such rate shall not be less
than the rate determined by the Secretary of the Treasury taking into consideration the current average market yield on outstanding marketable obligations of
the United States of comparable maturity, adjusted to the nearest one-eighth of
one per centum: and provided further, That no such interest shall be payable
to the Corporation until payment or provision for payment has been made with
respect to the expenses of administering the institution in default, including tax
liability, and all creditor claims against such institution, including the full
withdrawable or repurchasable amount of all account claims."
i(2) By inserting a period after the words "Section 405" in section 406(b)
thereof and deleting the remainder of said section 406 (bj following said period.

SECTION-BY-SECTION ANALYSIS
TITLE I
PROPOSED "HOUSING INSTITUTIONS MODERNIZATION ACT OF 1971

Section 101—Issuance of Capital Stock
Section 101 makes two amendments to section 5 of the Home Owners' Loan
Act of 19&3.
Amendment (1) would amend the first sentence of paragraph (1) of subsection (b) of said section 5. That sentence provides that a Federal savings
and loan association may raise capital in the form of "such savings deposits,
shares, or other accounts, for fixed, minimum, or indefinite periods of time (all
of which are referred to in this section as savings accounts and all of which
shall have the same priority upon liquidation)" as are authorized by its charter
or by regulations of the Federal Home Loan Bank Board as therein set forth.
The language "all of which shall have the same priority upon liquidation"




91
constitutes a serious limitation on the flexibility and workability of the provision. It prevents, for example, the providing of liquidation priority for
deposits over shares, or for deposits of public funds over other deposits, and
it equally prevents the issuance, for example to institutional investors, of
accounts having deferred status upon liquidation. Accordingly, amendment (1)
would delete the quoted language "all of which shall have the same priority
upon liquidation".
Amendment (2) would amend paragraph (2) of subsection (b) aforesaid,
which now provides: "To such extent as the Board may authorize by regulation or advice in writing, an association may borrow, may give security, and
may issue such notes, bonds, debentures, or other obligations, or other securities (except capital stock) as the Board may so authorize."
The parenthetical language "except capital stock" prevents the adoption for
Federal savings and loan associations of the more modern method of operation known in various jurisdictions as the permanent-stock, guaranty-stock, or
reserve-stock method, under which the savers are protected by the issuance of
capital stock which typically is nonwithdrawable and is, upon liquidation, deferred
to the claims of the holders of savings accounts. Amendment (2) would change
this parenthetical language to "including capital stock", thus making this more
modern method available to Federal savings and loan associations.
If this amendment were enacted, the Federal Home Loan Bank Board would
have complete and effective regulatory authority as to the extent and manner
of the use of this method of operation under existing provisions of subsection
(a) of section 5 of the Act, which authorizes the Board, under such rules and
regulations as it may prescribe, to provide (among other things) for the organization, operation, and regulation of Federal savings and loan associations. This
regulatory authority would include, but would not be limited to, the required
amounts of capital stock, the terms on which it could be issued, and the conversion of existing associations to the new type of operation, including the
assurance of adequate protection to existing savings-account holders in the
event of such conversion.
Federal savings and loan associations have no outstanding ownership equities
except those represented by deposits. There are no shares of stock. The Charters
of these institutions provide that in the very unlikely event of a liquidation of
the institution, the excess funds, remaining after the payment of deposits, of
interest, and of other obligations, will be distributed to the depositors who are
customers of the association in which respect they resemble consumers.
The Bank Board must have authority to assure that the rights of the depositors
to these benefits which are over and above the amount of deposits and interest,
are preserved. That authority should be sufficiently flexible so that the full
proceeds of the sale of stock representing ownership go to the depositors, and
to protect against mass last minute deposits by insiders and other devices to
water down or take away benefits that belong to the depositor. Present statutes
are not adequate for this purpose. Amendment is urgently necessary.
If the savings and loan industry is to provide the housing financing needs of
the country as they have in the past, and survive in a highly competitive savings market, they must benefit from all economies of scale. Since these economies
do exist, it is advantageous and necessary for mergers of small associations to
occur. These mergers would be greatly facilitated if the associations were in
stock form prior to the merger.
Highly related to the question of providing financing needs is the question of
obtaining capital in times of rising interest rates and in areas which traditionally are capital short. Even through little new equity capital is raised by
stock associations in the aggregate, it is primarily raised by associations located
in capital short areas from investors located in capital surplus areas. This is
definitely a way of distributing funds across the country in an efficient manner
to provide housing.
Section 102—Financing in Urban Areas
The twelfth sentence of section 5Cc) of the Home Owners' Loan Act of 1933
authorizes a Federal association to invest not more than 5 percent of its assets
(1) in real property located within urban renewal areas designated «as such
bv the Secretary of Housing and Urban Development under section 110(a) of
the Housing Act of 1949 (42 U.S.C. 1460(a)) : (2) in interests in such property;
and (3^ in oWgations secured by first liens on such property. The twelfth sentence also restricts investment in such real property and such interests to 2
percent of assets.




92
Section 102 would make two amendments. First, it would raise the 5 percent
limitation to 10 percent. Second, it would permit the Board to define areas for
the purposes of investment by Federal associations under the twelfth sentence.
This second amendment would make the twelfth sentence more workable and
flexible since, under section 110(a) of the Housing Act of 1949, the Secretary's
authority to designate an area as an urban renewal area is limited to approving
the area as appropriate for an "urban renewal project", which latter term is
itself subject to the complicated definitional provisions of section 110 (c) of
that act. While those provisions may be appropriate for determining the eligibility for loan and grant contracts under title I of the Housing Act of 1949 (42
U.S.C. 1451 et seq.) we believe they are not needed for the purpose of enabling
Federal savings and loan associations to make loans to assist in rehabilitation
operation®.
Investment by Federal savings and loan associations in redevelopable and
rehabilitatable real estate outside urban renewal project areas would enable
these institutions to forestall urban iblight and conserve the existing housing
stock prior to its decay. The FHLBB would of course continue to support HUD
projects by designating all such areas following the Secretary's designation.
The intent of the Sec. 102 amendment is to complement HUD efforts and to
utilize the comparative advantage of savings and loan associations, many of
whom have large volumes of outstanding loans and thus experience in "gray
areas" proximate to HUD-designated project areas.
Section 10S—Property Improvement Loans
Section 103 would raise to $10,000 the $5,000 limitation on the maximum dollar amount of property improvement loans contained in the fourth and sixth
sentences of section 5(c) of the Home Owners' Loan Act. This dollar limitation
has been successively raised over the years; in 1954 from $1,500 to $2,500; in
1956 from $2,500 to $3,500; and in 1964 from $3,500 to $5,000. Changed economic circumstances have made the 1964 figure increasing unrealistic.
In order to avoid wasteful and time-consuming piecemeal legislation, and in
view of the natural limits placed on such loans by reasonable lenders and homeowners, a good case could be made for eliminating the dollar limitation entirely.
It is believed, however, that a fixed $10,000 dollar figure will serve to check
occasional excess and should render further amendatory legislation unnecessary
for the indefinite future.
Section 104—Real Property
Under present law, Federal associations may invest directly in real property
only to the extent permitted under the twelfth sentence of section 5(c) of the
Home Owners' Loan Act (discussed above under § 102). In a number of states,
notably California, state-chartered associations may invest in real property
up to some percentage of assets or some similar base or limitation. Section 104
would correct this competitive inequality by authorizing Federal associations
to invest no more than 3 percent of their assets directly in real property. In
addition to this percentage-of-assets limitation, section 104 would impose limitations as to the location of the property and the purpose of the investment in
the property. The location of the property must be within one hundred miles
of the association's home office or in the State in which such home office is
located, and the purpose of the investment must be "for primarily residential
usage".
Section 104 would also authorize Federal savings and loan associations to
"warehouse" land for development with small percentage of assets and would
facilitate housing production, including "New Towns".
Section 105—Loans For Acquisition, Development and Improvement of Land
Section 105 makes two amendments to the paragraph added to section 5(c)
of the Home Owners' Loan Act of 1933 by section 805 (c) of the Housing Act
of 1959.
That paragraph now provides that, without regard to any other provision
of subsection (c) of section 5 of the Act except the area restriction, any Federal
savings and loan association with general reserves, surplus, and undivided
profits in excess of 5 percent of its withdrawable accounts may invest not exceeding at any one time 5 percent of such withdrawable accounts in loans to
finance the acquisition and development of land for primarily residential usage,
subject to such rules and regulations as the Board may prescribe.




93
The object of the paragraph, as set forth (at p. 628) in the House Housing
Subcommittee hearings on the Housing Act of 1959, was to provide for the development of housing sites. The term "development" is defined in section 545.614(d) of the Board's regulations. Loans for the construction of the housing must
be made under other authority and subject to different percentage and other
limitations. This fragmentation is unduly complex, prevents the paragraph
from being as effective a tool for housing finance as is desirable, and is largely
the result of the process of piecemeal amendment which has produced the
present text of section 5 (c).
Section 105 of the bill would eliminate this fragmentation by permitting loans
to be made under the paragraph for the improvement of the property as well
as for its acquisition and development, or any combination thereof. The section
would also change the percentage limitation on such loans from 5 percent of withdrawable accounts to 10 percent of the association's assets. This would make
a reasonable increase in the permitted amount of loans under the paragraph
and bring this paragraph in line with the other lending limitations in section
5(c), which are based on percentages of assets rather than percentages of
withdrawable accounts.
TITLE II

Section 201—Federal Savings and Loan Advisory Council
Section 8a of the Federal Home Loan Bank Act (12 U.S.C. 1428a) establishes
a Federal Savings and Loan Advisory Council to consist of one member elected
by the Board of Directors of each Federal Home Loan Bank (currently 12) and
six members appointed by the Board. Section 201 would raise the number of
appointed members to nine. It has been apparent to the Board for some time,
but especially since the creation of the Federal Home Loan Mortgage Corporation, that the Council needs to be expanded to provide representation to
industry groups which do not now have an institutional voice on the Council.
Section 202—Suits Involving Federal Home Loan Banks
Under existing law, the Federal Courts have original jurisdiction over suits
involving the Federal Savings and Loan Insurance Corporation (12 U.S.C.
1730(k) (1)), the Federal Home Loan Mortgage Corporation (§ 303(e), P.L. 9 1 351), and the Federal Reserve Banks (12 U.S.C. 632). The purpose of these
provisions, and similar provisions involving other Federal instrumentalities,
is to insure uniformity and consistency of treatment. Section 102 would give
the Federal courts comparable jurisdiction over suits involving Federal Home
Loan banks.
Section 203—Conflicts of Interest and Related Matters
Section 203 would add a new subsection (c), consisting of three paragraphs, to
section 17 of the Federal Home Loan Bank Act (12 U.S.C. 1437). Paragraph (1)
of the new subsection would clarify the authority of the Board to regulate conflicts of interest involving insured institutions and would extend this authority
to conflicts of interest involving member institutions. Paragraph (2) would provide for enforcement by extending to this subsection the remedies available to
the Board under other acts which it administers. Paragraph (3) would authorize
the Board to charge user fees and to utilize and to make payment for services
of other agencies in the implementation of this subsection and other statutory
provisions administered by the Board.
Section 204—Illinois Bank for Savings and Loan Associations
Section 913 of the Housing and Urban Development Act of 1970, as reported
by the House (H.R. 19436), reads as follows:
"SEC. 913. The provision numbered (2) in the first sentence of subsection (b)
of section 5A of the Federal Home Loan Bank Act (12 U.S.C. 1425a) is amended
to read as follows: '(2) unpledged deposits in a Federal Home Loan Bank or in
a State bank performing similar functions and in operation on February 6,
1970, and to such extent as the Board miay approve for the purposes of this
section, time and savings deposits in commercial banks, and'."
In a letter to the Chairman of the House Committee on Banking and Currency the Board stated its objections to the enactment of section 913 in the
following terms:
"Sec. 913, H.R. 19436, Liquidity of institutions. Section 5A of the Federal Home
Loan Bank Act, as amended in 1968, requires each institution which is a mem-




94
ber of a Federal Home Loan Bank or insured by the Federal Savings and Loan
Insurance Corporation to maintain certain types of assets in amounts fixed by
the Board, but not less than 4% noir more than 10% of its withdrawable accounts
and isbortiteim borrowings as therein set forth or, in the case of institutions which
are insurance companies, such other base or bases as the Board may determine
to be comparable.
Under the statute, these assets include cash and, to such extent as the Board
may approve, time and savings deposits in Federal Home Loan Banks and commercial banks. By section 523.10 of the Regulations for the Federal Home Loan
Bank System (12 CFR 523.10), the Board has limited eligible deposits to demand
and time deposits in a Federal Home Loan Bank and demand and time deposits
in an 'insured bank', denned as a bank insured by the Federal Deposit Insurance
Corporation which is not under the control or in the possession of a supervisory
authority. However, time deposits in an insured bank are eligible under the
regulation only if (1) the total of the member's time deposits in the same bank
does not exceed the greater of (a) one-fourth of 1% of the total deposits of the
bank (calculated as therein set forth) or Ob) $20,000, (2) no consideration
other than discounting to a current market rate of interest is received by the
member from a third party in connection with its making or acquisition of the
deposit, and (3) the deposit is negotiable and not over one year in remaining
maturity or, if not withdrawable without notice, the notice period does not
exceed 90 days.
In the administrative proceedings prior to the issuance of the regulation, an
Illinois corporation known as the Bank for Savings and Loan Associations,
incorporated in 1966 under the general banking laws of Illinois and not a member
of the Federal Reserve System or insured by the Federal Deposit Insurance
Corporation, but all of whose capital stock was owned by Illinois savings and
loan associations, took the position that demand and time deposits made in it
should be eligible on the same basis as those in a Federal Home Loan Bank.
It indicated that its ends would not be served if it were placed on the same
basis as that proposed for insured banks, asserting that the provision limiting
the total time deposits of a member in the same insured bank to one-fourth of
1% of the total deposits would have serious effects on it.
The Board did not grant the requested relief, and the same result is now
apparently being sought directly by statute, through section 913 of H.R. 19436.
The Federal Home Loan Bank Board objects to that section, for reasons briefly
summarized below.
First. For a bank to qualify under section 913, it must be, and must continue
to he, a State bank "performing similar functions" to a Federal Home Loan
Bank. It is not clear how institutions making or acquiring deposits in the Bank
for Savings and Loan Associations, or the Board and its examiners and other
staff members, could obtain current, dependable information as to what functions
that Bank was performing at any time or from time to time.
Second. The liquidity resources of the Bank for Savings and Loan Associations
cannot be compared with those of Federal Home Loan Banks. It could not borrow
from the Treasury, its obligations are not eligible for open-market purchase by
the Federal Reserve Banks or as security for advances by those banks as obligations of the Federal Home Loan Banks are, and there is no provision of
statute by which fiduciary, trust, or public funds under the control of the United
States could be invested in its obligations.
Third. The lack of deposit insurance and Federal Reserve membership means
that the Bank for Savings and Loan Associations is not under effective supervisory, regulatory, or enforcement authority of any Federal agency. If it got
into difficulties the Federal Deposit Insurance Corporation could not render
with respect to it the financial assistance by loans or purchases of assets which
that corporation is authorized to render as to insured banks.
Fourth. The provisions of the Board's regulation as to time deposits in insured
banks are designed to restrain undue concentration of deposits and to assure
ready availability. Section 913 of H.R. 19436 is obviously intended to escape
those safeguards in the case of the Bank for Savings and Loan Associations.
There is even danger that in other States (or in Illinois itself) State banks
which were in operation on February 6,1970, might claim that they were performing similar functions to a Federal Home Loan Bank and were entitled to the
same treatment as the Bank for Savings and Loan Associations.




95
Finally, we note that the word "unpledged", which now appears in the regulation but not in the statute, would be carried into the statute by section 913
of the bill. We believe that situations might later develop in which it would be
desirable to permit some pledged deposits to be counted as eligible, and we
consider it unwise to incorporate that word in the statute.
In light of the foregoing, the Board opposes the provisions of section 913 of
H.R. 19436."
The following section 916 was adopted in conference, and ultimately by the
Congress, in lieu of section 913:
"SEC. 916. Unpledged deposits in the Bank for Savings and Loan Associations,
Chicago, Illinois, maintained by any institution which is a member of a Federal
Home Loan Bank or is an insured institution as defined in section 401 (a) of
the National Housing Act, shall be considered assets for purposes of meeting
the liquidity requirements of section 5A(b> of the Federal Home Loan Bank
Act (12 U.S.C. 1425a(b))."
This section 916, while an improvement over .section 913, still suffers from
the fundamental defects in section 913, Section 204 of the proposed bill is an
effort to remedy two of these defects.
The first paragraph of section 204 would limit the applicability of section 916
to members located in the State of Illinois. This would eliminate the serious
imbalances in distribution of mortgage funds which would result if capital from
the rest of the States continued to flow into one State. The second paragraph
would enable the Board to insure the full liquidity of the reserves of institutions under its supervision.
Section 205—Advances
Section 10 of the Federal Home Loan Bank Act, which provides for advances
by the Federal Home Loan Banks to their members on the .security of home
mortgages or obligations of or fully guaranteed by the United States, provides
in subsection (c) that at no time shall the aggregate outstanding advances made
by any Bank to a member exceed twelve times the amounts paid in by the
member for outstanding capital stock held by it. Section 6(c) (2) (ii) provides
in effect that the Federal Home Loan Bank stock held by a member shall not
be reduced if the effect would be to cause the aggregate outstanding advances,
within the meaning of this provision of section 10(c) or within the meaning
of Board regulations defining that term for the purposes of the provision, to
exceed twelve times the amounts so paid in by the member. It has been the
Board's experience that the 12-to^l ratio acts as an excessive restriction on the
Board's power to assure stability in the housing sector during periods of economic downturn. The Board believes that a 20-to-l ratio is fully justified, and
section 205 of the proposed bill would so provide.
TITLE

III

Section 301—Repurchases of Mortgages
The alteration made by section 301 in the authority of the Federal Home
Loan Mortgage Corporation to conduct secondary mortgage market operations
is indicated fairly plainly by the text of the section. One point is worthy of
note, however. The added language means that the Corporation could purchase
an interest in a whole mortgage which it had sold, and could purchase the whole
of a mortgage where it had sold an interest in that mortgage. This authority is
in addition to the obvious authority for the Corporation to purchase a whole
mortgage where it had sold that whole mortgage, and to purchase an interest in
a mortgage where it had sold that interest.
Section 302—Percentage Limitation on 1-Year Mortgages
The third sentence of section 305(a) (2) of the Federal Home Loan Mortgage
Act provides:
"The Corporation may purchase a conventional mortgage which was originated
more than one year prior to the purchase date only if the seller is currently
engaged in mortgage lending or investing activities and if, as a result thereof,
the cumulative aggregate of the principal balances of all conventional mortgages
purchased by the Corporation which were originated more than one year prior
to the date of purchase does not exceed 10 per centum of the cumulative aggregate of the principal balances of all conventional mortgages purchased by the
Corporation."




96
Section 302 would raise the 10-percent limitation to 25 percent and would
thereby increase the flexibility of Corporation's secondary-market operations
in conventional mortgages.
Section SOS—Loan-to-Value Ratio
Section 305(a) (2) of the Federal Home Loan Mortgage Corporation Act
prohibits the Corporation, except under certain specified circumstances, from
purchasing a conventional mortgage under that section "if the outstanding
principal balance of the mortgage at the time of purchase exceeds 75 per
centum of the value of the property securing the mortgage". The customary
maximum limit on conventional home mortgages, under statutes and regulations quite generally in effect, is 80% rather than 75%, and section 303 of the
proposed legislation would accordingly raise this loan-to-value ratio in the
Federal Home Loan Mortgage Corporation Act to 80 percent.
Section 304—Commitments
The first and second sentences of section 305(a) (2) of the Federal Home Loan
Mortgage Corporation Act provide:
"No conventional mortgage shall be purchased under this section if the outstanding principal balance of the mortgage at the time of purchase exceeds 75
per centum of the value of the property securing the mortgage, unless (A) the
seller retains a participation of not less than 10 per centum in the mortgage;
(B) for such period and under such circumstances as the Corporation may require, the seller agrees to repurchase or replace the mortgage upon demand
of the Corporation in the event that the mortgage is in default; or (C) that
portion of the unpaid principal balance of the mortgage which is in excess of
such 75 per centum is guaranteed or insured by a qualified private insurer as
determined by the Corporation. The Corporation shall not issue a commitment
to purchase a conventional mortgage prior to the date the mortgage is originated,
if such mortgage is eligible for purchase under the preceding sentence only by
reason of compliance with the requirements of clause (A) of such sentence."
The effect of the second sentence is to prevent the Corporation from making
forward commitments for participations. The Board believes that this restriction, while perhaps arguably justifiable on grounds of caution at the inception
of the Corporation's existence, no longer serves any good purpose. The removal
of the restriction would enable the Corporation to achieve greater stability and
predictability in its secondary-market prices.
Section 305—Eligibility as Public Investments
Section 305 of the proposed bill would add a new subsection (f) to section 303
of the Federal Home Loan Mortgage Corporation Act. The new subsection (f)
would provide that, subject to regulatory authority otherwise applicable, obligations and securities of the Corporation except its stock shall be lawful investments and security for fiduciary, trust, and public or other funds whose investment or deposit is under the control of the United States or its possessions, or
under the control of corporations incorporated under the laws of the United States
or such possessions.
There are ample precedents for this type of legislation.
One such precedent is section 15 of the Federal Home Loan Bank Act, which
provides that obligations of the Federal Home Loan Banks, and it may be noted
that those are not guaranteed by the United States, shall be lawful investments
and security for fiduciary, trust, and public funds whose investment or deposit
is under the authority or control of the United States or any officer thereof.
Another precedent is section 409 of the National Housing Act. That section
provides that savings and share accounts of institutions insured by the Federal Savings and Loan Insurance Corporation shall to the extent they are so
insured be lawful investments and security for public funds of the United
States, fiduciary and trust funds under its control, and the funds of all corporations organized under the lawfi of the United States, subject to any regulatory
authority otherwise applicable.
Still another precedent is section 311 of the National Housing Act which provides that all obligations, participations, or other instruments issued by either
the Government National Mortgage Association or the Federal National Mortgage Association—and the latter's securities are not guaranteed by the United
States except in the special case of those which are GNMA-guaranteed—shall
be lawful investments and security for fiduciary, trust, and public funds whose




97
investment or deposit is under the authority and control of the United States
or any officer or officers thereof.
Section S06—Federal National Mortgage Association
Section 306 of the proposed bill would amend section 302 of the National
Housing Act to grant to the Federal National Mortgage Association the same new
powers which would be conferred on the Federal Home Loan Mortgage Corporation by sections 301-304 of Title III of the proposed bill.
TITLE IV

Section 401—Adjustments in Assets
Section 401 would add the following sentence to section 403(b) of Title IV
of the National Housing Act: "The Corporation shall have power to require such
adjustments as it deems necessary or appropriate in the amounts appearing in
the books, records, reports, or other documents of insured institutions in order
that their financial condition and operations may be fairly stated." It has long
been the position of the Board that the Federal Savings and Loan Insurance
Corporation already possesses the authority intended to be conveyed by section
401 and the Board has long had a regulation (12 CFR 563.17-2) implementing
that authority. However, this position represents a construction of general Iangage found in various places in Title IV and the validity of this construction is
open to possible challenge.
The Board believes, especially in view of the expansion of lending authority
intended to be accomplished by Title I of the proposed legislation, that the possibility of challenge should be clearly foreclosed.
Section 402—Definition of Affiliate
Section 407(m) of Title IV of the National Housing Act provides for the
examination of affiliates of insured institutions. The last sentence of section
407(m) (1) defines "affiliate" as follows:
"For purposes of this subsection, the term 'affiliate' shall have the same meaning as where used in section 2(b) of the Banking Act of 1933 (12 U.S.C. 221a(b)),
except that the term 'member bank' in said section 2(b) shall be deemed to refer
to an insured institution."
Section 2(b) of the Banking Act of 1933 provides:
"(b) Except where otherwise specifically provided, the term 'affiliate' shall
include any corporation, business trust, association, or other similar organization—
(1) Of which a member bank, directly or indirectly, owns or controls either
a majority of the voting shares or more than 50 per centum of the number of
shares voted for the election of its directors, trustees, or other persons exercising
similar functions at the preceding election, or controls in any manner the election of a majority of its directors, trustees, or other persons exercising similar
functions; or
(2) Of which control is held, directly or indirectly, through stock ownership
or in any other manner, by the shareholders of a member bank who own or control either a majority of the shares of such bank or more than 50 per centum
of the number of shares voted for the election of directors of such bank at the
preceding election, or by trustees for the benefit of the shareholders of any such
bank; or
(3) Of which a majority of its directors, trustees, or other persons exercising
similar functions are directors of any one member bank; or
(4) Which owns or controls, directly or indirectly, either a majority of the
shares of capital stock of a member bank or more than 50 per centum of the
number of shares voted for the election of directors of a member bank at the
preceding election, or controls in any manner the election of a majority of the
directors of a member bank, or for the benefit of whose shareholders or members all or substantially all the capital stock of a member bank is held by
trustees."
The essential effect of section 402 of the proposed bill is to substitute for the
50 percent requirement in section 2(b) the 25 percent requirement found in the
Savings and Loan Holding Company Act provisions relating to affiliation. It is
the experience of the Board that effective control, and therefore affiliation in
fact, frequently exists in cases of less than 50 percent control. Hence, section
402 would bring the Board's supervisory authority over affiliates of insured
institutions more into line with corporate reality.




98
Effective use of the lending and investment authority of the sort intended
to be conveyed in Title I of the proposed bill commonly involves activity by
affiliated persons and businesses. The Board believes that expansion of its regulatory authority over such persons and businesses is desirable to insure that
this proposed lending and investment authority will be used safely and wisely.
Section 403—Savings and Loan Holding Companies
Section 403 would make certain minor technical and clarifying changes to
section 408 (d) (4) of Title IV of the National Housing Act.
Section 404—Mergers
Section 404 of the proposed bill would add a new section 412 to Title IV of
the National Housing Act. New section 412 would clarify the authority of the
Board regarding mergers, consolidations, and similar transactions involving insured institutions and would provide procedures for the exercise of that authority which would be comparable to those applicable in the field of commercial
banks.
The proposed section 412 is modeled very closely upon the Bank Merger Act, as
amended (12 U.S.C. 1828(c)(l)). Under the section, insured savings and loan
associations would have available to them all the protections available to banking institutions under the Bank Merger Act, and at the same time, comparable
standards and procedures, particularly in the antitrust area, would be established for all financial institutions.
It will be noted that new section. 412 does not contain provisions comparable
to 12 U.S.C. 1828(c) (9) relating to inclusion of a description of each merger
transaction in the responsible agency's annual report. Comparable provisions
would duplicate in large measure the existing annual report requirements specified in the second to last sentence of section 17(b) of the Federal Home Loan
Bank Act under which the Board now describes merger transactions in its annual report to the Congress.
Section 405—Payment of Insurance
Both section 405(b), which applies to Federal and State savings and loan
associations, and section 406 (b), which applies only to Federal associations, of
Title IV of the National Housing Act envision that the Federal Savings and
Loan Insurance Corporation, upon its insurance settlement payments incident
to the default of an insured association, shall become the owner of, and succeed
to all the rights in, the insured portion of the accounts of the insured members
of the association in default, and that the insured members shall retain only
those rights relating to the uninsured portion of their accounts. However, the
present sections 405 (b) and 406 (b) use different terminology to describe such
result. In order to achieve uniformity, section 405 of this bill would amend sections 405(b) and 406(b) of Title IV of the National Housing Act by deleting
the subject provision with respect to the Corporation's insurance payments from
said section 406 (b) and by adding a new sentence to section 405(b) restating
more precisely the present rights of the Corporation and the uninsured account
holders, as follows:
"The surrender and transfer to the Corporation of an insured account in any
institution in default shall subrogate the Corporation with respect to such insured account and all rights incident thereto, and the insured member shall retain only those rights incident to any uninsured portion of his account."
Section 405 of the bill also would amend the present section 406(b) of Title
IV of the National Housing Act by deleting all reference to the Corporation paying the valid creditor obligations of the defaulted association. The deleted language is both ambiguous and superfluous since the Corporation in any event
would be obligated to pay all creditor obligations of the defaulted association,
out of such institution's assets, when it acts as a liquidating receiver; however,
the Corporation would not necessarily pay such obligations if it merges the association in default with another existing association or with a newly organized
Federal association.
(Section 405 also would add the following sentence to the end of section 405(b)
of Title IV of the National Housing Act:
"Upon the payment of insurance by the Corporation to the insured members
of the institution in default, the Corporation shall became entitled to interest
on the withdrawable or repurchasable amount of the accounts surrendered and
transferred to it, computed at a rate determined by the Federal Savings and




99
Loan Insurance Corporation, as of the date of default, based upon the average
market yield on the Federal Savings and Loan Insurance Corporation's investments in obligations of, oir guaranteed as to principal and interest by, the United
States, commencing upon the date of default and continuing until the date or
dates on which the Corporation's claim for the aggregate withdrawable or repurohasaible amount of all such accounts is paid in full by the conservator,
receiver, or other legal custodian of such institution: Provided, That such rate
shall not be less than the rate determined toy the Secretary of the Treasury
taking into consideration the current average market yield on outstanding
marketable obligations of the United States of comparable maturity, adjusted
to the nearest one-eighth of one per centum: and provided further. That no such
interest shall be payable to the Corporation until payment or provision for payment has been made with respect to the expenses of administering the institution in default, including tax liability, and all creditor claims against such institution, including the full withdrawable or repurchasable amount of all
account claims."
This provision is declaratory of the present law but the inclusion thereof in
Title IV of the National Housing Act is deemed advisable in order to avoid in
the future unnecessary litigation concerning the matter of the type involved in
past receiverships. Said provision also is intended to make clear that the obligation to pay such interest to the Corporation becomes a continuing liability of
the insured association upon its default even though the interest is not payable
until payment or provision for payment has been made with respect to the
specified expenses and other creditor claims. In order to achieve uniformity and
consistency in the event of receiverships in different States, such interest is to
be paid to the Corporation in accordance with the formulae stated in the last
quoted sentence. These formulae are consistent with OMB Circular A-70 and
are commonly employed in other Federal statutes. In the event of a surplus,
other creditors of the association in default, including the holders of its uninsured accounts, also would receive interest on their claims, but at the rate or
rates allowable by governing law or regulation.

Mr. BOUSSELOT. Mr. Wille, you mentioned in your statement on page
23 and commented already on the some 30 States that already pledged
securities against State deposits and mentioned that one alternative
to this bill would be if the various States that do not now have laws
would maybe improve the criteria and upgrade their laws. I wonder
if another alternative might be to exempt in this bill, should it go
through, those States that have adequate laws requiring backing to
this kind of security.
In other words, States like California, for instance, have a very
stringent requirement.
Mr. WILLE. Even if this proposal were to be passed in the language
of sections 25 and 26, the States would be able to control the repeal of
any pledging requirements that are now on their books, because what
you are talking about is public deposits of the State and local governments within that State.
Mr. EOUSSELOT. But another alternative would be to exempt those
States that have a higher criteria.
Mr. WILLE. Such an exemption might be difficult to draft since many
of the State laws imposing pledging requirements apply only to the
extent such deposits are not covered by Federal deposit insurance.
Mr. EOUSSELOT. Thank you. I have no more questions.
Mr. BARRETT. Mr. St Germain.
Mr. ST GERMAIN. The Home Loan Bank Board has issued regulations on its own on conflict of interest, some of which seem to be a
little more stringent than what is proposed in H.E. 5700.
Incidentally, I am a cosponsor, not that I agree with each and
every section of the act, but I cosponsored it so that we could have
the hearings and delve into this.




100
In view of the fact that you have propounded these regulations,
would you have any objection to these regulations being considered
as amendments to H.K. 5700, your particular regulation on the conflict of interest ?
Mr. MARTIN. Mr. St Germain, if you will indulge me, I would like
to refer back to previous testimony with regard to the great amount
of time that the staff and the Board and our institution have spent on
the subject in the last 2 years.
We have considered that the present regulations are the best job
we can do at the moment, although not the last such issuance, but we
have not had time to observe the administration of and implementation of these regulations in the field.
I would respectfully ask for some period of time to check out and to
test how they apply. It is the best job we can do, but it may not be,
even so, an adequate job.
Mr. S T GERMAIN. Under your new regulations on conflict of interest
there is a regulation prohibiting affiliated persons from granting loans
on prior condition, to wit, the borrower contract for interest, legal or
real estate services and what have you, prior to—with particular firms
as a condition prior to the granting of the loan.
Mr. MARTIN. AS a condition of that loan, yes.
Mr. S T GERMAIN. HOW can we prove that this prior condition
existed? Wouldn't it be better in essence to say thai/ any such activities are prohibited, both before as a prior condition, or after the
loan is granted or approved, thereby saving you the almost impossible
task of proving that a prior condition existed ?
Mr. MARTIN. In some cases this is a contractual matter in which the
proof lies in the terms of a contract, so-called conditional commitment.
Mr. S T GERMAIN. Unless you've got actual documentation—for
instance, how can you prove that on insurance? You can't insure a
house before you buy it, right ?
Mr. MARTIN. Our general counsel, Arthur Leibold, is here. Could I
refer your question to him ?
Mr. LEIBOLD. Congressman, as a practical matter there has to be
an agreement ahead of time in order for us to bar or ban the situation.
If someone voluntarily comes in after a commitment and takes out
a policy of insurance, that should not be barred, that would not be a
tie-in under any Federal or State statute.
Mr. S T GERMAIN. That makes sense, but by the same token how
can you document there was a condition prior to issuance of the loan ?
As I say, you cannot insure the house before you own it, correct ?
Mr. LEIBOLD. But, you can in many States. You should take out
a policy of insurance before you sign the agreement of sale.
Mr. S T GERMAIN. On the date that you pass the title ?
Mr. LEIBOLD. N O ; the day you sign the agreement of sale. In some
States, you have an interest the moment you sign the agreement of
sale, and typically the agreement of sale may be conditioned on
whether or not you get a commitment for a mortgage. So you then
go to your lending institution after you sign the agreement of sale.
Congressman, you are merely talking about the difficulties of proof
which we always have in these matters.
Mr. S T GERMAIN. Could you give us some examples of how you
could document that a prior condition existed ?




101
Mr. LEIBOLD. Well, the typical case would be someone admitting it,
some individual who seeks to borrow money advising the Bank Board
or its examiner that in fact he was required to take out a policy of
insurance from an affiliate of a particular savings and loan. That
would be the typical way.
Or, when we determine that a large percentage of borrowers have
insurance from the affiliate, we will send out an examiner and a lawyer-investigator to talk to the applicants, the borrowers, and find
out if there was, in fact, coercion used.
Mr. ST GERMAIN. Eight. There is a preponderance that would lead
one to believe that there is a possibility of this condition.
Mr. LEIBOLJ). That is correct.
Mr. S T GERMAIN. All right.
Mr. Martin, in the Emergency Home Finance Act there was
language adopted by the House to prohibit securities for funds. You
this morning stated you are against the 100-percent requirement, and
this has been alluded to by many of the previous members and you
have discussed this. But at that time your Office of General Counsel
assured the conferees that you had the authority to issue the required
regulation that this would be done and the conferees in their report
directed you to do so. Have these regulations in fact been issued?
Mr. LEIBOLD. Congressman, the regulations have not been issued.
The Office of General Counsel of the board has issued an opinion that
pledging of collateral or security for public deposits is appropriate.
But the difficulty is you run into the laws of the 50 States which do
not allow public deposits in savings and loans, even though pledging
of collateral is authorized. They typically allow those deposits to be
made in commercial banks or in institutions up to the insured amount.
In neither situation would our regulation be of any utility
whatsoever.
Furthermore, there are other complications. If there has to be collateral, then those funds which are pledged are not additional funds
that go into housing. So you merely have a $100,000 deposit, for
example, coming in but the pledging of collateral in the equal amount
which doesn't give $1 more to housing.
Mr. ST GERMAIN. This will be directed to both of you and you can
answer it in writing afterward.
It seems to me historically that the function of lending institutions
and banks is to take money from depositors and place that money
in sound investments for as good a return as possible.
Now we get into the new twist which is the equity position, more
popularly known as a piece of the action. Develop from that, No. 1
step, a sound investment for a good return. Then the next thing
was that the lending institution requires that they participate in some
of the profit so they not only get the interest on the loan but, in addition, they get a profit.
I am thinking primarily of large office buildings, shopping centers,
and what have you. Then when we get into tight money, lo and behold,
no longer is it merely a piece of the action as originally we understood
it, but the new twist is that the end of the term of the mortgage the
lender then owns the entire property, whether it be the office building, the commercial property, or the shopping center.
60-299—71—pt. 1




8

102
We say to oneself we have strayed too far afield from the original
purpose of the bank. To take in deposits and to lend money, because
here the lending institutions are in a great position. They lend the
money, they get the interest. They get a part of the profit as an
equity position. At the end of the term, if it is a sound investment
and sound loan, the mortgage is paid off and they own it.
I would ask you to address yourself to this in your written replies,
and unanimous consent—I am wondering if we will all have an opportunity to file additional questions with these gentlemen?
Mr. BARRETT. I think that was stated earlier. You will answer
questions.
Mr. S T GERMAIN. Well, I will ask that in case it wasn't asked, Mr.
Chairman.
Mr. BARRETT. That will be done, and I am sure the witnesses will
agree to answer any written question by any members of the
committee.
(The following are written questions submitted by Mr. St Germain to Mr. Wille, along with Mr. Wille's answers:)
Question A. Where giveaways are employed, would you agree that to protect the
depositor:
(1) The fair market value of the giveaway item should be disclosed?
(2) The annualized interest rate for the additional amount of deposit should
be disclosed?
For example, if a fry pan of $20 in value is given for new accounts of $500
minimum or $500 additions to existing accounts, this would be Wo/year if the
money were required to be deposited for one year, but less than 2% compounded
annually if the amount were required to be deposited for 2 years.
Answer. We would answer "no" to both parts of this question.
With respect to (1), if "fair market value" means retail price, this varies
extensively on each item and a bank might well find it impossible to state a single
price for an item which represented all fair market values. This is one of the
reasons the Corporation uses wholesale costs in its regulations which limit giveaways to merchandise, the wholesale cost of which is under $5 if the deposit is
less than $5,000 and $10 if the deposit is $5,000 or more.
With respect to (2), the Corporation does not believe that merchandise of
nominal value should be considered interest and would not support legislation
which would translate the cost or value of such merchandise into annualized
interest terms.
Question B. Would you favor "truth in depositing" legislation along the lines of
truth in lending or truth in packaging?
Answer. The Corporation would favor full disclosure to each depositor of all
terms of a deposit, including the interest rate and the circumstances under which
such rate can be changed after deposit.
Question C. Do you feel that the deposits which financial institutions obtain
from giveaways outweigh the disadvantages of possible quick withdrawal from the
institution when another (competing) financial institution offers a more attractive giveaway? In short, funds attracted by giveaways may actually be
leading the bank into a false sense of liquidity.
Answer. We have no supervisory evidence which indicates that any significant
share of the deposits attracted by giveaways jumps from bank to bank as additional giveaways are offered by competing banks. We also have no evidence that
any bank has failed or become a supervisory problem because it has given away
merchandise of nominal value to attract deposits.
Mr. BARRETT. Mrs. Heckler, you have been called out and we don't

desire to have a beautiful woman of this committee to not ask questions. I am sure Mr. McKinney won't mind. We will recognize you now.
Mrs. HECKLER. Thank you very much, Mr. Chairman. You are very
kind.




103
Mr. Wille, I want to be sure I understand your position in regard
to interlocking directorates. Is it your position we shouldn't adopt
a complete prohibition, as in H.E. 5700, but limit them among institutions in specific geographic localities where institutions would be in
competition; is that a correct statement of your position ?
Mr. WILLE. I think it is too brief a statement of the position of the
corporation, Mrs. Heckler. Eight now^, in statute law on the Federal
books, section 8 of the Clayton Act does prohibit certain interlocks
involving member banks of the Federal Reserve System.
We believe that possible abuses in the competitive arena between
competing financial institutions do warrant a statutory prohibition,
and that is the reason we are recommending changes and a broadening
of section 8 of the Clayton Act.
With regard to other types of interlocks which H.R. 5700 also covers,
involving nonfinancial institutions, we would recommend that there
be an administrative authority to deal with these matters on the part
of the three Federal bank regulatory agencies and the Federal Home
Loan Bank Board. This would allow us to take into account variations
in particular conditions or situations wThere perhaps the outright prohibition now in H.R. 5700 would have otherwise applied.
Mrs. HECKLER. YOU referred to possible abuses. Have you in your
experience seen any actual abuses ?
Mr. WILLE. AS I indicated in an answer to an earlier question, the
facts that we have wThere there may have been some abuses are limited
to two situations: Where there are interlocks between competing financial institutions and in some cases where a particular director of a
bank is also a borrower of the bank and loans have been made or are
made on certain terms not justified by the credit standing of the borrowing company.
We think the latter can be handled by regulation, but that the
former is susceptible to a general statutory prohibition along the lines
of section 8 of the Clayton Act.
Mrs. HECKLER. I wondered about the actual application of the prohibition against interlocks between financial institutions and business.
It would seem rather difficult in small communities to have competent
members of the board of a bank chosen if all businessmen are excluded
by virtue of the board prohibitions of this particular act. Would vou
give your judgment on this ?
Mr. WILLE. In some communities, we believe that could easily be
the case where there is such a scarcity of talented management for
these directors' spots. That is why we recommend some limited administrative discretion in allowing exceptions (to a more general statutory prohibition.
On the other hand, we are mindful that particularly in smaller communities there can be the most adverse effects of interlocks, in restricting competition, because the customer doesn't have a wide choice of
facilities for banking services or financial services. It is a question of
weighing those two out and we would recommend that that be done
by an administrative approach rather than by the outright prohibition now in H.R. 5700.
Mrs. HECKLER. Mr. Martin, would you care to comment on that last
question ?




104
Mr. MARTIN. Yes. We would join with the corporation in our recommendation and (position that the matter of interlocking directorates be
one of regulation. We recognize, as the Congresswoman has indicated,
that in the smallest communities there may be a positive value to be
obtained from savings and loans directors or commercial bank directors serving on another class of institution's board of directors.
Mrs. HECKLER. Thank you, Mr. Chairman.
Mr. BARRETT. Thank you, Mrs. Heckler.
Would the gentleman from Texas desire to be heard or ask some
questions ?
Mr. GONZALEZ. I appreciate this opportunity, Mr. Chairman, if I
may have it.
Mr. BARRETT. YOU may do so.
Mr. GONZALEZ. Thank you, sir.

Mr. Wille, with respect to the bill introduced, known as H.E. 3287,
the main intent being to prohibit the acquisition of bank interest or
shares through the hypothecation of other bank shares or related
transactions, I notice that in your reply to Chairman Patman, who
asked for an opinion on the bill, your reply was 100 percent negative
as has been most of the reaction from many of the banking interests,
particularly those in States that permit chain banking and the like.
Now, I can understand the rather severe language of my bill. It
is simple, but it is to the point. Of course, I know better than to think
that there is such a thing as a perfect bill. But I can't understand a
total negative readtion or attitude to what I consider to be an area
of dire need for reform or some measure of control. For example, in
reply to the request made by two members of this committee during the
time you testified the last time, one was a request to outline the type
of management practices that were common characteristics in the 19
bank failures, and your answer to that was characteristic of bold
management with respect to the Sharpstown State Bank, included
self-serving transactions through extension of a large volume of questionable loans which exceeded reasonable amounts to related interest,
liberal loan policies, ineffective collection practices, disregard for requirements and regulations, the maintenance of unsound investment
policies, and so forth.
But then a request was made relating to the history of the regulatory agencies' experience with respect to the Sharpstown State Bank,
on March 23, 1968, with concurrent State authority examination. The
response was that conditions improved; but information obtained
after that report was that banks were accepting brokerage certificates
of deposits and related loans, and that loans of about $22 million were
granted to finance almost the entire purchase price of three other
banks, leading to the continuation of "other problems" status.
Then 2 months later, May 7, 1968, FDIC examiner visited the bank
to investigate the above-mentioned loans and other loans and another
loan for $850,000 to finance the acquisition of majority interest in a
bank in Illinois.
Now, Mr. Wille, don't you feel that those of us interested in this
type of legislation are entitled to some constructive suggestion about
regulating this practice of acquisition of a bank by another bank,
which is definitely something with which this committee and the Con-




106
gress has been charged with since at least 1964 as a real problem area ?
Mr. WILLE. Mr. Gonzalez, I think that we should go back to the
actual wording of your proposed bill w\hich would prohibit any insured bank from making any loan to provide for the purchase of stock
in another bank. It is an outright prohibition and isn't limited to this
area of acquisition of the controlling block of stock of an existing
bank.
I pointed out in my letter that the broad terms of the prohibition
are such that, even in your home State of Texas, it would very severely
limit the chartering of new banks—banks being organized to serve
the convenience and needs of the people in Texas. There is no doubt
about it but that w^hen bank loans are made for the acquisition of
existing companies, whether they are banks or anything else, there
are going to be certain people, particularly incumbent management,
that are very unhappy with this particular development.
We recognize that there is an area of abuse here where bank loans
are made for the purpose of allowing some "insider"—as was the
case in Sharpstown, for example—to acquire control of other corporations and to use banks' funds for personal gain. We believe that these
are more susceptible to specific administrative reaction with individual institutions than the blanket prohibition you have suggested in
your bill, PI.R. 3287. It isn't that we are unsympathetic to the problem
of misuse of bank funds for acquisition loans which end up to the
personal gain of an "insider." I think where we part company is this
question of the broadness of the prohibition contained in the language
that you propose.
Mr. GONZALEZ. Well, this is what I am interested in learning. What
would be the alternative ? How wrould the language be refined here ?
Mr. WILLE. My letter to the chairman included several suggestions
in lieu of a complete prohibition. In pertinent part, for example, it
stated that:
To correct abuses that might arise from the speculative aspect of some bank
stock purchase loans, remedial legislation might take the form of an authorization for the appropriate banking agency to promulgate regulations with respect
to such loans that might, for example, prohibit 100 percent financing of such purchases by insured banks and require the purchaser to provide a significant portion of the funds necessary for the acquisition being considered. Such regulations
might also include a prohibition against the extension of credit on terms more
favorable than those usually charged for financing the purchase of non-bank
securities or on terms which explicitly or implicitly require the deposit of bank
funds with the lending institution.
As I indicated to your Committee during the course of my testimony on
March 9, 1971, changes in the remedies available to the regulatory agencies
when a cease-and-desist order is violated would materially assist the agencies in
curbing a variety of unsafe and unsound banking practices, including those that
might arise following a change of control financed by bank stock purchase loans
extended by another bank. Section 7 of the Federal Deposit Insurance Act, as
you know, requires the president or other chief executive officer of an insured
bank to report a change in control of the bank to the appropriate banking agency
promptly after he has knowledge of such a change. Alerted by this report, the
bank regulatory agencies review closely, through regular and special examinations, any changes in management policy that might follow. A change in the
cease-and-desist remedies available to the agencies could significantly assist the
Corporation in taking timely and effective action where changes in management
policy indicate that prompt correction is required.




106
I have tried to indicate, however, that this is a very difficult area
for a statutory prohibition. I think it is more susceptible to regulatory
reaction on specific loans and specific lending policies of a given institution. I think specific corrective action should be left to the regulatory agency.
Mr. GONZALEZ. Let me interrupt you right there. Here is a bank that
obviously was in trouble, according to the history of the regulatory
agency, and here is a $22 million item involving loans from that bank
for acquisition purposes of three other banks. Now, what could the
regulatory agency have done there that it didn't do, but would have
done if it would have sufficient statutory authority or regulatory authority; and if it did have the authority and didn't invoke it, well,
that is something else. But if it doesn't have it, what is the responsibility of the Congress to see to it that you get it ? I know this is a very
difficult theory, and I am not interested in over regulating anybody.
But I think the whole approach philosophically has been from both
the congressional and regulatory standpoint to look upon this as being
for the convenience and protection of bankers and banking, whereas
really it is the public interest that we should be serving, not the banking industry. We are not here to serve the purposes of the banking industry. We are not here to do it. We are here to serve the people.
What I want to know is why not, if the regulatory authorities didn't
have the authority, why not and what can we do about it ?
Mr. WILLE. Mr. Gonzalez, I will be glad to elaborate on the particular problems of the Sharpstown State Bank, as I did in the March 9
hearing. The most significant bank stock loans to which you refer,
however, were repaid well before the bank closed. It was my understanding that your bill arose out of the Gross National Bank situation,
not Sharpstown.
Mr. GONZALEZ. Not necessarily. Let me explain my position on that
one. I don't know whether the acquisition practices or pattern of the
people buying or attempting to buy is good, bad, or indifferent. There
we are charged with knowledge. Here I have it in my own backyard,
and I had constituents come in and saying you are a member of this
committee, we fear this, we fear that. I have not come to take the position that it is good, bad, or indifferent. The protestors, if you want
to call them that, brought out some history involving one of the men
who was attempting to get on the board, and there again we refer to
the proper regulatory authorities. But we are charged with knowledge
that an institution that has been chartered for more than a hundred
years and is a national bank. I guess, at least a century, is about to be
taken over through the use of resources from a large bank in a neighboring large city of Houston, and we think we have a continuing responsibility to make sure that the same thing doesn't happen here in
this acquisition that will destroy the basic intention of the charter
given to Groos National Bank to begin with. If that is the case then
we ought to stop chartering. Let's just get new banks through acquisition tactics. Why have chartering ? Why go that route ?
If we are going to have the purpose of chartering serve the statutory intentions, then I think it is our clear duty to define how we are
going to regulate these practices that we think we are on notice as
being inherently dangerous, potentially dangerous to the main reason
why a bank has been chartered.




107
Mr. BARRETT. The time of the gentleman has expired.
Mr. GONZALEZ. Well, I will ask for the same privilege as my colleague, Mr. St Germain, and ask unanimous consent that we submit
questions in writing and offer a chance for Mr. Wille to answer more
fully.
Mr. BARRETT. That may be done, and I think the witness have
agreed to answer those in writing. Mr. Bees.
Mr. EEES. Yes. I would like to ask several questions on the bill.
I don't see too many problems with section 2 as regards banks, because most escrow companies and such can be owned by virtue of the
one bank holding company, and the one bank holding company exception is in the bill.
But when you come to the savings and loan associations, I think
what this would do would be to treat mutuals in one manner and to
treat stock companies in another manner, because a stock company
can have a holding company and through the holding company you
can have all these financial operations such as appraisal, escrow, and
insurance. I think if we passed the restrictions on mutuals that it
would put stock companies in a far superior position to the mutual
companies.
Now, Mr. Martin, in your bill, Housing Institutions Modernization
Act of 1971, do you have a proposal for conversion of Federal mutuals
into stock companies. ?
Mr. MARTIN. Yes, we have the provision in section 101 of the act
to which the Congressman alludes, both the statutory language which
would permit new chartering of Federal stock institutions and the
conversion into a Federal stock form from a Federal mutual form.
Mr. REES. Then it is my opinion if we are to approve section 2 that
we would probably do best to amend into H.R. 5700 at least rpart of the
Housing Institution Modernization Act of 1971 which w ould allow
conversion so that a Federal institution could then have the advantage
of a holding company so as to hold escrow appraisal and insurance
companies within the group.
Mr. MARTIN. I think it would have that effect, yes, sir.
Mr. EEES. Let me ask another question.
The bill reads that if a person is a member of a board of directors
of a company and the bank has more than 5 percent of that company's
stock, which could be in a trust, that that would be a conflict and a
member of the board of directors would have to resign. This is my
interpretation of section 8. Isn't this rather difficult? Wouldn't you
find in certain situations for example, if a bank controlled as trustee
a major stock portfolio of a company, don't you think it might be a
good idea if that company might have some type of representation
on that bank's board ? It seems that a person is not allowed to protect
their interest as to what the bank might be doing. I just bring that up
as a point.
There is another amendment in section 9 which says you can't have a
member of a bank on the board of directors of another company where
substantial financial relationship exists. I can see the situation of
where a bank might loan $50 million to Lockheed Aircraft and they
would not be able to have a member of that bank on the Lockheed
Aircraft board. Now, I think the bank has a substantial interest to
protect if they have a big piece of the financing of a company.




108
Don't you think the bank has the right to protect the investment ?
The banker approves the initial loan, but I think there is the problem of what happens to that money and how it is spent.
Mr. WILLE. I think you have articulated, Mr. Rees, the precise reasons why we oppose the blanket prohibition in section 8 and section
9 of the bill.
Mr. REES. Another question.
I don't like to see the use of equity kickers. I know the building contractors were very unhappy in my district. They couldn't borrow
money so they went to insurance companies and insurance companies
took a big bite out of their operation.
But in the way that the restriction is written in section 14 it would
not prohibit an insurance company or a bank or anybody else from
forming an SBIC, for example, or real estate investment trust and
each of these entities could engage in equity financing. Does section 14
really prohibit equity kickers? Doesn't it mean the lawyers just get
a little more money for setting up a subsidiary corporation ?
There is a section that prohibits a bank from controlling more than
10 percent of the stock in any company. Control means generally
that the bank is acting as a trustee. So let's say that X YZ corporation,
in order to take care of the problems of an estate, takes 80 percent of
its stock which is owned by a family and has a bank administer
that stock as trustee.
Under this it would mean they would have to go to eight different
banks and give them 10 percent of the company and say okay, you
run this as a trustee, here is your 10 percent. The trustee fees could well
eat up that estate. Isn't this a problem again that exists in this bill ?
Mr. WILLE. Yes, it does.
Mr. REES. These are just a few minor items I noticed in reading the
legislation. I think that if we make these outright prohibitions that
there are going to be problems while not really solving the inequities,
because you can of course, always go around the barn by forming another type of company, or you go to a convenience of spreading your
action around which really might be against the best interest of the
estate that is being administered by the bank.
I would hope that when we are dealing with this bill, Mr. Chairman,
that we might also deal with the Housing Institution Modernization
Act of 1971, because I think that one needs the other if we are going
to make this a good bill if there is too much of a differentiation between
the mutuals and the State stock companies, I think it is going to hurt
the Federals in terms of their competitive position.
Let me ask just one last short question.
Why are the arguments against full interest of public funds? In
California a bank has to have full collateralization. If they have California school district bonds, for example, $1 million worth, that means
the bank must have $1 million of collateral behind that. If we have full
insurance doesn't that mean that the bank will then be able to use
that $1 million for lending in other areas ?
Mr. WILLE. That would be the effect of it if the State of California,
subsequent to the passage of this kind of legislation were to repeal
its pledging requirements, or it is conceivable that their present law
is written in such a way that it only applies to the amount of the deposit




109
not covered by FDIC insurance. I t is true that this would have the
effect in some States of freeing up a significant amount of bank assets
for other investments.
Mr. REES. Well, don't you think this would be good? This would
free that collateral money. It wouldn't just be a statute.
Mr. WILLE. The Federal Reserve Board might have a different view
on that.
Mr. REES. Thank you.
Mr. BARRETT. Thank you, Mr. Rees.
All time has expired.
Mr. Wille and Mr. Martin have been two very fine witnesses, very
edifying this morning, and did a splendid job.
This committee will now stand in recess until 10 a.m. tomorrow
morning.
(The following additional letters were received for inclusion in the
record:)
APRIL 5, 1971.
Hon. WRIGHT PATMAN,

House of Representatives,
Washington, D.C.
DEAR CONGRESSMAN PATMAN : Enclosed is a copy of a letter which I have received from Commissioner Eric E. Wohlforth, Department of Revenue, State of
Alaska, in which he supports your bill to provide for 100% FDIC insurance of
public fund deposits. Please note that Commissioner Wohlforth is willing and
able to participate in any hearings which you may call on this bill.
I, too, am in support of your legislation, and I would appreciate your keeping
me informed of progress on this bill.
With best wishes.
Sincerely,
NICK BEGICH, Member of Congress.
STATE OF ALASKA,
DEPARTMENT OF REVENUE,

Juneau, March 30, 1971.
Hon. NICK BEGICH,

Congressman for Alaska,
Longworth House Office Building,
Washington, D.C.
DEAR MR. BEGICH : We note with great interest the introduction of a bill by
House Banking Committee Chairman Wright Patman (D-Texas) which apparently provides for one hundred per cent F.D.I.C. insurance of public fund deposits.
The Department wholeheartedly supports the concept of such insurance. As
you know, the State has over one hundred million dollars on deposit with Alaska
banks constituting by far the highest percentage of State deposits to total deposits of any state banking system in the Union. The requirement of collateral in
the form of United States Government securities, United States Agency securities, or state or local government bonds has to date, inhibited the banking system from lending the funds represented by State deposits generally and in many
areas of critical need, such as FHA and VA mobile home loans.
Full FDIC insurance of public deposits would remove the necessity of requiring
State collateral and would be of tremendous benefit to the State.
I would appreciate a copy of the bill introduced by Representative Wright
Patman and periodic indications of its progress. This matter is of such vital
concern to this department that we would stand ready to testify at any committee hearing on short notice.
Very truly yours,




ERIC E. WOHLFORTH,

Commissioner.

110
APRIL 9, 1971.

HON. WRIGHT PATMAN, Chairman, House Banking and Currency Committee,
Raybum Building, Washington, D.C.
DEAR MR. PATMAN : Reference is made to H.R. 5700, which is now under consideration by the Banking and Currency Committee. Specifically, I wish to
comment on those sections of the bill which provide for the Federal insurance
of public deposits in both banking and savings and loan institutions.
Officials of the Alaska State government and members of the financial community of Alaska have been nearly unanimous in their support of the above
mentioned provisions. As a state which has an extremely high percentage of
public deposits within total state deposits, Alaska will benefit greatly from the
liberalized insurance and public deposit provisions. I t will mean the termination
of collateral requirements to insure deposits, and will free financial institutions to make loans in areas of great social need, such as housing and small
business development.
It is my understanding that representatives of the Alaska State government
will be sending more detailed documents of support to your committee, and I
hope they will be persuasive in supporting this legislation. If I can be of any
further help in obtaining information, I would be pleased to do so.
Sincerely,
NICK BEGICH, Member of Congress.
STATE OF ALASKA,
DEPARTMENT OF ADMINISTRATION,

April 13, 1971.
HON. WRIGHT PATMAN, Chairman, House Banking and Currency Committee,
17.8. House of Representatives, Washington, D.C.
DEAR REPRESENTATIVE PATMAN : I t is my understanding that you will begin

hearings on April 19, 1971 regarding House Resolution 5700 which, among other
things, provides for Federal Deposit Insurance Corporation coverage of public
deposits in banks and savings and loan associations. We in the State of Alaska
are exceedingly anxious to have public deposits covered by insurance in order
to dissolve the need for collateral which idles large sums which could be better
used in the economy. Please be assured of our full support in passage of this
important legislative change.
Sincerely yours,
JOSEPH R. HENRI,

Commissioner.

MATANUSKA VALLEY BANK,

Anchorage, Alaska, May 10, 1971.
Hon. WRIGHT PATMAN,

House Banking Committee Chairman,
Washington, D.C.
DEAR MR. PATMAN : The Matanuska Valley Bank has reviewed HR 5700
and particularly sections 25 and 26 on insuring public fund deposits by the FDIC.
Banks in Alaska have a larger percentage of public funds deposited with them
than almost any other state. By the FDIC taking over the insuring of all public
fund deposits it will relieve the banks of the collateral requirements presently restricting these deposits. This bill will enable the banks to more readily handle
the larger volume of loan demand and thereby further the development of the
whole economic structure of Alaska.
We strongly urge the passage of HR 5700.
Sincerely yours,
A. C. SWALLING,

President.

ALASKA STATE BANK,

Anchorage, Alaska, May 11,1971.
Hon. WRIGHT PATMAN,

Chairman, House Committee on Banking mid Currency,
Washington, D.C.
DEAR MR. PATMAN : We are not large by comparison to other banks in the U.S.
but wish to express our concurrence with the recommendation of Frank Wllle,
Chairman, Federal Deposit Insurance Corporation of House Representative 5700
concerning insurance for public units.




11(1
The meaningful recommendation pertains to Sections 25 and 26 of the bill which
Mr. Wille recommends be amended so as to (a) limit such insurance, in the case
of States and political subdivisions, to the funds of public units within the State
in which the financial institution is located; (b) require that the aggregate
amount of funds that could be deposited in banks or savings and loan associations be limited in relation to such criteria as liquidity, total deposts, and capital
and that the Corporation and the Federal Savings and Loan Insurance Corporation prescribe uniform restrictions with respect to such limitations; and (c)
require that the maximum rates of interest or dividends payable on comparable
deposits be the same for all banks and savings and loan associations.
Such legislation simplifies the bookkeeping for the Public Treasurer which is
a savings to the taxpayer and the insurance offers the protection needed.
The Treasurers of Alaska watch their dollars very closely and I can assure
you they negotiate a very tight bargain as far as any profits for the banks.
Very truly yours,
KENNETH C. HUME, President.

(Whereupon, at 12:40 p.m., the committee recessed, to reconvene
at 10 a.m., Wednesday, April 21,1971.)




THE BANKING REFORM ACT OF 1971
WEDNESDAY, APBIL 21, 1971
HOUSE OF REPRESENTATIVES,
COMMITTEE ON BANKING AND CURRENCY,

Washington, D.C.
The committee met, pursuant to recess, at 10 a.m., in room 2128,
Rayburn House Office Building, Hon. Wright Patman (chairman)
presiding.
Present: Representatives Patman, Barrett, Sullivan, Reuss, Moorhead, Stephens, St Germain, Gonzalez, Minish, Gettys, Annunzio,
Bevill, Griffin, Hanley, Brasco, Chappell, Koch, Johnson, Stanton,
Blackburn, Williams, Crane, Rousselot, McKinney, and Archer.
The CHAIRMAN. The committee will please come to order.
This morning, in continuing our hearings on H.R. 5700, 3287, and
7440, the committee is to hear from Commissioner Richard B. Smith
of the Securities and Exchange Commission, the Honorable William
B. Camp, Comptroller of the Currency, and Mr. Alan S. Ward, Director of the Bureau of Competition, Federal Trade Commission.
Commissioner Smith has been involved over the last 2 years or so
with a voluminous study carried on by the Securities and Exchange
Commission into the institutional investor. This study, which literally
runs into thousands of pages, was released just a few weeks ago, and
it has been impossible for a complete analysis to be done of this imHowever, some of the more relevant chapters, such as chapter V
on bank trust departments and chapter XV, which deals with institutional investors and the companies in which they invest, has some
very interesting things to say about commercial banks as institutional
investors. Much of the study confirms the findings of studies that this
committee has carried on in recent years concerning bank trust departments. Without going into detail at this point, the institutional investor study states in summarizing some of its findings that "a relatively
high incidence of interlocking personnel and business relationships
may reinforce any institutional power conferred by shareholdings,
multiply possible conflicts of interest, increase the opportunities for
use of inside information, and—if concentrated among relatively few
larsre institutions and companies—produce anticompetitive effects."
This, it would appear, is an extremely important finding in connection with the legislation before us.
I am sure that all of these gentlemen will contribute significantly to
the committee's consideration of this legislation. Let us first hear from
Commissioner Smith of the SEC, then Comptroller of the Currency
Camp and then from Mr. Ward of the Federal Trade Commission.
You may proceed in that order. Mr. Smith, you are recognized.




(113)

114
STATEMENT OF RICHARD B. SMITH, COMMISSIONER, SECURITIES
AND EXCHANGE COMMISSION, ACCOMPANIED BY PROF. DONALD
E. FARRAR, UNIVERSITY OF PENNSYLVANIA; AND PHILIP A.
LOOMIS, GENERAL COUNSEL, SEC
Mr. SMITH. Thank you, Mr. Chairman.
It is an honor for a representative of the Securities and Exchange
Commission to appear before this committee. As vou know our parent
committee in the House is the Interstate and Foreign Commerce Committee, and we don't usually have the opportunity of being before you.
The CHAIRMAN. May I ask that if you could summarize your statement in 15 minutes, it would be appreciated, and then we will get to
all three of you, and each of the members of the committee will have
an opportunity to ask questions. Your testimony has been made available to them, and it will surprise you to know how they look it over
before they attempt to interrogate you. This morning we have a Democratic caucus at 10 o'clock, and we are in somewhat of a bind. But we
are going to continue the hearings as long as we can.
Mr. SMITH. I will make an attempt to do so, Mr. Chairman.
While this legislation relates primarily to banks, which are generally
not within the jurisdiction of the Commission, your letter of March
18 suggested that several aspects of this bill relate to matters treated
in the Commission's institutional investor study. I am currently appearing in place of Chairman Casey at his request, because Mr. Casey
did not take office until after the institutional investor study had been
completed and transmitted to the Congress, while I have had some
contact with the study during most of its conduct.
I am accompanied here, Mr. Chairman, by Prof. Donald E. Farrar,
of the University of Pennsylvania, who was director of the study
through its completion. The study was primarily an economic study,
and since Dr. Farrar, unlike myself, is an economist, I thought he
might be better able to answer any questions with respect to the
economic aspects of the study. And he is here for that purpose.
I am also accompanied by the Commission's general counsel, Mr.
Philip A. Loomis.
The scope of the institutional investor study embraced banks, and
particularly the operations of the bank trust departments were studied
in some detail. As the entire text of the study only became available
last week, as you indicated, the Commission has not yet consulted
with Federal bank regulatory agencies concerning those portions
of the report that relate to banks. We feel that until such consultations, our conclusions in this area, which are initial, must necessarily
be considered preliminary.
Turning now first to H.E. 3287, this bill prohibits banks from making loans for the purpose of purchasing their own stocks or stocks
of any other banks. While banking policies may justify these prohibitions, I only mention in passing that this legislation would modify
the regulatory scheme adopted by the Board of Governors of the
Federal Keserve System pursuant to section 7 of the Securities and
Exchange Act of 1934.
H.E. 3287 would in effect prohibit an investor from purchasing the
securities of any bank on margin by a loan from the bank, although
under the Board's regulations the investor could purchase securities of




115
any other type of corporation. The bill apparently would not prohibit an investor from purchasing securities of banks on margin if
the loan were from a broker-dealer instead of a bank. And as you
know, most broker-dealer loans in that respect as hypothecated with
banks.
With respect to H.B. 5700,1 would first note generally that this bill's
definition of financial institution includes most banks, insurance companies, and registered broker-dealers. But it excludes registered investment advisers and registered investment companies, two of the
most important types of financial institutions in terms of equity
investing.
While at this time legislation might be considered with respect
to one type of institution, the Commission in its letter of transmittal
accompanying the study indicated that presently the burden of disclosure at least falls very unevenly on institutions. The problem of
institutional investors are not unique to a single type of institution.
It may prove more desirable to develop at the outset a consistent regulatory approach applicable to all institutions deemed appropriate.
I do not propose to discuss the matter of insurance coverage on
deposits of public funds in insured banks, which does not fall within
our Commission's jurisdiction, nor was it examined by the study.
The study did not deal specifically with personnel interlocks
among financial institutions, the area addressed in sections 2 through
5 of H.K. 5700. Sections 7, 8, and 9 of H.E. 5700 deal with a different
type of interlock, that is, vertical relationships between certain
enumerated classes of institutions and corporations for which the
financial institution manages an employee pension or welfare plan
or owns 5 percent or more of the voting stock of the corporation, or
where the financial institution has a substantial and continuing relationship with the corporation with respect to loans or extensions
of credit.
The study focused principally on the incidence of multiple shareholdings, personal and business relationships between institutions and
companies. I did not deal with the lateral relationships such as
common director ties between banks.
Data was analyzed on shareholdings, personnel ties, employee benefit plan management, loans and bank deposits, concerning the 50
largest banks, the 21 largest property and liability insurance companies, the 26 largest life companies, and the 70 or so largest investment advisory complexes.
Two initial conclusions emerge. First, that banks do have a greater
number of personnel and business ties with portfolio companies in
absolute terms than do either insurance companies or investment advisory complexes.
Second, it appears unlikely that the observed incidents of multiple
relationships in the case of banks occur entirely by chance. Banks are
historically more likely to have more than one relationship with any
particular company. The relationship between bank deposits and bank
loans was found to be particularly strong, although the study data
provides no basis for concluding that any one relationship caused the
other.
The multiple relationships exhibited by banks is perhaps not surprising in view of the fact that perhaps more so than any other insti-




116
tution, banks are engaged in providing a variety of financial services
both on the investment side and the commercial side.
Neither the study nor the Commission concluded that the existence
of the multiple relationships was undesirable per se. Indeed, specific
restrictions to curb possible abuses flowing from multiple relationships such as the Commission's rule 10b-5 can and have been devised.
Our attention has been directed to an aspect of section 8 of H.R.
5700 which may create unintended difficulties.
As noted, that section prohibits any officer, director, or employee
of any one of the seven types of financial institutions enumerated in
that section from serving as an officer or director of any other corporation if the financial institution he serves holds more than 5 percent of
the voting stock of such corporation.
There is an exception in section 8(b) for persons holding positions
within a group of companies which are part of a bank holding company system or a savings and loan holding company system. There is
no comparable exceptions for companies which are subsidiaries of
either insurance companies or registered broker-dealers in securities,
both of whom are treated as financial institutions for the purposes
of section 8.
A specific case called to our attention, and which is not uncommon, we
believe, is the situation where a broker-dealer has a wholly owned
subsidiary which is engaged in either managing or underwriting
mutual fund shares, or in providing investment advice or furnishing
other similar services. Taken literally, section 8 (a) would prohibit an
officer, director, or employee of a registered broker-dealer from serving
as an officer or director of any wholly owned subsidiary of that
broker-dealer which engages in the activities above mentioned.
While we are not experts in the insurance industry, we also understand that it is also not uncommon for insurance companies to have
subsidiaries engaged in various activities such as offering and selling
insurance policies or distributing shares of variable annuities sponsored by the insurance company.
We understand that section 8 was designed, in part, to limit concentrations of power by restricting personnel interlocks between financial institutions and independent corporations in which they have a
stock interest and that it was not intended to restrict parent-subsidiary
relationships. Section 8(a) (4) in connection with section 8(b) so indicates, but do not resolve the problem as to parent-subsidiary relationships in the case of groups of related financial companies other than
those in bank holding company systems or in savings and loan holding company systems. It is our feeling that this result was probably
not intended and that the committee may wish to correct it.
Section 12 of H.E. 5700 would require insured banks annually to
report their holdings of particular securities under investment management to the Federal Deposit Insurance Corporation. The Commission's Institutional Investor Study concluded that there were significant shortcomings in existing patterns of institutional reporting of
security holdings and^ security transactions, such as duplicative reporting to different agencies, lack of uniformity in reporting requirements,
and failure to require reports concerning holding of and transactions
in securities of specific companies.




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The scope of H.R. 5700 disclosure would be considerably more narrow than those deemed appropriate by the Commission. First, H.R.
5700 would require only annual reports of holdings, while Commission
proposals would encompass transactions in securities as well.
Second, H.R. 5700 is limited to disclosures by federally insured
banks, though there is no logical reason why expanded disclosures
would not be extended to all types of institutional investors.
Third, R.H. 5700 contemplates filings only with the FDIC, while
Commission proposals envision the SEC functioning as a central depository for information about security holdings and security transactions by all types of institutions.
Finally, while H.R. 5700 would require disclosure of the reporting
banks' voting rights with respect to securities under management, and
the manner in which proxies are exercised, if at all, the Commission
has proposed further that institutions state their policies on involvement in corporate affairs. In this way both portfolio companies and
institutional beneficiaries might be informed of this important aspect
of institutional investment management.
I think it important to point out, Mr. Chairman, that the Commission is proposing general rulemaking authority in this area to eliminate possible burdens, de minimis considerations, and the problems
that are created by inflexible statutory requirements where they serve
no appropriate purpose, and where other systems of reporting could
achieve that purpose and could be adopted with the flexibility of
rulemaking power.
Section 13 of the bill would prohibit any federally insured bank
from holding under investment management more than 10 percent of
any class of stock for which a registration statement has been filed
under the Securities Act of 1933, and from holding its own stock or
the stock of its parent company.
Data from the study show that banks may have potential economic
power to exercise significant influence over some of the companies
whose securities comprise their portfolios. Aggregate holdings of bank
trust departments constitute often more than 20 or 30 percent of the
outstanding shares of many large companies, that is bank trust departments in the aggregate. However, the study has also found that
it is relatively rare that a single bank will hold a very substantial
position in any one company, and in fact most banks surveyed have
self-imposed limitations on the amount of such holdings.
The study found that as a group institutions generally voted with
management. Banks voted negatively and deliberately abstained from
voting more ferquently, however, than did other types of institutions,
although not to any great extent. In addition, the study found evidence
of widespread institutional participation in corporate takeovers.
The Commission plans to deal with these latter problems through
the use of its existing rulemaking powers.
The Commission has not reached any decision as yet on recommending generalized restrictions on the size of institutional holdings. We
do not see any basis at this time for generalized restrictions on the
volume of institutional trading or the size of institutional transactions.
There do appear to be several reasons weighing against flat percentage limitations on institutional holdings. For one thing, institutions, particularly banks, may "inherit" large blocks of securities to
60-299—71—pt. 1




9

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manage, and the compelled diversification of such holdings may be
both difficult and harmful to beneficiaries as well as other shareholders.
Second, percentage limitations may work to the disadvantage of
beneficiaries by forcing purchases of less desirable stock or undesirable dispositions of securities.
Third, it is questionable whether a percentage limitation is needed
where the institution maintains a rigid separation between its trust
department and its commercial operations, and there is no intent or
effort to exercise control over portfolio companies.
Should nevertheless, limitations of the type set forth in section 13
of H.K. 5700 be imposed, we question whether the stock encompassed
should be those "for which a registration statement has been fiiled."
Registration statements under the Securities Act of 1933 are not filed
with respect to a class of stock, but rather are limited only to the particular securities being offered and sold pursuant to the statement.
Many publicly held companies do not have registration statements
under the 1933 act in effect at all times.
Accordingly, a more appropriate reference may be made to all companies whose equity securities are registered with the Commission under section 12 of the Securities Exchange Act of 1934, or companies
required to file reports with the Commission pursuant to section 15 (d)
of that act.
While my prepared statement covers additional matters, in view of
the time, Mr. Chairman, I will conclude my summary testimony at this
point in order to permit time for questioning and for the other witnesses
to testify.
The CHAIRMAN. Thank you, sir. And your written statement will
appear as it is in the record. And then if in the questioning all the
points are not covered you may extend your remarks in the record.
Mr. SMITH. Thank you.
(The prepared statement of Mr. Smith follows:)
PREPARED STATEMENT OF RICHARD B. SMITH, COMMISSIONER, SECURITIES AND
EXCHANGE COMMISSION

Mr. Chairman, members of the committee, my name is Richard B. Smith, and
I am a Commissioner of the Securities and Exchange Commission. I am here
in response to your letters of March 18 and April 5 requesting that a representative of the Commission appear at these hearings on H.R. 5700 and H.R. 3287.
While this legislation relates primarily to banks which are generally not within
the jurisdiction of the Commission, the Chairman's letter of March 18 suggested
that several aspects of this bill relate to matters treated in the Commission's
Institutional Investor Study. I am, accordingly, appearing in place of Chairman
Casey at his request because Mr. Casey did not take office until after the Institutional Investor Study had been completed and transmitted to the Congress,
while I have had some contact with thait Study during most of its conduct. I am
accompanied by Professor Donald E. Farrar of the University of Pennsylvania
who was Director of the Study through to its completion. The Study was primarily an economic study and, since Dr. Farrar unlike myself is an economist,
I thought that he might be better able to answer any questions with respect to
economic aspects of the Study. I am also accompanied by the Commission's
General Counsel, Mr. Philip A. Loomis, Jr.
The Committee has requested the views of the Securities and Exchange
Commission ocn two bills which would impose additional regulatory and disclosure
requirements on federally insured banks and certain other types of financial
institutions. H.R. 5700, introduced by the Chairman of the Committee, would
among other things, prohibit certain personnel interlocks; it would require disclosure by insured banks of their holdings of particular securities; it would place




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restrictions on securities holdings and loans by insured banks; and it would
prohibit "brokered" deposits. H.R. 3287, introduced by Representative Gonzalez,
would prohibit insured banks from making loans for the purchase of securities
issued by banks.
I should emphasize at the outset that most of the matters with which these
bills deal are not within the specific jurisdiction or expertise of the Securities
and Exchange Commission. I understand that the Committee is particularly
interested in the Commission's views insofar as they may reflect the results of its
recently comipleted Institutional Investor Study. The Study Report, submitted
to the Congress on March 10, 1971, included the Commission'ls initial conclusions
and recommendations. Some of these conclusions and recommendations, as well
as the underlying analyses upon which they are based, have a bearing on the
proposed legislation now before your Committee. On the other hand, some aspects
of the legislation—particularly those dealing with deposit insurance—were not
the subject of the Institutional Investor Study nor have they otherwise invoked
the Commission's authority or concern. Accordingly, I shall limit most of my
remarks today at a discussion of those provisions of the proposed legislation
which relate to problems considered by the Institutional Investor Study. The
Commission has determined to take no position at this time on the legislation
as a whole. We are happy, however, to provide analyses conducted by the Institutional Investor Study to the extent they are useful in your Committee's
deliberations.
It should be noted that the bills relate primarily to the conduct of insured
banks, insured savings and loan associations and mutual savings banks and the
activities of their managements and their employees. Although most of these
institutions are regulated by other Federal agencies and not by the Commission,
the scope of the Institutional Investor Study, as envisioned by the Congress,
necessarily embraced banks, in particular, and the operations of bank trust
departments were studied in some detail. Certain of the conclusions and recommendations of the Commission relate to banks. We have not so far, however, had
the opportunity to consult with the Federal bank regulatory agencies concerning
these matters since the complete text of the Institutional Investor Study just
became available last week from the Government Printing Office. We expect to
initiate such discussions promptly but until we have done so, our conclusions
with respect to banks must necessarily be preliminary.
BACKGROUND AND DESIGN OF INSTITUTIONAL INVESTOR STUDY

I would like to begin with a few remarks about the background and design
of the Study. The Institutional Investor Study was authorized by Joint Resolution of the Congress and approved by the President as Public Law 90-438 on
July 29,1968. The Commission was authorized to make "a study and investigation
of the purchase, sale, and holding of securities by institutional investors of all
types . . . in order to determine the effect of such purchases, sales, and holdings
upon . . . the maintenance of fair and orderly securities markets . . . the
stability of such markets . . . the interests of the issuers of such securities and
. . . the interests of the public, in order that the Congress may determine what
measures, if any, may be necessary and appropriate in the public interest and
for the protection of investors.'*
One of the most important types of institutions examined by the Study was the
banking industry. The data collected by the Study encompasses equity holdings
of and trading by the 50 largest bank trust departments in the United States.
These banks also provided certain information on their relationships with companies in the capacity of creditor, depository and employee benefit plan manager.
Chapter 5 of the Study focuses on operational characteristics of the bank trust
departments surveyed. It includes analyses of the types of accounts and assets
administered, costs, turnover and activity rates, performance, and compensation.
Chapter 9 includes data of concentrations of holdings in particular securities by
various categories of institutions including bank trust departments. Chapter 15
of the Study examines the impact of institutions, including bank trust departments, on portfolio companies—that is, companies whose equity securities comprise institutional portfolios. The chapter includes data indicating the extent
to which institutions in the Study's sample hold varying percentages of the outstanding shares of a broad sample of publicly held companies. There is also
an analysis of intercorrelations among shareholdings and certain types of personnel and business relationships linking institutions and companies.




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INITIAL CONCLUSIONS AND RECOMMENDATIONS OF THE COMMISSION

In its letter of transmittal submitting the Study to the Congress, the Commission made several proposals among other things designed to improve the flow
of information to Government agencies and to the public about the securities
holdings of and trading by institutions. Throughout the letter the Commission
stresses the need not only for improved reporting by and regulation of institutions, but for comparable treatment of all types of institutions. For example, in
discussing the need for better disclosures by institutions of their holdings of and
transactions in the securities of specific companies, the Commission noted that
"the burdens of disclosure fall unevenly on institutional respondents."
While we recognize that your Committee is primarily concerned with the activities of banks, the problems dealt with in the proposed legislation are not entirely limited to this one type of institution. H.R. 5700 defines "financial institution" for various purposes as encompassing most banks, insurance companies
and registered brokers and dealers. This definition excludes registered investment advisers and registered investment companies—two of the most important
types of financial institutions, particularly in terms of equity investment. It is,
of course, possible to legislate with respect to one type of institution at this
time, reserving consideration of appropriate treatment of other types of institutions. On the other hand, it may prove more desirable to develop at the outset a
consistent regulatory approach to the problems of institutional investment where
those problems are not unique to a single type of institution.
One of the primary benefits we hope will flow from the Institutional Investor
Study is a more encompassing perspective on the role of institutions of all types
and a delineation of the extent to which the regulatory requirements applicable
to each of them, at least as to their portfolio management, should be uniform.
In his letter of March 18 to the Commission, Chairman Patman stated that
H.R. 5700 covers the followingfivebasic areas:
1. Certain interlocking relationships among financial institutions, and between
them and other corporations;
2. Certain restrictions and disclosures in connection with loans made by financial institutions;
3. The problem of brokered deposits, which has caused a number of bank
failures in recent years;
4. The practice of offering gifts to potential depositors by financial institutions in order to attract deposits; and
5. Expanding insurance coverage on the deposits of public funds in insured
banks and savings and loan associations by 100 percent.
The last item, that is, expanding the insurance coverage on deposits of public
funds, not only does not come within the jurisdiction of the Commission but was
not examined in the course of the Institutional Study and, accordingly, with your
permission, I do not propose to discuss it.
With respect to the third item, the question of brokered deposits, this likewise
is not within our regulatory jurisdiction but certain perhaps related problems
involving bank deposits by securities brokers were considered by the Institutional Study and I will later mention these. I would like to note here, however,
that in the course of general enforcement of (the antifraud provisions of the
securities laws, we have recently come across situations which indicate that
brokered deposits 'may create a situation dangerous to banks and their depositors.
This may be particularly true where brokered deposits are procured by persons
wishing to borrow money from a bank and unable to otherwise provide the desired
compensating balances.
Chairman Patman also referred to H.R. 3287, a bill which prohibits banks
from making loans for the purpose of purchasing their own stock or stock of
any other bank. I believe that in this connection, I should mention the fact that
Section 7 of the Securities Exchange Act grants to the Board of Governors of
the Federal Reserve System authority to regulate the extension of credit for
the purchase or carrying of securities, including securities of banks, and the
Board of Governors under this authority has promulgated Regulation TJ regarding the use of bank credit for the purpose of purchasing or carrying seeurities. This section, as amended by Public Law 91-437, applies to the securities
not only of those banks which are listed on national securities exchanges but
also to the securities of the larger banks which are traded in the over-the-counter
market. H.R. 3287, if enacted, would modify the regulatory scheme provided in
Section 7 of the Securities Exchange Act. It would, in effect, prohibit an investor
from purchasing the securities of any bank on margin by a loan from a bank




121
although he could so purchase securities of any other type of corporation if he
complied with the regulations of the Federal Reserve Board. This bill might not,
however, prohibit an investor from purchasing securities of banks on margin
by a loan from a broker-dealer. There may be reasons of banking policy which
justify the prohibitions contained in H.R. 3287. As to this, I express no opinion
but I did think it proper to advise the Committee of the impact which this legislation would have on the regulatory scheme adopted by the Board of Governors
of the Federal Reserve System pursuant to Section 7 of the Securities Exchange
Act.
I will now turn to the first two areas referred to in Chairman Patman's letter
as to portions of which the Institutional Study may provide pertinent data.
INTERLOCKING RELATIONS

Sections 2 through 5 of H.R. 5700 deal, in effect, with personnel interlocks
between insured banks, insured savings and loan associations and mutual savings
banks with other financial institutions of the same type or of other enumerated
classes such as insurance companies, bank holding companies and registered
broker-dealers. The Institutional Study did not deal specifically with personnel
interlocks among financial institutions although it did consider a larger phenomenon, the trend to integrate various types of financial services in one institution or a group of related institutions. I might note, however, that Section 1$
of the Investment Company Act of 1940 restricts certain personnel interlocks
between registered investment companies and commercial banks, investment
bankers and securities brokers who serve as regular brokers to the investment
company. Section 6(c) of the Investment Company Act, however, authorizes the
Commission to grant exceptions from these and other prohibitions, if and to
the extent it is appropriate in the public interest and consistent with the protection of investors and the purposes and policy of the Act. Whether or not any
similar flexibility would be in order in connection with H.R. 5700 is a matter
which this Committee may wish to consider.
Sections 7, 8 and 9 of H.R. 5700 deal with a different type of interlock or relationship—that is, a "vertical" relationship between enumerated types of financial
institutions and corporations for which the financial institution manages am
employee pension or welfare plan or owns 5 per cent or more of the voting stock
of the corporation or where the financial institution has a substantial and continuing relationship with the corporation with respect to loans or extensions of
credit. The Institutional Study did deal with relationships between financial
institutions and corporations with which they had various types of business
relationships particularly securities holdings.
The Institutional Investor Study examined the incidence of personnel and
business relationships between institutions and companies, including companies
whose equity securities were held and managed by the institution. As noted in
Chapter 15 of the Study Report, "a relatively high incidence of interlocking personnel and business relationships may reinforce any institutional power conferred by stockholdings, multiply possible conflicts of interest, increase the opportunities for use of inside [corporate] information and—if concentrated among
relatively few large institutions and companies—produce anticompetitive effects."
While recognizing that possibly undesirable consequences might flow from
the existence of multiple shareholding, personnel and business relationships
between institutions and companies, the Study focused principally on the incidence of these relationships rather than on the possible consequences themselves—which obviously do not lend themselves to statistical analysis. The
Study was not concerned with "lateral" relationships between institutions—
such as common director ties between two banks. Therefore, its data do not
relate to those provisions of H.R. 5700 which would place limitations upon such
ties. The data do bear on the question of whether there is a systematic intercorrelation between various types of relationships linking institutions and companies.
The institutions surveyed included the 50 largest banks, 21 largest property
and liability insurance companies, 26 largest life insurance companies and 70
largest investment advisers, including advisers to registered investment companies. Data were collected on shareholdings, various types of personnel ties,
employee benefit plan 'management (which includes pension plans), loans and
bank deposits.
The initial conclusions which emerged from analysis of this data are twofold.
First, banks have a greater number of personnel and business ties with port-




122
folio companies in absolute terms than do either insurance companies or investment (advisers. Second, it appears unlikely that the observed incidences of
multiple shareholding, personnel and business relationships in the case of
banks occur entirely by chance. In other words, the Study concluded that unlike
insurance companies and investment advisers, banks are historically more likely
to have more than one relationship with any particular company. The relationship between bank deposits and bank loans was found to toe particularly strong.
This conclusion cannot be interpreted as implying that one type of relationship
necessarily causes or is the result of another relationship—for example, that
stock holdings lead to loans or vice-versa. It •merely establishes the fact that
banks are likely to establish additional types ol relationships with companies
they already "know" through one relationship.
Neither the Study nor the Commission concluded that the existence of multiple
relationships between institutions and companies were on their face undesirable. While the potential problems to which I have already referred are an
inevitable aspect of such relationships, it must be recognized that these problems are in part a result of the fact that banks, more so than other institutions, are engaged in providing a variety of financial services, both investment
services and commercial banking services. Thus, it is not surprising to find that
when banks hold stock in a company, they are more likely also to have a
director on the company's board, to have a creditor relationship with the
company, to serve as depository for the company's funds and to manage the
company's employee benefit plan.
Specific restrictions designed to curb possible abuses flowing from multiple
relationships can be and have been devised. For example, the Commission's
Rule lOb-5 under the Securities Exchange Act would prohibit a bank receiving non-public, material information about a company in its capacity as
creditor from purchasing or selling the company's securities on the basis of
that information.
Our attention has been directed to an aspect of Section 8 of H.R. 5700 which
may create unintended difficulties. As noted, that section prohibits any officer,
director, or employee of any one of the seven types of financial institutions
enumerated in that section from serving as an officer or director of any other
corporation if the financial institution he serves holds more than five percent of
the voting stock of such corporation. There is an exception in Section 8(b) for
persons holding positions within a group of companies which are part of a bank
holding company system or a savings and loan holding company system. There is
no comparable exception for companies which are subsidiaries of either insurance companies or registered broker-dealers, both of whom are treated as financial
institutions for purposes of Section 8.
A specific case called to our attention, which is not uncommon, is the situation
where a broker-dealer has a wholly-owned subsidiary which is engaged in either
managing or underwriting mutual fund shares, or in providing investment advice
or furnishing other similar services. Taken literally, Section 8(a) would prohibit an officer, director or employee of a registered broker-dealer from serving
as an officer or director of any wholly-owned subsidiary of that broker-dealer
which engages in the activities above mentioned. While we are not experts in the
insurance industry, we also understand that it is also not uncommon for insurance companies to have subsidiaries engaged in various activities such as offering
and selling insurance policies or distributing shares of mutual funds or variable
annuities sponsored by the insurance company.
We understand that Section 8 was designed, in part, to limit concentrations of
power by restricting personnel interlocks between financial institutions and independent corporations in which they have a stock interest and that it was not
intended to restrict parent-subsidiary relationships. Section 8('a) (4) in conjunction with Section 8(b) so indicate, but do not resolve the problem as to parentsubsidiary relationships in the case of groups of related financial companies other
than those in bank holding company systems or in savings and loan holding company systems. It is our feeling that this result was probably not intended and
that the Committee may wish to correct it.
DISCLOSURE OF INSTITUTIONAL HOLDINGS

Section 12 of H.R 5700 would require insured banks to report annually to
the Federal Deposit Insurance Corporation their "fiduciary" holdings of particular securities. Thelse reports, which wouM be available for public inspection,




123
would include information on the voting authority of the bank with respect to
each security and on the manner in which the bank exercised proxies.
One of the principal conclusions emerging from the Commission's Institutional
Investor Study was that there are significant shortcomings in existing patterns
of institutional reporting. As the Commission noted in its transmittal letter to
the Congress:
"The scope of information reported often is limited, particularly with respect
to holdings of and transactions in the securities of specific companies; information often is supplied to more than one agency, resulting in unnecessary and
costly duplicative efforts; and in some cases data is supplied only on a voluntary
or confidential basis, limiting both the comprehensiveness and usefulness of
the data supplied."
The Commission also noted that some institutional investors were subject to
more extensive reporting requirements than others. It stated:
"Extensive reports currently are provided by registered investment companies and most large insurance companies; banks, investment advisers and
self-administered foundations, endowments and employee benefit funds, however,
do not now for the most part provide information on holdings and trading in
particular securities to any public agency."
The Commission recommended that gaps in information flows about the scope
and impact of institutional investing be eliminated by amendment of the Securities Exchange Act of 1934 to provide the Commission with general rulemaking authority to require reports and disclosures of security holdings and
transactions from all types of institutional investors, including banks, as to
which the institution has beneficial or investment management discretion. As
the Commission noted:
"Such authorization would permit the Commission . . . to obtain continuing
data for public disclosure and for the production of statistical data or aggregates, to the extent that it deems such data necessary or appropriate."
As a lesis preferable alternative to general legislative authority to promulgate
reporting rules for institutions, the Commission recommended modification of
existing reporting requirements in the Exchange Act to encompass institutional
holdings and transactions involving securities as to which the institution had
either beneficial ownership—the present test—or investment management
authority.
Section 12 of H.R. 5700 appears to be designed to accomplish some of the
purposes embodied in the Commission's recommendations for improved institutional reporting. However, the scope of H.R. 5700 disclosures would be
considerably more narrow than those deemed appropriate by the Commission.
H.R. 5700 would require only annual reports of holdings, while the Commission's proposals would encompass transactions in securities—purchases and
sales—as well. Perhaps more significant is the fact that H.R. 5700 is limited
to disclosures by federally insured banks. There is no logical reason why expanded disclosures should not be extended to all types of institutions.
Furthermore, H.R. 5700 contemplates filings only with the FDIC. We appreciate that the FDIC, as well as other federal and state banking agencies, may require information on bank holdings in order to fulfill its regulatory responsibilities. However, the Institutional Investor Study found that there is already
considerable overlap in reports filed by institutions with various federal and
state agencies. Thus, the Commission's recommendations contemplated that the
SEC, as the agency charged by Congress with the broadest regulatory responsibilities over the public securities markets, would serve as a central depository
for information about securtiies holdings of and transactions by all types of
institutions. The Commission recognized in its transmittal letter accompanying
the Study that it would be necessary to "consult with other regulatory bodies
and interested persons on the form, frequency and content of reports to be
required, and arrangements by which all affected regulatory bodies can share
th^ data reported."
Thus, under the Commission's proposals, all types of institutions, including
banks, would report to the SEC, pursuant to rules adopted by the Commission
after opportunity for public comment. The daita reported would then be available
for use by all other regulatory agencies and, to the extent appropriate, by the
public. As an agency already receiving thousands of reports regarding securities
holdings and transactions from individuals and corporations as well as institutions, the SEC would appear to be the logical focal point for adoption, receipt
and dissemination of broader institutional disclosures.




124
H.R. 5700 would require disclosure not only of securities holdings, but also of
the reporting bank's voting rights with respect to the securities under management and of the manner in which proxies are exercised, if at all. The Commission's transmittal letter accompanying the Institutional Investor Study recognizes that these types of disclosures are appropriate for all types of institutions
which manage investments for others. However, the Commission in most respects
recommended more extensive disclosures than those prescribed by H.R. 5700.
Institutions would, under the Comimssion's proposals, state their policies on
involvement in corporate affairs so that both portfolio companies and institutional
beneficiaries might be informed of this important aspect of institutional investment management. The disclosures would encompass, for example, procedures for
considering proxy materials, any general policy regarding supporting corporate
management, any general policy of abstaining from voting, any general policy
on voting for or against (or not voting on) certain types of proposals, any general policy of participating or not participating in corporate takeover situations,
and any policies regarding business relationships, personnel relationships and
informal participation or consultation with portfolio companies in corporate affairs. As the Commission stated:
"This type of public disclosure would focus the obligation of institutions to act
in the interest of their beneficiaries and lead to their setting up procedures for
systematic attention to questions of stockholder voting."
Thus, the Commission concurs in principle with the disclosure philosophy
embodied in Section 12 of H.R. 5700, but would prefer that the reporting mechanisms suggested both be made more flexible by giving the SEC rule-making
authority and be amplified. They should be extended to all types of institutions,
which would make these disclosures available to other agencies and where appropriate to require them to be made available to the public.
RESTRICTIONS ON INSTITUTIONAL HOLDINGS

Section 13 of H.R. 5700 would prohibit any federally Insured bank from
holding under investment management more than 10 percent of any class of
stock "for which a registration statement has been filed under the Securities Act
of 1933" and from holding its own stock or the stock of its parent company.
The apparent purpose of these restrictions is to prevent banks from obtaining a
position of control in any portfolio company and to preclude bank managements
from perpetuating control through purchases of the bank's own stock.
The Institutional Investor Study did not consider the question of institutional
holdings of their own securities as a means of perpetuating control. The Study
did examine the holdings of the 50 largest bank trust departments—as well as
the holdings of other large institutions—in an effort to determine whether those
holdings constituted sufficiently large percentages of the outstanding shares of
various companies to create a potential element of economic power. The Study,
found that the banks surveyed were the largest institutional holders of its sample
of 800 publicly-held companies, with about $60 billion of the $115 billion worth
of stocks of such companies held by all institutions surveyed as of September
30, 196-0?. All institutions as a group held about 30 per cent of the value of all of
the sample companies. Therefore, based on this sample, one should not be surpristed to find that about one-third of the outstanding shares of any company are
held by institutions. Considering bank holdings separately, one would expect that,
on average, all banks as a group would hold about 18 to 20 per cent of the outstanding shares of a company. However, the Study found that banks—as well
as other types of institutions—tend to concentrate their portfolios in relatively
few stocks. At the same time, the stocks in which bank portfolios are concentrated
tiend to be the stocks of larger companies. The result is that the holdings of bank
trust departments taken together constitute a substantial percentage—often
much more than 20 or even 30 per cent—of the outstanding shares of many
companies, particularly large companies. The same is true, although to a lesser
extent, when only bank holdings coupled with voting authority are considered.
While banks may have the potential economic power to exert significant
Influence over some of the companies whose securities comprise their portfolios,
the Study found that ordinarily it is necessary to aggregate the holdings of
several banks t>efore those holdings constitute a substantial percentage of any
company's outstanding shares. It is relatively rare that a single bank trust
department will hold a very substantial position in any one company. Many
institutions, including banks, have self-imposed policy limitations on the amount
of stock they will hold in any one company; 22 of the 50 banks surveyed by the




125
Study maintained such limitations, none exceeding 10 percent. As the Study
points out in Chapter 15, it cannot be assumed that merely because a group of
banks together have a substantial percentage of a company's stock that those
banks will in fact act in concert to influence corporate policy.
In an effort to determine whether institutions, including banks, do attempt
to influence corporate policy and decision-making through their shareholdings,
the Study gathered data on institutional voting and informal participation in
corporate affairs. While the Study was not satisfied that its efforts produced
reliable statistical evidence of the extent of institutional participation other
than through voting, some general conclusions emerged from the body of data
collected and from Study interviews with institutional and corporate officials.
The Study found that institutions as a group generally voted with management on matters submitted to shareholder vote. Banks voted negatively and deliberately abstained from voting more frequently than did other tytpes of institutions, although not to any great extent. Banks also appear to have more formalized procedures for reviewing proxy materials. Some institutions believed that
informal participation in corporate affairs, such as direct contacts with corporate
management, might be necessary and appropriate under certain circumstances:
for example, when the comfpany requests advice or when the institution is "locked
in" to its holdings because the shares are restricted, as when the amount of shares
held is very large and difficult to dispose of, or sale of the shares might generate
unfavorable tax consequences. In general, however, unless the institution feels
that it has no alternative but to attempt to influence corporate policy, it appears
to regard its role as primarily that of investment manager and will dispose of
the company's shares if corporate management pursues policies with which the
institution disagrees. These institutional attitudes appear influenced in part
by the concern that participation in corporate affairs may be deemed inappropriate by governmental authorities, exposing the institutions involved to additional regulation or litigation.
In the area of transfer of corporate control—or "'takeovers"—the Study found
evidence of widespread institutional participation. Here, unlike ordinary corporate decision-making, the possible benefits to institutional participants may appear to them more clear and certain. The Study found that institutions were
in some cases able to obtain premium prices and other advantages—including
advance notice of an impending takeover bid—that were not made available to
other corporate investors. The Commission proposes to deal with the problems
created by institutional participation in corporate takeovers through the use
of its existing rulemaking powers.
The data and analyses developed by the Institutional Investor Study have not
resulted in the Commission recommending generalized restrictions on the volume
of institutional trading or the size of institutional transactions or in any
decision on a general limitation on the amount of institutional holdings. We note,
however, that in considering a possible flat percentage limitation on institutional holdings there are several reasons which weigh rather heavily against it.
First, institutions, particularly banks, may "inherit" large blocks of securities to manage; for example, the estate of a corporate officer who during his
lifetime held a large position in his employer eomipany, or a foundation created
by the former owner of a now publicly-held corporation or an employee benefit
plan which purchases the shares of the founding or sponsoring company. It
may not be feasible or desirable to diversify such a portfolio very quickly. The
impact of large sales of the securities might harm not only the portfolio beneficiary, but also other shareholders.
Second, percentage limitations may inadvertently cause hardship to institutional beneficiaries and generate conflicts of interest on the part of institutional
financial managers. This may occur when the financial manager is barred from
acquiring a particular stock for trust or other account under management, or is
required to dispose of shares out of one or more managed accounts, solely because of the overall percentage limitations on the amount of that companies
stock that may be held. If the institutional manager otherwise considers the stock
a desirable investment, the result may be to disadvantage the beneficiary by
forcing purchase of a less desirable stock. Undesirable tax consequences may also
result if shares must be disposed of.
In addition, the financial manager may be forced to choose among accounts
under management in making purchases and sales of stocks potentially subject
to the percentage limitation. The limitation might be especially (harsh in a case




126
where holdings had been under 10 percent, but exceeded that limit because of
events beyond the control of the financial manager—such as a repurchase by
the company of its own shares.
Third, it is questionable whether a percentage limitation is needed where the
institution maintains a rigid separation between its trust department and its
commercial operations and there is no intent or effort to exercise control or influence over the portfolio company.
The Commission recognizes that the question of institutional power over
portfolio companies has no simple solution. On the one hand, it is generally
desirable that institutions concern themselves as shareholders with the affairs of
portfolio companies, at least to the extent of voting intelligently on matters
presented to them in proxies. If a financial manager disregards such matters,
it may fail to fulfill the obligation it owes to its beneficiaries to conduct their
affairs with diligence and skill. On the other hand, there are potential problems stemming from concentrated economic power that are inherent in an environment consisting of large institutions holding substantial positions in large
corporations. The Bank Holding Company Act Amendments of last year recognized that limitations should be placed upon the acquisition by banks of operating control of non-banking entities. The question remains whether it is likely
that the trust departments of banks might be used as a means of attaining such
control through the use of savings entrusted to such banks by thousands of
public investors seeking professional investment management.
In the event that your Committee believes it appropriate to impose limitations
of the type set forth in Section 13 of H.R. 5700, we question whether the stocks
encompassed should be those "for which a registration statement has been filed
under the Securities Act of 1933." For one thing, registration statements under
the Securities Act are not filed with respect to a class of stock, but rather are
limited to the particular securities which are being offered and sold pursuant
to the registration statement. Therefore, the existing language in the bill might
be construed merely as prohibiting a bank from acquiring more than 10 percent
of a particular registered public offering of securities, rather than 10 percent
of the outstanding shares of any class of stock. We are not sure that this is
intended. Second, there are many companies which, while publicly held, do not
have registration statements under the Securities Act in effect at all times. In
fact, there are some publicly held companies which have never had an effective
Securities Act registration—such as companies which sold their shares publicly
before 1933 or under one of the exemptions from registration.
Accordingly, if it is intended to refer to a category of companies subject to
the federal securities laws, the appropriate reference would be to all companies
whose equity securities are registered with the Commission under Section 12 of
the Securities Exchange Act of 1934 or which are required to file reports with the
Commission pursuant to Section 15(d) of that Act. This would include all companies whose securities are listed on any national securities exchange as well as
most companies having 500 shareholders and over $1 million in assets. It should
be recognized, however, that some classes of companies have been exempted
from these requirements, notably unlisted insurance companies in most cases.
The third topic referred to in Chairman Patman's letter describing H.R. 5700
was the problem of brokered deposits and the fourth topic was the practice of
offering gifts to attract deposits. For purposes of our brief comment we deal
with these two subjects together.
BROKERED DEPOSITS AND GIFTS FOR DEPOSITS

Sections 19 through 24 of H.R. 5700 deal with the practice on the part of insured banks and insured savings and loan associations paying brokerage or other
compensation to persons for obtaining deposits in such banks or associations and
also with the practice of some banks and savings and loan associations giving
merchandise or other things as an inducement to persons who make a deposit.
The Commission has no comment on these practices as such. These sections are,
however, related to some degree to a matter which was examined in considerable
detail by the Institutional Study. This involved the relationship between deposits
made by securities brokers in banks and the allocation by banks of securities
commission business among brokers. The Study found that there was a strong
relationship between broker's deposits in banks and commissions received by
brokers from such banks. This raises an initial question as to whether or not
the allocation of brokerage commissions to brokers by a bank in relationship to




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the deposits of the broker in the bank would fall within the prohibition of Section 19 of H.R. 5700. Beyond this, both the brokered deposits referred to in H.R.
5700 and the practices of banks concerning broker's commissions may be symptoms of the same fundamental economic forces. When an institution obtains
something of value, as a deposit is to a bank, but does not pay any charge therefor by reason of applicable regulatory restrictions, there exists an incentive on
the part of such an institution to pay indirectly for the value received. Conversely from the viewpoint of the securities broker, when he receives compensation for his services which by reason of applicable regulation is in excess of
that which he requires to induce him to perform the services, in this case the execution of orders from the bank for purchase or sale of securities, he has an incentive to obtain this business by, for example, maintaining deposits in banks
giving him such brokerage orders.
While the Commission noted this situation in its letter of transmittal for the
Institutional Study it did not recommend any direct action except the initiation
of steps to introduce competitive commission rates for large brokerage transactions executed on exchanges. Consideration of this question from the viewpoint of bank acquisition of deposits from brokers through the use of brokerage
commissions was deferred pending consultation with the banking authorities
since the Commission believed that significant questions of banking policy and
bank regulation were involved on which it was not in a position to express an
informed judgment. The Commission believes, however, that it is possible that the
situations sought to be dealt with by Sections 19 through 24 of H.R. 5700
represent another example of the basic economic factors noted in the Institutional Study as referred to above.
Section 14 of H.R. 5700 prohibits lenders there specified from accepting equity
participations in the making of loans. The Institutional Study did not examine
into this matter specifically although data in Chapter 14 of the Study show that
most such type of financing in private placements has been done by insurance
companies. We have some question, however, as to whether a blanket prohibition
of this nature will not inhibit flexibility and innovation in the financing of
American industry. A stated reason of this prohibition was to prevent lenders
from acquiring control of non-banking companies through the use of such equity
participations. It would seem, however, that less drastic prohibitions might
accomplish this objective particularly in view of the existing restrictions on
banks and their holding companies from acquiring or controlling non-banking
businesses.
CONFLICT OF INTEBEST

Sections 15 through 18 of H.R. 5700 seek to deal with the conflicts of interest
which may be present where an insured bank, an insured savings and loan
association or a mutual savings bank makes loans either to its directors,
officers or employees or to a corporation in which they have a significant interest. The Institutional Study did not deal in any detail with questions of
this kind which did not appear to fall within the scope of such an economic study.
The Commission has, however, encountered similar questions under the regulatory statutes which it administers. Thus, Sections 15, 16 and 17 of H.R.
5700 would require disclosure by the financial institutions therein referred to
of loans made to directors, trustees, officers, or employees of such institutions.
The Commission also requires disclosure in proxy statements under the Securities Exchange Act and in registration statements under the Securities Act
of all transactions by the issuer in which directors, officers, and members of
their families have a material interest. The Commission's requirements in this
regard are at the same time somewhat broader and somewhat narrower than
those proposed in H.R. 5700. The Commission's disclosure requirements do not
extend to transactions in which employees, as distinct from officers and directors, have an interest nor do they extend to transactions in which the amount
involved is less than $30,000. On the other hand, the Commission's disclosure
requirements do not extend not only to loans but to any other transaction of
any kind, subject to specified exceptions, in which directors and officers have
a material interest.
The provisions of Sections 15, 16, and 18 of H.R. 5700 prohibiting loans to
corporations in which officers, directors, or employees of the specified financial
institutions have an interest find some parallel in the provisions of Section
17(a) (3) of the Investment Company Act of 1940 which prohibits affiliated
persons of an investment company, which includes all officers, directors, or em-




128
ployees of such a company, together with any corporation in which any such
person owns 5 percent of the voting securities, from borrowing* money from the
investment company or any company controlled by it unless the Commission,
upon application, determines that the transaction is reasonable and fair and
does not involve overreaching on the part of any person concerned. We suggest
the possibility that rather than a direct unconditional prohibition such as that
found in Sections 15, 16, and 18 of H.R. 5700, it might be appropriate to permit
exceptions to be made by the appropriate regulatory authorities upon application and after notice and opportunity for hearing if it determines that the transaction is fair and involves no overreaching.
Since this bill pertains in an important degree to disclosure by banks, I would
like to take the occasion to refer briefly to what the Commission believes may be a
shortcoming in the existing disclosure patterns as applied to banks. Securities of
banks are presently exempt from registration under the Securities Act of 1933.
This means that banks may offer and sell their securities to public investors
without affording them the protection of the full and fair disclosure which
Congress over thirty-seven years ago found necessary for investors to whom
securities are offered by almost all other corporations.
The reasons for the bank exemption are somewhat obscure. The House Report
indicates reliance on the supervision of banks by the Comptroller of the Currency. While the Comptroller has taken some commendable steps with respect
to offerings of bank securities, he does not have direct statutory authority, let
alone a miandate from Congress, nor are these disclosures backed up by the civil
liabilities provided for by the Securities Act.
(Whatever the reasons for exempting bank stock and other bank securities in
the 30's, we have questions that they are any longer valid. It is true that banks
are a regulated industry but so also are electric and gas utilities, telephone companies, television and radio stations, and airlines, yet none of these are exempt
from registration under the Securities Act. This, of course, would give us no
economic regulatory power over banks, any more than disclosure requirements
have given us any such regulatory power over utilities or airlines, which they
have not. We do not believe that subjecting bank stocks and other securities to
registration under the Securities Act would create any serious problems.
It used to be that financial statements of banks were rarely audited by independent public accountants as the Securities Act requires, but this practice appears to be changing and such audited financial statements by banks have become
farly common. Moreover, Congress did not exempt from registration under the
Securities Act securities of bank holding companies, including one-bank holding companies, and many of these have registered with the Commission without
difficulty. In the case of a one-bank holding company the required disclosure pertains primarily to the business of the bank whose stock is held by the holding
company, so that in substance we obtain the equivalent of registration of new
offerings of securities evidencing what is essentially an ownership interest in
any bank which constitutes the principal asset of a one-bank holding company.
We see no adequate reason why similar protection should not be provided for
investors in the stock of banks which are not owned by such a holding company.
While there may be justification for a limited exemption from the Securities
Act of 1933 for certain types of short term obligations and for certificates of
deposits, the Commission believes that equities and long term obligations issued
by banks and publicly offered and sold should be subject to the registration requirements of the Securities Act. The Commission, accordingly, is giving serious
consideration to seeking the removal of the existing statutory exemption for
such securities, just as we intend to do for securities issued by companies regulated by the Interstate Commerce Commission, the only other category of private
companies most of whose securities are so exempted. This exemption also appears
to be an anachronism and we are now having discussions with the ICC concerning it.
CONCLUSION

It has not, of course, been possible for me to review in detail the analyses,
findings and conclusions of the Study in areas of interest\to the Committee.
Needless to say, the Commission and its staff stand ready to assist the Committee further in its evaluation of the Study, and we welcome the Committee's
interest in implementing legislative solutions to some of the problems with which
the Study deals. At the same time, we wish to emphasize that institutional investors and their impacts on the securities markets, on corporate issuers and on




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the public interest are subjects that require a comprehensive overview and, to
the extent feasible, comparable treatment. As I have noted, the Commission intends to consult with other regulatory agencies on the findings of the Study and
on the Commission's initial recommendations as they affect financial institutions
under their jurisdiction. We may well make additional recommendations after
such consultations.

The CHAIRMAN. Mr. Camp, you are welcome to the committee.
We are glad to have the Comptroller of the Currency before us^
and we will have your testimony.
STATEMENT OF HON. WILLIAM B. CAMP, COMPTROLLER OP THE
CURRENCY

Mr. CAMP. Thank you, Mr. Chairman. It is a pleasure to be here
today.
I do have with me the members of my staff. We have made studies
of certain areas contemplated by this legislation. And with your
permission, later on I would like to have them
The CHAIRMAN. If you would like to file them for the record, yom
may.
Mr. CAMP. We have submitted to the committee a rather detailed
statement, which I won't bother to read.
But I have a very short statment which I would like to read.
The CHAIRMAN. That will be satisfactory.
Mr. CAMP. I do appreciate the opportunity to present the views of
the Office of the Comptroller of the Currency on this legislation. In
order to conserve the time of the committee, the following is a
summary of our position on the principal provisions.
With respect to interlocking directorates, our detailed statment expresses the view that the prohibitions of H.E. 5700 are too drastic and
would unduly disrupt accepted business practices. We agree that the
provisions of law are inadequate in that they only cover commercial
banks and do not regulate interlocks between commercial banks, savings and loan associations, and other types of financial institutions.
We favor an approach which would prevent interlocks between institutions in actual competition with each other and at the same time
preserve regulatory flexibility necessary to prevent hardship and unnecessary restriction.
It appears to us that the bill provisions against commercial bank
interlocks with customers and competitors are designed to prevent
three categories of possible abuse:
(1) The abuse of the competitive process;
(2) Unfair use of insider information; and
(3) Conflicts of interest.
It is our feeling that with the suggested expansion of the law on
interlocking directorates, that there would be sufficient existing statutory controls on all three areas of abuse. Our statement lists the existing Federal statutes which we believe are effective to control abuse
of insider information and conflicts of interest.
We are strongly opposed to the restrictions on bank trust departments, contained in sections 12 and 13. We feel that their effect would
be to unfairly handicap bank fiduciaries in their competition with
other types of trustees. We believe that the cost and administrative




130
burdens of complying with the disclosure proposals would outweigh
the benefits to be derived therefrom.
Our statement opposes the flat prohibitions of equity participation
loans, premiums for deposits and bank stock loans. While recognizing
that there are some possibilities for abuse in each of these areas, we feel
that there is ample existing law and regulatory authority to effectively control them.
A survey of a representative sample of national banks revealed very
little use of the equity "kicker" loan by national banks. However, we
feel that commercial loan rates should be left to competitive forces
and not subject to Federal control in the absence of compelling
necessity. Also, the bill would unfairly leave some types of commercial
lenders free of its control.
With respect to the complete prohibition of loans to insider interests,
we feel that any problems in this area are best dealt with on a case-by<5ase basis. In many cases, unexceptionable loan opportunities come to
a bank through its directors. We think that the emphasis in regulating
such loans should be on credit factors and lack of preferential treatment, rather than solely on the relationship between the borrower and
the bank.
We do not favor extending 100 percent deposit insurance to public
deposits mainly because of the disruption to the market for municipal
bonds which would be caused by the elimination of the present pledging requirements. We also feel that excepting one class of depositors
would inevitably lead to pressures to extend similar treatment to other
classes.
We do not support H.R. 3287 because it would prohibit even the
most experienced and desirable purchasers from obtaining bank financing to acquire control of a bank.
Further details covering our position on the above and other provisions are contained in our prepared statement.
Thank you, Mr. Chairman.
The CHAIRMAN. We will place your statement in the record as is,
Mr. Camp. And if at the conclusion of the hearing every point has
not been covered to your satisfaction, you may extend your remarks
and cover them.
Mr. CAMP. Thank you, sir.
(The prepared statement of Mr. Camp follows:)
PREPARED STATEMENT OF HON. WILLIAM B. CAMP, COMPTROLLER OF THE CURRENCY

Sections 2 through 9. Interlocking Relationships. The bill would amend the
Federal Deposit Insurance Corporation Act (and other banking law sections)
to prohibit the following: (1) any officer, director or employee of eight types
of financial institutions from serving in a similar capacity with any other such
institution; (2) any officer, director or employee of such financial institution
from serving in similar capacities with a corporation which does substantial
and continuing loan or pension trust business with the financial institution;
(3) commercial banks, savings and loan associations and mutual savings banks
from controlling or having interlocking relationships with a title company,
property appraisal firm, or other company which offers services in connection
with the closing of real estate transactions; (4) service as an officer or director
or employee of a commercial bank or savings institution, by any lawyer who
performs legal services for a customer of the institution in connection with
transactions with it; and (5) any interlocking relationship between any of the
eight types of financial institutions and any corporation in which the institution
has voting control offivepercent or more of the stock.




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The present federal law (section 8 of the Clayton Act, 15 U.S.O. 19) prohibits
interlocking relationships between a member bank of the Federal Reserve
System and any other bank located in the same city with such member bank
or in any city, town, or village contiguous or adjacent thereto. There are presently no statutory prohibitions against interlocks between the other seven types
of institutions listed in the bill or against interlocks between institutions more
geographically separated than adjoining towns.
We agree that some strengthening of the present law on interlocking directorates is desirable. The administration presently is developing a proposal which
would correct the existing deficiencies without disrupting legitimate business
relationships. Under this approach, the regulatory agencies would be given
authority to regulate interlocks with a mandate to protect the public from
anicompetitive situations or other abuses.
We have not seen documented examples of practices against the public interest
sufficient to justify the sweeping dislocation of accepted business practices which
would be caused by the adoption of the other prohibitions in Sections 2 through
9. On the contrary, we think it would be most detrimental to the public interest
to curtail the use of scarce executive management talent in this way.
We see no possible justification for prohibiting, for example, a ^ew York
City banker who maintains a winter home in Florida or some other section of
the country from contributing his banking knowledge to a small local bank
in the latter community. Similarly we see no reason why a large commercial
bank specializing in making loans to the chemical, furniture, or some other
industry, should not be able to have on its board a business executive skilled in
such field. It is no answer to say that such an executive could be found in a
corporation doing no business with a particular bank. Service on a (bank's board
of directors, is not an unmixed privilege. There is substantial risk of liability
involved in serving on the board of directors of any corporation, especially a
bank, and, unless a financially responsible person has some good reason, such as
a continuing business relationship, he will not assume such responsibility.
The possible abuses which Sections 2 through 9 appear designed to prevent, fall
into three main categories: (1) abuses of the competitive process; (2) unfair
use of insider information to the detriment of the general investing public; and
(3) untenable conflicts of interest created by a single individual occupying positions of fiduciary responsibility to different sets of beneficiaries.
It is our opinion that there is sufficient federal law on the books to deal with
problems (2) and (3) and that the proposal I have just outlined would adequately take care of problem (1).
(1) I do not think it is necessary to take the time of the committee to detail
the elaborate set of statutory, judicial and administrative apparatus which
exists to control abuses of the competitive process. Although, as the committee
knows, we do not always agree with the views of the Antitrust Division of the
Department of Justice, we do not think that anyone, least of all our office, could
fault them for lack of zeal or conscientiousness in pursuing their statutory
assignment.
(2) The abuse of insider information is also specifically outlawed toy existing
federal statutes, supplemented toy strict judicial interpretations. I refer to the
provisions of law administered by the Securities and Exchange Commission as
interpreted by the Texas Gulf Sulphur decision.
(3) With respect to conflicts of interest, there are many legal tools presently
available, The common and statutory law of corporate and fiduciary responsibility provide effective civil remedies to aggrieved stockholders. In addition to
this potential civil liability, questionable or improper action of any bank director
are subject to scrutiny, control and effective sanctions by the bank supervisory
agencies.
In addition, Section 22 of the Federal Reserve Act (12 U.S.C. 375, 375A) and
Regulation O issued thereunder controls loans to executive officers.
A powerful deterrent to self-dealing practices in institutions with more than
500 shareholders is the public disclosure requirements imposed by the Securities
Acts Amendments of 1964. The hand of the federal banking agencies in controlling conflicts of interest was greatly strengthened in 1966 by the passage of
the Financial Institutions Supervisory Act (12 U.S.C. 1818(b)). That Act
empowered the agencies to issue a cease and desist order against any practice
deemed detrimental to sound banking.
The philosophy underlying Sections 2 through 9 appears to be one of suspicion
of the integrity of the average businessman and banker. My over thirty-four
years of service with the office of the Comptroller of the Currency has not led




132
me to any such conclusion. My experience has been to the contrary—that with
few exception®, bankers and businessmen conduct their lives and affairs with
integrity. We think that present law if amended in accordance with the suggestion above would be adequate to take care of the exceptions as they may
arise.
§10. Mutual Savings' Bank Stockholdings in Other Financial Institutions.
Section 10 would completely eliminate the present practice of some mutual
savings banks of owning shares of commercial banks, insurance companies,,
savings and loan associations, bank and S&L holding companies and brokerage
firms.
We believe that a better approach would be to prohibit such ownership only
in those cases where interlocking relationships would be similarly prohibited.
§ 11. Commercial Bribery.
Section 11 would amend the Federal Criminal Code to make it a criminal
offense for a financial institution to offer or give a bribe to an employee of
any customer or potential customer of the bank.
This office is not aware of any instance in which a national bank has sought
to obtain business or influence a customer's conduct, by bribing the customer's
agent or employee. In the absence of such instances, it is not apparent to us why
federal legislation is necessary. Some states now make commercial bribery a
crime, and we know of no legal reason why such state laws would not be available for use against a financial institution.
Of course, if the committee has evidence of or reason to believe that banks,
S&Ls and the other types of institutions listed in Section 11 have been guilty
of abuses in this area, we would have no objection to the adoption of Section
11.
§§ 12 and 13. Trust Department Stockholdings.
Section 12 of the bill would require every insured bank to file with the FDIC
a list of the aggregate holdings in a fiduciary capacity of all securities, other
than government securities. Specifically, it would require filing information as to
the name, class, value, number held, and voting rights of the bank, and how
the shares were voted by the bank in the previous year. This list would be
available for public inspection.
We do not believe that the benefits to be achieved from this proposal justify
the costs which it will involve, both to the government and to the banks. This
information would constitute a vast mass of statistics, requiring large storage
areas and numbers of housekeeping personnel at the FDIC. Its very size would
pose a severe limitation upon its utility. In addition, we question the usefulness,
from a standpoint of most governmental policies, of such a listing. It presumably will reflect holdings as of a given date and have no transactional information. We believe that information with respect to specific holdings and transactions, obtained from specific banks as of specific times, is more relevant to the
responsibilities of the various government agencies having an interest in bank
trust departments. Sufficient power to obtain such information presently exists
in these agencies, in our opinion. If deficiencies exist, correction should be considered in the context of specific policy areas and agency needs. The accumulation
of a vast storehouse of abstract data of this nature called for by Section 12
will not be of material aid in detecting or bringing appropriate corrective action
in cases of abuse. Its primary utility, in our opinion, would be the facilitation
of broad-scale policy studies, such as the recently completed Institutional Investors Study of the S.E.O. We do not believe that the ready availability of this
information for such inquiries, which appear to be best conducted at periodic
intervals, furnishes sufficient justification for the cost involved.
This requirement would also be extremely burdensome upon the banks. Compilation of the information would require many man hours of work on the part
of bank personnel, and many hours of machine time in automated departments.
In smaller banks, the cost involved could represent the difference between a
profit and a loss in the operation of their trust departments. Thus, it would greatly
increase the cost of operation as a corporate fiduciary and have the tendency
to drive smaller competitors from the field and concentrate the business in the
hands of the larger institutions. This effect is manifestly undesirable.
Section 13 would prohibit insured banks from holding in the aggregate in
their trust departments more than 10% of any class of stock in any corporation
for which a registration statement has been filed under the Securities Act of




133
1933. In addition, it would forbid the holding of any stock, which has been issued
by the bank or its parent company, in the bank's trust department.
These limitations would, we believe, be of questionable benefit. They would
eliminate certain conflcts of interest and limit the potential for concentrations
of control of corporations by banks through their trust departments. However, in so doing, they would cripple the effectiveness of professional corporate
fiduciaries. A person planning the administration of his estate would have no
assurance that the trust department of his selection would be able to accept
his account, because some of his holdings might push the trust department aggregate over the 10% limit in a particular security. These considerations would
become particularly acute in the case of family-owned corporations. If the
stock were registered under the Securities Act of 1933, the use of a corporate
fiduciary would not be available to the family for estate planning purposes.
The flat prohibitions upon holding stock of the bank or its holding company
poses even greater problems for the person planning his estate. If he holds stock
of a bank, he would simply have to utilize the services of a different bank or
an individual. Large holdings of stock of a bank or bank holding company on
the part of an individual reflects great confidence on his part in the management of that bank. It is natural that such a person would also have great confidence in such bank's ability to manage his estate. This provision might deprive him of his constitutional freedom of choice and even drive his holdings
into the hands of a competitor bank. Even if the alternative institution were
not a competitor, the implications from an anti-trust standpoint, of encouraging the flow of blocs of stock of one bank to the trust department of another
bank, are serious.
Finally, we believe that the net effect of this section would be to drive
trust and estate business into the hands of individuals. Because of their mortality, frequent lack of expertise, and virtually complete freedom from governmental supervision, we do not regard this as a desirable result. We believe that
the desirable ends sought to be achieved by this section are now being obtained
through banking supervision. If it is felt that increased statutory safeguards
are required, the bank supervisors can readily implement them. For example,
Section 61 of Title 12 presently imposes a most effective restriction on the
voting of national bank stock held in a trust department, in the election of
directors of the fiduciary bank. This provision might well be extended to all
insured banks.
§ 14. Equity Participation Loans.
Section 14 would make it a federal crime for any insured bank, insured S&L
holding company, mutual savings bank or insurance company to take as consideration for any loan, a share in the ownership or profits of the borrower.
This office, in August of 1970, made a survey relating to equity participation
loans by national banks. A sample of 502 national banks was surveyed, including
all 149 national banks with deposits of $225 million or more. The remaining
353 banks in the sample were selected to provide representative coverage of
geographic areas and bank size.
The results indicate that equity participation loans are relatively insignificant
in the National Banking System. The sample banks reported only 112 such loans,
totalling $159 million as of August 31, 1970. This amount represented only .27
of one percent of the $58 billion volume of outstanding commercial and industrial
loans on the books of the sample banks. Only 42 of the 502 banks in the sample
reported any equity participation loans.
The volume of such loans by affiliates of banks in the sample was also small.
Fourteen banks in the sample reported one affiliate each with equity participation
loans. In all, 117 loans by these 14 affiliates totalled $28 million.
It is apparent from our sample that national banks are not making equity
participation loans to any significant degree. We have no reason to believe that
the attitude and practice of state member banks is different in this regard. Given
this small amount of activity, it could be argued that no great harm or inconvenience would be caused (at least to banks) by the enactment of the prohibition of
§ 14. However, we believe that the stronger considerations and arguments are
to the contrary.
First, the enactment of § 14 would represent a marked departure from the
approach of past Congresses to the field of law commonly referred to as the usury
statutes. Substantive regulation in this area has almost without exception been*
left to the states. In the absence of compelling necessity, we do not think it
60-299—71—pt. 1
10




134
advisable to take what might become the first step toward a general federal usurylaw.
Secondly, we believe strongly in the principle that markets should be left free
of any forms of price control, in the absence of compelling necessity. The traditional approach to the regulation of loan interest has been to impose only such
controls necessary to protect the unsophisticated consumer. Interest rates on
commercial loans have been left to find their natural level based on competition.
The commercial loan segment of our free market has always been one of the
most sensitive to changing money supply and general economic conditions.
Thirdly, the restriction of § 14 would apply only to banks, S&L's, their holding companies and insurance companies. The omission of mortgage companies,
pension funds and other possible sources of construction and commercial loans,
would give such lenders an obvious and unfair competitive advantage.
§§ 15,16,17, and 18. Insider Loans.
Section 15 would amend the Federal Deposit Insurance Act to require the following of insured banks:
(1) A report to the FDIC [for the purpose of placement in a public file] of the
nature' and amount of any loan to a director, officer or employee of the bank or
any member of such person's immediate family.
(2) No loan to be made to any person acting as agent for another, except on
condition that the bank be informed of the identity of the person receiving
the beneficial interest of the loan.
(3) No loan to be made to any corporation of which 5% or more of the outstanding stock is owned in the aggregate by directors, officers or employees of
the bank.
We believe that the statutory tools presently available to the supervisory agencies to combat self-dealing are adequate. These tools are described in our earlier
discussion of Sections 2 through 9. The existing tools provide for more flexibility
and fairness than the flat prohibition contained in the bill.
Also the interaction of the proposed public disclosure provision in Section
17(b) with the prohibition contained in Section 18 would result in an undue invasion of privacy of many bank employees and needless public disclosure of many
harmless transactions. Section 22(g) of the Federal Reserve Act (12 IJ.S.C. 375A)
as amended in 1967 expressly permits a member bank to make certain types of
loans to its own executive officers. The permitted loans include a residential mortgage loan of up to $30,000; a children's education loan of up to $10,000 and a
general purpose loan of not more than $5,000. We see no supervisory purpose to be
served by requiring such loans to be made a matter of public record as does proposed Section 17 (b).
§§ 19,20, and 21. Brokered Deposits.
Sections 19 and 20 prohibit any insured bank or S&L from making any payment to anyone as compensation for obtaining a deposit for the bank or S&L. A
payment made by a person other than the bank or S&L for the purpose of obtaining a deposit for the bank or S&L is deemed to have been made by the bank or
S&L if it had or reasonably should have had knowledge of the payment when it
accepted the deposit.
The acceptance of deposits and loans placed through money brokers has been a
significant contributing factor to several bank failures in the past few years. All
of the federal banking agencies now have outstanding directives designed to curb
the practice.
We also support the principle of outlawing the troublesome aspects of brokered
deposits by statute. In the national banks, the trouble causing aspect has been
the acceptance of questionable out-of-territory loans from the money broker
as a condition of his obtaining deposits for the bank. However, we understand
that the FDIO has found other types of brokerage abuses in some closed state
banks.
We therefore support in principle a prohibition of brokered deposits. We think
it important, however, that the charter supervisor, or some other banking agency,
be given exemptive and regulatory authority to define the terms used in the
statute. There are a few compensated deposit gathering services which are unobjectionable and even essential in certain markets.
§ 22. Gifts to Attract Deposits.
This section would prohibit the practice of offering merchandise or other premiums to depositors as an inducement to make or add to any deposit.




135
The use of merchandise premiums promoting retail deposits is presently
closely limited by rulings of all the federal banking agencies. The banking
agencies Coordinating Committee agreed some time ago to restrict the value of
such premiums to a wholesome cost of $5 in connection with deposits of under
$5,000 and $10 if the deposit is $5,000 or more.
It is our view that the existing regulatory approach to the giveaway problem
is preferable to a flat prohibition since it provides a measure of flexibility to
permit at least minimal competition to the benefit of the small depositor who
at present is restricted to a much smaller percentage of interest than are
depositors possessing over $100,000.
§§ 25, 26, and 27. Deposit Insurance for Public Units.
Sections would extend 100% insurance for deposits of federal, state and local
governments in insured banks and S&Ls.
Exempting public depositors from the $20,000 limit on insurance would appear
to conflict with the objective under existing law of providing protection for the
savings of individual families of moderate income who frequently lack the technical ability to appraise accurately the soundness of available outlets for their
funds, while maintaining the incentive to holders of large accounts to investigate institutions before placing deposits in them. Moreover, exempting one
class of depositors from the limitation on insurance coverage could lead to
pressures to extend the exception to other classes.
Local law now requires in almost all cases that public deposits be secured
in full by the depositor pledging federal state or municipal bonds. Some states
kill two birds with one stone by specifying that only home state bonds shall be
eligible collateral for this purpose.
Adoption of Section 25 would eliminate any need for pledging and probably
would have a substantial negative effect on the demand for municipal bonds,
a market which already suffers from serious structural problems.
For these reasons we do not favor the adoption of Section 25.
H.R. 3287. Bank Stock Loans.
The bill flatly prohibits any insured bank from making a loan, the proceeds
of which are used to buy any stock or bonds of any bank.
We understand the purpose of H.R. 3287 to be to stop the practice of one
bank financing the take-over of control of another bank. However, the language
of the bill goes much further and apparently prohibits any bank loan for the
purpose of purchasing even one share of bank stock. This would make unlawful
many, many routine loans for investment purposes. We know of no reason why
an investor should not be able to purchase bank stock on margin in accordance
with the prevailing margin requirements, in the same way as any other security.
Even if the bill were amended to prohibit only take-over loans, we feel that
it would be still inadvisable for the following reasons :
(1) Our office, and we are sure other bank supervisors, have had occasion to
call on a financially strong institution to finance the purchase of control of a
faltering one. This bill would take away that supervisory tool.
(2) One of the principal problems inherent in take-over loans, is the almost
inevitable sequel of some of the taken-over bank's liquid funds being transferred
to the lending bank as an inter-bank deposit. This inter-bank deposit is often
a prearranged condition of the take-over loan. The Department of Justice in a
letter to the Banking Agencies has taken the position that the use of an interbank deposit as a compensating balance for a loan to controlling persons of the
depositing bank, may constitute a misapplication of the depositing bank's funds.
This position was made known to all banks by the federal banking agencies in
a circular letter in October 1970.
We believe that the distribution of the Justice letter has been effective in
minimizing one of the most troublesome aspects inherent in take-over loans.
We understand another concern behind H.R. 3287 to be the prevention of
bank take-overs in general by undesirable persons through the use of funds
borrowed from other banks.
This is a laudable purpose with which we as bank supervisors could not agree
more. However, the bill draws no distinction between the desirable and undesirable purchaser-borrower. We fear that the effect of cutting off prospective
desirable bidders for banks from the conventional source of financing might be to
promote one of the very things the bill is designed to prevent—the use of
underworld money by undesirable elements.




136
It has been our experience that the great majority of bankers would never
knowingly finance the take-over of another bank by dishonest persons. This is
not to say that misjudgments have not and cannot occur. When one does occur,
we feel that the tools presently available are sufficient to take care of the situation. Under the provisions of the Barr Bill, (12 U.S.C. 1817(i) (1)) passed in
1966, a bank which makes a (take-over loan must notify the supervisory agency
of the take-over bank. This serves to alert the agency to watch out for possible
changes in management competence.
For the above reasons, we do not favor the adoption of H.R. 3287.
The CHAIRMAN. Mr. Ward, we shall be glad to hear from you.
And you may proceed in your own way.
STATEMENT OP ALAN S. WARD, DIRECTOR, BUREAU OF
COMPETITION, FEDERAL TRADE COMMISSION
Mr. WARD. Thank you, Mr. Chairman.
Mr. Chairman and members of the committee, it is a privilege for
me to participate in these important and timely hearings, and to communicate to you the statement of the Federal Trade Commission on
H.E. 5700 and H.E. 3287.
The Commission, as you know, has no jurisdiction in connection
with the proposed bills, nor does it have any jurisdiction over banking
generally. Section 5 of the Federal Trade Commission Act specifically
excludes coverage of banks. And the Clayton Act's grant to the Federal
Trade Commission of enforcement responsibility for the interlocking
directorate prohibitions embodied in section 8 of that act also excepts
banking and other regulated industry interlocks.
First, I would like to briefly read a short statement by the Commission stating its position on this legislation. The letter is from
Chairman Kirkpatrick of the Federal Trade Commission, addressed
to Chairman Patman:
Dear Mr. Chairman:
Thank you for your invitation to appear before the Committee on Banking
and Currency to present the Commission's views on H.R. 5700, the Banking
Reform Act of 1971, and H.R. 3287, a bill to prohibit federally insured banks
from making loans to provide for the purchase of bank stock and for other
purposes.
These proposals, amending three organic acts, deal primarily with banks and
other financial institutions. As you know, none of these acts, nor banking in
general, falls directly within the Commission's jurisdiction.
The Commission is interested, nonetheless, in the provisions in H.R. 5700
which are designed to control a number of business practices contributing to
the trend toward concentration in our economy. I refer, principally, to the prohibition of interlocking relationships among financial institutions and between
them and the business community in general.
The Commission has responsibility under the paragraph of section 8 of the
Clayton Act which prohibits interlocking directories between competing corporations. This paragraph applies only to limited types of situations and, in
the past, it has not proved easy to enforce. Commission orders have, in some
instances, been circumvented by the employment of equivalent techniques, such
as interlocking management personnel. Such techniques are not prohibited
by section 8 of the Clayton Act.
Therefore, the Commission has previously recommended expansion of the section to embrace all significant management officials, indirect as well as direct
interlocks, and vertical as well as horizontal ties.
The Federal Trade Commission considers that remedial legislation in the
area dealt with by H.R. 5700 is in the public interest to the extent noted above,
but withholds comment on the merits of any particular bill in view of the




137
statutory exclusion of banks from the operation of the Federal Trade Commission Act.
By direction of the Commission.
MILES W. KIRKPATEICK, Chairman.

I thought it would be helpful, in addition to transmitting this view
of the Federal Trade Commission on the particular bills, to comment
generally on the Commission's experience in carrying out its responsibilities to enforce section 8 of the Clayton Act dealing with corporate
interlocks.
The Clayton Act? as you know, was passed in 1914. It prohibited
certain conduct which might tend to eliminate or suppress competition. Section 8 of the Clayton Act dealt specifically with interlocks,
and prohibit interlocking directorates between competing companies
engaged in interstate commerce.
Generally speaking, the concern behind section 8 was about the
concentration of control of a large part of the American economy in
a few hands. There was in addition concern about conflicts of interest. And there was also the feeling expressed that if interlocks were
prohibited, there would be an infusion of new talent and new views
into the management of the Nation's business.
Section 8 as drafted, however, did not give the broad mandate
that was envisioned by the proponents of the legislation. It is generally conceded, I think, that insofar as industrial and commercial
interlocks are concerned, section 8 has not accomplished its sponsors'
objectives.
According to a staff report prepared by the House Judiciary Committee in 1965, enforcement of section 8 by both the Federal Trade
Commission and the Department of Justice has been irregular and
feeble. A major reason for the ineffective enforcement, as Chairman
Kirkpatrick's letter indicated, is the presence of certain technical
deficiencies in the statute itself.
First, it deals only with direct horizontal interlocks, that is, between
directors of competing companies. It does not affect management interlocks, and thus it is relatively easy to avoid the statute's applicability.
And where an investigation may be maintained by either the Commission or the Justice Department, a resignation usually is enough
to blunt the investigation.
Second, section 8 as it now exists does not deal with vertical interlocks, that is, interlocks between buyers and sellers, even though such
directorships may have an important influence on competition. For
example, as I am sure you will recall, the Supreme Court held in 1957
that the DuPont Company's ownership of some General Motor's stock
violated section 7 of the Clayton Act. An interlocking directorship between those two corporations—if it existed today, and we hasten to
assure you it does not—probably would not violate section 8.
Third, the statute does not deal with indirect interlocks, that is,
where an intermediate such as a bank or insurance company has directors on the boards of competing corporations.
Whether or not the law should completely prohibit management,
vertical, or indirect interlocks may be subject to question. But the failure of section 8 to deal with such interlocks in any way has unrealistically limited the statute's coverage.




138
In 1950, after a thorough study, the Federal Trade Commission
submitted to the Congress a report on the extent and nature of corporate interlocks in the United States. The report's major conclusions
were that interlocks were common among U.S. industrial corporations,
and that they probably had some significant anticompetitive effects.
They may have prevented companies engaged in parallel lines of production from invading one another's markets, for example. And there
seems to be the possibility that such interlocks created communities of
interest among corporations in different lines of endeavor.
Finally, and of particular interest to this committee, the commission
concluded that interlocking relationships between manufacturing corporations and financial institutions constituted the most important
series of interlocking relationships found, and also gave rise to the
most extensive and apparently significant of the networks of interlocking relations.
The Commission then, and several times since then, has recommended that section 8 be amended. Most recently this was done in
1969 by the staff in connection with its study on conglomerate mergers.
It is unnecessary, of course to even mention to this committee how
vital access to credit is to industrial and commercial competition. As
a Federal Trade Commission economist testified before this committee in 1959:
Banking, of course, is a critical part of our economy, and access to capital is
one of the most crucial problems to all of industry. Any major intermingling of
banking and industry surely poses serious problems for competition.

In my view, remedial legislation of the type posed here is in the
public interest. I have no specific comments on the provisions of these
bills; however, since they involve competitive issues in a market context where the Bureau of Competition is neither involved nor particularly experienced. I understand that officials of the banking agencies will testify on these aspects of the pending legislation.
Finally, one additional comment I would like to make. Despite the
limited coverage of section 8, our broader jurisdiction under the FTC
Act would permit challenge to interlocks under certain circumstances,
but those circumstances would not include direct involvement of banks.
Thank you.
The CHAIRMAN". Thank you, sir. You may insert your entire statement at this point in the record, sir.
(The prepared statement of Mr. Ward follows:)
PREPARED STATEMENT OF ALAN S. WARD, DIRECTOR BUREAU OF COMPETITION,
FEDERAL TRADE COMMISSION

Mr. Chairman and members of the Committee, it is a privilege for me to participate in these important and timely hearings, and to communicate to you the
statement of the Federal Trade Commission on H.R. 5700 and H.R. 3287.
The Federal Trade Commission, as you know, has no jurisdiction in connection
with the proposed legislation nor does it have jurisdiction over banking generally.
Section 5 of the Federal Trade Commission Act specifically excludes coverage of
banks. The Clayton Act's grant to FTC of enforcement responsibility for the interlocking directorate prohibitions embodied in Section 8 of that Act also excepts
banking and other regulated industry interlocks. Enforcement of Section 8's
banking provisions is lodged with the Federal Reserve.
The Commission, on the other hand, has had extensive experience with interlocking director problems, and my brief comments this morning will relate to that
experience which may be of interest to the Committee in connection with the
pending bills.




139
First, let me insert into the record a letter from Miles W. Kirkpatrick, Chairman of the Federal Trade Commission, addressed to Chairman Patman, stating
the Commission's position on the proposed bills. (The letter referred to appears at
the end of this statement.)
Second, let me very briefly summarize some of the significant elements of the
Commission's experience in enforcing Section 8 of the Clayton Act. The Clayton
Act, as you know, was enacted in 1914 to deal specifically with conduct which
did not violate the Sherman Act but which tended to restrain competition and
lead to monopoly or monopolistic behavior. The Act specifically prohibited, among
other things, price discrimination, exclusive dealing contracts, and acquisition of
stock in competing corporations, where such practices might result in a substantial lessening of competition. Section 8 of the Clayton Act contained provisions
prohibiting interlocking directorates between competing companies engaged in
interstate commerce. The first paragraphs of Section 8 dealt with banking interlocks ; commercial and industrial interlocks were dealt with in subsequent paragraphs of the Section.
Generally speaking, the prime concern behind Section 8 has been that interlocking directorates may tend to concentrate control over significant parts
of United States commerce in the hands of a few individuals, and that such
power inevitably would have anticompetitive effects. In addition, interlocks
can raise conflict of interest problems. In 1913, Mr. Brandeis argued for this
legislation to embody the fundamental law that "no man can serve two
masters."1 President Wilson, under whose leadership the Clayton Act and
FTC Act were passed, foresaw that Section 8 would "bring new men, new
energies, a new spirit of initiative, new blood, into the management of our
great business enterpirses.8
Section 8, as drafted, did not give the broad mandate envisioned by Mr.
Brandeis or fulfill President Wilson's lofty concept. Quite the opposite. It is
generally conceded, I think, that insofar as industrial and commercial interlocks are concerned, Section 8 has not accomplished its sponsors' objectives.
According to a staff report prepared for the House Judiciary Committee in
1965, "enforcement of Section 8 by both the Federal Trade
Commission and the
Department of Justice has been irregular and feeble."3 A major reason for
ineffective enforcement, I would point out, is the presence of certain technical
deficiencies in the statute itself.
First, Section 8 deals only with direct horizontal interlocks, that is, common
directors of competing companies. But it does not affect management interlocks of any sort—that is, where a management official rather than a director
serves on the board of another corporation. Thus, it is relatively easy to avoid
the statute's applicability.
Second, it does not deal with vertical interlocks, that is, interlocks between
buyers and sellers, even though such directorships may have an important influence on competition. For example, as I am sure you will recall, the Supreme
Court held in 1957 that the DuPont Company's ownership of some General
Motors' stock violated Section 7 of the Clayton Act. But an interlocking directorship between those two corporations—if it existed today, as it does notprobably would not violate Section 8.
Third, the statute does not deal with indirect interlocks, that is, where an intermediate such as a bank or insurance company has directors on the boards
of competing corporations. This, by the way, is not an unusual circumstance;
indirect interlocks have been common even among dominant corporations in
concentrated industries.
Whether or not the law should completely prohibit management, vertical, or
indirect interlocks may be subject to question. But the failure of Section 8 to deal
with such interlocks in any way, has unrealistically limited the statute's
coverage.
The Federal Trade Commission submitted to Congress in 1950 a thorough
and careful study of the extent and nature of corporate interlocks in the United
States and of the limitations of Section 8 enforcement. The report's major conclusions were that interlocks were common among United States industrial
corporations, and that interlocks probably had some significant anticompetitive
effects, for instance, by preventing companies engaged in parallel lines of
1
3

Brandeis, The Endless Chain, Harpers Weekly, December 6, 1913.
51 Cong. Rec. 14,222 (1914).
s Interlocks in Corporate Management, Staff Report to Antitrust Subcommittee of the
House Judiciary Committee (March 12, 1965), at p. 57.




140
production from invading one another's markets, and by creating communities
of interest among corporations in different lines of endeavor. Moreover, the
Commission found that vertical interlocks may have created integrated groups
of companies and tended to tie some manufacturers to specific outlets for their
products. Finally, and of particular interest to this Committee, the Commission
concluded that interlocking relations between "manufacturing corporations
and financial institutions * * * constituted the most important series of interlocking relations found and also gave rise to the most extensive and apparently
significant of the networks of indirect interlocking relations." *
The Commission then and subsequently has recommended amendment of
Section 8. Most recently, in the 1969 Staff Economic Report on Corporate
Mergers prepared by the Federal Trade Commission's Bureau of Economics,
the Commission's staff urged that there should be new interlocking directorate
legislation to amend Section 8 of the Clayton Act to deal with:
(1) Interlocks between competitors achieved by means of:
(a) Directors of one company acting as officers of another, and
(b) Directors of one company being large stockholders in another;
(2) Interlocks between potential competitors;
(3) Vertical interlocks between buyers and sellers, including industrial
firms and various kinds of financial institutions providing lending or investment
services;
(4) Indirect interlocks achieved through third party organizations of any
form—whether partnerships, proprietorships, associations or corporations.
This Commiittee, of course, well knows how vital access to credit is to industrial
and commercial competition. As a Commission Economist testified before this
Commiittee in 1969:
Banking, of course, is a critical part of our economy and access to capital
is one of the most crucial problems to all of industry. Any major intermingling5
of banking and industry surely poses serious problems for competition * * *
In my view, remedial legislation of the type proposed here is in the public
interest. I have no comments on the specific provisions of these Mils, however,
since they involve competitive issues in a market content where the Bureau of
Competition is neither involved nor particularly experienced. I understand that
officials of (the banking agencies will testify on these aspects of the pending
bills.
Finally, it should be noted that despite the limited coverage of Section 8, our
broader jurisdiction under the FTC Act would permit challenge to interlocks
tinder certain circumstances—not directly involving banks, however.
The CHAIRMAN. IS it correct, Commissioner Smith, that the SEC

favors regulation requiring certain disclosures of investment and trading by financial institutions, including bank trust departments, on a
regular basis?
Mr. SMITH. We do, sir.
The CHAIRMAN. NOW, what

percent of the New York Stock Exchange transactions would be covered by the institutional investors?
I have heard different estimates, 50, 60, 70 percent. What would you
say ?
Mr. SMITH. I t is in the area of two-thirds.
The CHAIRMAN. In the area of two-thirds.
What would you say, Mr. Camp ?
Mr. CAMP. I think that is correct, sir.
The CHAIRMAN. What would you say, Mr. Ward ?
Mr. WARD. I do not know.
The CHAIRMAN. NOW, then, is it not true that there is public disclosure of some kinds of investments, of insurance companies, of mutual funds, but there is no disclosure at the present time of the largest
4
5

Report of the Federal Trade Commission on Interlocking Directorates (1951), at 27.
Statement of Harrison F. Houghton. Chief, Division of Economic Evidence, Bureau of
Economics, Federal Trade Commission, "Bank Holding Act Amendments," Hearings before
the Committee on Banking and Currency, House of Representatives, Ninety-First Congress,
First Session, Part 1; April 1969, p. 349.




141
category of institutional investors, bank trust departments, there is
no disclosure of that?
Mr. SMITH. There is no required public disclosure.
The CHAIRMAN. NO requirement.
And we had an investigation 2 years ago and disclosed that there
was about $253 billion of assets in bank trust departments, and fewer
than 50 banks had over half of that. A recent disclosure indicates that
the bank trust departments have more than $280 billion, and 19 banks
have a majority of that. Were you aware of those figures, Mr. Smith?
Mr. SMITH. Yes, sir. The banks clearly are the most dominant institutional investors. I can't recite and confirm the specific figures you
gave me, but there is no question that there is a higher degree of concentration among bank trust departments, and that they are dominant
among the institutional investors.
The CHAIRMAN. Mr. Camp, you state that adequate bank supervision has prevented 'abuses of banks controlling large blocks of their
own stock in their trust departments, and in preventing self perpetuation of management. If this is true, how do we have such notorious
cases as the Cleveland Trust situation, where the management of the
bank controls 35 percent of its own stock ?
Mr. CAMP. Sir, I would like Mr. Miller to respond to that. But I
think you are overlooking the fact, possibly, that most of the stock,
own bank stock in trust departments of banks, is inherited through
wills or other forms from individuals, it is not stock that is gathered
in the open market.
The CHAIRMAN. YOU mean the banks inherited it ?
Mr. CAMP. Yes, sir.
The CHAIRMAN. Isn't that rather unusual ?
Mr. CAMP. I don't think it is unusual at all.
The CHAIRMAN. What percentage of it ?
Mr. CAMP. I don't know the percentage, but

I think there is nothing
unusual; if a person has been de'aling with a bank for many, many
years, and has had a very fine relationship with them, and names that
bank as trustee when he dies,, I see ndthing unusual about this. And
if a person happens to have bank stock among the assets of his estate,
I see nothing unusual about that.
The CHAIRMAN. I can see where a person connected with a bank
would have an affectionate feeling towards the institution. But in the
case of the customer generally I don't think that would hold true.
Mr. CAMP. I would not see why not. They have all the expertise, they
have the legal background, the real estate background, and the investment background. Who would you suggest that he leave it to ?
The CHAIRMAN. Maybe we haven't gotten our definitions straight.
You indicate there in your last statement that they are just putting it
in trust. That is entirely different.
Mr. CAMP. That is correct, sir.
The CHAIRMAN. The way I understood you to say it fir^t is that the
estate was left to the bank.
Mr. CAMP. NO, sir. What I understood you to be questioning me
about was whether a bank invested in the open market through its
trust department in its own stock.
The CHAIRMAN. I am afraid we misunderstood each other, so we will
not pursue that further at this point.




142
Now, there seems to be a difference of opinion between the SEC and
the Comptroller over the need for disclosure of certain stock holding and stock trading transactions by a financial institution including a bank trust department. The SEC feels that we need such disclosures on a regular basis, while the Comptroller would leave such
disclosures to special studies such as the recently completed Institutional Investors Study. Is that a fair statement of the divergent views,
Mr. Camp?
Mr. CAMP. I believe it is, although I would like Mr. Miller to speak
to that.
The CHAIRMAN. I don't have time. We are restricting ourselves to
5 minutes on the fir^t go-round. After that we will have plenty of
time.
Mr. CAMP. All right.
The CHAIRMAN. NOW, then, I want to ask just one question of Commissioner Smith. On page 17 of your statement you say: "It is relatively rare that a single bank trust department will hold a very substantial portion in any one company."
Yet your study pointed out the following percentage holdings in
some of the Nation's largest companies by one bank trust department:
Xerox, 5 percent; Gulf Oil, 15 percent; Ford Motor, 5 percent; Avon,
5 percent; Burroughs, 5 percent; International Paper, 10 percent;
S. & H. Co., 10 percent; TWA, 10 percent; Texaco, 20 percent.
How do you define substantial ? Couldn't a 5 percent holding be substantial in mfany instances where the remainder of the stock is widelv
diffused ?
Mr. SMITH. TO answer the last part of your question first, yes, in a
widely held security 5 percent can be a substantial holding.
As to the firs*t question, what is "relatively rare," when we were
looking at the some 800 stocks on which data were collected and not
simply at banks but a number of other financial institutions, we characterized the incidence as relatively rare. And in some few cases that
we inquired into there were situations such as Mr. Camp described
as being "inherited," in the sense that they were family estates being
administered by banks named as trustees under a will. And we do
share the concern about mandatory disposition, given that set of circumstances. Indeed, that is one of the prim'ary reasons why in our view
we would propose at this point in time a general rulemaking authority
on the part of the Commission to require disclosure, until we get some
better feel of the impact of mandatory prohibitions.
The CHAIRMAN. Thank you, sir.
Now, then, I yield to Mr. Johnson.
Mr. JOHNSON. Thank you, Mr. Chairman.
I think we are honored by having these three brilliant gentlemen
here this morning.
I want to go into this question of trust departments of banks. And
I will start with you, Mr. Camp.
In all my career, both in school, college, and elsewhere, and as a
lawyer, I have been taught that the only safe thing for a testator to
do, where he has large holdings, and has maybe a closely held family
business, or has stock in a company that he wants to perpetuate in his
family, is to create a trust and name a banking institution trustee,
because they have more longevity, they go into perpetuity, and all




143
the safeguards that you as a testator want for your estate are reposed
in a bank.
Now, isn't that pretty generally true, Mr. Camp ?
Mr. CAMP. Absolutely, sir.
Mr. JOHNSON. And isn't that the reason that we have banks operating trust departments today ?
Mr. CAMP. Yes, sir. I think if you eliminated that choice, a bank or
bank trust department, you would be eliminating something which
is very popular today, and quite in the news, and that is the "freedom
of choice" of an individual.
Mr. JOHNSON. That is to say, he can name any bank he wants to
be his trustee ?
Mr. CAMP. Or anybody else.
Mr. JOHNSON. Or anybody else. An individual if he wants to ?
Mr. CAMP. Even a lawyer.
Mr. JOHNSON. NOW, another point. When you establish a trust the
rule against perpetuity, of course, says that you can only establish a
trust during life or lives in being and 21 years and 9 months, which
includes the period of gestation, which has to be, of course. So trusts
are for that reason terminating every day throughout the banks in
this country; are they not ?
Mr. CAMP. Absolutely.
Mr. JOHNSON. AS a result of this inducement and this safeguard to
a testator to name a bank as his trustee, have you in the Office of the
Comptroller received, let us say, widespread abuses by banks in voting
stock as the Chairman of this committee infers?
Mr. CAMP. NO, sir. We are very careful about that. As a matter of
fact, there is a statutory prohibition against it.
Mr. Patman mentioned the Cleveland Trust Company, which is not
a national bank. And we have found no significant abuses involving
the voting of its own stock in its own trust department by the national
banks, it is prohibited bv statute, it is spelled out there.
Mr. JOHNSON. This act says that if the stock has been previously
registered by the SEC—I believe the rule is that any issue above
$300,000 has to be registered, so this ruling would cover practically
every company of any size in this country that has to go before the
SEC before they issued their stock. It would be a pretty far-reaching
rule, would it not ?
Mr. CAMP. I think it would be too far-reaching, sir.
Mr. JOHNSON. The statute says that if the trust department had 10
percent of the stock of a company that previously had registered with
the SEC, they couldn't, let's say, vote the stock.
Mr. CAMP. They couldn't even accept the trust, as I understand it.
Mr. JOHNSON. NOW, what would people do, then, that have family
owned corporations, or have stock in the companies which they don't
want to see divided among improvident children, let's say, what would
they do if this law would prevail, if this passes, sir ?
Mr. CAMP. It would be very burdensome, sir. It would certainly
eliminate their freedom of choice, and one of the accepted means of
establishing a trust.
Mr. JOHNSON. It would turn the business to the corporation trust
companies and companies which are not banking institutions but
which are fiduciaries, is that correct ?




144
Mr. CAMP. That is correct.
Mr. JOHNSON. SO you would have the same trouble with that type
of ownership or fiduciary relationship ?
Mr. CAMP. That is right. As I understand it, if a bank had an
aggregate in its trust department of 9 percent of a stock subject to this
statute, and I as an individual had dealt with that bank over many
years, and established a very close relationship with them, and wanted
to name the bank trustee under my will, and I happened to have 2 percent of that stock which I had accumulated over time, the bank would
have to say that they could not accept my account. This would seem
to me to be almost unconstitutional.
Mr. JOHNSON. Thank you. My time has expired.
The CHAIRMAN. Mr. GONZALEZ ?
Mr. GONZALEZ. Thank you.

This is a question for Commissioner Smith. In studying all of the
various interlocking relationships, the SEC report concluded by saying "that the likelihood that these functional interrelationships between
banks and portfolio companies will occur entirely by chance is extremely remote." Now, the Domestic Finance Subcommittee of this
committee, in its report on bank trust departments, indicated that the
Mellon National Bank has four interlocking directorates with Gulf
Oil Company, as well as managing 10 pension funds of that company,,
when the trust department held over 15 percent of the common stock
of Gulf Oil. It also shows that Morgan Guaranty having one interlocking director, and managing one pension fund of Texas Gulf Sulfur, while holding 10 percent of their common stock. Is it your
opinion that these examples are illustrative of this lack of coincidence?
Mr. SMITH. I don't know whether those particular examples and
the percentages that you indicated are typical. Certainly the general
phenomenon of existence of multiple relationships where a single
banking institution performs these many different functions does exist, and exists in a very consistent way.
Mr. GONZALEZ. In chapter 15 of your report you indicate that only
10 bank trust departments hold between 10 and 15 percent in companies
worth $19 million. The report goes on to say that the data portrays
the potential dominance of a relatively small group of large banks
over portfolio companies. In view of their potential dominance, why
does the report then conclude and say "It does not follow that the institutions will necessarily act together or that the influence of one institution will be augmented through concerted activities"? Is there
any real basic statistical predicate for that statement ?
Mr. SMITH. There is an absence of a statistical predicate for stating
the contrary. In the case of a single institution such as the examples
you gave, such interrelationships may exists. There are also questions,
of course, of who dominates the financial institution; the flow of power
as between industrial companies and financial institutions is not altogether clear in many instances. The statistical corelationships that
the study developed do not indicate causative factors. And I think
that was what we were attempting to say, that the extent of the analysis
to which the study proceeded was simply the establishing of statistical
correlations, and we did not go through to the establishing of causative
factors.




145
Mr. GONZALEZ. I see.

So while there may be a tendency to conclude one way, actually
statistically—you don't have statistics to prove it either way ?
Mr. SMITH. There is a limitation as to what statistical evidence can
prove or disprove. It is my own view that this kind of analysis helps
to focus the problem, but it does not necessarily represent the solution
to it.
Mr. GONZALEZ. In your institutional report you recommend the full
disclosure?
Mr. SMITH. Yes, sir.
Mr. GONZALEZ. HOW often would you suggest?
Mr. SMITH. That can vary. This, of course, was

the Commission's
first effort at systematically collecting data from banks and from
other financial institutions with which we have had no prior contact.
Our experience in developing that data, collecting that data, was a
difficult one, because we have been accustomed to the kinds of data
that investment companies provided to us. Their forms of recordkeeping, aggregations of data, were different from other institutions.
So that it is not a simple process to dictate what kind of data should
be provided, how often, and in what way. Our primary concern here
is the impact of institutional investors on equity markets and the information to these markets. That would, I think, indicate that we
would like to see more, probably like to see more frequent reporting
than annual. We require investment companies to report this kind of
information on a quarterly basis.
Now, given the very heterogeneous mix of funds which banks administer, personal trusts, corporate trusts, pension funds, and trusts
with many different characteristics in terms of the authority of the
trustee to manage—they are very individualized instruments—it is
not a very simple task to require, with reasonable regard to the burden
on the reporting institution, how often and in what form such reports
should be made. We are quite sure in our own mind that such reports
should be made. But we would like to have the general rulemaking
authority to take account of the heterogeneous accounts that particularly banks have.
Mr. GONZALEZ. I believe your answer does explain the difficulty of
precisely fixing the specific frequency of reporting, and all.
I am sure you are familiar with the Texas developments with respect to the SEC proceedings and the insurance companies.
Mr. SMITH. Yes, sir.
Mr. GONZALEZ. There

is a common saying in Texas, as a result of all
of that, that if you had the same strict requirements with respect to
these interpersonnel director dealings that the SEC governs with respect to corporations in the issuance of stock and securities, with respect to bank transactions, you wouldn't have had some of these developments such as the closing of the Sharpstown Bank, and so forth;
is that true ? Is there any substance to that ?
Mr. SMITH. I would like to respond to that. I think first, Mr. Gonzalez, you appreciate that this is a litigative situation. So I feel myself precluded from discussing that particular situation here.
In general, it is not a fair description to say that the Securities and
Exchange Commission regulates loans to affiliates generally with




146
corporations that are registered with us. Our general regime is simply
one of disclosure, and through the means of registration statements
and periodic reports and proxy statements, we require disclosure of
material transactions with affiliates.
With respect to investment companies, our powers go beyond that
of disclosure. There are prohibitive and regulative provisions in the
Investment Company Act which the Commission administers with
respect to that one type of financial institution. And there are provisions there generally prohibiting transactions among affiliates except where the Commission finds that it does not involve overreaching
or unfair transactions with respect to the financial institution.
As I understand, the testimony that was given yesterday—and I
have not had an opportunity to read it, so I am basing this on newspaper reports—the views of the banking authorities who testified then
sounded to me comparable to the kind of control, but with the flexibility of administrative treatment, that the Commission has with
respect to investment companies.
Mr. GONZALEZ. One little followup question. That is exactly what
I was trying to get to.
Now, in your field do you have discretionary authority in supervising these disclosures with respect to acquisition and the like, or do
you have total power of prohibition ?
Mr. SMITH. With respect to noninvestment companies and nonpublic utility holding companies, our powers relate only to disclosure.
We also do have antifraud enforcement powers; obviously if there
is a fraud involved in our securities transactions, that comes within
our enforcement powers. But in terms of prohibiton, we have no such
powers, except with respect to investment companies and the public
utility holding companies. And there the general statutory format has
been in essence to prohibit such conflicting transactions, except to the
extent that the Commission finds, under general standards, that they
do not in any way impair the operations of that financial institution,
or are unfair or against the public interest.
Mr. GONZALEZ. Suppose then instead of a bank it were an insurance
company, and the insurance company diverted a substantial percentage of its capitalization for the acquisition of some other corporations,
and from a good management standpoint, and from a Securities Exchange Commission standpoint, it would look like a dubious thing,
what would you do about that, if anything ?
Mr. SMITH. Absent fraud on investors only require disclosure with
respect to insurance companies, some of which are exempt from certain parts of our statutes.
Mr. GONZALEZ. Thank you very much.
Thank you, Mr. Chairman.
The CHAIRMAN. Mr. Stanton?
Mr. STANTON. Thank you, Mr. Chairman.
The CHAIRMAN. Let's try to restrict the time to 5 minutes so that
all of us can be given an opportunity to question.
Mr. STANTON. That is a good idea.
Mr. Smith, in your colloquy with the Chairman you seemed quite
emphatic when you made the statement that bank trust departments
are the largest institutional investors, which is a fact. Do you believe
this is wrong?




147
Mr. SMITH. NO, I don't believe it is "wrong." There are many kinds
of concentrations in American business generally. And given the
existence of very large businesses, one would expect very large financial institutions. I would not say that it is wrong. There are certain
aspects of that concentration that we would like to explore with the
banking authorities, because we are quite conscious of our limited
knowledge and expertise in the policies behind the banking system,
which is a very complex mechanism.
There are some things which are a little difficult for us to understand, such as, at least in some States, the requirement that a trust
company, a corporation that wants to engage in trust operations,
must also engage in comercial banking operations, and vice versa.
Those we are not quite sure we understand at this point. And we do
plan to have some discussions with banking authorities in some of
these areas where perhaps it is a matter of our being better informed,
but where we have initial questions.
Mr. STANTON. YOU know, in this numbers world in which we live,
somebody is always first and somebody is always the largest. Would
you rather see some other type of an organization the largest institutional investor?
Mr. SMITH. NO, I can't say that I have preferences one way or the
other. The commission's role is not to determine those kinds of allocations, but simply to try to preserve to the degree possible the fairness
of the securities market. I think, generally speaking, that the more,
different decision centers there are with respect to security markets,
the stronger these markets are.
Mr. STANTON. DO you have within the Commission the authority
to go into the trust departments of banks to find out any information
that you wish to ascertain ?
Mr. SMITH. We have no inspection or examination powers with
respect to banks, which are administered by the various bank regulatory agencies. We do have subpena powers in connection with enforcement actions involving securities frauds or manipulations and,
so that we do have
Mr. STANTON. Have you ever been turned down by a financial institution on a request for information you desired ?
Mr. SMITH. Oftentimes a financial institution will feel that a confidential relationship exists with its customer and will not voluntarily
provide information to us. And they might quite properly at that
point ask to be given a subpema so that they will be under a legal
mandate to provide the information.
Mr. STANTON. They do the same thing with the Banking and
Currency Committee.
Mr. Camp, I want to compliment you on your statement. One thing
that you do for the committee members which is of great value is,
to make a section-by-section analysis. And I like to see that in the
statements that we get.
Will it be a fair statement to say that—and I have not read your
complete statement here this morning—that you feel that 80 or 90
percent of the bill before us, H.E. 5700, is either unnecessary or is
covered now by the regulatory agencies having the authority?
Mr. CAMP. Yes, that is a fair statement, sir.




148
Mr. STANTOIST. I believe you said that it is section 11 of the Federal
Criminal Code which makes it a criminal offense for a financial institution to offer or give a bribe to any employee of a customer or potential customer of a bank. And you went on to state that you don't think
this is necessary, and in all your years you have never heard of it
being used.
Mr. Chairman, I think it would be appropriate to put it in the
record at this time if the committee has any evidence or reason to
believe that banks, savings and loans or other types of institutions
have been guilty of abuses in this area.
Mr. Smith, you disagreed with Mr. Camp when it comes to the
subject of trust department reporting. Mr. Camp makes the general
statement that the accumulation of additional information would be
cumbersome and very expensive, especially for the small banking
institutions. H.R. 5700 covers only a yearly report, and you would want
it more frequently than that.
Do you think that there is some basis for Mr. Camp's objection to
this that it would be too expensive?
Mr. SMITH. I am sure Mr. Camp has a good basis for any position
he takes. But we may disagree about some things with respect to
reporting. I assume Mr. Camp obtains all the information he needs
for the regulatory responsibility he has. The Commission's concern
is one of making sure the securities markets and public investors have
such information as they may need. And perhaps that is a somewhat
different focus, bias if you will, perspective that the Commission has
with respect to reporting that may not strike the bank regulatory
agencies as being in their particular field.
Mr. STANTON. Mr. Ward, I wa^ just wondering, once again getting
to your statement, about section 8 of the Clayton Act. As I understand,
it, only national banks are affected under section 8 at the present
time on interlocks in communities in which the banks are located, intracommunities. My question is, if it is true, has the Federal Trade Commission ever recommended to Congress that other financial institutions
are covered under this act ?
Mr. WARD. Even as to the banks that are covered, the Federal Trade
Commission has no jurisdiction under the first part of section 8 of the
Clayton Act which deals with banks. The only part of section 8 of
the Clayton Act that the Federal Trade Commission deals with is the
part that deals with corporate interlocks, which is a subsequent paragraph. We have nothing to do with the banking interlocks.
Mr. STANTON. Thank you, Mr. Chairman.
The CHAIRMAN. May I state in reply to your question as to whether
or not the committee had any evidence along the lines of the bribery
matter that was decided that there was a situation which came to our
attention during the investigation of the Penn Central matter which
has been regarded as a commercial bribery case. I t involved obvious
preferencial treatment by a major New York bank in connection with
a loan, a loan to Penn Central officials. There is evidence to show that
this highly professional treatment was granted in order to keep Penn
Central business in the banks. Of course, it is a highly lucrative oper-




149
ation to the banks, and I don't blame them for wanting the deposits,
and especially the free deposits. According to your statement, Mr.
Camp, in the last 2 years the banks have had about $225 billion of the
free use of money through demand deposits. And therefore this is a
very important matter. It is our understanding that New York law
enforcement officials are investigating their action as a possible violation of its commercial bribery statutes.
This would seem to me good evidence that the Federal statute covering interstate transactions should be seriously considered.
Mr. STANTON. Mr. Chairman, I am interested in that bribery case.
Was it a case where a bank was soliciting business, or attempting to
keep the customers away ?
The CHAIRMAN. We are in no position to take the time of the other
members at this point. But we shall be very glad to document it. We
assure you that the Penn Central case was a terrible case, and it leads
to lots of things that should be stopped.
Mr. WILLIAMS. Mr. Chairman, I should like to make the observation that there is already a law against what the Penn Central and
the New York banks were reputed to have done.
The CHAIRMAN. Mr. Gettys.
Mr. GETTYS. Thank you, Mr. Chairman.
Mr. Ward and Mr. Smith, following up some of the previous interrogation, would you put restraints upon a testator or a trustor in
naming a banking institution or other financial institution as a
trustee {
Mr. CAMP. I didn't get your question.
Mr. GETTYS. Would you put any restraints on a testator or a trustor
in naming a bank or other financial institution as a trustee?
Mr. CAMP. NO, sir, I would not. I think that would be depriving a
person of his constitutional freedom of choice.
Mr. GETTYS. Would you put any limitation on the amount of trust
property that a bank or other financial institution could represent?
Mr. CAMP. NO, sir, I would not. I think you have come to a very
basic question here, and that is, are our holdings, our large holdings, in
and of themselves an abuse strictly because of concentrations ?
Now, when we find abuses in this fashion, where we detect them we
report them to the proper agents.
Mr. GETTYS. We have some serious questions in the Congress. If I
were a banker, which I am not, would I have conflict of interest in
serving on the Banking and Currency Committee?
If I am a lawyer, which I am, would I have a conflict of interest in
serving on the Judiciary Committee? If I were a farmer, which I am,
would I have a conflict of interest in serving on the Agriculture
Committee?
There are very serious questions inside and outside the Congress.
Would you place any restrictions on a bank trustee taking commissions in dealing with the trust estate property of its own stock; that is,
of the bank stock ?
Mr. CAMP. Yes, I would.

60-299—71—pt. 1




11

150
Mr. GETTYS. Would you not permit the trustee to take a commission
on dealings with the bank stock which you sell to the trust ?
Mr. CAMP. They are prohibited by statute in dealing, with their own
stock. The only way that the bank can have its own stock in any manner is for a debt previously contracted, or to be the recipient in kind
through a trust estate.
Mr. GETTYS. But do not State laws in most instances restrict your
dealings with the banks ?
Mr. CAMP. That is right, although I am quite surprised that a number of States allow banks within their States to purchase directly stock
of other banks. Pennsylvania is one. And Louisiana is another. And
there are others.
Mr. GETTYS. I appreciate the fact that you would even let a lawyer
be a trustee. But there again, State law covers that. But would it be
proper, do you think, for a trustee who is a lawyer to practice law for
the trust?
Mr. CAMP. One who is a trustee for other parties outside the
Mr. GETTYS. NO. Suppose that a trustee is a lawyer, should that
lay wer represent that trust estate ?
Mr. CAMP. I see no reason to preclude that.
Mr. GETTYS. For a commission or a fee ?
Mr. CAMP. Outside the bank ?
Mr. GETTYS. Yes.
Mr. CAMP. I see no

reason to preclude that. I think most lawyers are
honest people.
Mr. GETTYS. What I am worried about in this—and there are many
things, Mr. Chairman, in this bill that I have no objection to, and
which I think would lend themselves to proper regulation of banks
and other institutions—but the presumption is that everybody is
crooked. Wouldn't it be better to presume that everybody is honest and
go from that standpoint ?
Mr. CAMP. That is correct, sir.
And I think one thing that has failed to be pointed out here is that
as far as investments of banks are concerned through their trust departments, there is set out actually in the trust indenture itself, the type
of investments that banks through their trust departments can acquire.
And it is not the bank in any case going helter-skelter. We require
that they follow the terms of the trust instrument very carefully. And
in most States there is a so-called list of legal investments for trust
accounts.
Mr. GETTYS. Thank you, sir. My time has expired.
The CHAIRMAN. Thank you.
Mr. Blackburn.
Mr. BLACKBURN. Thank you, Mr. Chairman.
Mr. Smith, I am sure that you are aware that existing State laws
generally require full disclosure by fiduciaries as to their holdings and
their activities each year. You are aware of that, are you not ?
Mr. SMITH. By the fiduciary ?
Mr. BLACKBURN. Yes.
Mr. SMITH. Yes.




151
Mr. BLACKBURN. And so before we enact legislation which would
require extensive and very expensive burdens on banking institutions
and anyone else who might be dealing with stocks, wouldn't it be advisable to have the SEC make a study as to existing reporting laws
and whether or not they might be adequate for your purposes ?
Mr. SMITH. We have such a survey, Mr. Blackburn. The appendix
to chapter 1 of "The Institutional Investor Study" does reflect such a
survey. And chapter 5 has a rundown of the State requirements in this
area. One of our purposes, in fact, is to reduce the duplicative burden
that a number of financial institutions have in reporting to various
regulatory authorities.
There is always a cost-benefit equation with respect to disclosure.
Any disclosure system costs some money. And the question is: Is the
public benefit great enough to justify it? We have reached a conclusion that the benefit of increased reporting, increased disclosure, by
the largest financial institutions, including banks, justifies the cost.
The inflexibility of trying to do this by statute, it seems to me, might
tilt that equation to the extent of making it more costly than beneficial,
and that is why we have proposed that the Commission be given rulemaking authority to require disclosures. Our interest is in informing
public investors about it. And to the extent that reporting to the Commission could be incorporated with the bank or regulatory authorities
who may want more information in certain areas, we would make every
attempt to do that in the exercise of our rulemaking authority, with a
very conscious effort to reduce duplicative reporting.
Mr. BLACKBURN. AS I interpret your response, then, this bill, in your
opinion, would go further than you think is necessary at this time?
Mr. SMITH. It goes further in some respects in the rigidity of the
requirements. It does not go as far in other respects, in that we would
like such reporting by financial institutions in addition to banks, and
we would like the flexibility, perhaps, to require the reporting wTith
respect to transactions, and perhaps more frequently than annually.
Mr. BLACKBURN. I think that directs my next question to Mr. Ward.
,As I recall your testimony, Mr. Ward, you feel that section 8 of
the Clayton Act may need some change. Now, aren't we really dealing
with the question of jurisdiction right now? If we are going to enact
the present law, the one that is before the committee, we are extending
the jurisdiction of the FDIC very broadly into perhaps the antitrust
area. In your opinion, don't you think it would be more manageable
and more applicable to extend the authority of section 8 and extend
the jurisdiction of the Federal Trade Commission, rather than inject
a new agency into antitrust legislation ?
Mr. WARD. Insofar as the interlocking provisions of section 8 that
deal with banks, I think the Commission—I am not positive about
that, but I doubt that the Federal Trade Commission has taken a position that it should be given jurisdiction over interlocks among banks
such as covered by this bill. The only reason I went in on our experience
under section 8 is that I think it does reveal that there are certain
troublesome aspects of dealing with this on a flat prohibition basis,
unless it is fairly broad.




152
Mr. BLACKBURN. But don't you think it would be more manageable
to allow the FTC to manage such an area rather than thrust the FDIC
into this new role?
Mr. WARD. NOW, I really don't have a position on that. I don't know
what it would mean for FDIC to get into this area, because they
certainly will not have any jurisdiction of matters that the Federal
Trade Commission has.
Mr. BLACKBURN. Mr. Camp, as I interpret your statement—and I
am in agreement with Mr. Stanton here—we shouldn't scratch a place
that doesn't itch. Your testimony points out that perhaps we are creating some strawmen as evils in the banking institution, where really the
evils don't exist when you look at the actual operation of the institutions. Am I right in that interpretation ?
Mr. CAMP. Absolutely, sir.
Mr. BLACKBURN. My time has expired.
The CHAIRMAN. Mr. Annunzio ?
Mr. ANNUNZIO. I have no questions. Thank you, Mr. Chairman.
The CHAIRMAN. Mr. Williams.
Mr. WILLIAMS. Thank you, Mr. Chairman.
I want to compliment all three of you gentlemen for your testimony,
and I want to thank you for being here.
I think that your statement, Mr. Camp, has been a very comprehensive statement. You have put your finger on some of the things
which are really wrong with H.R. 5700. On page 2 of your testimony,
where you are commenting on interlocking directorates, you say that
rather than handle things in the manner in which this bill suggests,
you think it would be most detrimental to the public interest to curtail
the use of scarce executive management talent in the way prescribed
by H.K. 5700. Would you care to elaborate on that, sir?
Mr. CAMP. Yes, sir. I think if this bill is carried to its ultimate,
if it prevails, what you would have in banking would be an in-house
board of directors. And I think that the banks are entitled to have
the expertise of the outstanding men in their communities representing all segments of the economic life of their communities on
their boards of directors. I don't think they should be deprived of
that. If they are in a cattle area, I think they ought to have cattlemen
on the board. If they are in an agricultural area, they ought to have
the agricultural people. Or the automobile dealers, and any outstanding men. And I presume—and I have found it almost always
true that when a man goes on a board of directors, he is an honest
man.
Mr. WILLIAMS. On page 7 of your testimony you state that the
accumulation of a vast storehouse of abstract data of this nature
called for by section 12 will not be of material aid in detecting or
, bringing appropriate corrective action in case of abuse. I certainly
am inclined to agree with your viewpoint. I think that the cost, as
you stated in your statement, could not possibly, be justified.
Mr. Smith, when a bank buys stock for a trust account, is the bank
buying the stock to exercise control over a company or a corporation,




153
or is it buying the stock for investment purposes for the benefit of the
trust account ?
Mr. SMITH. I assume that the general purpose would be the latter.
It is not always a simple matter to break a question such as that down.
We have found institutional involvement in transfers of control to be
fairly considerable, not necessarily for the purpose of a bank assuming
control, but participating in transfers of control to somebody else, and
therefore assisting in the control transfer effort. But as a general
matter, certainly any investment fiduciary should be buying for investment purposes.
Mr. WILLIAMS. Mr. Smith, section 14 prohibits insured banks, insured savings and loan associations, mutual savings banks, bank or
savings and loan holding companies and insurance companies from
obtaining any equity participation for making a loan.
Use of debt securtities convertible into stock or with warrants
for purchase of stock has long been accepted as a useful form of
corporate finance typically resulting in lower interest costs to the
borrower.
For instance, about a month ago I noticed an ad for new offerings
of debt securities by Pennzoil United, Inc. The company offered $75
million of 25-year debentures at 100*4 with an interest rate of 8%
percent. At the same time the company also offered $50 million at
25-year subordinated convertible debentures at 100 with an interest
rate of only 5 ^ percent.
Had the company been denied the use of convertible debt securities
it is clear in this case the company would have had to pay at least
66 percent more interest than was necessary with funds borrowed on
a convertible basis.
Would you not agree that the flat ban on so-called equity kicker
financing works to force up interest costs for borrowers denied this
financing device with the lenders covered by this section of the bill ?
Mr. SMITH. It wasn't clear to me, Mr. Williams, at least from a
strict reading of the language of the bill, that it included convertible
securities. You could see how one might construe the language to
include that. But let's assume that it does. Whether you are talking
about convertible securities or debt with warrants, I would think
that a flat prohibition of this kind would inhibit the flexibility and
ingenuity of raising money for American industry, and would as a
result have a counter productive effect.
Mr. WILLIAMS. It would really be an adverse effect.
Mr. Chairman, I ask unanimous consent that this Pennzoil United,
Inc. advertisement be made a part of the record.
The CHAIRMAN". Without objection, it is so ordered.
(The advertisement referred to follows:)




154
This announcement is neither an offer to sefl nor the solicitation of an offer to buy any of these securities.
The offering is made only by the Prospectus,

$125,000,000

Pennzoil United, Inc.
$75,000,000
Debentures 8h% Series due March 1,1996
•
Price 100.25%
and
$50,000,000
5H% Convertible Subordinated Debentures due 1996
•
Price 100%
Copies vf the Piospetnrs mayb&obta'merf in any Stare only from such <
toe several underwitets-as may lawfully offer these jecurwes m s

White, Weld & Co.

Lehman Brothers

The First Boston Corporation

Smith, Barney & Co.

BIyth & Co., Inc.

duPontGIore^Forgan

Eastman Dillon, Union Securities & Co.

Halsey, Stuart & Co. Inc.

Hornblower & Weeks-Hemphfll, Noyes

LazardFreres&Co.

Loeb, Rhoades & Co.

Salomon Brothers

Dean Witter & Co.

American Securities Corporation
CBWL-Hayden, Stone Inc.

Qark^Dodge & Co.

Ladenburg,Thalmann&Co.
Reynolds & Co.

Hallgarten & Co.

SpencerTrask & Co.

The Robinson-Humphrey Company, Inc.
Arthurs, Lestrange& Short
A. E. Masten & Co.
Anderson & Strudwick

Craigie

March 24.1971




R.W.Pressprich&Co.

L. F. Rothschild & Co.

Shearson,H7mmill & Co.

Tucker, Anthony & R. L. Day

G. RWallcer & Co.
Johnston, Lemon & Co.

Johnson, Lane, Space, Smith & Co., Inc.

Legg, Mason & Co., Inc.

Singer, Deane & Scribner
Ferris& Company

Moore, Leonard & Lynch,
Chaphn, McGuiness & Co.

Investment CorporaUon of Virginia

W. E. Hutton & Co.

John Nuveen & Co.

Wood, Strulhers & Winthrop Inc.

R. S. Dickson, Powell, Kistler & Crawford

Alex. Brown & Sons
F. Eberstadt & Co., Inc.

E. F. Hutton & Company Ino

F. S. Moseley & Co.

Walston & Co., Inc.

Swiss American Corporation

J. C. Bradford & Co.
Dominick & pominick,

Rotan, Mosle-DaDas Union, Inc.

F.S.Smithers&Co.,Inc

Stone & Webster Securities Corporation

Paribas Corporation

Bear, Stearns & Co.

Equitable Securities^Morton & Co.

Kidder, Peabody & Co.
Paine, Webber^JacksorTk Curtis

Shields^&Company

Wertheim&Co.

Drexel Firestone
Goldman, Sachs & Co.

Mackall &Coe

Wheat & Co., Inc.

Robert Garrett & Sons, Inc.
Parker/Hunter

Thomas & Company, Inc.

Davenport & Co.
Mason-Hagan, Inc.

Kaufman Bros. Co.

TheFurmanCo.

Sterne, Agee & Leach, Inc.

155
The CHAIRMAN. Mr. Bevill.
Mr. BEVILL. Thank you, Mr. Chairman.
Mr. Ward, I believe in your testimony your one recommendation
is that we expand section 8 of the Clayton Act, and that this would
be in the public interest to do this. Is this the only recommendation
you have as far as this legislation is concerned ?
Mr. WARD. I think the position of the Commission is that we believe that legislation of the type proposed by H.R. 5700, with a
prohibition of interlocking directorates on a direct horizontal basis,
is in the public interest, and the general concept of that type of
legislation is in the public interest.
Now, whether the specific terms of these bills are designed to
carry that out in a proper way within the banking context is something
that the Federal Trade Commission has no expertise in.
Mr. BEVILL. It struck me that of the five basic areas that H.E. 5700
covers, that you really make only the one recommendation, am I
correct on that? In other words, you are not recommending the
provisions about the broker deposits, or expanding the insurance
coverage, you have no recommendations on any of those?
Mr. WARD. NO.

Mr. BEVILL. YOU are making one recommendation, and that is to
expand section 8 of the Clayton Act, is that right ?
Mr. WARD. I don't think that the legislation would have to be
within the context of section 8 of the Clayton Act. I think section 8
of the Clayton Act, certainly in the industrial and commercial area,
is outmoded, that it should be amended extensively. As far as it
relates to banks, I think the same defects are apparent, and should
be changed.
Mr. BEVILL. And you are not sure that the way this bill is worded
that this is the best way to do it ?
Mr. WARD. I am not sure, because our jurisdiction doesn't include
banks, and there may be—for instance, on the equity kicker, if that
were in the commercial field, I have no doubt that it would violate
the antitrust laws. But there may be situations in banking where a
flat prohibition of that type of practice might prohibit other things
that are perfectly proper.
Mr. BEVILL. Mr. Smith, out of the five basic laws that are covered
by H.E. 5700, I believe that you stated that two of them were not
within your jurisdiction. And I wonder, did you endorse any of the
other three ?
Mr. SMITH. With respect to the disclosure requirements
Mr. BEVILL. Your testimony is that you favor the provision as to
disclosure ?
Mr. SMITH. Not quite. We favor the concept of disclosure of institutional holdings and institutional transactions, but we would prefer,
rather than a flat requirement that such information for banks be
filed with FDIC, a general rulemaking authority on the part of the
SEC to require disclosure from all institutional investors. We think
that the flexibility of a rulemaking power would permit us to focus
on the cost-benefit equations with respect to particular areas of disclosure. I would be very strongly in favor of the thrust of that provision toward disclosure.




156
Mr. BEVILL. Of the five areas that the bill covers, there is one that
touches on a subject in which you are interested, but you don't really
go along with the way it is proposed.
Mr. SMITH. Right.
Now, in the conflict of interest provisions, while the Commission
has no general position with respect to those, we also are generally
favorably disposed toward provisions which deal sensibly with conflict of interest questions. And we pointed to the type of regulation
in that area which the Commission performs with respect to investment companies.
Mr. BEVIL. Thank you.
Mr. Camp, on these five basic areas here, have you had any occasion
in your vast experience as Comptroller of the Currency to run across
instances where the public interest was not protected under the existing
law?
Mr. CAMP. No, I have not.
Mr. BEVILL. DO you know of anything that this bill would do to protect the public interest, ?
Mr. CAMP. I don't believe, sir, that this bill contains any facets in
law which are not now available. There are many legal tools which
are presently available. The common and statutory law of corporate
and fiduciary responsibility would provide effective civil remedies to
aggrieved shareholders. In addition to this potential civil liability,
questionable or improper actions of any bank director are subject to
scrutiny, control, and effective sanctions by the bank supervisory
agencies.
In addition, section 22 of the Federal Reserve Act, and regulation O
issued thereunder, control loans to executive officers.
A very powerful deterrent to self-dealing practices in institutions
with more than 500 shareholders is the public disclosure requirements
imposed by the Securities Act Amendment of 1964. The hand of the
Federal banking agencies in controlling conflicts of interest was greatly
strengthened in 1966 by the passage of the Financial Institutions
Supervisory Act. That act empowered the agencies to issue a ceaseand-desist order against any practice deemed detrimental to sound
banking.
The philosophy under sections 2 and 9 appears to me to be one of
suspicion of the integrity of the average businessman and of the average banker. And my own 35 years with the Office of the Comptroller
of the Currency has not led me to any such conclusions.
Does that answer your question ?
Mr. BEVILL. That answers it. My time is up.
Mr. BARRETT (now presiding). Mr. Crane.
Mr. CRANE. I have no questions.
Mr. BARRETT. Mr. Hanley would have been next according to the
sequence here, but he was called to the telephone. So we will recognize
Mrs. Sullivan of Missouri.
Mrs. SULLIVAN. Thank you, Mr. Chairman.
I have several questions—they are very shoit—for Commissioner
Smith.
In section 32 of the Banking Act of 1933, member banks are prohibited from having interlocking relationships with broker-dealers. Do




157
you favor broadening this prohibition to all insured financial institutons as set forth in H.E. 5700 ?
Mr. SMITH. We have taken no position on that, Mrs. Sullivan. We
are quite satisfied with the provision as it affects broker-dealers in the
Glass-Steagall Act. We have taken no position with respect to that
area beyond broker-dealers.
Mrs. SULLIVAN. Would you really have any jurisdictional interest
in studying this question, to see whether or not your concern should
extend to the practices of the other insured financial institutions?
Mr. SMITH. We do not interpret our jurisdiction as going to that
question. That is a matter of the administration of the banking statute,
which is done by the banking agencies, and we did not examine that
question itself.
Mrs. SULLIVAN. And you don't think it relates to the information
that you need or should have when making decisions on investments,
or anything else concerning regulated institutions?
Mr. SMITH. We certainly see the desirability for the disclosure of
such relationships, with respect to disclosures to shareholders in banks.
I don't know to what extent the disclosure requirements under the 1964
amendments as promulgated by the Comptroller of the Currency get
into that area. I am not familiar with that,
Mrs. SULLIVAN. Doing a little studying, as I have, on the relationships of bankers serving as directors of insurance companies, or savings and loans, or other institutions, and vice versa, and seeing some
of the failures in some of these areas and losses to the owners of the
stock of these institutions, I would think that the SEC would have
some kind of jurisdiction, or really should have knowledge of this
interlocking relationship.
Mr. SMITH. Mrs. Sullivan, you appreciate that our function with
respect to banks is quite limited. They are exempted from most of the
statutes that we administer. And the disclosure requirements that are
applicable to banks under the 1964 amendments are administered by
and reported to the bank regulatory authorities themselves.
Mrs. SULLIVAN. I have one other question for you, Mr. Smith. As
your excellent report on institutional investors noted, the percentage
of holdings of common stocks by institutional investors is clearly on
the rise. And in view of this trend, don't you think that it is advisable
to clearly separate the investment role from the management role, so
that the financial institution does not dominate portfolio companies ?
Mr. SMITH. I am not sure, Mrs. Sullivan, that I understand what
you mean by separating the investment from the management role. I
don't know if you mean separating the trust investment functions from
the commercial banking operations or whether you are talking about an
issue that is very current in the securities industry of separating investment management functions from brokerage functions. I am not sure
what you are focusing on.
Mrs. SULLIVAN. For instance, under the One-Bank Holding Company Act, we were trying to separate the banking business from any
other business that the holding company might be performing. Now,
with the institutional investors investing so much, and growing as
large as they are, should they be permitted to also get involved in
the management of portfolio companies, as well as do the investing?
Mr. SMITH. The industrial companies ?




158
Mrs. SULLIVAN. I am thinking of managing the companies in which
they invest as well as the investing.
Mr. SMITH. Yes. Under the 1940 act we do get into such questions.
There is of course, a line to be drawn between an institution whose
function is investing and an institution who gets into the controlling
of operations. Most investment companies, other than perhaps SBIC's,
most investment companies do refrain from controlling operations of
companies in which they invest. And, I think, that historically has
been the position of bank trust departments as well. There have been
cases, such as Cleveland Trust, that have raised questions in that
respect, but as a general matter we do not see the phenomenon of financial institutions in fact controlling operations of industrial
companies.
Mrs. SULLIVAN. Thank you. My time has expired.
Mr. BARRETT. Thank you, Mrs. Sullivan. Mr. Rousselot.
Mr. ROUSSELOT. Mr. Camp, on page 5 you refer to the substantial
risk of liability involved in serving on a board of directors. You have
referred to that again in your answer to other questions. Could you
expand upon why you brought this into your testimony ?
Mr. CAMP. Because, No. 1, I want to emphasize again that I think
the banks are certainly entitled to have on their boards the outstanding business and civic leaders of their communities. And it is not without some sacrifice that a man goes on the board of directors of a bank.
It is not all "picking peaches." There are liabilities, some severe ones.
There are liabilities for making improvident loans. There are liabilities for making excessive loans and, where losses occur, or investments. So that it is just not an honorary position. A man has to be a
dedicated, thoughtful person, with great integrity, before he goes on
the board of directors of a bank.
Mr. ROUSSELOT. AS I recall, in Michigan there is presently a lawsuit involving a bank where the officers and directors may find themselves liable on certain questions. So they are really subject to scrutiny
under several proceedings if they act improperly in the management
of these funds or these type portfolios, is that not correct ?
Mr. CAMP. That is correct, sir.
Mr. ROUSSELOT. And really aren't we here presuming that we need
Federal laws because the statutes are not adequate, when really in
fact we might even be preempting some State laws ?
Mr. CAMP. Sir, in all candor I believe that we do have—and speaking now for the national banking system—ample Federal law. There
is an elaborate set of statutory, judicial, and administrative apparatus
which exists to control abuses of competitive processes.
As for the use or abuse of inside information, it is also specifically
outlawed by existing Federal statutes, supplemented by strict judicial
interpretations. And I refer now to the provisions of the law administered by the Securities and Exchange Commission as interpreted by
the Texas Gulf Sulfur decision.
So we are very careful in our examining process to see that there
are no concentrations of credit to officers, directors, or employees of
a bank. We have a specific section of our examination report which
would be very critical of that situation if it represented a concentration, No. 1, or if, No. 2, it does not represent a concentration, but rep-




159
resents an extension of unsound credit. So we follow it very carefully
indeed. And if we find conditions like this existing in a national bank,
we have ample authority under the provisions of the cease and desist
statute to stop it.
Mr. ROUSSELOT. Thank you.
Mr. BARRETT. Thank you, Mr. Smith.
Mr. Stephens, I know you are a very representative member of
this committee, but Mr. Hanley, I think, arrived here much earlier.
So I will recognize Mr. Hanley.
Mr. HANLEY. Thank you, Mr. Chairman.
Mr. Camp, I believe you have described the interlocking provisions
of this bill as being too drastic. I wonder if you might cite some examples where you might think that interlocking prohibitions would
be necessary or appropriate.
Mr. CAMP. I think, sir, that we have cited them. I believe that, for
instance, within the same general area, the same competitive environment, that one could well prohibit the director of a bank serving on the
board of directors of a savings and loan association, and vice versa, the
director of the savings and loan association serving on the board of a
bank. But that would still go to the same test which applies to banks
in the Federal law. In other words, it would not be reasonable, in my
opinion, to say that an individual serving on the board of directors
of a bank in New York, and maintaining, say, 6 months of the year a
home in Florida, that he couldn't be on the board of a little savings
and loan association in Florida. So I think we have got to apply the
same test now that we did to banks. And I think that is very amply
protected.
Mr. HANLEY. If I read you properly, what you are saying is that
there actually isn't any valid reason for the language in this particular
section of the bill.
Mr. CAMP. Absolutely, sir.
Mr. HANLEY. I believe you further said that about 90 percent of the
provisions contained in the legislation are already covered. That leaves
about 10 percent apparently which might be appropriate for us to
legislate on. Could you tell us what this 10 percent might encompass ?
Mr. CAMP. Yes, sir. Basically it would go to, if the Congress in its
wisdom wants to do away with "giveaways"—which I don't think it
should, but I have no really basic feeling on it, after all, the consumer
is entitled to something—we could set limitations on that.
And there is another one here, the "brokered deposits." That one, I
think, maybe is a little too severe. There is nothing really wrong with
any type of deposit. It is the human action, the use of the money that
gets you into trouble. But I have no strong feelings on brokered deposits, except to say that I think that now this bill is a little bit too
narrowly drawn, and that there are some legitimate long-term concerns
dealing with broker deposits. But I would certainly make it a violation
to have a brokered deposit tied into a loan, specific loan. That is where
the troubles have come from.
Mr. HANLEY. Wouldn't it be fair to say that the broker deposit is in
actuality a circumvention of regulations ?
Mr. CAMP. I don't think that you could say that all broker deposits
are, no, sir. Some are, very clearly.




160
Mr. HANLEY. The major percentage would be a circumvention, isn't
that fair to say?
Mr. CAMP. NO, sir. I don't believe that to be a fair statement, because
there are some very fine firms which do deal with larger certificates of
deposit. It is the "fly-by-night" operator who generally comes into a
very small town, and through the use of a certificate of deposit imports
money to which is attached a loan generally far out of the natural
trade territory of the bank, that gets that bank into trouble, and nine
times out of 10 there is collusion at the time between the banker and the
person who brings the certificate in to the bank. It is a criminal action,
really, it is a conspiracy.
Mr. HANLEY. If I may relate back to the matter of interlocks again,
you have cited as an example an interlocking director of, say, a New
York City bank serving on the board of a small bank in Florida. How
would you treat a situation where a New York City banker is sitting
on the board of a major banking institution, say in California, San
Francisco, or Chicago, how would you treat that sort of situation ?
Mr. CAMP. Well, under the present law that would be permissible.
Mr. HANLEY. But is this healthy?
Mr. CAMP. I don't think that I would object to a prohibition against
that in a major bank. But you would have to define very carefully what
constitutes a major bank. And if you are seeking to merge
Mr. HANLEY. We are talking about a major institution.
Mr. CAMP. I don't know what position the Justice Department would
take. I don't know that the courts would say that these particular
banks are actually competing.
Mr. HANLEY. I know that time is running out on me.
I have a question for Mr. Smith relating to page 6 of his testimony.
Mr. Smith, on page 6 you say that the SEC has recently come across
situations which indicate that broker deposits may create a situation
dangerous to banks and their depositors.
Mr. BARRETT. Would that gentleman yield to me?
Mr. HANLEY. Mr. Chairman ?
Mr. BARRETT. Would you be desirous of having the question answered
in writing?
Mr. HANLEY. That would be fine.
Mr. BARRETT. TO whom are you submitting the question ?
Mr. HANLEY. To Mr. Smith.
Mr. BARRETT. Mr. Smith, would you be willing to answer his question
in writing?
Mr. SMITH. I am not sure he completed the question.
Mr. HANLEY. It has to do with your testimony on page 6 where you
say "We have recently come across situations which indicate that
broker deposits may create a situation dangerous to banks and their
depositors." I would appreciate it if you could expand upon that
in writing to the committee.
Mr. SMITH. With the Chairman's permission, I would like to give a
response to that now, which will be quite short.
There are enforcement actions pending involving that situation, and
it is for that reason that I would respectfully like to decline to speak
further on it. It does involve loan situations su^h as Mr. Camp described earlier.




161
Mr. HANLEY. It does involve matters already under litigation?
Mr. SMITH. Yes.
Mr. HANUEY. Thank you. I withdraw the question.
Mr. CAMP. Could I expand on that just one moment, please, sir ?
Mr. HANLEY. Yes.
Mr. BARRETT. Mr. Camp, would you be kind enough to yield to me?
Mr. CAMP. Yes.
Mr. BARRETT. We are running short, and the gentleman has consumed
about 5% minutes, plus 10 others. If you make your answer short we
can proceed here.
Mr. CAMP. Thank you, sir.
I would like to point out that the 19 banks which have failed since
January 1, 1969, represent 0.00137 percent of the total number of
insured banks, and those banks held about 0.00041 percent of their
total deposits.
Mr. HANLEY. YOU are a mathematical genius. Thank you.
Thank you, Mr. Chairman.
Mr. BARRETT. The gentleman's time has expired.
Mr. McKinney.
Mr. MCKINNEY. Mr. Camp, do you see any reason why there
shouldn't be mutuality of some members of boards of directors ? Take
aD industrial town of 150,000 or 250,000 people. Do you see any
reason why the same man or men, at least some of the same men should
not serve on both the board of a commercial bank and a mutual savings
and loan institution ?
Mr. CAMP. Sir, I believe if you considered them in the context that
I do, as competitors, that this legislation should extend to the directorships of banks, savings and loan associations, and mutual savings
banks.
Mr. MCKINNEY. DO you consider them to be competitive?
Mr. CAMP. Yes, sir, I certainly do, although the Justice Department
doesn't seem to go along with my view.
Mr. MCKINNEY. I resigned from the board of a mutual savings bank
because I thought being on this committee was a conflict of interest.
Mr. CAMP. A great many mutual savings banks own banks, particularly in Massachusetts, and other States. Was that your case?
Mr. MCKINNEY. NO, it was

not.

Just for the record, I would like to state that I think the public in
general sometimes has a feeling that a bank director rides in a RollsEoyce and gets a large paycheck. I think my pay was $40 a month*
Mr. CAMP. That is right.
Mr. MCKINNEY. Yes.
Mr. BARRETT. Mr. McKinney,

would you just yield to me at this

point?
Mr. MCKINNEY. Yes.
Mr. BARRETT. I think

Mr. Camp in an earlier statement here said
that in his 30 years he has heard of very few dishonest bankers.
Is that accurate ?
Mr. CAMP. NO. I said that in my 34 years I have never heard of a
banker bribing somebody to open an account with a bank.
Mr. BARRETT. That wouldn't be dishonest if he did?
Mr. CAMP. I would say it would be dishonest, but I know of no case
like that, sir.




162
Mr. BARRETT. Did you read the paper this morning about the Edenton Bank where the president and four stockholders had used $200
million of the bank's money ?
Mr. CAMP. $200 million ?
Mr. BARRETT. Yes, sir.
Mr. CAMP. Did he bribe anybody, sir ?
Mr. BARRETT. It is in the paper this morning.
Mr. CAMP. I understand that. But I thought

your question was,
did the man bribe anybody to do business with the bank ?
Mr. BARRETT. That probably will come out in the trial, don't you
think?
Mr. CAMP. I would think it would. But I would be very surprised if
the banker bribed anybody to do business with the bank.
Mr. BARRETT. I don't want you to be surprised, I just want you to
be knowledgeable of these things.
Mr. CAMP. I am knowledgeable, sir.
Mr. BARRETT. I don't want to consume the gentleman's time.
Mr. McKinney, thank you for yielding.
Mr. MCKINNEY. Mr. Camp, would you consider it to be wrong for
a mutual savings bank, where there was a limitation on a participation, to own stock in a commercial bank within the same State or even
within the same community ?
Mr. CAMP. Sir, I would like to defer that to my counsel, Mr. Bloom.
Mr. BLOOM. I believe the position in the statement on that question, Mr. McKinney, was that we think that any restriction on mutual
savings bank stockholderships should parallel the restriction on interlocking directorates generally. Whatever is thought desirable in that
way should also be the rule for the stockholders.
Mr. MCKINNEY. The reason I ask this question is that I find myself
as an ex—and I underline it—mutual savings bank director, and I was
of that opinion, but I am begining to wonder, that a mutual savings
bank was basically a nonprofit bank organized to allow home loans in
the main, that we had a responsibility to achieve the largest single return for our depositors, and to facilitate our loaning money in the
housing market. And the reason I asked this question is that when I
look at a portfolio I found it very hard to find any gold chip or blue
chip stock that will return to a mutual savings bank the 6.5, 6.2, or
5.7 percent that a gold chip well-run commercial bank will return.
So that I think there is somewhat of an area here of conflict in the
fact that we are charged, or a board is charged, with maintaining the
best possible rate of return on safe investments that we possibly can in
a mutual savings bank, and yet if we limit them in commercial bank
stockownership we are cutting the single highest return gold chip
stock that they can possibly own out of their portfolio.
Mr. CAMP. I see your point, sir.
Mr. BARRETT. Thank you, Mr. McKinney.
Mr. Brasco.
Mr. BRASCO. I would like to start—because I don't know when I
will get the chance again—by making an observation for the record, in
response to something that was said by my colleague, Mr. Williams,
yesterday when he called this the bank destruction act of 1971. I am
one of the cosponsors of this piece of legislation. And I am not a co-




163
sponsor because I am interested in destroying the banking industry.
But I think that the areas that the bill cover are some areas that we
have all found to be abused from time to time. And that is why a
greater degree of regulation is sought in these particular areas. And
I find it almost amazing how every time we have a bill that has something to do with the banking industry how the industry reacts to it,
as if we were talking about regulating the use of their own money.
You see, it is not their money that we are talking about. We are talking about something that is known as the public's money. And that is
what is in the bank, the public's money. And we give to the banks the
franchise to use that money. It is a public trust. And I think that we
have a right to look into these matters with this legislation without
having it being called destruction when we seek to regulate institutions that manipulate the public's funds.
And now that I have that said, I would like to ask Mr. Camp some
questions on the question of interlocks.
Mr. Camp, I don't claim to profess any great expertise in this area,
but you mentioned several times that the reason why this provision of
prohibiting interlock arrangements between financial institutions, is
invalid is because of the lack of talent, and that the institutions involved should have the best talent available. Are you seriously suggesting that we don't have any talent to serve as members of the
board of directors of these institutions other than having to borrow
talent from other insitutions ?
Mr. CAMP. Sir, I repeat, I think that a bank—I know that you have
outstanding men in your congressional district, men of great integrity,
of great business success, leaders in the community, established
leaders.
Mr. BRASCO. But a lot of them never get a chance to be a board member. It seems to be a well-defined clique, members of one company or
one bank—serving in multiple capacities. I can make some recommendations as to individuals who would make good board members.
Mr. CAMP. DO you know any bank directors now that you feel
shouldn't be on the boards by reason of their lack of ability or
integrity ?
Mr. BRASCO. That is the fallacy, if I may say so, of your observations. I am not here accusing anyone specifically. I am talking about
areas that have been abused and have a potential of being abused
in an area where public funds are involved. And I am not specifically
accusing an individual. But I think it would be a better system if we
allowed more people to participate as members of the boards of these
various institutions. And I don't think that the argument that there
is insufficient talent is a good one. If there is, then we had better start
developing some talent to make a healthier system. And I think that
service should be spread around, as some of the committee assignments
are trying to be spread around in the Congress. That is not to say
that the other people who had them are not intelligent and capable
people, but it is a healthier situation when you start to spread the
action around. Don't you think that should be done here ?
Mr. CAMP. Let me say here, under the statute, the board may have a
minimum of five directors or a maximum of not more than 25. Would
you be in favor of expanding that, say, to 50 or 75 ?




164
Mr. BRASCO. YOU see, the thing that I am concerned about,
Mr. Camp, without being put in the position of making specific
accusations against individuals, and what I think the bill is alluding
to, very simply, is that there is a very distinct possibility of creating
an unhealthy situation where you have all of these interlocking
directorships. And very simply, it is not a question of our making
more seats available or not, the real issue is, very simply, should we
have these men sitting on the boards of so many institutions, so many
different institutions, and is it a legitimate response to say there is a
shortage of talent ? I don't think there is a shortage of talent. And as
you say, there are certainly capable businessmen in my district, and I
can bring in a load of them if you would be willing to help me place
them or give them recommendations to go on as members of the
boards of financial institutions.
My time has expired.
Mr. BARRETT. DO you desire to ask a further question ?
Mr. BRASCO. NO.
Mr. BARRETT. YOU

have a little more than 30 seconds left if you are
perpared to use it.
Mr. BRASCO. NO, thank you.
Mr. BARRETT. Mr. Stephens has come in. Mr. Koch was before him,
but he went out to make a phone call. And due to his absence we will
now turn to Mr. Stephens.
And Mr. Stephens, incidently, if Mr. Koch comes in, we will have
to recognize him before Mr. Chappell.
Mr. STEPHENS. Thank you, Mr. Chairman.
Mr. Chairman, I would like to say one thing to follow up what
Mr. Brasco has mentioned.
It is true that the commercial banks have an advantage in having
the deposits, the demand deposits, and it is a use of it they make of
public money. But it is not just as simple as Mr. Brasco and
Mr. Patman have said. In spite of the fact that banks have the use of
that money, they do provide a very valuable service in keeping my
books and your books, and they provide a very valuable service in
protecting your money, because without the banks you would be
putting dollar bills in a can and sticking it under the chickenhouse
like it was done 50 years ago.
I would be glad to yield.
Mr. BRASCO. I agree with you. And I think that is the crux of the
argument. In keeping my books and your books and everybody else's
books, we want to see that we keep them correct.
Mr. STEPHENS. That if fine. I didn't want the impression to be
left that the banks were just using funds without performing a service,
and that we were letting banks milk the public without paying them
for demand deposits.
Getting back to the subject on hand, I agree with the testimony
that has been given today. First of all, the gentlemen have said that in
their field they could not rightfully try to answer some of the points
involved here. And I am glad you didn't attempt to do so, because
that could cause some confusion for us.
I refer to the testimony of Mr. Camp, am I correct in my understanding that you feel that this is not truly a bank "reform" bill,
because we already have limitations? We have gone over that ever




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since I have been on this committee time and time again. We went
over the same area when we talked about creating thrift institutions,
and the conflicts of interest that were supposed to be inherent in the
interlocking directorate. Now, actually as far as I have been able to
see, a bank director who was also a director of a savings and loan
has only two fields in which he could possibly have a conflict of
interest. The first one is, the bank and the savings and loan are both
competing for the savings of people, and that could be a conflict. Now,
the second conflict that I can see is possibly, if a bank director is also
on a savings and loan board, then he would be prone to say, "Let's
don't let the savings and loan expand into writing checks and into
the whole field of commercial banking." That seems to me to be the only
places where you might have a conflict of interest. And that, of course,
could readily be resolved, and is resolved, because according to my
understanding of the Federal Home Loan Bank Board, if you make
an application for a new charter you are supposed to outline the
people that are going to be on that, and they will object very
strenuously and won't grant you permission to form a new savings
and loan association if you have an overabundance of bank directors,
knowing that there is the possibility of conflict in the whole area of
competing for savings and the purposes for which commercial banks
are formed.
As far as the conflict of interest are concerned, what I am about to
say is not quite in the testimony here, but I thought I might bring
this forward, because so much has been said in the last couple of
years about people who are on this committee who have stock in national banks. I think if that is a conflict that you can carry the conflict
of interest to the extent that you can say that there is a conflict of
interest that I should not have a bank or savings and loan deposit
because I belong to this committee.
The second idea, if you carry it to that absurd position, is that if, as
a member of the Banking and Currency Committee, I have a savings
account in a savings and loan, I have greater conflict of interest when
I sponsored—which I have done—legislation that provides for flexible
interest rates than by owning bank stock because the interest is guaranteed to be paid. Now, that is a conflict of interest that you don't
have when you have bank stock. Bank stock pays in the form of
dividends only when the earnings are there. There is no guarantee
that I, as the owner of bank stock, will get 1 penny as a result of that.
I think that being a member of this committee and being a director in
a bank or a savings and loan is definitely wrong, not because of a
conflict of interest, but because I have got the responsibility of discharging the duties of this office and also the duties of a directorship,
and I would neglect one or the other. My objection is not necessarily
because of a conflict of interest as to the subject matter, just the fact
that I have got a fiduciary relationship to fully discharge to both
jobs.
And I know, to finish my time, Mr. Chairman, that as far as the
State of Georgia's laws are concerned, the director of a bank can be
held responsible for the actions of the bank, and he has not got a
defense that he was not there and didn't vote on the proposition, or
that he was not in attendance. He can be liable for his acts of omis60-299—71—pt. 1




12

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sion, for failure to do his duty, as well as for doing it in the wrong
fashion.
Mr. CAMP. Correct.
Mr. STEPHENS. And he can be held financially responsible for the
actions of the board of directors, and he can't say, well, I wasn't
there when it happened.
Mr. CAMP. That is absolutely correct, sir.
Mr. STEPHENS. Thank you.
Mr. BARRETT. Thank you, Mr. Stephens.
Mr.Chappell?
Mr. CHAPPELL. I have no questions, Mr. Chairman. I will yield to
Mr. Brasco if he would like to ask more questions.
Mr. BRASCO. If it is all right, I would like to ask Mr. Smith this
question. On page 27 of your statement, Mr. Smith, you suggest the
procedure whereby exceptions would be permitted with regard to the
insider loan situation. I am wondering exactly what kind of a procedure you are suggesting that should be followed in this area. Are
you making a proposal wherein the insider loans would be prohibited
unless a formal application were made to the appropriate regulatory
agency for an exception, rather than permitting them to go along
with the requirements to disclose such loans ?
Mr. SMITH. NO. The former. The Investment Company Act operates
in that manner, a general prohibition, but permitting exceptions to be
made upon application and hearing, if necessary, and determination
by the Commission that the transaction is not unfair or overreaching.
Mr. BRASCO. I am not thoroughly familiar with that. I am wondering if you can elaborate on what you mean by "hearing," if anything.
Mr. SMITH. Public hearing.
Mr. BRASCO. If any. I assume that that is discretionary.
Mr. SMITH. Yes; we will notice it for hearings. And if somebody
asks to appear at a hearing, then the hearing is held. Oftentimes under
delegated authority, if no one requests a hearing, we determine it on
the record without
Mr. BRASCO. Who would have to request a hearing, Mr. Smith ?
Mr. SMITH. Any interested person; for example, a stockholder or
creditor of the financial institution.
Mr. BRASCO. I am not familiar with this. You will have to forgive
me; you are sort of losing me. How would the interested person know
that such an insider loan was contemplated, and how would he know
so that he could request a public hearing on the matter? What kind
of notice would they receive under this plan ?
Mr. SMITH. Under the Investment Company Act we publish the
notices as public releases, and they are distributed to people who are
on our mailing list, and to the company itself, and they are on the
public record.
Mr. BRASCO. But not necessarily all the people that may be involved ?
Mr. SMITH. There are not direct mailings to every conceivable
person that could be interested; no. But it is a matter of public record.
And to the extent that it is feasible to give publicity to that notice, it
is done.
Mr. BRASCO. DO you think that that is adequate, then, on something
that could be as potentially dangerous as an insider loan?




167
Mr. SMITH. I think the primary reliance is upon the Commission's
determination that this is not an unfair or overriding transaction.
I don't mean to indicate that we simply publish a notice, and, if no
one appears, it is then approved. In a number of cases the &taff will
demand a hearing on its own motion, because it wants to get further
matters introduced in the public record.
Mr. BRASCO. One more question for Mr. Smith.
I am not suggesting in all of my remarks that we shouldn't have
any trust in the Commission or other people in the regulatory agencies.
But I think the problem is—and I think my colleague, Mr. Stephens,
pointed out—that the public is getting the wrong idea of what is going
on here. And I think that if you explain a plan such as the one you
explain on page 27 to the general public, and tell them about that
kind of notice, their reaction is what we see today, because it is just
very difficult to get notice, in my opinion. I am an attorney, and I know
that you just don't get notice to people by doing it the way you
suggested. And I think the public is becoming sophisticated enough
to know that, too. And that is why they have so many doubts about
what we do, not so much that what we do is wrong per se, but that
the public is beginning to understand that there are too many shortcuts
in the system, that maybe we would rather not have a hearing on a
matter, not because there is anything wrong with having a hearing,
or that the hearing would disclose anything wrong, but just because
we don't want to waste the time to do it. We will have to start getting
away from that thinking if we want to reeducate the public in terms
of getting their support for all of our institutions.
Mr. SMITH. Mr. Brasco, that is why I think the best way to do it is
to have the general prohibition. I think the reason that you permit
the administrative agencies to make exceptions within standards laid
down by the Congress is because there is a rigidity about the prohibition where there may be transactions quite favorable to the institution
from which they would otherwise be prohibited from engaging, and
where the forum for a public test and staff examination and Commission determination, that it is not unfair or overreaching, serves to
eliminate the possibility that free and easy exceptions would be made.
I am certainly in no way indicating that we do that. Indeed, the staff
has told me that they cannot remember an instance where an investment company even applied to make a loan to an affiliate.
Mr. BRASCO. Thank you.
I want to ask one last question of Mr. Camp.
On page 2 of your statement, Mr. Camp, you recite section 8 of the
Clayton Act which prohibits interlocking relationships between a
member bank of the Federal Eeserve System and any other bank
located in the same city as such member bank in any city, town, or
village contiguous or adjacent thereto. I assume you would agree
with that.
Mr. CAMP. Yes, sir.
Mr. BRASCO. My question

is, it would seem to me that when this was
initially drawn it was drawn to take us to a point—but I think when
they drew it they were talking with an attitude in mind that did not
take into consideration the fact that financial institutions with interlocking relationships compete on a nationwide basis. I think when




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they first drew up that piece of legislation they were obviously talking about a horse and buggy kind of approach to finance.
So with that in mind don't you think that should be broadened in
some way ?
Mr. CAMP. I would have to study that. I would certainly like to
have you testify on that before the Justice Department in an antitrust suit involving the bank mergers. They will, in an antitrust suit,
confine the competition to a county or contiguous counties where the
bank could branch, and thus far they have utterly failed to recognize
that there are broad competitive geographic considerations.
Mr. BRASCO. That may be so, Mr. Camp, but I am asking you if
you don't think it should be broadened.
Mr. CAMP. Sir, I would have to study that. And I don't know on what
basis you would broaden it. Would you have banking districts, or
what did you have in mind ?
Mr. BRASCO. I am admittedly not an expert. And I am a cosponsor
of this bill because I think that there are areas that need regulating.
And you were saying that 90 percent of the bill is unnecessary for one
reason or another, and I am trying to find out who is correct here. We
heard some testimony from Mr. Martin and Mr. Wille, who have
some degree of expertise, certainly far greater than mine, and they
agreed with more sections of the bill than you agreed with. And obviously we are involved in some differences of opinion among the
experts, and I am more interested in your reaction to whether we
should expand section 8 rather than my own opinion.
Mr. CAMP. Sir, it certainly seems to me that it is a well-known fact
that our office doesn't always agree with the views of the Antitrust
Division, the Department of Justice. But I don't think that anyone,
and least of all our office, could fault them for lack of zeal or conscientiousness in pursuing their statutory assignment where they
think a merger of banks is anticompetitive, I believe they have the
statutory authority now.
Mr. BRASCO. SO you don't think that there are any changes necessary,
then?
Mr. CAMP. I don't believe that the Justice Department would think
so. They certainly filed suit.
Mr. BRASCO. I know that. And I don't mean to get involved in that.
You have said twice the Justice Department doesn't think so. But do
you think so, sir, or do you agree with them ? That is all I am trying
to find out. I am not trying to fault anyone, but to get your opinion
as to whether or not you agree with the Justice Department that this
should remain the same, or we should change it, that is all.
Mr. CAMP. Sir, it is my understanding that the administration is
presently developing a proposal which would correct any existing
deficiencies without disrupting legitimate business relationships.
And under this approach the regulatory agencies would be given authority to regulate interlocks to protect the public from anticompetitive situations, or any other abuses.
Mr. BRASCO. SO it is a fair assumption, I take it, that the administration thinks that we should get to a paint, statutorily speaking, by regulation where we go beyond section 8 of the Clayton Act ?
Mr. CAMP. That may be the case, sir. I haven't seen the proposal.
Mr. BRASCO. Thank you.




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Mr. BARRETT. Thank you, Mr. Brasco.
Mr. Smith, Mr. Ward, and Mr. Camp, you have been three very fine
and very patient witnesses. And we are grateful for your presence here
this morning.
All time has expired. The committee will stand in recess until 10 a.m.
tomorrow morning.
Thank you.
(The following are written questions submitted by Chairman
Patman to Mr. Camp, along with Mr. Camp's answers:)
Question 1. You cite as an example of an innocuous interlocking directorate
a New York Gity banker serving on the board of a small bank in Florida. How
would you treat a situation where a New York City banker it sitting on the
board of a major banking institution in Chicago or San Francisco?
Answer. Our general feeling is that there should not be any interlocking
directorates between banks in actual direct competition with each other. In
the case of the few large banks which do business nationwide, the rule should
be the same.
We understand that the Administration is working on a proposal which will
include this principle, as well as provide administrative flexibility to deal with
unusual situations.
Question 2. While you state that some strengthening of the law on interlocking
directorates is desirable, you seem to take the approach of leaving most of the
disclosures as to the coverage of such interlocks to administrative regulation,
is that correct?
Answer. We are not sure what is meant by "the disclosures as to the coverage
of such interlocks." The bill itself does not deal with the question of interlocks by requiring disclosures; the bill contains express prohibitions against all
interlocks between eight categories of institutions.
We understand that the Administration will propose specific alternatives
to the complete prohibitions of the bill and that these alternatives will provide
for administrative discretion to deal with atypical situations.
Question 8. You raise the question as to whether a 10 percent limitation on
the holding of any particular securities by a bank trust department would cause
serious problems in connection with family-owned corporations. However, the
provision establishing such a limitation, in order to prevent an over-concentration in specially traded securities by a trust department of a bank, would be
unlikely to effect family-owned corporations, since the provision is limited to
stocks registered under the Securities Act of 1988. Isn't that correct, Mr. Gamp?
Answer. No, as was pointed out by SBC Commissioner Smith during his testimony, the tying of the trust limitation to securities registered under the Securities Act of 1933 would produce rather whimsical results. The 1933 Act requires
prior registration before the public sale of any security, with some exceptions.
There is no general exception for family-controlled corporations. For example
if a family, owning 100% of a corporation having a single class of stock, decided
to sell 20% of their stock to the public, it would have to file a registration statement under the 1933 Act. Under Section 13 as written, it would appear that in
the event of death in the controlling family or for any other reason, it would
be impossible for a bank to assume fiduciary control of the family interest.
Question h. On page 6 of your testimony, you state you know of no instance
of commercial bribery involving a bank. You also state that some States make
commercial bribery a crime. First of all, it should be noted that not all States
make such an activity a crime. Secondly, it must be some sort of a problem,
because a larpe state with numerous banking institutions like New York does
have such laws.
There is a situation that came to our attention during the investigation of
the Penn Central matter which may be regarded as a commercial bribery case.
It involves obvious preferential loan treatment by a major New York bank, in
connection with a loan, and a group of businessmen including several Venn Central officials. There is evidence to show that this hiqhly preferential treatment
was granted in order to keep Penn Central business in the bank. It is our understanding that New York law enforcement authorities are investigating this action
as a possible violation of its commercial bribery statutes.




170
This would seem to be good evidence that a Federal statute covering interstate transactions should be seriously considered. What is your view of this?
Answer. As you know, the Committee staff interpretations of the facts and
circumstances involving Penn Central have been vigorously disputed by some
of the banks and others named in the reports. These facts and circumstances
are presently the subject of numerous investigations and lawsuits. Until such time
as at least some of the disputed issues have have been resolved, we do not think
that the Penn Central case provides a sufficiently clear foundation on which
to base legislation.
Question 5. Equity Participation. On page 11 of your statement you say:
"It is apparent from our sample that national banks are not making equity
participation loans to any significant degree. Given this small amount of activity,
it could be argued that no great harm or inconvenience would be caused (at
least to banks) by the enactment of Section IJf.
On page 12 you say:
". . . The restrictions of Section 14 would apply only to banks, savings and
loans, thier holding companies and insurance companies. The omission of mortgage companies, pension funds and other possible sources of construction and
commercial loans would give such lenders an obvious and unfair competitive
advantage."
Are you saying that you recognize that equity participation in general is a
problem within the financial industry as a whole, and that the bill should be
amended to achieve broader prohibitions in this area?
Answer. No. It is my belief that the equity participation loan has not
created a substantial problem either for the financial industry as a whole or for
commercial borrowers as a whole. I am saying that if the Congress decides to
prohibit equity participation loans, in fairness it should prohibit them for all
types of lenders who have engaged in the practice.
Question 6. In 1962, your predecessor as Comptroller of the Currency received
a report from his Advisory Committee on Banking. This was a very prestigious
committee including such well known banking figures as Donald M. Graham,
Chairman of the Board of the Continental Illinois National Bank of Chicago;
George S. Moore, President of the First National City Bank of New York; and
Frank E. McKinnney, Chairman of the Board of American Fletcher National
Bank of Indianapolis, Indiana. This distinguished Committee recommended, and
I quote, "The prohibition of present law on interlocking directorates should
be made applicable between banks, savings and loan associations and mutual
savings banks, whether chartered under Federal or State law"
Do you agree or disagree with the recommendation of this distinguished
committee:
Answer. I agree whole-heartedly. As I stated in my prepared statement.
"We support an expansion of the present statute to cover any of the eight types
of financial institutions within the same geographic boundaries as are now contained in the Clayton Act."
Question 7. On page 8 of your statement you say:
"These limitations [contained in Section IS of H.R. 5700 regarding holding
more than 10 percent of any class of stock in any corporation] would be of questionable benefit. They would eliminate certain conflicts of interest and limit the
potential for concentrations of control of corporations by banks through their
trust departments."
Would you please elaborate on this. What conflicts and what concentration of
control?
Are you saying we have to have conflicts of interest and concentrations of control for the sake of professional corporate fiduciaries?
Answer. Your paraphrase of our comment does not properly reflect its entire
scope. "These limitations" refer to all of Section 13, including the prohibition on
ownership in a bank's trust department of that bank's stock or that of its parent
holding company. The conflicts of interest to which we are referring are those
which are the subject of Section 9.12 of Regulation 9. They arise when a bank
owns its own stock or that of an affiliate in a fiduciary capacity. As you know,
Regulation 9 prohibits the holding of such stock unless the customer who establish the account has specifically authorized it. Its purpose has been to enable this
office to ensure that a bank does not act improperly when it is placed in this posituation. This has been a concern of the examiners of this office. The concentration of control to which the statement refers is that which exists when a control-




171
ling interest in a corporation is held in a trust account. This usually occurs in
trust departments in the case of closely-held family corporations.
The outright prohibitions of H.R. 5700 upon ownership of stock of the trustee
bank or its holding company, even when authorized by the customer who set up
the account, would obviously, we think, eliminate that conflict without regard
to whether an adverse effect resulted therefrom. Similarly, when a bank is precluded from holding over 10% of the stock of a company which is registered
under the Securities Act of 1933, as H.R. 5700 would do, it is impossible for anyone owning a controlling interest in such a company to plan on placing that interest in an account at a bank. This is what we were recognizing in the statement
upon which you requested elaboration.
The bill would make no distinction as to whether an adverse effect or abusive
practice was resulting from the holding. Both H.R. 5700 and your present questions apparently assume that all conflicts of interest and all possible means by
which a bank may find itself holding a controlling interest in a corporation are
inherently evil, not subject to administrative control, and must, therefore, be
obliterated. We do not share these conclusions.
To respond specifically to your second question, we were saying in our statement what a flat prohibition in the one case, and an absolute limitation in the
other, administered without regard to whether the wishes of the creator of the
account are being carried out, and without regard to whether an abuse is being
committed, or whether an adverse situation has resulted, would severely and
needlessly limit the availability of the professional corporate fiduciary to the public. We believe that improper or adverse results which could occur in these situations can be adequately prevented through banking supervision, without in the
process depriving a large portion of the public of the use of a corporate fiduciary.

(Whereupon, at 12:25 p.m., the committee recessed, to reconvene at
10 a.m., on Thursday, April 22,1971.)




THE BANKING REFORM ACT OF 1971
THURSDAY, APRIL 22, 1971
HOUSE OF REPRESENTATIVES,
COMMITTEE ON BANKING AND CURRENCY,

Washington, D.C.
The committee met, pursuant to recess, at 10 a.m., in room 2128,
Rayburn House Office Building, Hon. Wright Patman (chairman)
presiding.
Present: Representatives Patman, Barrett, Sullivan, Gonzalez,
Hanna, Gettys, Griffin, Chappell, Mitchell, Widnall, Johnson, Stanton,
Blackburn, Williams, Wylie, Heckler, Rousselot, McKinney, and
Archer.
The CHAIRMAN. The committee will please come to order.
The first witness this morning is Prof. Stanley C. Vance, Miner
Professor of Business Administration at the University of Oregon.
Professor Vance is one of the leading experts in the country on the
boards of directors and management of major corporations. He is
the author of three leading books in this field, including "Boards of
Directors: Structure and Performance," "The Corporate Director,"
and his most recent book just published in February of this year,
"Managers in the Conglomerate Era."
The members have before them an article which Professor Vance
wrote on Penn Central in the winter 1971 issue of the Bankers
Magazine.
We appreciate very much your coming all the way from Oregon to
testify before the committee, Professor Vance, and, if you will, summarize your statement, and we will proceed to asking you questions
on H.E. 5700 and the other bills before us.
Before you proceed, may I inquire as to two other witnesses who will
go on after Professor Vance, Mr. Greene, and Mr. Scott.
They are not here as yet. You may proceed, Professor Vance.
STATEMENT OF PROF. STANLEY C. VANCE, H. T. MINER PROFESSOR
OF BUSINESS ADMINISTRATION, GRADUATE SCHOOL OF MANAGEMENT AND BUSINESS, UNIVERSITY OF OREGON, EUGENE, OREG.
Mr. VANCE. Chairman Patman and Members of Congress. I have
spent more than a quarter of a century in the field of teaching in higher
education in the area of industrial management. If I have to summarize in a single word what I have been trying to do, I would say it
would be to stress the meaning of productivity.
Our system, as we all know, our enterprise system, has been
extremely effective in developing and improving productivity. And
boards of directors have probably been among the most important
(173)




174
of all the facets in making our system so great in improving productivity. However, typical of any institution or component of any
institution, boards of directors need continuing modification, refurbishing and improvement, and I think at this point in our society,
when things are changing in partically every sector we must not
neglect to look at boards of directors to see what can be done to improve
our system and make it even more effective than it has been in the
past.
I do not have too much of a presentation to begin with.
I would like to save my time to answer any questions that you
might have.
The CHAIRMAN. That will be very fine, Professor Vance.
Your statement was given to the members of the committee with
that thought in mind.
The other witnesses have not appeared, neither Mr. Scott or
Mr. Greene, but when they come in I will reserve the right to put
them on so we can examine all the witnesses at the same time.
We will place your prepared statement in the record at this point,
and when the transcript is sent to you for approval you can make any
additions you desire.
Mr. VANCE. Thank you.
(The prepared statement of Mr. Vance follows:)
PREPARED STATEMENT OF STANLEY C. VANCE, H. T. MINER PROFESSOR OF BUSINESS
ADMINISTRATION, GRADUATE SCHOOL OF MANAGEMENT AND BUSINESS, UNIVERSITY OF OREGON, EUGENE, OREG.

This statement is intended as a strong plea for H.R. 5700 and particularly
for those sections dealing with boards of directors. My position is the consequence of more than twenty years of study and research on the subject of
directors and directorates in large-scale publicly-owned American enterprise.
These research findings have been set forth in a number of articles and in three
books on the subject of directorate structure, function, performance, and future.
Out of my probings the most significant influence is that the knowledgeable
American public is rapidly coming to the conclusion that boards of directors
arfc unnecessary and perhaps even a corporate handicap. This view was succinctly set forth in a 1965 editorial in Forbes magazine by its editor Malcolm S.
Forbes. The comment was captioned: "Boards of Directors: Who Needs 'Em?".
In a subsequent letter to the editor I stated, "Sir: Your November 15 Fact
and Comment on 'Directors—Who Needs 'Em?', while miniature in size, totes
a lot of substance. There does seem to be a growing sentiment: that the conventional board of directors is in a state of obsolescence. Directors, like dodos
and dinosaurs, can become museum items if we continue to view the directorship
function as some sort of charismatic attribute."
Much of the public dissatisfaction and disillusionment with the directorate
concept can be attributed to directors who assume honorific posts and to others
who seek only self-aggrandizement opportunities. H.R. 5700 in its first basic
area, that of interlocking relationships, is definitely a step in the right direction,
Personally, I would like to see the prohibition even more stringent covering
corporate officers of client corporations and lawyers and accountants with a
vested interest. I would also like to see a one-man one-directorate philosophy
pervade the industry, thus creating opportunities for other competent executives.
While H.R. 5700 is a good start in the right direction, it apparentlv applies
only to one type of interlock, the personal variety. The Bill does not touch upon
two other important types of interlock: familial and institutional. The latter
form is by far the most prominent at present and presumably will continue
to increase in incidence.
Nevertheless, H.R. 5700 does have real value. Consider one typical case.
Chase Manhattan Bank. In 1967 Chase Manhattan Bank's directors had
immediate and imminent contact with 28 industrial firms, 16 utilities. 10
insurance companies, 10 financial institutions, and 4 miscellaneous ; a total of 68.




175
Among the insurance companies were: New York Life, Equitable Life (2),
Metropolitan Life (4), Travelers (2), and Continental. The financial institutions
included: Bowery Savings, Provident National, Lehman Corp., Rockefeller
Brothers, Wells Fargo, Harris Trust, and First National of Chicago. The
industrials covered an even more impressive list of distinguished corporations.
This focus upon Chase Manhattan Bank is not intended to put this eminent bank
in a bad light. Virtually every one of our major financial firms has a comparable
interlocking directorate complex.
The negative aspects of director interlocks can be summarized a s :
1. The very real opportunity for collusion. This is especially the case for
institutional director interlock.
2. Even when blatant collusion is not practiced, institutional interlock gives
very obvious preference to a few elect firms. Competitively this handicaps the
vast majority of smaller and less influential American firms.
3. Interlock too frequently implies questionable ethics, particularly in
conflict-of-interest situations.
4. Interlock in any form tends toward inbreeding.
5. Interlock leads to part-time directors who progressively give less attention
to their secondary boardroom responsibilities.
6. Interlock strifles top management development by superimposing a layer
of elite directors. In one of my studies ("The Bank Vice Presidency: Last Stop
on the Line", The Bankers Magazine, Vol. 147, No. 4), I found that among the
top 50 commercial banks there were only 60 directors out of 1,150 who held
vice-presidencies in their respective banks. These 50 banks at that time had
approximately 7,000 vice presidents. Statistically this gives us a less-than-onepercent rate for bank vice presidents who also serve their firms as directors.
By contrast over 80 percent of these bank directors came from without. As a
judicious estimate, there were in this outside director group at least 2,000 interlocks, of which perhaps 700 would now be affected by H. R. 5700.
7. Interlocks are undemocratic. In an era when we postulate the dignity and
equality of all men, interlocks perpetutate an antiquated, aristocratic, and
elitist form of control. If we really believe in equal opportunity for all people
then we must remove the constraints which now prevent the great majority of
Americans from ever reaching the ultimate in our corporate structure.
Even though I feel H. R. 5700 does not go nearly far enough in rectifying the
boardroom imperfections in our banks and other related enterprises, it is a very
laudable measure. It is one small step in the right direction.
The CHAIRMAN. YOU have before you a chart of the Penn-Ceneral

Board showing the relationship with other corporations, professor.
This chart shows the following:
Of the 23 directors, 16 had direct relationships with banking institutions or bank-holding companies. Of the above 16 directors, four
listed their principal occupations as banking. Of the remaining directors, one director had fiduciary relationship with an investment
banking firm, and one other director was chairman of the board of an
insurance-holding company.
In toto, 18 of the 23 directors were interlocked with banking and
other financial institutions. There were 14 commercial banks and three
savings banks interlocked with the Board of Directors of PennCentral.
Let me ask you the following questions in connection wdth this
chart:
Was this high percentage of financial interlocks, almost 80 percent
of the directors, typical for the board of directors of a railroad or
anv other major corporation ?
You may answer that now, if you please.
Mr. VAXCE. Well, in terms of railroads, Penn-Central was the outstanding firm, and, therefore, its board may not have been quite the
same as other boards. But on the other hand, in terms of banking




176
associations and in terms of other outside associations, Penn-Central
is quite typical of the railroad industry.
The CHAIRMAN. HOW important are the directors to the financial
success of a large corporation ?
Mr. VANCE. In terms of operating efficiency, zero.
In terms of the flow of funds, I do not have any inside information
but as a private citizen I would guess that their influence is quite
significant.
The CHAIRMAN. Did the make-up of Penn Central's board provide
any advantages to the railroad ?
Mr. VANCE. TO the railroad, I doubt it very much.
The CHAIRMAN. Would the railroad have been better off with a board
composed of directors more familiar with the industry problems facing
railroads rather than a board almost entirely composed of financially
oriented people?
Mr. VANCE. I think very definitely the big weakness in many outside boards is that we have individuals who are not cognizant with the
problems of that industry, at least from the technical point of view.
And our society is getting more complex technologically. We need people at the top who do know something about what that particular firm
or company or railroad or bank is doing.
The CHAIRMAN. What adverse effects could have occurred because
the board was dominated by financial people, especially where the
railroad conducted substantial business with many of these banks?
Mr. VANCE. Well, of course, this is a restriction in competition, and
from one angle smaller banks or smaller lending institutions might
have difficulty in terms of making contact financially with Penn
Central. There could be undue favoritism to certain banks that have
direct contacts. But, in total, it would be almost in the direction of a
collusive effect.
The CHAIRMAN. What are the disadvantages as regards financial
success of director interlocks between a corporation and banking institutions doing business with that corporation ?
Mr. VANCE. TO the corporation or to the bank ?
The CHAIRMAN. Either—to the corporation, really.
Mr. VANCE. What would be the handicap to the corporation ?
The CHAIRMAN. What are the disadvantages as regards financial success of director interlocks between a corporation and banking institutions doing business with that corporation ?
Mr. VANCE. Especially, for smaller firms, corporations, there is a
strong probability that the best possible price for money borrowed
mi<^ht not be available.
The CHAIRMAN. And it does not give the smaller bank an opportunity to compete ?
Mr. VANCE. Precisely.
^ The CHAIRMAN. The premise of much of your writing on corporate
directorates is that the present interlocking relationships create an
elitist and aristocratic form of control of the country's larger business enterprise. Could yon elaborate on this premise with an eye toward
the reform presented in H.R. 5700 ?
Mr. VANCE. I think this touches on the crux of the problem, thnt in
a democratic society we should have opportunity for all people to




177
attain the very top level. And when we do have interlocks, the number
of opportunities open to the general public, those who are competent
and capable in this particular field are limited very, very drastically.
In the banking business, if half or more pf the, roughly say, 25,000
directors of the top 1,000 banks is held in an interlocking fashion,
very obviously, those 25,000 positions are closed to the most effective
people, the vice presidents, or the other people in the community,
who might serve a particular bank or corporation quite effectively.
The CHAIRMAN. Mr. Widnall.
Mr. WIDNALL. Mr. Chairman, I have no questions at this time.
The CHAIRMAN. Mr. Barrett.
Mr. BARRETT. Just one or two brief questions, Mr. Vance.
I reside in the city of Philadelphia. We get quite a number of
questions on the Penn Central bankruptcy. I was thinking, because of
your background and your position in Oregon, that you might be able
to come up with some answers. For example, this committee has become very familiar with the Penn Central Railroad Co. because
of our study of the role of financial institutions in its ultimate collapse.
It is known that the Penn Central has an incredible number of interlocks with the Nation's largest banks, as geographically shown on this
chart that you have here. Do you believe that these interlocks play
a part or played a part in the bankruptcy of our Nation's largest transportation company and system ?
Mr. VANCE. Congressman Barrett, although I am from Oregon, I
am an expatoriate Philadelphian, and, so, I have a keen sympathy
with the Pennsylvania Eailroad and its problems.
And, to answer your question, I might point to one or two individuals. For instance, Dr. Gaylord Harnwell, president of the university.
I believe that in his participation at Penn Central he was injuring
the university. In this particular era, universities have massive problems, and I think the president ought to give attention to his prime
obligation. So, from one direction, an educational direction, Dr.
Harnwell should have stayed home, at the university, and taken care
of problems at the university, which now has a very serious financial
problem, as you know.
Switching, and taking a look at the topman, Mr. Stuart Saunders,
just glancing at the list here, I notice that he is a director of Georgia
Pacific. I made a trip to visit with you here, and it took 1 entire day
to get here, and it will take another day to get back. For Mr. Saunders
to attend a meeting of the board of directors of Georgia Pacific, he
would have to travel 3 days. The board of directors of a corporation
should have a meeting at least once a month, and any board that does
not have a meeting at least once a month is a very ineffective board.
So, in order for Mr. Saunders to attend to Georgia Pacific's problems,
he would have to spend 3 days a month, and I think that would be
cheating Penn Central. And I think this is the basic reason we had
trouble at the Penn Central. Its board was much too spread out, it
was dedicating its time piecemeal to too great a number of corporations, and consequently there is inefficiency, ineffectiveness, and
bankruptcy.
Does that sort of answer it ? Or is that too strong a statement ?
Mr. BARRETT. It does, somewhat.




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I wonder if you are now indicating that because of the lack of meetings held at an appropriate time there is much going on without the
knowledge of the directors that you have named here—I will not name
him again. Is that what you are saying ?
Mr. VANCE. NO. What I am saying is that people are human and
people have fatigue factors built into their sj^stems, and to attend to
too many obligations can be most fatiguing and can, therefore, lead
to inefficient performance.
Mr. BARRETT. Would this indicate, then, that the only way we can
prevent the interlocking relationships would be through statutory
law and not regulation?
Mr. VANCE. Hopefully, this control or this basic policy would stem
from corporations, banks, insurance companies. I hope they can see
the light. But, unfortunately, a system once it is established tends to
continue in the same direction. That is natural, and I think some kind
of control must be imposed, and I think the control stems from this
particular august group.
Mr. BARRETT. I probably have another half second.
Do you think restricting the director interlocks along the lines that
are recorded in this bill—namely, H.R. 5700—will have the positive
anticompetitive effects intended ?
Mr. VANCE. I do think that the bill will increase competition in this
particular sector in banking. But I think one of the greatest values is
that it would put other corporations on notice that there is a possibility of sanction of law being imposed upon endeavors other than in
the banking sector, in the insurance sector, or the manufacturing end
of business. And I think that would be real therapy, and, hopefully,
that corporations would then look at themselves introspectively and
take the necessary steps to have a more modern type of board of
directors.
The CHAIRMAN. Mr. Scott, will you come around, please, and take
your place at the table as a witness.
We have heard from Professor Vance. We have not finished with
him, because we want to ask him questions. But we will let you proceed.
Will you please summarize your testimony, make it brief, and then
we will then ask you questions, because all of the members have your
testimony and they are acquainted with it and are, therefore, in a
position to ask questions.
And, if anything is not included, after you get through answering
questions that you think should be included, you have a right to extend
your remarks in the record and include anything that you want to
that is pertinent to this inquiry. It that satisfactory ?
Mr. SCOTT. Yes; thank you, Mr. Chairman.
The CHAIRMAN. YOU represent the U.S. Savings & Loan League
and the National League of Insured Savings; you represent both of
them?
Mr. SCOTT. N O ; I just represent the U.S. Savings & Loan League.
I do not know where the National League witness is.
The CHAIRMAN. And you are president of the First Federal Savings
and Loan Association of Jackson, Miss., I believe?
Mr. SCOTT. That is correct, sir.




179
The CHAIRMAN. Thank you very much for coming. And you may
summarize your testimony, and then we will permit members to ask
you questions, along with Mr. Vance at the same time.
Mr. SCOTT. Thank you.
STATEMENT OF TOM B. SCOTT, JE., CHAIRMAN, LEGISLATIVE COMMITTEE, U.S. SAVINGS & LOAN LEAGUE; ACCOMPANIED BY
STEPHEN SLIPHER, LEGISLATIVE DIRECTOR, AND ARTHUR
EDGEWORTH, WASHINGTON COUNSEL

Mr. SCOTT. The Bank Eef orm Act is clearly one of the most comprehensive and substantive pieces of financial legislation to be taken
up by the Congress in recent years. Perhaps the most comparable
legislation was the Federal Supervisory Act of 1966, which dealt only
with banks and savings institutions. The Bank Eeform Act covers
these institutions plus credit unions, insurance companies, brokers,
title companies, appraisal firms, and real estate closing businesses. It
also touches on thousands of regular business corporations insofar
as they have certain relationships with financial institutions. Also
the Supervisory Act dealt primarily with actual violations of law
and regulation of specific wrongdoing. In a sense, its real impact was
on that tiny minority of institutions where there was significant
wrongdoing. By contrast, the Bank Eeform Act deals with many
practices that are traditional and of themselves have not been
considered improper or unethical.
We recognize, of course, that review and updating of laws with
respect to the conduct of financial institutions is a very appropriate
and essential part of this committee's work. The complexities of modernday business and some of the recent developments in the corporation
area make it obvious that the spirit and intent of this legislation is
most commendable.
Since this legislation is applicable to many types of institutions,
the committee has scheduled a variety of supervisory agencies to
testify. At the time of our executive committee meeting on April 17,
when we were arriving at our policy, we were, of course, not cognizant
of the positions being presented to the committee. We will be influenced
by these hearings and may offer additional comments after studying
all the testimony. We have, however, reached certain conclusions and
are prepared to express some opinions on the bill at this time.
INSURANCE OF PUBLIC FUNDS

100 PERCENT

We strongly endorse the provision to provide 100 percent insurance
for funds in the custody of public officials. We feel it is very appropriate and in the public interest to provide full insurance for these funds
which, in reality, consist of an accumulation of deposits of many
individuals. Currently, savings and loan associations cannot receive
these funds over the $20,000 ceiling. Banks are able to accept these
accounts regardless of size but there have been several instances where
there have been bank failures resulting in losses over the $20,000
insurance limit. I am sure that the municipality of Eatonton, N.J.,
wishes that 100 percent insurance of public funds was on the law




180
books now. Also, according to the American Banker of April 13, the
Governor of Illinois has recommended 100 percent insurance as the
result of certain bank failures.
This committee approved a provision with a similar objective last
year in the Emergency Home Finance Act but it did not become law.
We hope the committee will approve section 25 of the present bill.
PROHIBITION ON GIVEAWAYS

The U.S. Savings and Loan League endorses the provision which
would prohibit financial institutions from using premiums as an inducement to open or add to savings accounts. We feel this could have
been accomplished by regulation but apparently not all the Federal
agencies would agree to do so. The use of giveaways has a tendency to
spread among financial institutions and eventually become a nuisance
and nonproductive. We had a very chaotic and excessive giveaway situation in California some years ago and the business there supported
a California law completely prohibiting the practice. So far as I
know, there is no desire in California to repeal that law.
BAN ON EQUITY PARTICIPATIONS

Savings and loan associations rarely use any form of equity participation and we are not prepared to take a strong stand for or against
them. As has been pointed out, this was something primarily used by
insurance companies with respect to major projects during the height
of the tight money period We would urge, however, that there be a
clarification so as not to prohibit the existing practice of "joint ventures." Under some State laws, savings and loan associations, to a
limited extent, may undertake development of housing in a joint,
venture with the builder. We think this is quite different from th<*
so-called "equity kickers" and should not be prohibited.
BROKERED DEPOSITS

The use of brokered deposits is not a significant practice in the
savings and loan business and we would support a prohibition against
it. We agree fully that there are dangers when large brokered accounts
have been tied into loan transactions.
A few associations use employees or agents to develop savings business. and we think (the law might be clarified to permit this practice to
continue. It is in no way involved in the practice which has brought
brokered deposits into such disrepute.
INTERLOCKING DIRECTORSHIPS

With respect to interlocking directorships, we do not feel that so
far as the savings and loan business is concerned that there has been
a significant problem. On balance, our institutions have probably
gained substantially by the presence of knowledgeable financial men
on our boards. The savings and loan business is extremely competitive
and we do not believe that the makeup of our boards of directors has in
any manner reduced this competitive vigor. Nor do we know of any




181
instances where interlocking directors, per se, have been a material
factor in savings and loan supervisory problems.
However, we recognize a mounting sentiment in Congress and
among the supervisory agencies to abolish or eliminate interlocking
directors between potentially competing instructions.
We would offer for consideration that there is a distinction between
those institutions dealing with savings and home lending and those
who are in the insurance, securities, or title business. Thus, we suggest that the interlock restriction be limited to directors who serve a
commercial bank, savings bank, or savings and loan association. The
Federal Deposit Insurance Corporation and the Federal Home Loan
Bank Board, in their statements Tuesday, suggested that this proposed
language is too rigid.
We also believe there is a distinction between a person who merely
serves as a director of several financial institutions and one who is
an active officer of an institution. It may be appropriate to restrict the
service of a managing officer of a savings and loan association on a
commercial bank board and vice versa, but it does not necessarily
follow that a retail store executive, a professor, or an accountant could
not serve on several boards.
The committee might also want to make some exception for the small
cities where financial institutions may have difficulty in obtaining
competent directors outside the financial institutions.
We would also want to emphasize the need for a longer period to
adjust to any restriction on interlocks than the 3-year phaseout period
provided in the bill's enactment clause. Directors typically serve
3-year terms and the changeover should be made on a gradual scale
to avoid disruption.
A number of ideas for providing for this phaseout have been considered. One such formula would require that after 3 years, two-thirds
of the directors be independent (noninterlocking), after 6 years,
five-sixths, and after 9 years, 100 percent. Thus, a typical board of
nine or 10 could have only three interlocking directors after 3 years,
one after 6 years, and one after 9 years.
RESTRICTIONS ON OFFICERS, DIRECTORS, AND EMPLOYEES

H.R. 5700 contains a number of restrictions with respect to the relationships of officers, directors, and employees to other business-related
activities and the performance of legal services. We feel that, as
drafted, this is a severe change in many of the traditional relationships which have existed and served the association and its customers
well in the past.
There is already a great deal of regulation, scrutiny and control
in this area. For example, since 1968, regular reports filed by savings
and loan associations have contained extensive information on business affiliates and activities of officers, directors, employees and attorneys. I have attached a copy of such a document entitled, "Officer's
Questionnaire" to our supplemental statement, I call particular attention to paragraphs 9 through 13.1 think the committee will agree that
it is very searching and thorough. (See p. 185.)
60-299—71—pt. 1




13

182
Last November, the Federal Home Loan Board issued comprehensive regulations dealing with conflicts of interest, spelling out
many prohibited acts.
In the last few days, the Board has proposed a new set of regulations
dealing with affiliated persons designed to further protect against improper relationships, particularly "insider" loans.
Clearly, there is no vacuum so far as controlling conflicts of interest
in the savings and loan business. The Federal Home Loan Bank Board
has testified that it is satisfied with its present authority except as
to some flexibility to equalize rules for various types of institutions.
As a supplement to this statement, we comment on some other sections of the bill, which I will touch on just briefly at this point.
We would like to call special attention to section 413, prohibiting
an officer, director, or employee from providing certain legal services.
Although it may not have been intentional, the literal wording would
appear to prohibit a lawyer who serves as an officer, director, or
employee of an association from giving legal advice to the association itself, even at a board meeting. We also do not believe that it is
necessary, or in any sense desirable, to prohibit a borrower from paying for legal services rendered by the counsel of an association in
connection with a loan. Both the association and the borrower need
a legal opinion on property title and the borrower should not be required to obtain outside counsel at additional expense.
We also are concerned about section 8, which sets a blanket prohibition against certain interlocking relationships where the interest is
as small as 5 percent. We are particularly concerned that this statutory
prohibition would be extremely disruptive to the existence of service
corporations formed and owned by savings and loan associations
under Federal law. There should be a specific exemption from the
prohibition with respect to service corporations closely paralleling
the exemption provided for holding companies.
We do not believe that public inspection is needed for the loans on
homes made to officers, directors, and employees. These loans are reported to the superviser under present rules.
Again, our supplemental statement goes into more detail on these
questions.
CONCLUSION

In conclusion, we would like to commend the committee for holding extensive hearings on this legislation. As is true with most major
bills, we can support some, but not all, of H.R. 5700.
The CHAIRMAN. Thank you very much.
(A supplement to Mr. Scott's statement and the document entitled,
"Officer's Questionnaire" follow:)
SUPPLEMENT TO STATEMENT OF TOM B. SCOTT, JR., CHAIRMAN, LEGISLATIVE COMMITTEE, U.S. SAVINGS AND LOAN LEAGUE, R E : BANK REFORM ACT (H.R. 5700)
DISCUSSING SECTIONS 3, 8, 9, AND 16 OF THE BILL

In his testimony Mr. Scott commented briefly on the sections of the proposed
Bank Reform Act which apply to a variety of financial institutions and business
inter-relationships. The purpose of this supplement is to give additional comment on some of the provisions which would have specific and significant impact




183
on savings and loan associations, though it is recognized that other types of
financial institutions and corporations would also be subject to a similar set
of restrictions found in the bill.
Title companies, etc.
Section 3 of the bill, in addition to prohibiting interlocking directorates,
would place severe prohibitions on savings and loan associations and persons
closely connected with them with respect to operating title companies, appraisal
businesses and real estate closing services, and obtaining and giving legal
advice. We are opposed to these provisions as presently drafted (page 5, lines 6
through 20). For example, on the question of "controlling" a title company, it
is altogether too stringent that an insured institution or its officers or family
members be prohibited from directly or indirectly controlling a title company.
In many instances the only business people truly interested in the operation
of a title or abstract company are the savings and loan associations and other
mortgage lenders in a particular area. So long as the borrowers are not forced
by contract or otherwise to deal with that particular title or abstract company, what real harm is there in the savings and loan and its officers having
a substantial interest therein?
The Committee, of course, may be concerned about possible abuses in this
area. For that reason the Committee should consider the existing regulations
and policies followed by the Federal Home Loan Bank Board (FHLBB), which
clearly minimize any chance for abuse. For example, in connection with the
yearly examination of a savings and loan association, key personnel must fill
out a comprehensive questionnaire, a copy of which has been attached to this
statement. One of the principal questions on that form ( # 9 ) requires directors,
officers, employees, attorneys and agents to list each "business enterprise" in
which any of them may have a direct or indirect interest since the last examination, especially where the business enterprise has had any transaction with
the savings and loan. Further, the person must indicate the nature of his
interest and the volume and type of business involved. The definition of ''business enterprise," moreover, includes every conceivable significant function,
such as, construction, land ownership and development, building materials, real
estate services and sales, real estate financing and investing, commercial banking,
all types of insurance, escrow companies, and loan origination and closing firms.
There are many other similar disclosures which the questionnaire requires.
Furthermore, associations are already subject to a number of legal prohibitions
against coercing any borrower to go to any particular company whether it be
a title or abstract firm or a lawyer. It seems clear that the combination of
yearly disclosure requirements and these prohibitions against coercion, including the Bank Board's regulation 12 CFR, § 563.35, dealing with tie-ins, are
together sufficient to deal with potential abuses. Clearly a borrower today already
has the right to deal with any reputable title or abstract firm he may wish to,
including any company controlled by a savings and loan, its officers or familyconnected persons.
Legal advice
Section 3 of the bill, as mentioned, would prohibit iany director, officer, or
employee of a savings and loan from providing legal services for "any person"
in connection with a loan or other business transaction involving the savings
and loan association. It appears that this prohibition is .altogether too stringent.
Read literally it would prohibit a lawyer who is an officer, director, or employee of an association from advising or representing either the .association
itself or anyone else in connection with any loan or "other business transaction" with such institution. This is a drastic result, and one which would
prohibit a lawyer-director from advising the association of any business transaction, even in a Board meeting. It would prohibit a lawyer-employee from
handling even a loan closing in the association, or doing any title work for
the association.
At the very least any such statutory change should clearly recognize that it is
perfectly proper for the association to choose any lawyer it may wish to give
it advice in connection with any transaction in which it is involved, even ,a
director, officer or employee. Whatever satutory language is eventually enacted
in this area, it should be made clear that there is no intention to place restrictions on the selection, employment or retention of counsel by ,a savings and
loan association for legal services rendered to it, nor upon the right of the




184
savings and loan association to require a borrower or other person in connection with a business transaction to pay for legal services rendered to the
association by such counsel in connection with a loan or other buisness transaction. Incidentally, this same principle should apply to the selection of title
companies, appraisal firms or loan closing companies. The association should
be free to select whom it wishes when it comes to obtaining services from
these business entities.
Prohibition against 8. d L. director from serving other companies in which
the 8. & L. has a 5 percent stock interest
Section 8 of the bill (pages 8-9) would prohibit directors, officers and employees of savings and loans from serving as directors or officers of any other
corporation in which the association has a voting stock interest greater than
5%. Without quarreling with the general thrust of this section, it should be
pointed out that a 5% interest in most cases is far too insignificantly to require
this kind of blanket prohibition. Even 25% ownership may be unimportant
inhere control is insignificant. Therefore, it might serve the savings and loan
business, the public in general and all other businesses to do no more than
require the disclosure of financial inter-relationships involving stock ownership
to State and Federal supervisory authorities, who would generally have power
to limit these relationships where potential abuses are obvious.
As has already been noted, the present regulations and policies of the
FHLBB on disclosure of financial relationships by directors, officers, and
employees are clearly sufficient to meet the question of possible abuses. The
fact remains that there is a need for flexibility in this kind of statutory proposal, which will allow the regulatory agencies to protect both private and public
interests, while balancing one against the other within a framework of equity
and fairness.
In addition to the basic argument that a prohibition against interlocking
relationships simply because of a stock ownership percentage would prove too
inflexible and, in any event, is actually unnecessary in view of present supervisory policies, it should be noted that any new statutory prohibition should
nevertheless recognize the existence of service corporations formed and owned
by savings and loan associations pursuant to Federal law. You may recall that
Congress has already authorized Federal savings and loan association to invest
in these service companies when it passed the Housing Act of 1964. There
should be a specific exemption from the prohibition against interlocking relationships closely paralleling what the bill already provides for holding company
relationships. In fact, the bill provides in a number of places an exemption
wherever holding company relationships might be involved. We feel this same
exemption should be provided for any service corporation relationship which
might involve directors, officers, and employees of savings and loan associations
which have legally formed and invested in such service companies.
Public inspection of loans to officers and directors
Section 16 would require savings and loans to report to the Federal Home
Loan Bank Board all loans made to directors, officers, employees, and their
families so that this data can be made available to the public. There can be
no real objection to the requirement that such data be made available to the
FHLBB. In fact, such information already is available. For the most part any
such loans are limited to mortgage loans on single-family dwellings, and
according to various regulations can be made available to directors, officers,
and employees only on a restricted basis.
However, there seems to be no purpose in making the details of these mortgage
loans available to the public. In fact, the details on mortgage and home improvement loans made to officers, directors, and employees should be specifically
exempted from the requirement that loian data be made public.
Section 16 (pages 18-19) would also prevent a savings and loan association
from making any loan to a corporation where the directors, officers and employees (individually or in the aggregate) of the savings and loan own 5%
of any of the corporation's stock (voting or non-voting). We oppose this provision as clearly too stringent and unnecessary. It lacks the necessary flexibility
which a regulatory agency could better provide by requiring adequate disclosure of the details and establishing more reasonable guidelines than simply
a 5% stock ownership benchmark. This would also assure the public and private
businesses that their respective interests would be adequately and fairly
protected.




185
Prohibiting interlocking directors where an 8. & L. has a "continuing" loan
relationship with a corporation
Section 9 of the bill would prevent a director, officer, or employee of a savings
and loan from acting as a director of a corporation because the savings and
loan has a "substantial and continuing relationship" in making loans to a particular company. The bill of course provides that the Bank Board would define
a "substantial and continuing relationship". From the outset the provision
appears too stringent, particularly since the* meaning of a "substantial and
continuing relationship" for making loans has not yet been defined. But, in any
event, there is really no need to prohibit interlocking relationships in this situation since there is already adequate authority to require disclosure of any relationship, as well as a legal duty on the part of the director or officer involved
to disqualify himself when any loan-making decision involving the corporation
should arise.
OFFICER'S QUESTIONNAIRE

Date of this Examination
Date of Last Examination
Docket No
In order to make a comprehensive analysis of the financial condition of the
institution, certain information is needed which is not ascertainable from the
books and permanent records. This information must therefore be furnished by
an executive officer who has such knowledge or can obtain it by appropriate
inquiry. Signed supporting schedules should be attached where space provided
on the form is inadequate. If any question is not applicable, insert the word
"None." This information is requested under the authority of Section 407(m) (2)
of the National Housing Act.
AFFILIATES

For each of the institution's affiliates, as defined in Section 407(m) (1) of the
National Housing Act and Section 2(to) of the Banking Act of 1933 (12 USC
221a(b)), list its name and address; its officers; its directors (or other similar
officials) ; and persons or business entities who own or control 10 percent or more
of the voting shares. Show the manner of affiliation, type and volume of business
transacted with the institution, and any indebtedness to the institution. An affirmative answer to any question from 1 through 8 indicates an affiliate of the
institution, in which case the information requested in this paragraph should
be furnished.
1. Does the institution own or control either a majority of the voting shares*
or more than 50 percent of the number of shares voted at the last election of
directors, trustees, or similar officials of any corporation, business trust,,
association, or other similar organization?
2. Does the institution control in any manner, other than as described in
question 1, the election of a majority of the directors, trustees, or similar officials
of any corporation, business trust, association, or other similar
organization?
3. Is any corporation, business trust, association, or other similar organization
controlled, through stock ownership or otherwise, by shareholders of the institution who own or control either a majority of the shares of the institution or
more than 50 percent of the number of shares voted at the last election of
directors of the institution?
4. Is any corporation, business trust, association, or other similar organization
controlled, through stock ownership or otherwise, by trustees for the benefit of
the shareholders of the institution?
5. Does the institution's board of directors include a majority of the directors,
trustees, or similar officials of any corporation, business trust, association, or
other similar organization?
6. Does any corporation, business trust, association, or other similar organization own or control either a majority of the shares of capital stock of the
institution or more than 50 percent of the number of shares voted at the last
election of directors of the institution?
7. Does any corporation, business trust, association, or other similar organization control in any manner the election of a majority of the directors of tht>
institution?




186
8. Is all or substantially all the capital stock of the institution held by trustees
for the benefit of the shareholders or members of any corporation, business trust,
association, or other similar organization?
INTERESTS OF INSTITUTION PERSONNEL

For purposes of this section, all references to the institution's personnel
include its directors, officers, employees, attorneys, and agents. In capital stock
institutions, all references also include persons or business entities who own or
control 10 percent or more of the institution's capital stock. Also, for purposes of
this section, unless specifically excluded by the language in the question, references to a business enterprise, regardless of its legal form, include but are not
necessarily limited to, construction, land ownership and development, building
materials and services, real estate services and sales, real estate financing and
investing, commercial banking, financial institutions other than such banking,
insurance (including casualty, fire, mortgage, title and life), escrow companies
and loan origination and closure.
9. List each business enterprise in which any of the institution's personnel
have a direct or indirect interest if such enterprise had any business transactions
with the institution since the last examination. Indicate the nature of the
interest and the volume and type of business involved.
10. List all loans or contracts made or purchased by the institution since the
last examination wherein any part of the proceeds was disbursed or credited to
the benefit, directly or indirectly of any of the institution's personnel (except
loans on their own savings accounts and appraisal, title, deed recording, and
cancellation fees). Name the persons benefited and state the amount and purpose
of, and the basis and reasons for, such disbursements or credits.
11. List all loans or contracts made or purchased by the institution since the
last examination, not listed in answer to question 10 in which any of the
institution's personnel had a personal interest of any kind, directly or indirectly.
Name such persons and state the amount and purpose of, and the basis and
reasons for, such disbursements, credits, or other benefits.
12. List the institution personnel who receive any commission, fee, or rebate
from outside sources, or benefit, directly or indirectly, from any business placed
through, by, or with the institution, if such information has not been furnished
in response to questions 9, 10 and 11. Name such persons and state the amount
and purpose of, and the basis and reasons for, such disbursements, credits, or
other benefits (Exclude legal, appraisal, and inspection fees formally approved
by the Board of Directors.)
13. Identify institution personnel who have an interest in another business
enterprise which is in competition with the institution for loans, savings, or any
other kind of business engaged in by the institution. Identify the business enterprise and furnish information about each such interest which has not been
furnished in response to the questions in this section.
BOOKS AND RECORDS

14. List the assets (except recurring current accurate) which are not carried
on the general books of the institution.
15. List each asset which, in your opinion, has a security or collectible value
less than book value. Give an estimate of the current value of each such asset.
16. List each check, note, mortgage, or other security instrument, which is
invalid or is not in full force and effect. Give an estimate of the current value of
each item.
17. List all loan commitments not recorded on the institution's commitment
register or other similar type of record. State the amount that is legally binding
and the amount that is not. Show the amount of each expected to be exercised
within 6 months, 6-12 months, and after 1 year.
18. List all liabilities and all contingent liabilities (except loan commitments
and current accurals) which are not recorded on the general books.
19. Furnish details of each oral or written agreement not recorded on the
institution's permanent records which affect the financial condition of the institution. State where the information is located and what person knows the facts
about such agreement.




187
OTHER INFORMATION

20. Identify any proposed changes on the board of directors, in the status of
officers, or in control of the institution's capital stock.
21. List all known holders of proxies of shareholders, state the number of votes
cast by each at the last election of directors, and show the total number of votes
cast at that election.
22. List the suits in law or equity and the court having jurisdiction in which
the institution is defendant. State the names of the plaintiffs, the amounts sued
for, and the nature of or alleged basis for the litigation. Furnish the name and
address of the attorney handling etach such suit for the institution.
23. Name any director, officer, employee, or agent who has at any time been
convicted of any criminal offense involving dishonesty or a breach of trust.
24. Name any director, officer, employee, attorney, or agent who has since the
last examination, embezzled, abstracted, misapplied or otherwise misused any
funds or other assets for which the institution was accountable. State the dates,
nature of irregularities, whether the FBI, local prosecuting authorities, supervisory authorities, and insurer under fidelity bond were notified, and the extent
of restitution or settlement by insurer. State whether the surety has furnished
written assurance that its bond continues in full force with respect to any person
named in response to this question.
25. Furnish any other information not recorded on the general books or permanent records or disclosed by your answers to questions 1 through 24 which affects
the financial condition of the institution.
The foregoing statements are made with due recognition of the provisions of
Title 18, United State Code, and to the best of my knowledge and belief they are
true and correct.
Isfgnature)^
(Title)
(Institution)
(Notary YublTc")"
STATE O F :

County of:
Subscribed and sworn to before me this
day of
My commission expires
(Notarial Seal)
The CHAIRMAN. The statement of Mr. Raleigh W.

Greene, chairman,
Committee on Legislation, National League of Insured Savings Associations has been received by the committee and will be placed in
the record at this point.
(The statement referred to of Mr. Raleigh W. Greene follows:)
STATEMENT OF RALEIGH W. GREENE, CHAIRMAN, COMMITTEE ON LEGISLATION,
NATIONAL LEAGUE OF INSURED SAVINGS ASSOCIATIONS

Mr. Chairman and members of the Committee. My name is Raleigh W. Greene.
I am President of the First Federal Savings and Loan Association of St. Petersburg, Florida and Chairman of the Committee on Legislation of the National
League of Insured Savings Associations, a nationwide trade association composed of members that are part of or affiliated with the savings and loan industry. On behalf of the National League, it is my privilege to present this testimony with reference to those portions of the Banking Reform Act of 1971 (H.R.
5700) that affect savings and loan associations and to comment upon other legislation either pending before the Committee or that we would like the Committee
to consider.
First, the National League expresses appreciation to this Committee for its
continuing efforts better to enable the savings and loan industry to serve the
public through the passage of appropriate legislation affecting that industry.
Over recent years, those efforts have expanded the ability of the industry to
encourage thrift by enabling it to offer savers a variety of types of savings accounts and investments. Legislation approved by this Committee has also wid-




188
ened the types of loans and investments that can be made by the industry to meet
the demands of its customers. We are hopeful that the Committee will look kindly
upon certain amendments we will propose to H.R. 5700 that are designed to increase further the ability of savings and loan associations to serve their customers while retaining those attributes of financial strength and soundness
that have rightfully earned the confidence of the American public.
THE BANKING REFORM ACT OF 19 71

We realize that the Committee is properly looking into other aspects of the
structure and operations of the savings and loan industry with the intention of
safeguarding the public interest. The National League appreciates the sincere desire of Committee members to assure, insofar as human foresight can do so, that
the framework and methods of operation employed by this industry will establish
an equitable balance among the respective interests of savers, borrowers and
personnel connected with savings and loan associations.
The National League's study of H.R. 5700, however, leads it to question
whether some of its provisions would really accomplish the desired result.
Would these provisions lead to the financing of more residential ownership or
rental? We ask you to join with us in taking a closer look at certain specific
provisions of the bill.
Section 3(a) would prohibit a director, officer, employee or trustee of a savings and loan association having savings accounts insured by the Federal Savings and Loan Insurance Corporation from serving at the same time as director,
officer, employee or trustee of seven listed types of organizations that have a
connection with finance. Included among the seven is "any insurance company",
a term that needs clarifying. If it refers only to a company that issues insurance
policies as a carrier, its scope is much smaller than if it encompasses any insurance agency. Recent regulations of the Federal Home Loan Bank Board concerning service corporations either wholly or partly owned by a savings and
loan association make it possible with the Board's approval to have the service
corporation perform the functions of an insurance agency. (Section 545.9-1 (b)
(2), Regulations for the Federal Savings and Loan System).
Another of the seven classes of organizations a director of an insured institution could not simultaneously serve would be a company with which the institution has a substantial and continuing business relationship that is either a
title company, a property appraisal company or a real estate loan-closing company. Abstracting and appraisal functions can presently be performed by service corporations wholly or partly owned by insured institutions, under authority
set out in section 545.9-1 of the Regulations for the Federal Savings and Loan
System issued by the Federal Home Loan Bank Board.
Section 3 of the bill would also bar an insured institution (as well as any
officer or director thereof or member of his immediate family) from directly
or indirectly controlling any title company, appraisal company or real estate
loan-closing company. If enacted, that provision would outlaw an arrangement
now authorized by section 545.9-1 of the regulations cited above whereby Federal associations are entitled to own such companies in whole or in part when
they take the form of service corporations organized under the law of the
State in which the home office of the owning institution is located.
The proposed provision would, in addition, bar any control of such a company
by an officer or director of the insured institution or any member of the immediate family of the officer or director.
Section 8 of the bill would prohibit a director, officer, employee or trustee of
an insured institution from serving at the same time as an officer or director
of any corporation in which the institution holds more than 5 per cent of any
class of voting stock. This provision would outlaw the present lawful arrangements whereunder insured institutions can own more than 5 per cent of a class
of voting stock of a service corporation and can have personnel of the institution also serve as officers or directors of the service corporation.
Section 9 of the bill would bar a director, officer, employee or trustee of an
insured institution from serving at the same time as a member of the board
of directors of any corporation with which the institution has a substantial
and continuing relationship with respect to the making of loans, discounts or
extensions of credit. That provision would prevent continuation of the present




189
lawful arrangement whereby a service corporation that receives financial support from the savings and loan association or associations that own it may have
on its board of directors persons who are also personnel of the insured institution.
Section 16 of the bill would bar an insured institution from making any loan,
discount or other extension of credit to any corporation in which 5 per cent
of the outstanding shares of any class of stock is owned by personnel of the
institution or their immediate families. This would affect the ability of insured
institutions to have financial dealings with corporations in which their personnel,
as distinguished from the institution itself, hold as much as 5 per cent of any
class of stock in the aggregate. The result might well interfere with loan arrangements with building contractors who happen to serve as officers or directors of
the insured institution.
While business arrangements are, of course, subject to change, it is a historical
fact that the Congress in 1933 authorized an appropriation of funds to enable
the Federal Home Loan Bank Board to promote the organization of Federal
savings and loan associations (Section 2.6, Home Owners' Loan Act). In making use of these promotional funds, it would be natural for the Board to seek
formation of Federally-chartered savings and loan associations by those engaged in collateral activities that might interest them in encouraging the development of savings and loan associations as a source of thrift and home finance.
The pattern of business affiliations that developed in that era has continued to
the present. Enactment of the bill in its present form would introduce an element
of forced reorganization of business relations between insured institutions and
other business organizations.
It is true that the bill would exempt from its prohibitions against simultaneous
service for two business organizations any such service that occurs within the
structure of a single savings and loan holding company. Presumably this exemption is based on the theory that internal transactions of such holding companies
are already adequately controlled by statutory provisions applicable to savings
and loan holding companies.
In passing, it is noted that the use of the noun "trustee" in connection with an
insured institution employs nomenclature not ordinarily associated with savings
and loan associations, although readily associated with mutual savings banks.
Although its use may be harmless, the Committee may want to eliminate it from
the bill in this context.
It is also noted that the term "immediate family" is not defined either in this
bill or in the National Housing Act of which the pertinent term would become
a part. Clarification of the meaning of that term is desirable. Some earlier proposed administrative definitions of this term have ventured too far out on the
limbs of the family tree, in the view of the National League.
Another provision in the bill that calls out for classification is the meaning to
be ascribed to the word "person" as used in that portion of section 3 which would
add a new section 413 to the National Housing Act and would prohibit any
"trustee, director, officer or employee" of an insured institution from performing
legal services in connection with a loan or other business transaction with that
institution, for any person. If "person" as there used is intended to refer to someone other than the institution the trustee, director, officer or employee serves,
the restrictions imposed by the provision would be less severe than if the term
includes that institution. "Person" is defined in Section 408 of the National Housing Act, but only for the purposes of Section 408 itself. There the term includes
an individual or a company. Section 408 further defines "company" to include a
corporation, which would include an insured institution that has a corporate
form, as do most savings and loan associations.
If the proposed section 413 would bar a lawyer who is an officer, director or
employee of an insured institution from representing that institution in loan
transactions or other business transactions in which it is involved, the prohibition would seem to put an end to the employment of house counsel by any insured
institution.
If "person" as used in proposed section 413 means sojneone other than the
insured institution for which the individual works, the prohibition is not so
sweeping. But it would presumably be more strict than the canons of legal ethics,
which permit a lawyer to represent more than one party to a transaction as long
as the parties he represents know he is doing so and consent to the arrangement.
Indeed, the principle of disclosure to all having a legitimate interest that an
Individual serves in some capacity for more than one institution offers a means
of discouraging abuse of authority by those in a position to do so.




190
There is nothing inheretly evil in an agent working for more than one principal or an employee working for more than a single employer. Potential conflicts of interest abound throughout our way of life even being evident in such
a basic theme as the favoritism shown by parents to a particular child or children. Fortunately in only a few of those cases is the potentiality transformed into
an actual conflict of interest by means of a misuse of power. And as the literal
lighting of public ways has been found to be a deterrent to crime, so the figurative
light cast by public disclosure exerts a strong influence against a temptation to
misuse authority. In such a light, a man is encouraged to respect his various
loyalties by rendering to Ceasar what is Ceasar's and to God what is God's.
Nor can one who disregards various loyalties do so with impunity, because the
law normally and rightly makes remedies available to victims of such a misuse of
authority.
Combining a requirement for public disclosure of dual service with a requirement that the dual servant disqualify himself from taking part in transactions that involve a conflict-of-interest under penalty of civil and/or criminal
sanctions offers an adequate alternative to the prohibitory approach to the
situation which would be adopted by the bill in its present form.
Basically, the disclosure approach is adopted in section 16 of the bill which
would add a new section 414 to the National Housing Act. That provision would
require each insured institution to report to the Federal Home Loan Bank
Board the nature and amount of all loans made by the institution to any of its
personnel or member of their immediate family. It also would require that the
Board make such information available to the public. With a reasonable definition of "immediate family", such a provision is preferable to a prohibition against
any such loans and can serve the public interest fully as well.
The criminal sanction approach for misuse of power is contained in section
11 of the bill. This subjects to criminal penalties both parties to a bribe designed
to influence the conduct of an agent in a transaction between his principal and
the party offering the bribe. Even here the element of disclosure and consent is
brought into play, because the penalty would not attach if the benefit offered
to the agent is accepted with the consent of the principal, presumably on the
theory that one forewarned is forearmed and therefore immune from undue
influence.
I realize we have not yet taken note of the fact that section 27 of the bill would
grant more than 3 years for those affected by the bill's dual service prohibitions
to come into compliance with those provisions of the bill. But that is because the
National League is not of the opinion that any phase-in period would remove the
basic objections to the prohibitory approach taken by these provisions of the bill.
Dual service by individuals also has many points in its favor in the public
interest. Particularly in smaller communities, it enables the citizens to obtain
the services of financially knowledgeable men in the operation of various types
of financial and other institutions. Such advantages would be difficult, if not
impossible, to obtain if the one-man, one-job principle were to be invoked.
It has also been argued that appropriate distinction should be made where one
of the dual service positions consists of service to a mutual form of institution.
That type of service is not susceptible of improving the servant's equity position,
as is true in the case of ownership by the servant of permanent capital stock
whose increase in value can be translated into cash through sale of the stock.
In summary, then, as to the provisions in the bill dealing with dual service, the
National League recommends control through disclosure rather than through
prohibition.
EQUITY PARTICIPATION

Section 14 of the bill would prohibit any lender as therein defined from accepting any equity participation in consideration of making a loan. The category of
"lender" as defined in that section is noticeably more exclusive than the category
of "financial institution" defined elsewhere in the bill. Apparently because they
lack a nexus to the Federal government (other than special tax treatment) real
estate investment trusts are omitted from the definition of "lender". So are all
individual lenders and all corporate or trust lenders except FDIC-insured banks,
FSLIC-insured savings and loan associations, mutual savings banks whose deposits are not insured by FDIC, insurance companies, bank holding companies
and savings and loan holding companies. Thus, mortgage bankers (as distin-




191
guished from mortgage brokers acting for covered principals) are not subject to
the prohibition. With so many lenders free from the control of section 14, the
Committee may well consider whether its passage would create an unfair competitive situation in which controlled lenders would be compelled to rely mainly
on interest as a return on loans while uncontrolled lenders could reduce the interest cost in return for sharing an equity position in the loan project. Is this provision thereby setting up a condition increasing the risk of operating institutions
that are members of Federal share or deposit insurance agencies?
BENEFICIARY OF LOAN

Section 16 of the bill would add a Section 414(c) to the National Housing
Act prohibiting an insured institution from making a loan to a fiduciary except
on condition that the identity of the beneficiary of the loan be revealed to the
institution. While a prudent lender welcomes the maximum mnount of information about the use of loan proceeds, the lender looks to the fiduciary for repayment of the loan and is not always in a position to assure that the declared
beneficiary is in truth the actual beneficiary. No objection is raised to making
disclosure of the beneficiary a condition to the loan, but likewise no assurance
can be given that the disclosure made will be accurate. The extra cost involved
in policing the actual use of loan proceeds (where such policing is feasible)
would increase the cost of handling the loan and therefore make the loan less
attractive to the lender and consequently less available to fiduciaries.
BROKERED DEPOSITS

Section 20 would amend Section 5B of the Federal Home Loan Bank Act so
as to prohibit the payment of compensation to a third party for obtaining funds
for deposit or investment in an insured institution.
Section 21 would provide criminal sanctions for the finder who knowingly
fails to comply with that prohibition. The National League questions the need
for such an outright prohibition and criminal sanctions in view of the strict
restrictions already placed on insured institutions with respect to the payment
of finder's fees, by virtue of outstanding regulations issued by the Federal Home
Loan Bank Board. Under the circumstances, section 20 seems to provide an example of overkill as it relates to FSLIC-insured savings and loan associations.
GIVEAWAYS

Section 23 of the bill would add a provision to section 5(B) (a) of the Federal
Home Loan Bank Act to prohibit giveaway premiums for opening or adding to a
savings account, "except in the case of interest or dividends subject to limitation
under this section." If that exception is intended to exempt giveaway premiums
that count as dividends or interest under the rate control ceiling, the situation
seems to reflect the status quo, as far as insured institutions are concerned.
Federal Home Loan Bank Board regulations already prescribe such a limitation
on giveaway premiums. (Section 520.2(f) of the Regulations for the Federal
Home Loan Bank System.) This could well lead to the conclusion that section 23
is not necessary while Federal rate control authority over interest and dividends
remains on the statute books. A question may be raised as to whether the provision is intended to invoke an absolute prohibition against such giveaway premiums if (as was recently true for a short period) the Federal Home Bank Board's
direct rate control authority expired.
H.R. 5685 employs a different approach to restrictions on giveaway premiums.
Section 24 of that bill would not relate those restrictions to rate control ceilings.
Moreover, they would permit the use of such premiums up to a value of $5.00
on a non-recurring basis as an inducement to open or add to a savings account
in an institution that is a member of the Federal Home Loan Bank System. The
pertinent provisions would further allow sale of merchandise to a depositor as
part of a promotional campaign, presumably a campaign conducted by the member institution. The dollar limits now applicable under section 526.2 (f) of the
Regulations for the Federal Home Loan Bank System are $5.00 for an amount
of less than $5,000 placed in an account and $10.00 for an amount of $5,000 or
more so placed. Giveaway premiums within these limita need not be counted
against the rate -control ceiling under the regulation.




192
On the matter of giveaway premiums, the National League has been willing
to follow the State law or practice applicable in any given jurisdiction where
the institution involved is located.
#
In the case of mutual savings banks not members of FDIO, the similar provision in Section 24 of H.R. 5700 would exempt the use of giveaway premiums
for payment of ordinary interest or dividends. Since it is difficult to determine
what rate of dividends or interest would be "ordinary" in the case of such
mutual savings banks operating under the law of different States, the meaning
of the exception needs clarification, particularly if it intended to place such
mutual savings banks under competitive restraints like those proposed to be
placed on FDIC-insured banks (including FDIC-insured mutual savings banks)
and FSLIO-insured savings and loan institutions.
FULL INSURANCE FOR PUBLIC UNIT FUNDS

Section 26 of the bill would provide full insurance by FSLIC of public unit
funds placed in savings accounts in insured institutions. Present law is interpreted to limit the insurance on such funds to a total of $20,000 for any number
of public money accounts maintained in a single insured institution by a single
public official. The National League has supported a position that would increase
that insurance ceiling in line with a "separate fund" doctrine. Under this theory,
a single public official could obtain up to a total of $20,000 insurance coverage
on each account in a single insured institution that represents a deposit of funds
designated for separate uses by the appropriate public body. In other words, this
would allow a single public official who has custody of several separate funds to
obtain as much as $20,000 insurance coverage for each such separate fund to
the extent it is deposited in a single institution. No change would be made in the
present situation whereby a single public official can obtain up to $20,000 insurance per account by opening accounts in more than one insured institution. This
separate fund proposal provides a way to increase insurance coverage somewhat
while still preserving a less than 100 per cent ceiling on insurance coverage of
public unit funds. Under this arrangement, deposits exceeding the insurance
coverage would be secured, if at all, by a pledge of specific collateral by the institution accepting the account.
The recent Legislative Conference of the National League recommended that
the League support legislation to introduce the separate fund doctrine if it became impractical to obtain legislation that would provide 100 per cent FSLIC
insurance coverage for public unit accounts.
Unfortunately, savings and loan associations suffered withdrawal of public
unit funds in some instances when the Federal Home Loan Bank Board revised
its regulations governing insurance of accounts a few years ago and the strictures of present coverage for public unit accounts impressed themselves upon the
public officials who were custodians of such public funds. Since then, administrative attempts that have unfortunately proved inadequate have been made by
Federal regulatory bodies to alleviate the situation. Remedial legislation is
definitely called for at this time. It is within the discretion of the Congress to
determine the exact form such legislation should take.
The National League has no objection to the provision in section 26 that would
authorize the Federal Home Loan Bank Board to regulate the total amount of
public unit funds that can be carried by an insured member in savings accounts
in insured institutions.
H.R.

7440

I now invite your attention to H.R. 7440 which is pending before the Committee
and also deals with potential conflict-of-interest situations that involve savings
and loan associations and their personnel and others who perform services for
such associations. This bill is identical with section 911 of the Housing and
Urban Development Act of 1970 as reported by this Committee last year. The
National League appreciates the opportunity to comment on the provisions of
this bill in the course of a hearing, an opportunity not presented to it last year
because of the parliamentary situation.
Our earlier comments about the conflict-of-interest provisions in H.R. 5700
apply wUh equal force to provisions on that topic in H.R. 7440. We recommend
adoption of a disclosure technique rather than a regulatory or prohibitory technique, to control the fortunately rare instances in which savings and loan officials abuse their trust. The National League completely concurs with the desire




193
«of the sponsor of H.R. 7440 to achieve fair treatment for borrowers from insured institutions and institutions that are members of the Federal Savings and
Loan System. But in all sincerity it fears that the major provisions in that bill
would unnecessarily interfere with efficient and fair operation of these savings
and loan associations that would be subject to it. For example, the pervasiveness
with which and detailed manner in which the Federal Home Loan Bank Board
would toe ^empowered to regulate or prohibit every facet of operations of an
association would seem to substitute the Federal Home Loan Bank Board for
the board of directors and management personnel of the association as the dominant force in carrying on daily operations- of the association. With all due respect to the supervisory expertise of the Board and its staff, there is no reason to
suppose that such intensive intrusion into daily operations of association would
serve the public interest nearly as well as operations conducted in accord with
lawful policy determined by thousands of boards of directors and management
officials of associations closely attuned to local needs by continuous attention
to the appropriate role to be played by savings and loan associations in the community. Admittedly, complete prohibitionary tactics could prevent any evil being
done by associations, but they would be fortiori also prevent any good from being
accomplished by associations. The National League prefers an economic climate
in which associations can operate in accordance with private enterprise doctrines
while being subject to reasonable regulatory and supervisory restraints because of
their practice of working largely with capital supplied by others than the directors or officers of the associations.
The National League questions the advisability of enabling the Federal Home1
Loan Bank Board to set up registers or rosters of persons eligible to perform
services for savings and loan associations or for any "affiliated person" of such
associations, as that term is defined in the bill. It particularly questions the
proposal that the Board be authorized to remove persons from such registers
or rosters involuntarily. This appears to ignore any semblance of due process
with respect to the removal of names from the lists of the favored. The services
expressly brought within the ambit of such authority would include not only
appraisal or valuation services, but also legal services, title services, insurance
services, settlement services, escrow services and trustee services. However, the
express listing of these types of services would not be deemed to exclude other
type of services.
The Board's present authority over Federally-chartered savings and loan
associations is extensive. H.R. 7440 would not only expand that authority, but
by applying these provisions also to State-chartered associations that are members of FSLIO or the Federal Home Loan Bank System, would expand to a far
greater extent the present powers of the Board with reference to those Statechartered associations and thereby usurp from State supervisory authorities the
practical value of powers granted to them by State law.
We respectfully note that all other provisions put forth by the sponsor of
H.R. 7440 to prevent a recurrence of unsavory treatment of borrowers by a few
were enacted into law as part of the Housing and Urban Development Act of
1970. Combined with additional legislative provisions the National League is
here supporting, a state of law should be achieved that places in the Federal
Home Loan Bank Board the authority, coupled with appropriate disclosure and
reports, required to forestall any new instances of shoddy treatment of borrowers
of the type brought to light by the investigation conducted by the Ad Hoc
Committee on Home Financing Practices and Procedures very capably chaired
by the sponsor of H.R. 7440.
CONSUMERS BANK ACT OF 1971

At this time, Mr. Chairman, I should like to note general National League
support for the Consumers Bank Act of 1971 (H.R. 2473). The League is in full
accord with the declaration of purpose in that bill to the effect that additional
powers are needed by the savings and loan industry in order to serve better
the needs of the public for financial services.
The bill contains provisions dealing with two of the five legislative topics given
high priority in the recent National League Legislative Conference.
Section 2 would authorize the Federal Home Loan Bank Board to issue stock
charters, as well as mutual charters, to savings and loan associations and would
permit conversion to a Federal stock form by mutual savings and loan associa-




194
tions after obtaining Federal Home Loan Bank Board consent. The National
League strongly supports these provisions.
Section 4 of the bill would enable Federal savings and loan associations to offer
its customers checking account services by handling demand deposits. The reserve
requirement authority as to such deposits would be parallel to that vested in the
Federal Reserve Board with reference to member banks of the Federal Reserve
System, but the regulatory body would be the Federal Home Loan Bank Board
instead of the Federal Reserve Board. Federal Reserve Banks would be authorized to accept such checks for clearance. The National League lends strong
support to these concepts.
Section 5 of the bill would confer trust powers on qualified Federal savings
and loan associations to act as trustee for trusts containing not more than $100,000 at the outset. Such a proposal was among those fully supported by the National League Legislative Conference, although being assigned a lower level of
priority.
In the case of all the checking account and trust powers in this bill, if granted,
they would enable the savings and loan industry to extend its sphere of service
to the individuals who normally make up its list of customers. The stock form of
organization would offer the association an alternative framework within which
to provide that service.
Sections 6 through 8 of the bill would enlarge the operational opportunities of
Federal associations by authorizing them to make small business loans in a limited amount, issue credit cards and act as insurance agent. While the National
League has adopted no express legislative position on such proposals, they come
within the concept of enabling saving? and loan associations to increase the
services they render to individuals. The recipients of small business loans of the
type authorized in the bill would be individuals whose needs for financial service
could be more sympathetically handled by the savings and loan association that
is accustomed to dealing with people of modest means. If the small business is
that of a land developer or building contractor, this new form of small business
loan would afford both the small businessman and the association more flexibility
in their transactions with one another. Because of these considerations, those
provisions of the bill also deserve National League support.
NATIONAL LEAGUE LEGISLATIVE PROPOSALS

With your permission, I would now like to invite the attention of the Committee to four legislative proposals supported by the National League. We hope
your Committee will see fit to add the gist of these proposals as amendments to
whatever bill is reported out of Committee favorably as a result of these hearings. At this point I respectfully request permission to include in the record a
copy of a proposed bill that would carry the title of the Savings and Loan Act
of 1971 and contains the four legislative proposals to which I have referred and
n copy of a brief summary of those provisions.
Section 2 would authorize Federal savings and loan associations to make consumer loans for any lawful purpose.
Section 3 would empower such Federal associations to offer checking account
services to individuals and organizations that do business with the associations.
The provisions are very much like those on checking accounts in H.R. 2473.
Section 4 would authorize the Federal Home Loan Bank Board to issue Federal stock charters for savings and loan associations and would allow Federal
mutual associations to convert to a stock form with Federal Home Loan Bank
Board approval. Again the provisions are like those in H.R. 2473.
Section 5 would employ the FDIC method of computing depost insurance
premiums for computing similar insurance premiums to be paid to FSLIC by
insured savings and loan institutions.
The National League believes that all four of these provisions would enable
the savings and loan associations they affect to provide better service to individuals and organizations that ususally deal with savings and loan associations. We
would welcome the opportunity to discuss in more detail with Committee members or staff personnel of the Committee the provisions in the proposed bill.
CONCLUSION

Mr. Chairman, this concludes my testimony on legislative matters pending
before the Committee that affect National League members more or less directly.
We appreciate the opportunity to present these comments to the Committee.




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(Proposed bill containing four legislative proposals and a summary of those
provisions follows:)
A BILL To expand the ability of savings and loan associations to serve individuals and for other purposes.
Be it enacted by the Senate and House of Representatives of the United
States of America in Congress assembled, That this Act may be cited as the
"Savings and Loan Act of 1971".
CONSUMER LOANS

SEC. 2. Subsection (c) of Section 5 of the Home Owners' Loan Act of 1933, as
amended, is amended by adding thereto the following paragraph:
"Without regard to any other provisions of this subsection, any such association may make and invest in loans to individuals made for any lawful purpose."
CHECKING ACCOUNTS

SEC. 3. (a) Subsection (b) of Section 5 of said Act, as amended, is amended
by renumbering paragraph (2) as paragraph (3) and by adding thereto the
following paragraph (2) :
"An association may also raise capital in the form of demand deposits as a
means of offering checking account services to individuals and to any organization that (i) maintains a savings account in the association or (ii) that is, or
has been within one year proir to the date such services are offered to it, a
borrower from the association or a purchaser of loans (or any interest therein)
from the association or (iii) that supplies to or purchases from the association
any goods or services in the ordinary course of business. Any such association
for such a purpose may accept deposits subject to withdrawal on demand, ineluding deposits of its own funds, and may honor requests for withdrawal of such
deposits in the form of checks and drafts. Any association that accepts demand
deposits pursuant to this subsection shall at all times maintain reserve balances
in addition to all other reserves held or maintained by it, as herein provided.
The reserve balances shall equal not less than 7 per cent and not more than 22
per cent, as prescribed from time to time by the Board, of the full amount of
such deposits held by an association as determined by the Board. Such reserves
shall be held in one or more of the following forms :
(1) Demand deposits in one or more Federal Home Loan Banks.
(2) Demand deposits in one or more Federal Reserve Banks.
(3) Demand deposits fully insured by the Federal Deposit Insurance Corporation in one or more commercial banks.
(4) Marketable securities having not more than seven years to run to maturity, issued or guaranteed by the United States.
(5) Items in transit, as defined by the Board, to the extent that demand deposits in the associations are increased by such items.
(6) Coins and currency of the United States.
For the purposes of this subsection, the Board is authorized to define the
terms 'demand deposit', 'savings deposits', 'shares', or 'other accounts'. The
Board is further authorized to suspend for a period not exceeding thirty
days and from time to time to renew such suspension for periods not exceeding fifteen days, any requirement for reserve balances specified in this subsection. No association shall, directly or indirectly, by any device whatsoever, pay any interest on any demand deposit.
An association accepting demand deposits may become a member of a
clearing facility for checks and drafts and may pledge its assets and meet
other conditions required for such membership.
(b) The first paragraph of section 13 of the Federal Reserve Act is amended
"by inserting "or savings and loan association" immediately after "nonmember
bank or trust company" both times the last-quoted words appear therein.
FEDERAL STOCK SAVINGS AND LOAN ASSOCIATIONS

SEC. 4. (a) Subsection (a) of Section 5 of said Act, as amended, is amended—
(1) by deleting the word "mutual" both times it appears therein, and
(2) by inserting " ( 1 ) " immediately after " ( a ) " , and by adding at the end
thereof the following:
"(2) An association may be chartered either as a mutual institution or as a
corporation having capital stock. Except where otherwise indicated by the context, references in this Act to 'associations' refer to both mutual associations
and stock associations.




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"(3) In the case of a stock association, the capital stock shall represent the
permanent capital of the association, subordinate to all other liabilities and
capital of the association. Stock may be issued only in accordance with the
regulations of the Board.
"(4) Upon the written application of a mutual association, the Board may
permit the association to convert into a stock association if the Board determines
that—
"(A) two-thirds of the association's directors have voted in favor of the
proposed conversion;
"(B) two-thirds of the votes cast by account holders in person or by proxy
have been cast in favor of the conversion at a meeting duly called and held
not more than six months prior to the filing of the application with the
Board; and
"(C) the conversion will be conducted pursuant to a plan which is approved by the Board as fair and equitable."
(b) Paragraph (2) of subsection (b) of Section 5 of said Act, as amended,
is amended by deleting therefrom the parenthetical expression "(except capital
stock)".
FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION PREMIUMS

SEC. 5. (a) Subsection (b) of Section 404 of the National Housing Act is
amended—
(i) by renumbering the present paragraph (3) as paragraph (4), and
(ii) by inserting as a new paragraph (3) the following: "As of December
31, 1971 and as of December 31 of each calendar year thereafter in which
an institution pays a premium in accordance with the requirements of this
subsection (b), the Corporation shall transfer 33% per centum of its net
premium income received under this subsection (b) to its capital ^account
and the balance of such net premium income shall be credited pro rata to
the insured institutions from which such premium income has been received, based upon the premiums of each institution becoming due during
said calendar year. Each year such credit is made, it shall be applied by the
Corporation toward the payment of the total premium becoming due from
the institution on the next premium payment date and any excess credit
shall be applied upon the premium payment becoming due on the premium
payment date succeeding the next premium payment date. The term 'net
premium income' as used herein means the total premiums which become
due during the calendar year under this subsection (b) less (1) the operating
costs and expenses of the Corporation for the calendar year: (2) additions
to reserve to provide for insurance losses during the calendar year, except
that any adjustments to reserve which result in a reduction of such reserve
shall be added; and (3) the insurance losses sustained in said calendar
year plus losses from any preceding years in excess of such reserves. If the
above deductions exceed in amount the total premiums which become due
during the calendar year, the amount of such excess shall be restored by
deductions from total premiums becoming due under this subsection (b) in
subsequent years."
(b) Subsections (c), (d) and (h) of Section 404 of said Act, as amended, are
hereby repealed.
(c) Subsection (g) of Section 404 of said Act, as amended, is revised to read
as follows:
"Any provision of law to the contrary notwithstanding, no insured institution
hereafter shall be obligated to make any prepayment to be credited to the Secondary Reserve and the Corporation hereafter shall not accept or receive further
such prepayments. Each insured institution's pro rata share of the Secondary
Reserve shall be used as follows. Earnings hereafter realized on amounts in the
Secondary Reserve shall be paid in cash semiannually on May 1 and November 1
to each insured institution in accordance with its pro rata share of the Secondary
Reserve. The remainder of each insured institution's pro rata share of the Secondary Reserve shall be used, to the extent available, to discharge such institution's obligation for its premium under subsection (b). In the event that obligation ceases for any reason other than as provided in subsection (f), any residue
of an insured institution's pro rata share of the Secondary Reserve shall be paid
to it in cash as soon as practicable after the cessation of such obligation."




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SUMMARY OP THE SAVINGS AND LOAN ACT OF 1971

Section 1. Short Title—Savings and Loan Act of 1971.
Section 2. Consumer Loans—Authorizes any Federal savings and loan association to make loans to individuals for any lawful purpose.
Section 3. Checking Accounts—(a) Authorizes any Federal savings and loan
association to accept demand deposits to offer checking account services to individuals and also to organizations that are savers in or borrowers from the
association or purchasers of loans from it or dealers in goods or services with the
association. Required reserves ranging between 7% and 22% of deposits would
be set by the Federal Home Loan Bank Board. Reserves may be held in the form
of specified demand deposits, marketable U.S. Government-issued or -guaranteed
securities maturing within 7 years, items in transit and U.S. coins and currency.
The Board could suspend reserve requirements for short periods. No association
could pay interest on demand deposits. The association could join a clearing
house.
(b) Authorizes Federal Reserve Banks, solely for purposes of exchange or
collection, to receive from any savings and loan association deposits and checks
and drafts payable upon presentation or maturing notes and bills, if the association maintains with the Federal Reserve Bank a balance sufficient to offset
items in transit. This subsection amends section 13 of the Federal Reserve Act
(12 U.S.C. section 342).
Section 4. Federal Capital Stock Savings and Loan Associations—
(a) Authorizes the Federal Home Loan Bank Board to charter Federal
capital stock savings and loan associations. The stock represents permanent
capital subordinate to all other liabilities and capital of the association. The
Board would have regulatory power over the issuance of such stock.
Also authorizes a Federal mutual association to convert to a Federal stock
association upon % favorable vote by the association's directors and % favorable vote by association members voting at a meeting held no more than 6
months before applying for conversion, provided the conversion is conducted
under a plan approved by the Board as fair and equitable.
(b) This is a technical amendment to remove from Section 5(b) of the
Home Owners' Loan Act of 1933 the present prohibition against issuance of
capital stock by Federal savings and loan associations.
Section 5. FSLIC Premiums—(a) Authorizes savings and loan associations
to follow the premium pattern applicable to FDIC-insured banks by receiving
a credit for % of the net premium income received by the Federal Savings and
Loan Insurance Corporation annually. FSLIC is to place the remaining % of
the net premium income in its insurance reserves. The association's credits
apply toward future premium payments. Net premiums are computed by deducting from gross premiums (1) FSLIC annual operating costs and expenses,
(2) insurance losses during the year, and (3) the amount, if any, by which
insurance reserves are exceeded by losses during that year and preceding years.
If the deductions to be made exceed premiums due in a year, the excess will
be deducted from gross premiums received in future years.
(b) Section 404(c), dealing with assessment of premiums to equal FSLIC
losses and expenses at not over % of 1% of accounts of insured members per
year, section 404(d), dealing with prepayment of premiums to be placed in
the Secondary Reserve, and section 404 (h), dealing with mandatory deposits
up to 1% of savings accounts by institutions in FSLIC upon call of the Federal
Home Loan Bank Board, would all be repealed.
(c) In place of the present provisions in section 404(g) that suspend prepayments to the Secondary Reserve once the Primary and Secondary Reserves
together equal 2% of insured accounts of FSLIC member associations and require resumption of prepayments if that percentage level drops below 1%%,
a revised subsection (g) terminates the requirement for any further prepayments to the Secondary Reserve. The revision also requires semiannual cash
payment to institutions of future earnings on their pro rata share of the
Secondary Reserve and use of the balance of that share to pay regular premiums
to the Primary Reserve. If the Secondary Reserve has not been completely used
when regular premium payments no longer become necessary, the balance m
the Secondary Reserve would be paid to institutions in cash on a pro rata
WILLIAM F. MCKENNA, General Counsel, NLI8A.
60-299—71—pt. 1




14

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(At this point, the committee retired into executive session, after
which, the hearing was resumed in open session as follows:)
The CHAIRMAN. We will resume now with the bill before the committee.
I have interrogated the witness. Mr. Widnall was given an opportunity to interrogate him, but desired not to, and Mr. Barrett has
interrogated the witness. Now, it is Mr. Johnson's time to interrogate
the witnesses.
Mr. JOHNSON. I would like to ask some questions of Professor Vance.
You are espousing a novel idea here today, that of doing away with
boards of directors in corporations.
When you lecture to your students at the University of Oregon, is
that what you are advocating, that they do away with directorates
entirely and just run a corporation by executive control ?
Mr. VANCE. On the contrary, I am advocating a stronger board of
directors. I am advocating a reconstituted or stronger board of directors where all the board members really participate and where the net
effect is not a passive directorate but is actually a working directorate.
I am not advocating abolition of boards.
Mr. JOHNSON. YOU are not?
Mr. VANCE. Definitely not.
Mr. JOHNSON. And you are endorsing what Malcolm Forbes had to
say about who needs boards of directors, and you just threw this in;
is that it?
Mr. VANCE. I just threw that in to indicate that there is a strong
sentiment among the American public questioning boards of directors.
And I think that is a terribly important question, if the public concern
continues to move in that direction; then, I think we ought to constitute the board so that it would perform is function and the directorate
not be, simply, as I mentioned, and honorific position.
Mr. JOHNSON. Mention was made yesterday of the Mellon National
Bank in Pittsburgh.
They have a pretty well diversified board of directors, and are a
tremendously great, successful institution. Now, can you see anything
sinister in the fact that the board of directors of the Mellon Bank are
men of affairs and widely distributed throughout the Nation and have
pretty much been greatly successful in what they have been doing in
their own lines of endeavor, or do you think that the board of directors
should be confined to shareholders of the Mellon Bank ?
Mr. VANCE. I think that a broader representation would be very
effective, including men of affairs but also including more individuals
who have a direct association with the working mechanisms of the
bank; namely, the vice presidents, sir, and perhaps shareholders, too.
There would be nothing wrong with having a balanced representation.
I think that is in the interest of our democratic system.
Mr. JOHNSON. Of course, to be a director in any bank, you must have
a certain number of shares of stock in the bank, so every director is a
shareholder of a bank.
Mr. VANCE. Right.
Mr. JOHNSON. I am thinking now of the other banks in this country
that have pretty well diversified boards of directors and have created
the greatest banking system in the world. But, if I understand what you
are saying, the boards of directors are terrible and they should be




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done away with, and they have made a flop of it, and you are here to
advocate that what they are doing is sinister, and that we had better
cut it out. Isn't that what you have been saying ?
Mr. VANCE. Absolutely not.
Mr. JOHNSON. What are you saying, then ?
Mr. VANCE. I think that in any institution or organization typically
there comes a time when we have to modify, we have to reconstitute, we
have to rebuild, we have to renovate, and on the board of directors' end
of it, the board room end of it, it is time to take some steps to correct
perhaps abuses or practices that at one time were not negative but
today are negative.
At one time there was nothing wrong with having a small elite type
of directors in an institution; but, today, 31 mililon Americans own
stock, and what I am advocating is to keep in step with the times, in
that we are having, practically in every institution of our Nation, a
greater participation by the people, a democratic participation, and
especially in banks but also in most of our large corporations where
now we do not have that type of participation. It is a small group of
individuals that tend to perpetuate their board-room affiliations. There
is not real democratic process in the election of most of our directors
today. There is a single slate of candidates.
By contrast, if I could put it facetiously, perhaps, even in the totalitarian nation, you do tend to have more than one candidate run for
one post. In Yugoslavia very recently this was true for the top 200
positions, or whatever it was, they had double the number of individuals running for the positions. They are all in the same party. But
nevertheless they do have a choice, whereas in most of our board-room
elections by proxy there is absolutely no choice. You vote for the man
designated by management.
Mr. JOHNSON. NOW, the other power structure in this Nation is the
great unions. And it goes without saying that the same men, the
same boards of directors, the same persons, each year are reelected and
control the larger unions in this Nation, and they are becoming more
powerful all the time.
Do you advocate a more democratic selection, let's say, of directors
and chiefs of our great unions in the same way that you are advocating
it for banks and corporations ?
Mr. VANCE. Very definitely, sir.
I think that many big mistakes have been made just by having two
great union chiefs in for so long. John L. Lewis was head of the coal
miners' union for 30 years. And I know something about that, because
I have had an association with anthracite coal mining in Pennsylvania.
And Walter Reuther was the head of the automobile workers for 26
years. I think that is much too long. I think that is anti-democratic.
Mr. JOHNSON. My time has expired.
The CHAIRMAN. Mrs. Sullivan.
Mrs. SULLIVAN. Thank you,T Mr. Chairman.
First, Mr. Chairman, I w ant to take this opportunity to welcome
our witnesses this morning, and particularly Mr. Scott. I want to
thank Mr. Scott for the support and assistance he gave me on the first
nonprofit homeownership subsidy program, section 221 (h). And, as
a result, in part, of the difficulties his group and other nonprofit groups
ran into in sponsoring such projects. Due to the information we got




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here in Washington during the investigation of the Ad Hoc Subcommittee on Home Financing Practices and Procedures, we created
a new office in HUD to work exclusively with the nonprofit sponsors
of subsidized homeownership projects to help them cut through and
reduce the paper work and red tape.
So, I thank you, Mr. Scott, for the help and encouragement you gave
me on this. As you remember, I placed our correspondence on this subject in the hearings of the ad hoc subcommitee.
But, Mr. Scott, I do not find anything in your statement this morning dealing with the need for legislation to deal with the conflict of
interest situations which the ad hoc subcommittee brought out in the
last Congress, and which the Friend report certainly underscored.
Your statement refers to the legal and economic complexities of the
prohibitions in Chairman Patman's bill dealing with interlocking directorates, and so on. But what about the moral aspects of this
problem?
Do we have a situation which requires action and which requires
correction ?
Mr. SCOTT. I really do not think so. Please look at the document that
is called the officer's questionnaire, beginning with question 9 through
13. (See page 186.) If these questions are answered to the supervisory
authority honestly—and certainly I can't imagine that any managing
officer, in the fact of title X V I I I of the U.S. Code would answer otherwise—if these questions are answered honestly, then all of the facts
as regard any sort of relationship of officer, director or employee that
could occur and would in any way benefit an individual as opposed to
the association will come out clearly. When we file this report, Mrs.
Sullivan, the attachments will make the report look several inches
thick.
Mrs. SULLIVAN. DO you feel they are all answered honestly ?
Mr. SCOTT. I just cannot imagine anyone, in the face of title X V I I I
of the U.S. Code, not answering this in full and in all honesty. One
would have to desire to do wrong to do otherwise. And I do not believe
this is widespread in our business.
Mrs. SULLIVAN. Mr. Scott, do you feel that the regulations already
established by the Home Loan Bank Board, and those which it has
proposed, or regulations it might issue under the present authority,
can more than correct any problem situations in conflict of interest,
and did your organization support the regulations proposed in this
field by the Home Loan Bank Board ?
Mr. SCOTT. YOU are speaking of the regulations that have just been
entered into the Federal Register?
Mrs. SULLIVAN. Over this past year—because they have issued proposed regulations that some people in the industry thought they did not
have the authority to do.
Mr. SCOTT. The first set of regulations that they issued last year,
our business felt were too extensive. And, as I understand it, they have
reviewed these regulations and have recently put into the Federal Register conflict-of-interest type regulations, and I have not had an opportunity to study those regulations in detail.
Mrs. SULLIVAN. DO you know if the U.S. Savings and Loan League
endorsed the efforts of the Home Loan Bank Board to tighten up on




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the conflict-of-interest matter, and can you support the proposed
regulations?
Mr. SCOTT. Yes, we favored stronger regulations, as far as conflicts
of interest are concerned.
Mrs. STZLLIVAN. Just one other short question.
Chairman Martin of the Home Loan Bank Board has testified that
his agency does not have sufficient clear-cut authority to deal by regulation with all of the serious problems in the area of conflicts of
interest. Do you disagree with the position of Chairman Martin on
that?
Mr. SCOTT. I do believe I do disagree with Chairman Martin. I am
not aware—did he testify in this respect ? I do recall that.
Mrs. SULLIVAN. Instead of answering it now, when you review and
correct your transcript, would you like to give us an answer to that?
Mr. SCOTT. Thank you.
The CHAIRMAN. Without objection it is so ordered.
(The information requested follows:)
REPLY RECEIVED FROM MR. SCOTT

Mrs. Sullivan, we feel the Board clearly has full authority to deal by regulation
ivith all serious and objectionable conflicts of interest which may have developed
or which could develop involving the savings and loan business. I have already
pointed out in my earlier statement the very comprehensive "Officer's Questionnaire" which requires yearly disclosure of the various business and other
ownership relationships among directors, officers, employees and attorneys, with
particular emphasis on functionally related businesses such as construction, land
ownership and development, building materials and servicing, real estate services and sales, real estate financing and investing, commercial banking, financial
institutions other than banking, insurance (including casualty, fire, mortgage,
title and life), escrow companies and loan origination and closure.
I have also noted the newly proposed regulation which would govern conflict
of interest situations among affiliated persons. New § 563.33 will prohibit nearly
every conceivable objectionable "insider loan". I can't imagine the Board proposing a regulation along these lines if it had no power to do so. New § 563.33 of
course is only a proposal, but the Board already has existing regulations and
policy statements carefully controlling other possible abuses. For example, Rmemo #19 (10-30-68) : R-memo #19-1 (1-16-69) and § 563.35 and § 571.7 (1119-70) already regulate:
Loan transactions involving directors, officers, attorneys, et al., connected
with a savings and loan (10 specific situations).
Selection of a depositary.
Remuneration and other financial benefits of officers and directors (10
specific situations).
Moreover, § 563.35 prohibits tie-in arrangements involving insurance, building
materials, legal services and real estate brokers.
I know, Mrs. Sullivan, that your question did not specifically relate to appraisers and loans to single-borrowers, but I also am familiar with your Ad
Hoc Subcommittee Report and your concern with these matters. I simply point
out that § 563.17-1 calls for examinations and audits of savings and loans, "with
appraisals when deemed advisable" by the Board; and allows the Federal Savings
and Loan Insurance Corporation (FSLIC) to make independent appraisals in
connection with any examination of any loan by using appraisers selected by the
regional Home Loan Bank's Chief Examiner (at the expense of the savings and
loan). Also § 571.1 sets the criteria for making independent appraisals, lists more
than 12 situations when such appraisals should be made, and defines the term "professional appraiser" (see Federal Register, June 7,1966).
As to loans-to-one-borrower, § 563.9-3 already limits the aggregate of loans-toone-borrower to the lesser of either (1) 10% of savings or (2) the total of an institution's net worth. As you know, any of the regulations or policy statements




202
which I have made reference to can be changed without the need for legislation,
which, of course, is the kind of flexibility strong supervisory agencies like the
Federal Home Loan Bank Board should be permitted to exercise in most cases.
I would like to conclude by stating that we feel the Board under the Supervisory Act of 1966, already made permanent by the 91st Congress, has been
given unprecedented authority over savings and loan associations representing
more than 97% of all savings and loan assets. The fact is, the Board clearly has
significant authority to issue and enforce cease and desist orders against any
association which the Board believes is engaging in or is about to engage in a
violation of a law, rule, regulations or unsafe and unsound practice, as defined
by the Board. As has been pointed out to you before, the scope of the Board's authority is so comprehensive and adequate as to achieve the objectives of the
recommendations and concerns of your Ad Hoc Subcommittee. Moreover, the
anti-trust laws of the country and your truth-in-lending law (Regulation Z) are
also laws available to the Board within the scope of its supervisory
responsibilities.
The fact remains that the Board has more than adequate authority to prevent
and correct any abuses, serious conflicts of interest, or unsafe and unsound practices in which a few savings and loan managers might engage. I feel strongly
that great care should be exercised in adopting any legislative proposal which
would take that one last step of putting in the hands of the Board the unprecedented opportunity to take over the complete management of each savings and
loan association.

(At this point, the committee retired into executive session, after
which the hearing was resumed in open session as follows:)
The CHAIRMAN. Mr. Stanton.
Mr. STANTON. Thank you, Mr. Chairman.
Mr. Vance, have you ever served on the board of directors of a bank ?
Mr. VANCE. Yes and no; I served on the board of directors of—
what is the organization—where high school students make projects,
junior achievement, and also a small corporation as an outside director,
and, after about 5 months after I joined it, it went broke.
Mr. STANTON. I was just curious.
I wonder if you would not, recognizing and generalizing the way
you do, agree that some of the examples that you set for the big ones
do not apply to the small ones or the vast majority of financial institutions in this country ?
Mr. VANCE. I would agree completely that it would be quite difficult
to have a single rule which would be equally applicable to large and
small. Most of my research work has been done with the large industrial corporations. I spent 16 months under the auspices of Standard
Oil visiting the headquarters of the biggest corporations. So, I might
have a slant in that direction and, therefore, in regard to banks there
might be some aspects that I cannot speak with general authority.
Mr. STANTON. Let me give you a specific example.
We talked yesterday about the Mellon Bank. I am not sure of my
facts, but I think the gentlemen I have in mind is on the board of the
Mellon Bank, and he is chairman of the board of one of the first 20
largest corporations in America. He has a summer home in my district,
180 miles away, in a little community which I would say is about the
size of Patman's Junction, Tex. The local people want this man. He
is very successful, financially ^nd otherwise. They want him to ?erve
on the board of this financial institution, and he does. And it is very,
very small. And he has done it, because, primarily, he looks forward in
a couple of more years to retiring, and this will be his permanent
home. He has a great interest in that community. And by his particular




203

influence and the prestige that he has brought to this board the institution is growing. I think he spends more time on this little board's
activities than he does on the Mellon Bank. Do you think that is wrong ?
Mr.VANCE. In that particular instance, probably not. I do not
know the facts, and I would hate to say.
Mr. STANTON. Admitted, it is very broad. But I do not think it
would be wrong. I can't see how it could be wrong. And, therefore,
if it is not wrong, then your testimony in support of H.R. 5700 is
not consistent, and you cannot, in my opinion, generalize for the
thousands of financial institutions that we have in this country. The
people that we have had before us say that they have the authority to
regulate these things, and perhaps they should be stronger regulated.
But to legislate across the board for the thousands of institutions—I
do hope you do not teach that generalization to your students.
At the same time, I disagree wholeheartedly with your testimony.
Your two and a half pages of testimony primarily expresses the growing sentiment that the conventional board of directors is in a state of
obsolescence. You can point out specific examples to your students,
but, once again, I do not think you can generalize because of the tremendous diversification of the types of boards that we have in this
country.
Mr. VANCE. But, by contrast to the gentlemen that you mentioned
whose situation or case might be justifiable or excusable, there is an
equal number and perhaps a much greater number of individuals who
serve in quite a different capacity and whose positions in a dual role
could, be seriously questioned, and I think that is the prime intent of
the bill9 rather than to take the few instances where there is no harm.
Mr. STANTON. Yes. But we have had the regulatory agencies who
have appeared previously this week say that they have considerable
leeway to regulate this problem themselves without specific legislation.
I yield back the balance of my time.
Mrs. SULLIVAN (presiding). Mr. Gonzalez.
Mr. GONZALEZ. Mr. Vance, it seems that the thrust or the premise
of your writtings on corporations and directors is that there exists
an elite or an aristocratic element at this corporate control level.
Could you elaborate on that, in view of the intended reforms that are
contained in H.E. 5700 ?
Mr. VANCE. First, I do not think this elite-ist approach is collusive.
I do not think it is an elite by birth necessarily, but it is an elite in
terms of being self-perpetuating by way of individuals who belong
to the same clubs, perhaps go to the same schools or have come from
the same schools. The prime reason is that they perform a function in
our economic system which puts them on a par.
Mr. GONZALEZ. The question, I guess, could be directed to both you
and Mr. Scott.
Mr. Scott seems to be saying that you can't quite get this talent
from small cities or small communities.
Now, do you really believe that there is a shortage of talents in small
towns, and if so how small is a cut-off board ?
Mr. SCOTT. The problem, I think, that we are pointing at is that
banks typically have larger boards of directors than do savings and
loans, and where the two coexist in one small community—let me use the




204

standard metropolitan statistical area as an example of the larger
communities—the banks tend to be able to attract, for many reasons,
people that are more talented and more knowledgeable in the area of
finance. And I think if a man is going to make a choice, surely it is
going to be in favor of the bank rather than the savings and loan.
Mr. GONZALEZ. Along those lines, the committee, as long ago as
about 4 years ago, produced a report. I was surprised that it was not
analyzed any more than it has been. To me, it was particularly disturbing, because it showed that there is a pattern on this interlocking
question and that about $30 million worth of assets were used to acquire—I forgot how many—to acquire control of billions of dollars
of bank interest. In my area alone, we had about $50 odd million, in a
short period of time, less than a 2-year period, that was diverted by the
banking institutions in my city. I do not have the big banks of Texas,
yet they were acquiring, through diversion of over $50 million worth
of their assets, a lot of other banks as far away as 250, 300, 325 miles.
This would seem to indicate that the acquisition pattern was from the
big to the smaller. But here in the last few months, again in my own
city which is the third largest city in Texas—it is not a small city;
it is a metropolitan area—we have a fairly substantial bank with
total assets of some $80 million or better, and here we have an apparent
takeover attempt by the use of at least $6.5 million of credit from a
large bank in a large city about 190 miles away—Houston, Tex. What
do vou think of that ?
These studies and the failures of banks in the last 5 years indicate
that there is a pattern here that is with us. Your acquisition of banks,
takeover of banks, is happening very frequently. And what I want to
know is how do you reconcile this with the normal procedure of chartering a bank?
Is this tendency something that we should ignore, or is it something
that we are clearly on notice—that we ought to do something about ?
To add another bit of information, the recent celebrated closing
down of the Sharptown State Bank—which was an insured bank in
Texas—now reveals that about $23 million worth of its assets had
been used in acquiring four other banks, one as far away as Illinois.
Is it your opinion that under the circumstances, Congress has a duty
or no duty, or that the regulatory authorities have a duty or no duty,
or should it just be completely ignored ?
Mr. SCOTT. I think the Congress very definitely has a duty in this
area.
Mr. GONZALEZ. Yes, I put in a little bit of that in very simple
language. Do you have any comments about it?
Everybody seems to be against it.
We seem to say: You will prevent acquisition of banks by another
bank, or the use of credit to buy a bank. If it is that bad, we should
not have it that way.
But what alternative do we have in view of the fact that you feel
there is a responsibility to do something about this?
Do you have any suggestions ?
Mr. SCOTT. Of course, I am not familiar with the study that you
have mentioned at all. It is a bank study. But I can probably dig it
out and look at it. But I am aware that there has been a pattern of




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concentration, growing concentration, in banking, and some economies
feel that this is a desirable pattern, especially in capital poor areas,
such as Mississippi, for instance. I would not think that would be true
in Texas. Texas is not capital poor.
Mr. GONZALEZ. It could be. Texas is a highly diversified State. And
we have some areas in which there is no question but that an infusion
of capital and credit would be helpful, and that this probably could
be provided in an acquisition. But this is what I am getting at. Shall we
just admit that it is impossible to draft a bill to help prevent innocent
depositors from being hurt as they have been and are being hurt, or is
regulation the answer, and can it be exercised?
That is what I am trying to get at. What can be done constructively ?
Can we legislate in such a way that it will not work a hardship on
honest banking practices ?
My time has expired.
So, may I ask unanimous consent that if possible this answer or
comment be given to us for the record.
Mrs. SULLIVAN. I think that would be better.
Mr. GONZALEZ. Thank you very much.
(The information requested follows:)
REPLY RECEIVED FROM ME. SCOTT

Congressman Gonzalez, we share your concern of the public's loss of deposits
in any financial institution; but this matter is one solely related to commercial
banks and is a bank supervisory problem, and the banking agencies can more
appropriately make recommendations in this field.

(At this point, the committee retired into executive session, after
which the hearing was resumed in open session as follows:)
Mr. VANCE. Madam Chairman, could I direct a comment to Congressman Gonzalez relative to his first question ?
Mrs. SULLIVAN. Mr. Vance, will you add it in the testimony when
you correct your transcript ?
Mr. VANCE. Thank you.
Mrs. SULLIVAN. Mr. Blackburn.
Mr. BLACKBURN. Thank you, Madam Chairman.
Professor Vance, I am going to be very candid with you. I have
read your testimony and I have heard your comments here.
I have the very distinct feeling that you have been traveling in the
rarified atmosphere of the university too long and that your testimony
is living proof of the efficacy of the Peter principle.
I want to explore a few things with you.
Am I to understand that American enterprise is a failure because
it is not structured the way you think it should be structured ?
Mr. VANCE. Definitely not. It is a success.
Mr. BLACKBURN. I think it is rather successful.
Mr. VANCE. Very definitely.
Mr. BLACKBUR>N. In the view of the success of our economic system^
why should we use the power of government to very seriously disrupt
the organization of that system for some unknown result?
Mr. VANCE. For the simple reason that in every successful organization we have a research and development component that tries to




206

keep us on a par with other institutions or corporations, and even
nations competing with us.
Mr. BLACKBURN. We are successful competing, are we not?
Mr. VANCE. Internationally, we are very definitely not; in many
areas—steel—you name it.
Mr. BLACKBURN. But that is because of the fact that business
enterprise does not control.
Mr. VANCE. Very evidently not.
Mr. BLACKBURN. Where we are being defeated is in those areas
such as textiles and steel in which the labor component is a major
factor.
Mr. VANCE. I would disagree with you.
Mr. BLACKBURN. In our technical skills, we are more than competing
with other countries.
Let's explore some of your testimony a little further here.
You are suggesting that we make our enterprises more democratic,
and that we must remove the constraints which now prevent the great
majority of Americans from reaching the ultimate in our corporate
structure.
Well, now, am I to understand that we ought to have 75 percent
of all Americans on boards of directors?
Would that be a sufficient majority? Or should it be 90 percent?
Mr. VANCE. I do not think the question is quite pertinent.
Mr. BLACKBURN. I think the statement is pertinent. And I am
trying to find out what you are talking about here.
Mr. VANCE. The sort of thing that I was talking about in my
statement, the 50 biggest banks with approximately 7,000 vice
presidents, of whom less than 1 percent have ever reached the ultimate—I think this is a constraint upon our talent.
Mr. BLACKBURN. Yet you do not challenge me when I say that
our economic system has proven to be quite successful.
Why should we seriously disrupt it when we may run the risk
of destroying it?
Mr. VANCE. I do not quite see how this would be disruptive.
Mr. BLACKBURN. YOU do not think it would be disruptive?
Mr. VANCE. NO.
Mr. BLACKBURN.

I can't imagine anything that would be more
disruptive than some of the provisions of this bill. If we completely
reconstitute the directors of our major institutions and make them
more democratic, as you so urgently urge, should we provide a greater
opportunity for Americans to be in Congress ?
Should we shorten the term to 2 hours so that we can get more
Congressmen during our careers ?
You know that most Americans will never be in Congress.
Mr. VANCE. I think I would be completely opposed to having a
Congress where we had a self-perpetuating group. I think that you
should represent the people, and if you do not, then I am opposed to
you; but I think you do, and, therefore, I am in favor of you.
Mr. BLACKBURN. We are elected, aren't we?
Mr. VANCE. Precisely. But that election has to be a free election
and not a constrained election. Similarly, in a corporation, there
should be free election and not a small group perpetuating itself.
Mr. BLACKBURN. I am not on a board of directors but I participate
occasionally in the election of directors, because my insurance firm




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Is one where we do elect the directors. And, frankly, they are doing
& good job, and I see no reason to throw them out and bring in another
bunch just hoping that they will do a better job. And I think that
the whole thrust of your statement would do great mischief to our
economic system. And thank heavens that you do not represent the
majority of thinking in our country.
1 yield back the balance of my time.
Mrs. SULLIVAN. Mr. Hanna.
Mr. HANNA. Thank you, Madam Chairman.
Since we have talked about unanimous consent, Madam Chairman, I
wonder if I could make a unanimous consent request ?
I understand that previously you, yourself, made the request that
your legislation relative to some institutional changes be considered
at the same time, and that the witnesses be allowed to testify on your
bill. I have personally introduced H.R. 2473 which I think goes along
with the major goal the chairman announced Tuesday when he said
H.R. 5700 is intended to reach a goal of the enhancement of competition among financial institutions. I think the legislation I have introduced has a parallel goal. And I have asked unanimous consent for
any witness who cares to, to testify on that bill. I am not making any
great drive to inject it, but if they would care to, I would like to hear
some testimony.
Mrs. SULLIVAN. I would say that I would not be allowed to rule
on this. I think you have to consult the Chairman on it. When I made
my request, it was at the very beginning of the hearings, to include
a bill on conflicts of interest which we had approved last year.
Mr. HANNA. I would have made the same request. I regret I was
not here the first 2 days, but I was out on official business of this
committee, as I think the chairman knows.
If the chairlady does have any compunctions about the rule, I will
make that unanimous consent request when the chairman is here.
Mrs. SULLIVAN. I think that would be better.
Mr. HANNA. I want to be sure that everybody is comfortable.
Madam Chairman, I want to ask the witness: Is there, Mr. Vance,
an elite in your European corporations similar to the elite you have
talked about?
Mr. VANCE. I think you should take that nation by nation. In Japan
we have the zaibatsu.
Mr. HANNA. That certainly is an elite.
Mr. VANCE. Very definitely.
I think in England we have a situation, probably, which I think
we ought to avoid by all means. The big boy relationship, Eaton,
et cetera.
Mr. HANNA. How about France?
Mr. VANCE. In France, I think we have an engineering elite.
In Italy, a family elite, which is probably moving more in our
direction. Of course, In Russia, we have a different type of elite.
Mr. HANNA. I am glad that you have iriade that overall representation, because I was struck by an article written by a Dutchman whose
analysis read something like this:
Americans build institutions of such strength that they can tolerate a leadership that is less than the best. Europeans build such poor institutions that they
have to have superior leadership.
The Russians, given time, can reduce both the quality of their institutions
and the quality of their leadership to mediocrity.




208

It would seem to me that is a penetrating analysis.
And I have noted, and I would like to bring it to the attention of
Mr. Blackburn, that there is a tendency in the United States for the institution to carry whatever leadership it has, even Congress. And when
things have been going well, it has been my observation that the leadership takes credit; and when things are not going well, they blame
something further down the institution.
Has that been your observation?
Mr. VANCE. Very definitely.
And to mention specifics, let us take a glance at Chrysler Corporation. Perhaps, I should not mention the name of corporations. But Mr.
Townsend has taken credit for a very successful rejuvenation of
Chrysler from the mid-1960's up to recently. What happens from here
on ? Mr. Townsend and the president, Mr. Riccardo, will be punished
if Chrysler fails. But what about the board of directors? Will any
director be fired? Absolutely, not.
Mr. HANNA. That raises another question.
It seems to me that recently I read that in the spirit of hardship perhaps some of the relationships of the board of directors are being
spelled out a little more strongly, their responsibilities as well as their
prerogatives and prerequisites, or any other way you want to express
what you get out of it, and that many were dropping directorships
because they realized that when things go wrong, there are certain responsibilities, and I know that is true in banks, because I happen to be
involved in a situation in my own district indirectly as their Congressman, where the board of directors of the bank is in real trouble, because they did not realize what responsibilities they were assuming.
Maybe we need to make more strong the legal responsibilities of the
directorship so that people will not be so anxious to take them unless
they want to take the burdens with the benefits.
Wouldn't that be a way of doing it, instead of just trying to figure
some way to second-guess the operation of the system, as to how it selected its leadership?
Mr. VANCE. I think very, very definitely.
In my tour of major corporations, and meeting with some of the top
in our industrial system, I would like to give credit to Mr. Roger Blough
who stressed the concept of involvement among his directors, and he
was constantly groping for ways and means to involve his people—
directors, that is.
And I think this is where we need to pay a lot more attention, namely,
stressing involvement. Involvement means responsibility, and it means
reliabilty also.
Mr. HANNA. I hoped that you had stressed that. I think that is a
better way to put it.
Thank you. And my time has expired.
Mrs. SULLIVAN. Mr. Williams.
Mr. WILLIAMS. Thank you, Mrs. Sullivan.
I would like to thank you gentlemen for being here this morning and
testifying before this committee.
Mr. Scott, on the first page of your testimony, you deal with the
Federal Supervisory Act of 1966. Then, you go on to say that this act
had a very real impact. Then, referring to H.R. 5700 which we have




209

under consideration here now, you say that the Bank Eef orm Act deals
with many practices that are traditional and of themselves have not
been improper or unethical. Do I take it that you mean that the section of this H.E. 5700 that deals with these practices is unnecessary ?
Mr. SCOTT. That would be the import of my statement.
Mr. WILLIAMS. YOU also state on page 2 of your testimony that you
strongly endorse the provision to buy 100 percent insurance on funds
in the custody of public officials.
Now, we have already heard testimony—I believe it was from Mr.
Frank Wille, the Chairman of the FDIC, that 30 States right now require financial institutions to cover the full amount of public deposits,
deposits of public money, with certain specified securities. So, therefore, the public funds are protected.
The statement was also made that the securities used to cover these
public deposits are usually Government bonds, municipal bonds, county
bonds, State bonds, or something of that nature, and if this practice
was discontinued, it could have an adverse effect on the public bond
market. We all know the public bond market is in some difficulty right
now.
Have you taken into consideration the statement made by Mr. Wille
in reaching this conclusion ?
Mr. SCOTT. I could not agree with that at all. Mr. Wille's argument
is very imaginative. I think banks buy municipal bonds because they
have a very favorable tax treatment.
Mr. WILLIAMS. And at the same time they are using these bonds to
specifically cover the full amount of public deposits, so that therefore
they are really insuring those deposits to the fullest extent right now.
Mr. SCOTT. I just do not agree with Mr. Wille's statement.
Mr. WILLIAMS. And you also say that this business of using premiums
as an inducement to save, that this could have been accomplished by
regulation, but apparently not all Federal agencies would agree to do
so. I do not believe that that is exactly a true statement. I think that
some regulation has been agreed to by all of the regulatory agencies.
Mr. SCOTT. I think what I was trying to say was that the complete
ban of it was not agreed to by all Federal agencies.
Mr. WILLIAMS. The regulation of it was.
Mr. SCOTT. By regulation.
Mr. WILLIAMS. ISTow, in your statement, Mr. Vance, at the bottom
of page 3, you make the point that these 50 banks at that time had
approximately 7,000 vice presidents. Are you aware of the fact that
many of the big banks in States which permit branch banking do have
branch banks, and it is their custom to give every manager of a
branch bank the title of vice president ?
Mr. VANCE. I am aware of that, yes, plus the various functional
areas, geographic areas.
Mr. WILLIAMS. DO you at the same time realize that just because a
man has worked himself up to be the manager of a branch bank he, in
all probability, does not have the qualifications to serve as a director?
Mr. VANCE. That is very definite. I do not think all people have
that particular talent. I think people, vice presidents in particular,
ought to be given an opportunity to develop this talent, correct.




210
Mr. WILLIAMS. But nevertheless it does not mean that because they
have got the title of vice president that they have already developed
those qualifications.
I would like to make this observation, too. You mentioned sort of
an elite group serving on boards of directors. Actually, I think that is
a misstatement. I think that the main criterion for serving on a board
of directors is not which school you went to, or how many friends you
have, but rather the success that you have achieved. All banks and
corporations want successful men on their boards of directors in order
to take advantage of their knowledge which they had to have in achieving their success.
Mr. VANCE. I would not know how to answer that particular
question.
I think every organization, banks included, should seek leadership
that would have talent that would help, yes. And if a man has succeeded and demonstrated a certain capacity, then that person would
definitely have an inside track.
Mr. WILLIAMS. What I am saying is: This is the practice today.
My time has expired.
Thank you.
Mrs. SULLIVAN. Mr. Gettys.
Mr. GETTYS. Thank you, Madam Chairman.
Mr. Vance and Mr. Scott, this whole subject of ethics and morals
and conflicts of interest is an intriguing one, and I wonder, where a
conflict of interest occurs, where does it begin and where does it stop ?
The man who has been engaged in a number of activities in his lifetime may not be eligible to serve on anything, even a church board,
because there are so many conflicts of interest. We sometimes wonder
if a farmer should serve on the Agriculture Committee, if a lawyer
should serve on a judiciary committee, or if a banker should serve on
this committee.
I am wondering if it is going to come to a point that a prerequisite
for a man to serve on a board is that he know not anything about the
subject. What is a conflict of interest?
And, then, are we to presume that a man who has gained stature in
his community is not to be asked to serve on some of these boards of
prestige and financial importance? The very fact that he has attained
that stature appears, in the thinking of some, to eliminate him from
selection as a director on a board ?
These things worry me.
Should we have to have incompetents running this country ?
Should we say that a man who has practiced law ought not to be
able to serve in Congress, because it has something to do with making
laws ?
Where is the point that you have a conflict of interest ?
One further thing. Is it that we have come to the point in this country
that we must presume that everybody is dishonest?
It used to be, you know, under our Constitution that we presumed
that a man is honest, that he was not guilty until proven otherwise, but
today it seems there is an element throughout our country that thinks
you have got to assume that this man or that man or that woman is




211
dishonest, and we have to protect ourselves against him before we give
him any responsibility.
I wonder, if you as a professor, Mr. Vance, and Mr. Scott, as a practitioner in business, could comment on that?
The whole subject disturbs me greatly.
Mr. VANCE. I think that, as a beginning point, in terms of conflict of
interest, you might take the exceptional case. And, hopefully, there are
not too many. Glancing at the Penn Central chart that I have here, I
note that there are two relationships, or two people with contacts with
United States Steel, two with Allegheny Ludlum, and one with National Steel. Now, if Penn Central has been purchasing large quantities
of steel rail or steel of any sort from these three enterprises, I think
they ought to be looked at a little more carefully. I do not think there
should be contact between the steel supplier and the steel user. Obviously, I think, this is an outright case of conflict of interest.
And let me go to the other extreme. And I think this could be debated at great length. When a man has divided his time over so many
ventures that he can't give his own venture his prime time and enough
time to keep that organization working effectively, then he is in conflict of interest even though no dollars are involved, his time is involved, and his dedication to his prime objective is involved. And that
is why I pointed out Mr. Saunders, for instance, with his diverse endeavors. I think he is in conflict of interest on that score, ethically, or
call it what you will. Somewhere in between, we will have the courts
determining in the next 20 years or so what conflict of interest is. We
will have many more cases than are currently pending in terms of
director reliability and related areas.
Mr. GETTTS. YOU feel that an individual in our country is no longer
competent to judge in his own conscience whether he is an honest man
or has a conflict of interest ?
You see, you can't legislate morals. You take a man elected to Congress. I don't care how many laws you pass or how many regulations.
If he is dishonest he is going to be dishonest; if he is honest, he is
going to be honest, whether you have got laws or not, on a bank board
or on a savings and loan board in Congress. If you have got a dishonest man, all the rules and laws in the world are not going to keep
him from being dishonest.
Mr. VANCE. I agree with you completely. Honesty should begin in
the individual, and in terms of a small enterprise, bank or otherwise,
where the ownership is vested within the individual, then, I do not
think there is that much of a problem1; it is not serious.
But where you have widespread ownership and where you have 31
million Americans—and the number is increasing rapidly—who are
direct owners of stock in fee, then, I think it is another problem, and I
think you should take a very careful look in terms of the honesty
aspects, because you are protecting us.
Mr. GETTTS. Thank you, Madam Chairman. My time is up.
Mrs. SULLIVAN. Mr. Wylie.
Mr. WYLIE. Thank you, Madam Chairman.
Mr. Vance, I start out by saying that I find it difficult to accept your
statement and then make the observation that the fact that 6 percent of
the earth's people live in the United States and yet produce 50 percent




212
of the earth's goods is pretty good indication to me that our system has
not been too bad, or is a pretty good system.
How would you advocate that the board of directors of corporations
be selected?
Mr. VANCE. Getting back to the previous comment, I do not think
I mentioned 6 percent and 50 percent, but I think there is some relationship there.
But my concern is for example with the fact that United States Steel
is no longer the biggest steel company in the world; a Japanese merger a short time ago created Nippon Steel, the biggest steelmaker in
the world.
Mr. WYLIE. HOW do people in Japan elect the members of their
boards of directors?
Mr. VANCE. Birthright, the zaibatsu.
Mr. WYLIE. YOU mean the stockholders in the companies in Japan
do not have anything to say about who serves on their boards of
directors?
Mr. VANCE. Stock ownership is far more concentrated than in the
United States. This is our problem, that our ownership is spread out.
Mr. WYLIE, Then, don't you think that in Japan ownership of stock
is important? Pursuing the matter of Japan, I think Japan is now
second in production of goods in the world; is it not?
Mr. VANCE. I think so—probably Russia. But we have limited
statistics.
Mr. WYLIE. DO you think Russia might be second in the production
of goods?
Mr. VANCE. I would guess so.
Mr. WYLIE. West Germany comes in there someplace.
And I think they elect their members of boards of directors in West
Germany pretty much the same way as we do.
Mr. VANCE. They have the codetermination technique where you
have representation of labor and the management and the public on
a single board, in a relatively small section of the total economy, steel,
coal, and so forth.
But in the free enterprise section, the board is elected.
I think it is basically the banking type of influence that elects the
board.
Mr. WYLIE. YOU would not suggest that we have the Russian system
of forming corporations in the United States?
I guess they do not have any corporations.
Mr. VANCE. Obviously, not.
Mr. WYLIE. I think the point I am trying to make here is what
would be the alternative to our system ?
I do not see how this could be more democratic.
The stockholders all have an opportunity to vote as to who runs
their corporation.
How could you make it more democratic than that ?
Mr. VANCE. I must have used some injudicious phrases in my statement, because I do not recall stating anywhere anything in terms of an
overthrow of our system. What I want is a strengthening of our system, and I want a correcting of imperfections in the directorate election, and in the directorate function, not an overthrow or any radical
change at all. I think what we have is excellent.




213
Mr. WYLIE. That goes back to my first question, then.
How would you advocate that the members of the board of directors
be selected, then ?
Mr. VANCE. Well, the current method, with more choice perhaps,
instead of electing a slate which is designated by management.
I hate to take Ralph Nader's side, but I think there is a point there in
terms of having a broader representation, a broader spectrum of the
ownership being at least put on the ballot, a choice, not just the 15
directors to be elected but probably 20,30,40 names and a complete and
adequate statement in terms of the backgrounds of these people rather
than a sentence or a name.
I think, in a recent statement
Mr. WYLIE. Aren't these relationships between the corporations,
boards of directors, and stockholders all provided for in our antitrust
laws?
Mr. VANCE. I do not quite follow the particular
Mr. WYLIE. What I am trying to say is that under the antitrust laws,
as far as corporations are concerned, I think the relationships between
corporations are spelled out, and the rights of stockholders, and this
sort of thing. Would you suggest that these antitrust laws be repealed ?
Mr. VANCE. Definitely not; strengthened, if anything, but not
repealed.
Mr. WYLIE. Then, maybe I have misunderstood your testimony, I
don't know.
But, as I say, I gained the direct impression, as we went through the
testimony, that you did not care for the present system of electing members of the board of directors and suggest that it be more democratic,
and I am attempting to find out how you could suggest that it be
made more democratic. There ought to be some ownership in the
corporation.
Would you suggest that the board of directors be elected by the public at large across the United States ?
Mr. VANCE. Definitely not. The stockholders have that function, and
I think that ought to be kept with the stockholders.
Mr. WYLIE. I think my time has expired. Thank you very much.
Mrs. SULLIVAN. Thank you, Mr. Griffin.
Mr. GRIFFIN. Thank you, Madam Chairman.
I would like to join in welcoming you gentlemen to the committee,
particularly Mr. Scott whom I have had the pleasure of knowing for
many years. He is an outstanding community leader and business
leader in Jackson.
Inasmuch as Mr. Gettys' time expired before you had an opportunity
to comment, Mr. Scott, on the conflict-of-interest questions, would you
like to comment ?
Mr. SCOTT. Yes, thank you, Mr. Griffin.
I guess Mr. Gettys put his finger on the real problem: "Where do you
draw the line?" And this is a very tenuous problem. And he also points
out that much of our whole structure is based on trust and faith. And
I think it probably points up the fact that 99 percent of business transactions are honest. And it is difficult to draw this conflict-of-interest
line. If you make it too severe you weaken the whole business structure.
And if you do not have some regulation by the supervisory authorities,
then it can be abused. It is a very hard area to deal with effectively.
60-299—71—pt. 1




15

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Mr. WIDNALL. Would the gentlemen yield to me ?
Mr. GRIFFIN. Yes, I yield, Mr. Widnall.
Mr. WIDNALL. Mr. Scott, could you tell us what types of firms may
be represented on the board of directors of a typical savings and loan ?
Mr. SCOTT. If my institution is typical—may I use that 'i
Mr. WIDNALL. Sure.
Mr. SCOTT. We have a wholesale fruit man; we have a supermarket
firm executive; we have a school supply man; we have a utility company executive; we have a surgeon, who, incidently, is a very outstanding and able director. I think that gives you sort of an idea.
Mr. WIDNALL. One last question. Very short.
If the board had 15 members, would more than one or two be from
other lending institutions ?
Mr. SCOTT. In our institution, we do not have any directors who are
officers of another financial institution. We do have several directors
who also serve on bank boards.
Mr. WIDNALL. That is all. Thank you.
Mrs. SULLIVAN. Mrs. Heckler.
Mrs. HECKLER. Thank you, Madam Chairman.
I should like to thank the two gentlemen who testified today, and
address my question to Professor Vance.
Professor Vance, I think we all share a desire to improve our system
to allow for the introduction of new elements in leadership in the
society. There is a question as to how we can accomplish all of our
objectives most effectively, and here we might agree or disagree.
I find that in your statement great stress is placed on the case of
institutional director interlock, and that seems to be the basis for the
work in which you have spent a great number of years.
Now, of course, this bill does not deal with that.
So, therefore, it is the question of how the experience of the institution of interlock really relates to the kind of situation we have today.
I am also concerned about the stress on developing a more democratic means of selecting a board of directors of an institution.
In your studies, have you studied the bylaws of, say, the banks or
other financial institutions ?
And could you tell me whether or not in most of these bylaws
there is a provision or mechanism for election of nomination by the
shareholders or stockholders who might disagree with the selections
that have been made or presented to them ?
Mr. VANCE. There are provisos, I think at GAF we currently
have a dissident group, Mr. Millstein and his associate, which is trying to wrest control. That might represent the democratic process.
I am not sure. I am not on the inside of that.
Mrs. HECKLER. YOU are saying that more democracy should be introduced. Do you feel that the provisions for nomination from the
floor or from the shareholders do not provide a sufficient vehicle for
democracy ?
Mr. VANCE. At the moment, I would say "Yes," that I do not think
it is feasible to nominate from the floor—it is perhaps possible—in a
specific major annual meeting to make a nomination from the floor but
I do not think it is ever done.
Mrs. HECKLER. Have you studied the procedures in the bylaws and
viewed these mechanisms on a scientific basis ?




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Mr. VANCE. I have never made a study of that particular aspect,
but to the best of my knowledge, within the bylaws there are provisos
which state that you have to put your proposition before the management committee prior to the meeting; in fact, in all of the proxy
statements that you or I receive it is already determined what is going
to be voted on. So, you may earlier make an attempt at having a
director of your choice nominated but not from the floor.
Am I clear as to that ?
Mrs. HECKLER. Would that kind of a mechanism allowing for a
direct nomination by shareholders, were prior notice given, be an
improvement; would you say ?
Mr. VANCE. I think it would be an improvement. Whether it would
be optimal, I am not sure.
Mrs. HECKLER. I am concerned with the function of the board of
directors, and I am interested in your comments in The Bankers
Magazine on the subject of "Penn Central—A Lesson for Bank Boards
and One-Bank Holding Companies," in which you say, on page 79 of
that magazine:
The situation all boils down to simply this: Penn Central's top management
and, in particular, its board of directors, just was not groomed and geared to
venture the conglomerate way. There has been entirely too much naive genr
eralizing to the effect that 'business is business' and that any board of directors
can tackle any kind of business endeavor.
A board of directors, like any competent decisionmaking body, must be qualified to analyze pertinent problems and to guide the organization on the optimal
course.

I wondered, in the case of small companies particularly since wTe
are involved with not merely large institutions but small ones, if you
deprive individuals in the eight categories you mentioned in H.R.
5700 from coming in as directors, those with financial expertise in
other fields, how would you then constitute a competent board geared
to tackle the kind of decision-making that is necessary ?
Mr. VANCE. I think we might be underestimating the talent available in most of our communities. I come from a relatively small community, 80,000 people. I know most of the individuals. I have been a
Rotarian; I am currently on the city of Eugene Budget Committee. I
think that I know must of the leading citizens, and I think that we
have an abundance of talent, given an opportunity to develop it. But
if that opportunity is never forthcoming, obviously these people will
never have a chance to demonstrate their talents. So, I think that even
within a small community there is adequate talent. And I think that
most small banks, or banks in small towns, do not need the massive
boards that we have as in New York City. I think a board of eight
or ten or twelve people could do an effective job, and I am sure there
would be no need, therefore, for interlocking aspects. I think I can
find eight individuals without conflicts of interest or interlock relationships who might or could do an effective job within the smaller
communities.
Mrs. HECKLER. Of course, we do not wish to perpetuate conflicts
of interest. However, the witnesses we have had so far from the regulatory side have indicated that they have not seen great abuses and
have not pinpointed any cases in the specific nature of abuses.




216
Now, I just wonder if the board of Penn Central was incompetent,
according to your analysis—and, indeed, you might be right. I do
not question that, but nonetheless if they were not able to handle their
jobs, were not competent to handle their jobs, how can you say that
people without financial background and all—if people who have
experience in these other corporations are barred, how can you say
that the level of confidence can be obtained from any board of
directors ?
Mr. VANCE. I think the basic financial competence should be forthcoming from the institution itself.
Second, financial talent can be purchased; experts in various areas
are available for a fee. And I think the function of the other members
of the board can be to appraise local conditions, the various items that
pertain to the community, more so than to the financial aspects. Of
course, the two cannot be completely separated.
Mrs. HECKLER. I think if we have not experimented in developing
new talent on a broad basis, it is quite unlikely that you w^ill maintain
your shareholders' consent on a continuing investment. And that would
be a problem, too.
My time has expired.
Mrs. SULLIVAN. Mr. Chappell.
Mr. CHAPPELL. Mr. Scott, I notice on page 6 of your statement that
you say :
In the last few days, the Board has proposed a new set of regulations dealing
with affiliates designed to further protect against improper relationships.

I just wonder wThether or not you are satisfied with these proposals ?
Mr. SCOTT. I have not had an opportunity to read them carefully.
Mr. CHAPPELL. And you have no comment ?
Mr. SCOTT. In general, we favor them, but I have not had an opportunity to inquire.
Mr. CHAPPELL. If you did favor them, would you object to their
being written into the legislation ?
Mr. SCOTT. I do not understand why we should write them into the
legislation if they are satisfactory.
Mr. CHAPPELL. IS it the sort of thing
Mr. SCOTT. When you write legislation, it is no longer flexible. When
you write a regulation, if you have made an error, why, you can adjust
it with an improvement of the regulation.
Mr. CHAPPELL. Are you familiar with the type of regulations? You
say you did not have a chance to study it.
Mr. SCOTT. Yes, sir.
Mr. CHAPPELL. Are you familiar with the type of regulations?
Mr. SCOTT. Yes, I am.
Mr. CHAPPELL. All right. Are any of these regulations the sort that

should be written into law, or would you take each of those and prefer
that it be handled by regulations ?
Mr. SCOTT. I would prefer that all of that be handled by regulation,
because of the flexibility.
Mr. CHAPPELL. I take it from that, that you would feel that the
Congress itself would be inflexible, that the Congress itself would be
so inflexible that it would have trouble keeping up with the economic
situation.




217
Mr. SCOTT. .NO, I do not mean that. Obviously, a regulatory agency
which the Congress created is intended to function with greater ease
and flexibility and rapidity than the Congress itself could function.
You are dealing, I think, in the Congress with the broad general problems, and you want these regulatory agents to deal with the nittygritty.
Mr. CHAPPELL. With the policymaking and so forth.
Mr. SCOTT. Yes,

sir.

Mr. CHAPPELL. I just wondered whether or not you thought all of
the proposals, or the approaches made in the regulations, were such
that they ought to be retained just as regulations, or whether or not
they were matters which you would perceive to be policymakers
touched on in those regulations. And you say they are all regulatory ?
Mr. SCOTT. I think they are all regulatory.
Mr. CHAPPELL. NO further questions.
Mrs. SULLIVAN. Thank you. Mr. Rousselot.
Mr. ROUSSELOT. Dr. Vance, you mentioned in your statement that
H.R. 5700, in its first basic area, that of interlocking relationships, is
definitely a step in the ri^ht direction; but that, personally, you would
like to see the prohibition even more stringent. How would you do
that?
Mr. VANCE. I jotted down a few notes. As I mentioned, in the terms
of the proxy system
Mr. ROTTSSELOT. HOW should we change that in this bill ? You would
want it legislatively in this bill.
Mr. VANCE. NO. I think the bill is good enough as is.
Mr. ROUSSELOT. Your statement is, you say, it is a step in right direction, but that you would like the prohibition even more stringent. Tell
us those areas that you want more stringent.
Mr. VANCE. Item 1, the proxy system. I would like to see—as a simple example, I think that Standard Oil currently has an issue before
it
Mr. ROUSSELOT. We are, of course, talking about banks and financial
institutions. Let's speak to those.
Mr. VANCE. My competency is not as broad in the area of banking
Mr. ROUSSELOT. I beg your pardon. Your competency is not great in
the field of banking, but you are telling us how to legislate in the field
of banking?
Mr. VANCE. I say more so in the area
Mr. ROUSSELOT. That is an incredible statement. You are here to tell
us how to legislate in the field of banking, and, by your own admission,
you tell us you are really not competent in the field to talk on it. That
is an incredible statement, but go ahead.
Mr. VANCE. The boards of directors of banks and of the corporate
system do have much more in common than they differ, and I think
that my experience in the field of the corporate structure does carry
over into the field of banking. T
The proxy system, I think w e all agree, is identical in banking as
it is in the corporate system.
Mr. ROUSSELOT. Similar.
Mr. VANCE, Therefore, any inconsistencies or any weaknesses in the
proxy system as it pertains to the corporate end of it very likely—
in fact, almost certainly—do carry over into the banking system.




218
Mr. ROUSSELOT. Specifically, in this bill, how would we tighten up
on the proxy system ?
Mr. VANCE. I think—and this is where you threw me off by way of
implying that my competency is zero
Mr. EOUSSELOT. NO; that is what you said. I am just quoting you.
Mr. VANCE. NO. Well, it is misunderstanding.
In the corporate field at the moment, there is a move on the part of
the dissident groups and, perhaps, the Ralph Naderites—I am not
sure—and those like the Gilbert Brothers to disqualify proxies that are
not signed. Apparently, management has been voting all these proxies.
Mr. ROUSSELOT. Do you know any banks today, that allow proxies
that are not signed ?
Mr. VANCE. I am sorry, not signed, but with no indication that they
are for or against the management proposal, they have to be signed.
My error. But when there is no indication that you are for or against,
then that particular proxy is voted management's way.
Mr. ROUSSELOT. Would you make those prohibitions more stringent ?
Mr. VANCE. I would like, as I mentioned earlier, to see more than one
person designated as the candidate for one post. You all go through
that same operation, and I do not think that is undemocratic.
Mr. ROUSSELOT. Will the stockholders in those banks have an opportunity to offer additional candidates ?
Would other people offer candidates ?
Mr. VANCE. Hopefully, the stockholders would.
Mr. ROUSSELOT. Don't most banks provide, prior to their annual
meetings, an opportunity for people to submit candidates ?
Mr. VANCE. I do not think it is done on a broad basis. It is not done
effectively. I can't name, and I wonder if you can name, situations
where the banks have asked for and have received an additional number of candidates over and above those that are being elected ?
Mr. ROUSSELOT. HOW many there are, I can't say, but I know that the
Bank of America which operates in our State does.
What other areas could we make more stringent?
Mr. VANCE. I would like to see—and now you are pushing me.
Mr. ROUSSELOT. It is your own statement.
Mr. VANCE. I would like to see the record of directors who
attend
Mr. ROUSSELOT. The stockholders' meeting?
Mr. VANCE. NO, at their regular monthly meetings, or the quarterly,
whatever they might be.
Mr. ROUSSELOT. YOU would like to see it, or you would like to see it
published ?
Mr. VANCE. I would like to see it published, what directors attended
such meetings.
Mr. ROUSSELOT. Would you put this in the legislation, that all of
those who attend should be published?
We are talking about legislation.
You have spoken in favor of this bill.
Your statement to us is that if you were legislating, you would make
it more stringent. Tell us how.
Mr. VANCE. If I were legislating, there would be a supplementary
bill. This bill as is




219
Mr. ROUSSELOT. Maybe you can submit that for the record, as to
how you would change this. We would be glad to have it.
Mr. VANCE. At the moment, I do not have a bill worked out. As
you know, a bill
Mr. ROUSSELOT. You were the one that said that you would like the
prohibitions to be even more stringent. And I was merely trying to
ask how you would do this.
Mr. VANCE. I mentioned a few instances
Mr. ROUSSELOT. One way is for the banks, themselves, to publish
somehow, more broadly, who attended the meeting and who did not.
Mr. VANCE. Correct. It is a very minor step, but I think that would
help. It would indicate that certain individuals are honorific in terms
of their position, that they have the title but they do not attend and
do not participate. This is very difficult to implement, but I would like
to see the positions of various directors on various issues, for instance,
on conglomeration
Mr. ROUSSELOT. YOU would like them to publish their vote in the
record ?
Mr. VANCE. Yes. It would be very difficult to implement this point.
Mr. ROUSSELOT. Maybe we should do this in this legislation.
Mr. VANCE. Probably not in this legislation.
I think that would be a time-consuming operation.
Mr. ROUSSELOT. That is what we are here to do. We are talking about
this specific legislation.
Mr. VANCE, I think this legislation is excellent and it ought to be
passed.
Mr. ROUSSELOT. But your statement was that as it relates to interlocking relationships—and you spent a lot of time on that issue—that
one of the problems was that this was a step in the right direction but
it did not go far enough in its prohibitions, and I thought maybe you
could elaborate on how, if you were a legislator, you could improve
that.
I see my time has expired. Thank you very much.
Mrs. SULLIVAN. Mr. Vance, may I'.jijust ask this?
Would disclosure of who the institutional stockholders are and
publishing copies of the minutes of the board meeting be other areas
to make a board of directors more democratic ?
Mr. VANCE. Very definitely so. I think at least it woud give us a
glance at who constitutes the owners of this particular corporation.
Mrs. SULLIVAN. And, then, also, a showing of who attends these
board meetings, and who does not, and whether it is an active board ?
Mr. VANCE. Precisely.
Mr. ROUSSELOT. And how would we publish those—in the paper?
What would be the restriction we placed on them?
Mr. VANCE. We do get annual reports that tell us very little,
beautiful pictures of a project
Mr. ROUSSELOT. I am very familiar with it. I saw the annual report
of the University of Oregon, and I did not think it showed very much.
Mrs. SULLIVAN. Let's argue that later.
Mr. Mitchell.




220

(At this point, the committee retired into executive session, after
which the hearing was resumed in open session as follows:.)
Mr. MITCHELL. Mr. Vance, I read your statement very carefully,
I am quite intrigued by it, and I find it quite attractive. Though I sit
on this side of the aisle, I must admit that my philosophical tradition
is more in the line of Mills as delineated in "The Power Elite"
and much more in line with Lundberg as delineated in "The Rich
and Super Rich." I would like to indicate that I found it very, very
attractive, because I share philosophically with you the concern over
the differential aspects which have led to certain undemocratic processes in this whole system.
Also I would like to indicate that I understand, as a witness here—
although you may be required to give specific answers to certain questions—that you may also lay out general comment from which my
astute colleagues can extract certain information which might
strengthen the legislation.
My colleague has spent a great deal of time asking you for specific recommendations about strengthening H.R. 5700. I think it is
a good bill—a needed one. I do not want to put you on the spot at
all, but I would like to ask you very specifically: Are there any
things at all, in 1, 2, 3 order, that you would like to submit as
recommendations at this juncture or at a later juncture to strengthen
this bill even more?
I, too, am mulling over in my mind some possible means of
strengthening this legislation. If you have any suggestions at all, I
would be glad to listen to them, or if you would prefer to submit
them at a later date to the entire committee or individual members,
that would be fine, I am sure.
Mrs. SULLIVAN. If the witness wishes to submit them later, when
he corrects his testimony, that would be satisfactory.
Mr. VANCE. I think that would be more judicious. I am not experienced enough in speaking before such an august body to enumerate
such things spontaneously, and, perhaps, I have not followed through
with the amenities in the proper place; perhaps, I stated it too candidly. But I think that it is a lot more important than being a lobbyist
of the suave type. So, I hesitate at this point to set forth anything
that I would be held to, but if you wish I would be very pleased to
work on any aspects that I think might be helpful to you.
Mrs. SULLIVAN. May I say, Mr. Vance, that you should send these
as soon as possible to the committee itself to be included in this
portion of the testimony.
(The information requested from Mr. Vance follows:)
REPLY FROM MR. VANCE

As I tried to stress in the preceding comments, a one-man instantaneous
proposal to make HR 5700 more "stringent," would be pretentious and quite
superficial. However, at Congressman Rousselot's insistence, I venture to suggest the following as meriting investigation and possible legislation, not only
for corporation boards but also for banks since there is basically no difference
in their function.
1. My sentiments on one-slate directorate elections have already been stated.
2. Certain dissident stockholder groups have begun to question the common
practice whereby all managements vote unmarked ballots. A similar practice
in the political sphere would undoubtedly create a stir. It seems reasonable that
only marked proxies should be counted.




221
3. More detailed information on the backgrounds, associations, and specific
competencies of all candidates is needed. Many major corporations such as
Standard Oil Co. (New Jersey) have for quite some time been providing this
type of information. On the other hand, as late as 1966, American Telephone
and Telegraph Co. refused to provide its stockholders more than the candidates' names in its proxy solicitations. This practice was changed at AT&T in
1967.
4. Mention has already been made of the need for published attendance records.
At the April 28, 1971, General Electric Co. annual meeting at Miami, Florida,
only five directors out of eighteen deigned to attend This is an attendance rate
of only 28 percent. Only one out of the fourteen outside directors attended. If
this had not been a public meeting, this .below-quorum participation would not
have been known. Certain dissident groups are trying to get individual corporations to adopt proposals to drop directors who miss statutory meetings for
two years in a row. However, nothing is being done to ensure director attendance
at the regular monthly or quarterly meetings.
5. Consideration should be given to disclosing how individual directors feel
about and vote on the really crucial issues. The first real breakthrough in this
respect occurred last month when General Motors Corporation revealed that
Dr. Leon Sullivan, its most recently appointed director, cast a dissenting vote
on an issue pertaining to GM's affiliate in South Africa. This previously unheard
of action proves that it can be done. In the Penn Central case, the stockholders
have a right to know which directors advocated the conglomeration gamble which
resulted in investors losing nearly $2 billion.
6. Shareholders should be given an opportunity to participate with the directors,
in at least a few "open" meetings, just as I have had the opportunity to testify
publicly before this group. This does not preclude necessary "executive" sessions
of the board. At present the only opportunity interested investors have to see
their top policy makers in action is at the annual meeting which too frequently
is a mere formality and at times, even a farce.
7. More frequent boardroom meetings are essential. The quarterly pattern
reflects upon the inactivity of that board and perhaps even of the firm.
8. Officer-directors must be given some form of job security, thus, hopefully,
reducing the fear of executive sanction on recalcitrants.
9. The question of director liability should be studied. Penn Central's payment
of an annual premium of $305,360 to Lloyds of London for a $10 million policy
to protect its officers and directors against charges of wrongdoing is a good
illustration. Here we have a situation where the stockholders are indirectly
insuring officers and directors who might subsequently be proven to be derelict,
incompetent or even guilty of unethical or illegal action which directly affect
these same investors' interests.
10. All fees and retainers, except for reasonable travel and per diem payments,
made to outside directors should .be paid not to the outside directors but to their
respective banks or corporations. At present the median pay per meeting is
about $500 while annual retainers average about $4,000 (with a growing number
moving toward the $20,000 level). The typical justification, that even this is a
low price for such talent is an unsubstantiated subjective judgment. To me, the
current outside director payment practice is simply executive moonlighting.
Such a practice might be overlooked for a wage earner who is on the payroll
eight hours a day but executives presumably are employed on a "total-time" basis.
These are a few of the areas which are equally vital to corporation and bank
boards where more stringent measures might .be considered for strengthening
HR 5700. The most significant area, however, is probably outside the jurisdiction
of this committee; namely, these restrictions, together with those already incorporated in HR 5700 should also be extended to the corporate sector.
Mr. VANCE. Congressman Mitchell, I have just finished a paper on

"Black Power in the Board Room." I think you might be interested,
because it touches on this particular thing very definitely.
Mr. MITCHELL. This is one of the areas of concern to me. I look at
the large numbers of blacks who have substantial amounts of money
in the banks and never appear at board meetings. Often I hear from
people who say they never even get a notice about a board meeting. So,
I think there are areas of concern. I have about a minute left, and I




222

do not intend to use it all, but I just want to insert for the record this
comment, that based on your statement and your testimony presented
before this committee, I personally have no reason to doubt your
competency as a witness before the committee.
Thank you very much.
Mr. VANCE. Thank you.
Mrs. SULLIVAN. Mr. McKinney.
Mr. MCKINNEY. Mr. Scott, I am very interested in your association's viewpoint on equity participation.
In your testimony, on pages 3 and 4, you allude to it but you are not
terribly specific, and I am particularly disturbed about what I would
call the statement "joint ventures," because I really fail to see any
difference between equity participation and joint ventures, so I would
assume by joint ventures, you are calling for a larger percentage participation on the part of savings and loan or the bank involved.
Mr. SCOTT. NO, I would say that the equity participation is maybe
the shotgun wedding and the joint venture is one by consent. The
two parties get together willing to produce an end result, such as
perhaps a massive housing project, where the builder does not have
the capital but maybe has the know-how and the institution has the
money.
Mr. MCKINNEY. But isn't equity participation, in actuality, No. 1,
a way in which a savings and loan association and, for instance in
my State, a mutual savings bank can participate and protect the bank
and the depositors from the increasing inflation and the cost of living,
and isn't it true that in most of our leases we see signs today on a
commercial basis that there is in fact a cost-of-living escalation clause
which reflect into this equity participation?
And, then, in reality, the shotgun approach that you allude to is
really just a result of the free marketplace anywhere,
Mr. SCOTT. That is right. In other words, the cost of money got so
high that the only way that the people who were interested in the
project could get to the project was to give part of it to the lender.
Mr. MOKINNEY. I would assume that equity participation or the
shotgun approach to it would diminish as rapidly as the supply of
money grows.
Mr. SCOTT. I think it has.
Mr. MCKINNEY. Another question that I had for you is: On page
4 and 5, you stress the viewpoint—and I quite agree with you. You say:
"On balance, our institutions have probably gained substantially by
the presence of knowledgeable financial men on our boards."
But then when we go down to paragraph 3 on page 5, we find:
We would offer for consideration that these are distinction between those
institutions dealing with savings and home lending and those who are in the
insurance, securities, or title business.

I would agree with you that there is a definite difference. I would
go along with that statement, but I find it difficult when we then come
down to savings banks, because, for instance, under the State charters
of mutual savings banks in such States as have them in the northeast,
I find very little difference between them and the savings and loan
associations as thev are known in vour State.




223

Mr. SCOTT. Yes. What we are saying there is that maybe there should
be some restriction on interlock between commercial banks and savings
and loan associations because they are so much alike and they are
competitive.
Mr. MCKINNEY. Mr. Vance, one thing in your testimony that particularly disturbed me is that—I might say that my public references
and thoughts on (the subject of the board of directors of the Penn
Central Railroad are well known to anyone who happens to read any
of the northeastern newspapers who publish what I have to say about
these various questions. But one thing really distrubs me is that you
talk about making a board more democratic by bringing on vice presidents of the corporation involved. What distrubs me most is that this
bill—and I have served on several boards, all of which I have resigned
from. I would say that one of the things that disturbs me the most is
the fact that corporate officers, I feel, should probably, if anything, be
ex-efficio nonvoting chairmen of boards, and that to talk about bringing more of the corporate structure of a bank onto the board of a bank
which supposedly represents the stockholders to me is not democracy;
it is building the most incredibly ingrained power structure that you
could possibly come across, and I would far rather see a gentleman
without financial expertise on the board of a bank making a decision
than I would a man who has to kowtow to the president of the bank
everytime he moves.
Mr. VANCE. Once, again, my analogy is from the corporate field
where we have the executive committees in most of our large corporation sand middle-sized and small corporations made up of officers of
those corporations. That gives the corporation an instant response
to a problem, because you can convene your executive committee instantaneously, whereas if you have an executive committee made up
of outside directors, or if you have no executive committee, then you
are at the mercy of the phone, perhaps, and you get garbled communications, or you have to convene an emergency session of the board, but
you do not have the immediate response to problems that is feasible
as demonstrated in corporations that have officer-directors currently
available who have the power to make such decisions.
Mr. MCKINNEY. Do you know of any instance whatsoever—I certainly do not know of any—where the full board does not have the
right to change, eradicate, remove, or do anything they wish to with
the decision of the executive committee?
The executive committee is, as you say, a fast, immediate source of
information or action, but it appears to me that any board in this
country of any type of corporation, even a bank, has the right to
revoke that action taken by the executive board at any time.
Mr. VANCE. Precisely. But, generally, the executive committee does
have the right to act in lieu of the full board and rarely, especially if
it is large enough to comprise the significant portion of the board—
rarely are its decisions repealed.
Corollary to this, we are developing nationwide the office-of-thepresident concept which is nothing but a substitute for an effective
executive committee, indicating a need for a power structure, or call
it what you will, available and capable of making decisions on questions that come up so suddenly.




224

Mr. MCKINNEY. My time has expired. But I would simply say that
the last place I would look for democracy on the board is within the
corporate structure itself.
Mrs. SULLIVAN. Mr. Archer.
Mr. ARCHER. Mr. Vance, your testimony has been almost exclusively
to treating situations in nonfinancial corporations—oil, steel, autos.
And, of course, as it has been pointed out, the only authority that this
committee has is with respect to financial institutions—that is the only
way we can get a handle on legislation.
With respect to this and trying to orient your testimony toward this
bill and toward the financial institutions, let me ask you this: Have
you ever served on a bank board ?
Mr. VANCE. No.
Mr. ARCHER. Have you ever attended a bank directors'
Mr. VANCE. I held no bank directors' meetings ?
Mr. ARCHER. I did not ask you that. I asked you if you

meeting?

had ever
attended one.
Mr. VANCE. Very obviously no.
Mr. ARCHER. YOU have not attended, then ?
Mr. VANCE. NO. They are closed to the public and even to stockholders.
Mr. ARCHER. DO you realize that in a bank directors' meeting it is
customary for the directors to proceed to go over all the loans that
the bank has been made in the previous period of time since the last
meeting and to evaluate these loans and give their expertise as to
whether these loans are solid, how they should be policed and this
sort of thing? Are you familiar with the fact that such action is customary in bank directors' meetings?
Mr. VANCE. Yes, I am.
Mr. ARCHER. Are you

also familiar with the fact that the bank
directors carry different responsibilities than the directors of other
types of corporations with respect to individual liability; are you
familiar with that?
Mr. VANCE. I did not think there was any difference in liability.
Mr. ARCHER. Mr. Vance, you are testifying before this committee
with respect to banking legislation, and you do not know the responsibilities of a director of a bank, yet you are coming here and testifying before us as to what we ought to do on this bill.
Mr. VANCE. I do not know what the question is.
Mr. ARCHER. I think I made the question very precise.
You are stating here that there is public dissatisfaction and disallusionment as to directors who assume honorific posts and you equating
a bank director to an honorific post. And the point of my question is:
I>o you understand the functions and the responsibility of a bank
director? And you have just told me you do not know, and yet you are
calling them honorific.
Mr. VANCE. I do not think that there is much difference between a
bank director and a director of a major corporation in terms of the
basic liabilities.
Mr. ARCHER. Mr. Vance, I think you had better go back and consult
the laws as they relate to bank directors, because the imposition of
responsibility on a bank director is significantly greater than it is in




225

the private corporations that you have been talking about, and, personally, I think, when you refer to a bank director as honorific that
you do not understand what a bank directors' responsibilities are.
I yield back the balance of my time.
Mrs. SULLIVAN. Mr. Archer, may I say that if what you say is true,
we w^ould have many directors in jail right now.
Mr. VANCE, Exactly.
Mr. ROUSSELOT. That would be good.
Mrs. SULLIVAN. I can give you some excellent examples,
Mr. VANCE. Congressman Archer I would challenge you to provide
me with any instance
Mr. ARCHER. YOU are not here to challenge a member of this committee on anything, and I think you are out of order.
Mr. VANCE. I withdraw that.
Mr. ARCHER. Madam Chairman, let's proceed.
Mrs. Sullivan. I want to thank both of you gentlemen for coming.
The time of everyone has expired. The third witness has not shown
up as yet this morning. So, the committee will stand in recess until
10 o'clock tomorrow.
(Whereupon, at 12:18 p.m., the committee recessed, to reconvene at
10 a.m., Friday, April 23,1971.)




THE BANKING REFORM ACT OF 1971
FRIDAY, APRIL 23, 1971
HOUSE OF REPRESENTATIVES,
COMMITTEE ON ILINKING AND CURRENCY,

Washington, D.C.
The committee met, pursuant to recess, at 10:05 a.m., in room 2128,
Ray burn House Office Building, Hon. Wright Patman (chairman)
presiding.
Present: Representatives Patman, Sullivan, Mitchell, Widnall,
Brown, McKinney, and Archer.
The CHAIRMAN. The committee will please come to order.
Our first witness this morning is Prof. Edward S. Herman, of the
Wharton School of Finance, University of Pennsylvania. Professor
Herman is the author of the section entitled, "Conflict of Interest
in the Savings and Loan Industry," which is a part of a four-volume
study of that industry carried out by Professor Friend of the University of Pennsylvania in 1969.
Professor Herman's study has received wade attention and we are
very glad that he could take the time to give us the benefit of his
views on the legislation before us, much of which relates to the question of conflict of interest among financial institutions.
After Professor Herman's statement we will have Mr. Angus McDonald. After they are finished the members will each be allowed the
privilege of interrogating them.
Professor Herman, you may present your statement to the committee, or summarize if you wish, and then we will proceed with the
questions. We have found that we are really cover the text of a statement pretty well in the questioning by committee members. The committee members get the statements in advance and go over them and
therefore are prepared to ask questions, otherwise they would not be
prepared to.
So you are recognized, sir. You are welcome to the committee, and
we are glad to have you, and we look forward to hearing testimony.
STATEMENT OF PROF. EDWARD S. HERMAN, WHARTON SCHOOL OF
FINANCE, UNIVERSITY OF PENNSYLVANIA
Mr. HERMAN. Thank you, Mr. Chairman. I am happy to be here
before this committee.
Since my statement is very short I think the most expeditious thing
would be to read it to you.
I have divided my statement into three parts, the last two of which
overlap rather substantially. First, I have summarized several parts




(227)

228
of my study on "Conflict of Interest in the Savings and Loan Industry," published by the Federal Home Loan Bank Board in 1970,
which seem most relevant to the matters covered in H.R. 5700. Second,
I have put together some general comments on the problems involved
in regulating interlocks. Finally, I make a few very specific comments and suggestions on the bill.
One of the most striking features of the savings and loan industry
is the extent to which associations are interlocked with other financial
institutions, especially commercial banks.
An internal FHLBB study of 1965 found that two out of three
associations were interlocked with at least one other financial institution, and that one out of three associations were interlocked with another financial institution. In a large random sample of 805 associations which I prepared on the basis of 1968 data, 451, or 56 percent of
them, had one or more commercial bank interlock. The breakdown
by number of bank interlocks is shown in table I, which is reproduced
in my statement, from the study.
One can see, for example, that 153 associations had three or more
interlocks with commercial banks. Many of these associations, of
course, had more than one interlock with the same bank.
In table II, which I have also presented in my statement, taken
from the study, it is shown that 173 of the 805 sample associations had
two or more interlocks with the same bank.
My own assessment of these data is that, on a very conservative
estimate, at least 20 percent of the sample associations were under
common control with a commercial bank in 1968. In many instances
this had come about as a result of bank interests being permitted to
organize a de novo savings and loan association, although in quite
a few cases the fusion of interests occurred subsequent to organization.
In any event, this structure of interlocks and extensive common
control of savings associations and banks would seem on its face unhealthy, because banks and savings associations can and do compete
for savings deposits and mortgage loans. Furthermore, especially when
the association is a mutual organization, control by a bank organized
as a stock company holds open the possibility of various other kinds
of abuse, such as fee allocations favorable to the bank, and the use of
the association as a dumping ground for unwanted loans.
The justification usually given for this state of affairs has been
twofold:
(1) An association under bank control is better—and will produce more local mortgage loans—than no association•; and
(2) It is argued that, in many cases, especially in small towns,
technical expertise is in short supply, and must be met from the
local financial community, including banks, I am sure that these
justifications are valid in some cases, but my impression is that
the proportion of bank interlocks that can be adequately defended
by such considerations is not very large. In some cases, also, the
first justification only applies in the short run; that is, the bank
may only speed up the date of formation of the association. But the
bank-sponsored association may then preclude a new independent




229
entrant more or less indefinitely. In other words, if a bank is permitted to organize an association it may preempt that opportunity
more or less permanently; and this has happened in a number of
cities where the banks got in early. And in a couple of cases I
happen to know, there were potentially independent associations
in the offing, and they were precluded by the bank entry, and as
far as I know, a new nonbank entrant has not come into those
markets up to this point.
It seems to me that the advantages of this great proliferation of
bank-association interlocks and the establishment of control relationships between them, especially at this stage in the development of the
savings and loan industry, are far outweighed by their negative potential. These relationships seem to me contrary to public policy in at
least three respects:
(1) They are likely to impair competition, an outcome that
can be observed in some cases in the form of less aggressive and
noncompetitive behavior by the controlled associations;
(2) They may involve fee and asset allocations and transfers
detrimental to the interests of the associations; and
(3) They enhance the burden of regulation, which cannot assume arm's-length bargaining in transactions between the interlocked firms.
Remedial action in the area of bank-association interlocks seem to
me long overdue, and this is provided in H.R. 5700.
Another finding in the savings and loan conflict study that is worthy
of the committee's attention is the extent of, and lack of control over,
reciprocal lending. This is a method of evasion of the prohibition of
lending to officers and directors of associations, whereby the officials
of one association borrow from another and reciprocate by lending
to the officials of the association from which they borrow. Banks may
enter into this system of reciprocal lending with associations. In a
late 1968 compilation by the supervisory authorities, 14 associations
in the Houston area were found to have 54 loans outstanding to officers
and directors of other associations, with an aggregate volume of $14.6
million. This does not include loans from banks which are heavily
interlocked with savings associations in the Houston area.
I provide in my statement a table from the study showing the extraordinary network of interlocking among financial institutions in the
Houston, Tex., area.
This practice seems to me to need much greater legislative and regulatory attention than it has received up to now.
I turn now to part I I of my statement, which is about the genreal
problem of controlling interlocks.
I have a great deal of sympathy with the purpose of H.E. 5700 and
agree with the specifics of some of its most important provisions, especially those placing limits on horizontal interlocks. Their passage
would represent a constructive step in the continuing efforts to preserve a competitive financial system.

60-299—71—pt. 1




16

230

It should be recognized, however, that interlocks are of secondary
importance in comparison with close-knit combinations in determining the distribution of economic power. They may help cement alliances, and they can serve as a mechanism for facilitating coordinated
behavior, but they can hardly be put in the same class of importance
with, say, a series of bank mergers that reduce the number of rivals
in an area by two-thirds and triple the average size of banks. It is a
classic case of trying to shut the barn door long after the mare and
all the little colts have been swallowed and digested, to try to deal
with bank lending and trust department power after the great wave
of mergers that was permitted to take place after 1945.
Great aggregations of capital and assets mean great capacity to buy,
sell, lend and borrow; in a word, primary economic power. That
power will be felt and it will be employed. Prohibiting vertical interlocks with borrowers or portfolio companies would, I suspect, have
only modest value in limiting the extent and exercise of power. The
views of real power holders can be made known and their interests
can be protected by means other than through directorships. Interlocks may contribute a marginal addition to power, but they are not
likely to add very much, especially where there is a single interlock
and the firm in question is reasonably large and important. The power
that comes from lending is not eliminated by prohibiting board representation to the lender; in fact, insofar as the lender regards his capacity to protect his interests as weaker, he might feel compelled to
exact more onerous terms, including greater restrictions on managements incorporated into the credit agreements themselves.
However, insofar as interlocks reinforce a powder position, and reduce the ability of outsiders to obtain credit or do business within the
more tightly knit circle, they weaken competition. Equally important,
vertical interlocks may have important horizontal effects where the
interlocks by one institution, say a bank, extend to many firms that
compete with one another, that is, a group of producers of steel. In
this case vertical interlocks amount to horizontal interlocks among
competitors at a second degree removed.
It is hard to see how this can be legislated against without a fairly
broad limitation on vertical interlocks. The present, bill would not get
at these interlocks in the absence of a creditor or substantial owner
position, but this may be an unimportant limitation.
The qualifications in my support of limitations on vertical interlocks do not apply to an attack on horizontal interlocks among financial
institutions, although there too constraints on primary structural
change in the form of increased concentration would seem considerably
more important than control over interlocks.
In the case of horizontal interlocks, however, the potential for damage to competition among institutions whose functions have increasingly tended to overlap, and who are therefore both actual and potential competitors, seems to be a fairly important vehicle for establishing and maintaining common control. This is a consequence, in part,
of the relatively small size of many associations; in part it results, from
the mutual form, which increases the importance of officer-director
positions—versus stock ownership—in control maintenance.




231
Returning to the greater importance of close-knit combinations than
looser alliances, there is a further question to be considered. If companies want to affiliate with one another, and this is prohibited in
looser-knit forms, they may be inclined to combine more closely if this
option is open. H.E. 5700 in this respect encourages the fusion of, say,
title and real estate companies, into holding company systems, as
they are no longer permissible private affiliates.
This is defensible as a means of eliminating open conflict of interest
situations, but it should be recognized that it involves stimulating
larger more diversified power entities.
Let me conclude with a few specific comments on H.R. 5700.
First, I have already indicated my basic support of the limitations
on horizontal interlocks, and my support, with reservations, of limiting
vertical interlocks in section 7,8, and 9.
Section 11 seems to me to be unworkable in that "intent" and '"understanding" regarding officer conduct are too fuzzy, too elusive, and
too impossible of proof to constitute appropriate legislative raw
material. Absolute prohibitions on officer-director loans from company
banks would be more workable but would suffer from other serious
difficulties.
I support the disclosure requirement on bank fiduciary security holdings in section 12 and the 10 percent limitation in section 13. With respect to the prohibition of bank fiduciary holdings of own stock, I
have some reservations. Section 18(2) seems unduly restrictive. Why
not merely prohibit banks from acquiring their own stock by purchase ? Is it the intention of this subsection to force banks to terminate
their relationships with all personal trusts that include the bank's stock
even where the bank has no voting rights ? Wouldn't the stock of bank
A owned by bank B in fiduciary trust accounts pose a greater threat
than own stock held by bank A ?
I think that last is a fairly important point. This bill does not deal
explicitly with a very important group of cases in the bank trust field,
namely, cases where one bank in a city owns stock in other banks in
the city. In many cases on the buy list of a bank in a major city are the
stocks of other banks in that city.
It seems to me that the acquisition in fiduciary trust accounts of stock
of competitors is far more important than stock held of the bank itself,
especially in fiduciary trust accounts, that are personal trusts where the
bank has no control.
That concludes my statement, Mr. Chairman.
I would be happy to try to answer any questions that you may have
at this time.
The CHAIRMAN. Thank you, sir.
Your prepared statement will be placed in the record at this point.
(The prepared statement of Professor Herman follows:)
PREP ABED STATEMENT OF EDWARD S. HERMAN, PROFESSOR OF FINANCE,
WHARTON SCHOOL, UNIVERSITY OF PENNSYLVANIA

I have divided my statement into three parts, the last two of which overlap
rather substantially: First, I have summarized several parts of my study on
Conflict of Interest in the Savings and Loan Industry, published by the Federal
Home Loan Bank Board, (FHLBB), in 1970, which seem most relevant to the




232
matters covered in H. R. 5700. Second, I have put together some general comments on the problems involved in regulating interlocks. Finally, I make a few
very specific comments and suggestions on the Bill.
I. SAVINGS AND LOAN INTERLOCKS WITH OTHER FINANCIAL INSTITUTIONS

One of the most striking features of the savings and loan industry is the
extent to which associations are interlocked with other financial institutions,
especially commercial banks. An internal FHLBB study of 1905 found that two
out of three associations were interlocked with at least one other financial institution, and that one out of three associations has at least one officer interlocked
with another financial institution. In a large random sample of 805 associations
which I prepared on the basis of 1968 data, 451, or 56% of them, had one or
more commercial bank interlock. The breakdown by number of bank interlocks
is shown in Table I, which is reproduced here from the Study. One can see, for
example, that 153 associations had three or more interlocks with commercial
banks. Many associations, of course, had more than one interlock with the same
bank. Thus, Table II, also taken from the Study, shows that 173 of the 805 sample
associations had two or more interlocks with the same bank.
TABLE 1 — NUMBER OF COMMERCIAL BANK INTERLOCKS OF 805 SAVINGS AND LOAN ASSOCIATIONS
IN 1968
Associations
Number of interlocks
0
1
2
3
4
6

Associations

Number

Percent

354
195
103
65
44
25
15

44.0
24.2
12.8
8.1
5 5
3.1
1.9

Number of interlocks
7
8
9
17
Total

Number

Percent

1
1
1
1

1
.1
. l

805

100.0

TABLE U.-NUMBER OF COMMERCIAL BANK INTERLOCKS OF 805 SAVINGS AND LOAN ASSOCIATIONS IN 1968,
CLASSIFIED BY THE HIGHEST NUMBER OF INTERLOCKS WITH ANY ONE BANK
Associations

Associations
Highest number of interlocks with any 1 bank

-

0
1
2
3
4

Number
354
278
105
39
16

Percent

Highest number of interlocks with any 1 bank

44.0 5
34.5 6 .
13.0 9
4 8
2.0

Total

Number

Perce.n1

10
2
1

1 2
.2

805

100.0

My own assessment of these data is that, on a very conservative estimate, at
least 20% of the sample associations were under common control with a commercial bank in 1968. In many instances this had come about as a result of bank
interests being permitted to organize a de novo savings and loan association,
although in quite a few cases the fusion of interests occurred subsequently to
organization. In any event, this structure of interlocks and extensive common
control would seem on its face unhealthy, because banks and savings associations
can and do compete for savings deposits and mortgage loans. Furthermore,
especially when the association is a mutual organization, control by a bank
organized as a stock company holds open the possibility of various other kinds
of abuse, such as fee allocations favorable to the bank, and the use of the association as a dumping ground for unwanted loans.1
1
In my study I discussed a number of cases where bank domination of savings associations seemed to have had an adverse effect on competition, or damaged the association in
other ways. It should be pointed out, however, that no significant adverse effects of bank
affiliation were found in the aggregative statistical analysis that I conducted. This may
have been a result of some serious weaknesses in the data. The author has urged the FHLBB
to attempt a more refined analysis of the effects of bank and association links.




233
The justification usually given for this state of affairs has been two-fold: (1)
an association under bank control is better (and will produce more local mortgage
loans) than no association; and (2), in many cases, especially in small towns,
technical expertise is in short supply, and must be met from the local financial
community, including banks. I am sure that these justifications are valid in
some cases, but my impression is that the proportion of bank interlocks that can
be adequately defended by such considerations is not very large. In some cases,
also, the first justification only applies in the short-run; i.e., the bank may only
speed up the date of formation of the association. But the bank-sponsored association may then preclude a new independent entrant more or less indefinitely.
It seems to me that the advantages of this great proliferation of bank-association interlocks and the establishment of control relationships between them,
especially at this stage in the development of the savings and loan industry, are
far outweighed by their negative potential. These relationships seem to me
contrary to public policy in at least three respects: (1) They are likely to impair
competition, an outcome that can be observed in some cases in the form of less
aggressive and non-competitive behavior by the controlled association; (2) they
may involve fee an asset allocations and transfers detrimental to the interests
of the association; and (3) they enhance the burden of regulation, which cannot
assume arms-length bargaining in transactions between the interlocked firms.
Remedial action in the area of bank-association interlocks seems to me long
overdue.
Another finding in the savings and loan conflict study that is worthy of the
Committee's attention is the extent of, and lack of control over, reciprocal
lending. This is a method of evasion of the prohibition of lending to officers and
directors of associations, whereby the officials of one association borrow from
anther and reciprocate by lending to the officials of the association from which
they borrow. Banks may enter into this system of reciprocal lending with associations. In a late 1968 compilation by the supervisory authorities, 14 associations
in the Houston area were found to have 54 loans outstanding to officers and
directors of other associations, with an aggregate volume of $14.6 million. This
does not include loans from banks, which are heavily interlocked with savings
associations in the Houston area. (Table III, reproduced from the Study, shows
the extraordinary network of interlocks among financial institutions in the
Houston area.) This practice seems to me to need much greater legislative and
regulatory attention than it has received up to now.




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II. CONTROLLING INTERLOCKS

I have a great deal of sympathy with the purposes of H.R. 5700 and agree with
the specifics of some of its most important provisions, especially those placing
limits on horizontal interlocks. Their passage would represent a constructive
step in the continuing effort to preserve a competitive financial system. Nevertheless, I feel that it is important to call attention to some of the difficulties
and weaknesses in an attack on interlocks, and especially vertical interlocks.
It should be recognized that interlocks are of secondary importance in comparison with close-knit combinations in determining the distribution of economic power. They may cement alliances, and they can serve as a mechanism
for facilitating coordinated behavior, but they can hardly be put in the same
class of importance with, say, a series of bank mergers that reduce the number
of rivals in an area by two-thirds and triple the average size of banks. It is a
classic case of trying to shut the barn door long after the mare and all the
little colts have been swallowed and digested, to try to deal with bank lending
and trust department power after the great wave of mergers that were permitted to take place since 1945.
Great aggregations of capital and assets mean great capacity to buy, sell,
lend and borrow; in a word, primary economic power. That power will be felt
and it will be employed. Prohibiting vertical interlocks with borrowers or
portfolio companies would, I suspect, have little value in limiting the extent
and exercise of power. The views of real power holders can be made known
and their interests can be protected by means other than through directorships.
Interlocks may contribute a marginal addition to power, but they are not likely
to add very much, especially where there is a single interlock and the firm in
question is reasonably large and important. The power that comes from lending is not eliminated by prohibiting board representation to the lender; in fact,
insofar as the lender regards his capacity to protect his interests as weaker,
he might feel compelled to exact more onerous terms, including greater restrictions on managements incorporated into the credit agreements themselves.
This skepticism does not apply with equal force to an attack on horizontal
interlocks among financial institutions, although there too constraints on primary structural change in the form of increased concentration would seem
considerably more important than control over interlocks. In the case of horizontal interlocks, however, the potential for damage to competition among institutions whose functions have increasingly tended to overlap, and who are
therefore both actual and potential competitors, seems more substantial. In
the savings and loan case, also, the interlock seems to be a fairly important
vehicle for establishing and maintaining common control. This is a consequence,
in part, of the relatively small size of many associations; in part it results
from the mutual form, which increases the importance of officer-director positions (versus stock ownership) in control maintenance.
Returning to the greater importance of close-knit combinations than looser
alliances, there is a further question to be considered. If companies want to
affiliate with one another, and this is prohibited in looser-knit firms, they may
be inclined to combine more closely if this option is open. H.R. 5700 in this
respect encourages the fusion of, say, title and real estate companies, into holding company systems, as they are no longer permissible private affiliates. This
is defensible as a means of eliminating open conflict of interest situations, but
it should be recognized that it involves stimulating larger more diversified
power entities.
III. SPECIFIC COMMENTS ON H.R. 5700

a. I have already indicated my basic support of the limitations on horizontal
interlocks, and my reservations on the desirability and feasibility of limiting
vertical interlocks in Sees. 7, 8 and 9.
b. Sec. 11 seems to me to be unworkable in that "intent" and "understandings" regarding officer conduct are too fuzzy, elusive, and impossible of proof
to constitute appropriate legislative raw material. Absolute prohibitions on officer-director loans from company banks would be more workable but would
suffer from other serious difficulties.
c. Sec. 13(2) seems unduly restrictive. Why not merely prohibit banks from
acquiring their own stock by purchase? Is it the intention of this subsection
to force banks to terminate their relationships with all personal trusts that
include the bank's stock even where the bank has no voting rights? Wouldn't




236
the stock of Bank A owned by Bank B in fiduciary trust accounts pose a greater
threat than own stock held by Bank A?

The CHAIRMAN. We will next hear Mr. Angus McDonald. Mr.
McDonald is a consultant from Mid-West Electric Consumers Association. He was for many years the legislative representative and
director of research for the National Farmers Union. He has for a
long time had a deep interest in the problems of interlocking relationships among various types of corporations.
Mr. McDonald, we appreciate your testifying before the committee today. The members of this committee have a high regard and
great respect for you, and they value your testimony. We have heard
you on many subjects, and you always make a good, forthright, honest, sincere witness. And we appreciate the fact that your are before
us today. You may proceed in your own way in presenting your
statement to us today.
STATEMENT OF ANGUS McDONALD, CONSULTANT TO THE MID-WEST
ELECTRIC CONSUMERS ASSOCIATION

Mr. MCDONALD. Thank you, Mr. Chairman. I appreciate that
introduction very much.
Prior to my association with the Mid-West Electric Consumers
Association, as the chairman has indicated, I was employed by the
National Farmers Union during a period of approximately 22 years.
During that period I handled legislation in which the Farmers Union
had an interest involving the Sherman Act, the Clayton Act, the
Robinson-Patman Act, the Federal Trade Commission Act, and the
Reclamation Act of 1902. In short, I handled all legislation involving
so-called monopoly problems.
I will address myself at this hearing to only the interlock provisions
of the bill.
My interest particularly in the interlock situation stems in part
from the fact that the consumers association with which I am associated employed me to make a survey of all the interlocking relations
of all the power companies in the United States. The task is not yet
completed, I would say about 95 percent.
I have for the information of the committee—and I would
appreciate, Mr. Chairman, being allowed to make a few corrections in
this document—I have here a 30-page document which lists alphabetically the power company executives who may have conflicts of
interest in their financialn o corporate
relationships.
The CHAIRMAN. W ^ u ^ objection, the statement may be inserted,
with the understanding that Mr. McDonald will have the privilege
when he looks over the transcript to make any corrections that he
desires to make. You may summarize your statement if you desire,
and this will all be in the record.
Mr. MCDONALD. Thank you, Mr. Chairman.
I will now enumerate a few of the most important interlocks.
The Chemical Bank of New York has 12 interlocks with seven
commercial banks, five with four savings institutions, 18 with 13
insurance companies, and six with miscellaneous financial institutions.
The commercial banks include the Continental Illinois National
Bank & Trust, the First Pennsylvania Bank, Fidelity Union Trust,




237

the First National Bank of Jacksonville, the First Merchants
National Bank of Richmond, and Wilmington, Del., Trust Co.
The savings institutions include the Seamans Bank for Savings,
the Harlan Savings Bank, the Empire Savings Bank, and the Western
Savings Fund.
Insurance companies linked with the Chemical Bank of New York
are as follows: New^ York Life Insurance, Life Insurance Co. of
America, Equitable Life Assurance Society of the United States
Mutual Life Insurance, Peoples Home Life Insurance of Indiana,
Mutual Assurance, Pennsylvania Mutual Life Insurance, Home Insurance, Home Indemnity, Atlantic Mutual Insurance, Royal Globe
Insurance, and Stock Insurance Co. of the Green Tree.
Morgan Guaranty Trust Co. is interlocked with the Hartford
National Bank & Trust and the Bank of Montreal and with the
Seamans Bank for Savings.
It has interlocks with 15 insurance institutions which include: Aetna
Casualty & Insurance, Aetna Life Insurance, Aetna Life Assurance,
Canada Life Assurance, Insurance of America, National Reinsurance
Co., Standard Fire Insurance, Producers & Citizens Life Insurance,
New York Life Insurance, Pennsylvania Mutual Life Insurance,
Metropolitan Life, Continental Insurance, Fidelity Insurance, Fidelity-Phoenix & Casualty, and Excelsior Life.
First, National City Bank of New York is interlocked with the
Mercantile Bank of Canada, Hartford Bank & Trust and the
Wilmington Trust Co. Interlocks with savings institutions include
the Rochester Savings Bank, the Dry Dock Savings Bank, and the
Seamans Bank for Savings.
Insurance interlocks include the following companies: New York
Life Insurance, Northwestern Mutual Life Insurance, Teachers Insurance & Annuity Association, Connecticut Mutual Life Insurance,
J. C. Penney Insurance, J. C. Penney Life Insurance, Global Life Insurance, Global Reinsurance, Global General Insurance, National Reinsurance, Mutual Life Insurance, All State Insurance, Metropolitan
Life Insurance, Federal Insurance, Vigilant Insurance, Colonial Life
Insurance, Pacific Indemnity, Atlantic Mutual Insurance, Centennial
Insurance, and Prudential Insurance.
Now for Chase. The Chase Manhattan Bank of New York is interlocked with six other commercial banks, including the First National
Exchange
The CHAIRMAN. Mr. McDonald, I think it would be more impressive
for us to get the real meaning of this than to recite them all by name.
Give us the point that is involved and put the others in the record, if
you please.
Mr. MCDONALD. I appreciate that Mr. Chairman.
Chase has six interlocking with commercial banks, and seven interlocks with six insurance companies.
Interlocks among financial institutions in the Midwest and West
occur much less frequently than in New England and New York. The
Continental Illinois National Bank & Trust Co. has only two bank
interlocks, one is with Chemical of New York and the other is with
Northwest Bancorporation, Continental has only six interlocks with
insurance companies, four of which are subsidiaries of the parent
company.




238
First Bank System is of special interest. This group of banks which
dominates financial concerns in the area controls 88 active banks and
trust companies with 107 offices in Minnesota, Montana, North Dakota,
South Dakota, and Wisconsin.
First Bank is interlocked seven times in four banks: the First National Bank of St. Paul—I will not name the banks, it has interlocks
with seven insurance companies.
Incidentally the First Bank Corp. is interlocked with the Northwest
Bancorporation.
Now, I turn, Mr. Chairman, to a brief discussion of New England.
And the members will notice that there are several pages of material
here in which I discuss in some detail the directorships in the seven
power companies which supply the New England area with electric
power.
The CHAIRMAN. If you will summarize them, then we will have an
opportunity to ask you questions and probably bring out the points
you have in mind. In the event they are not brought out, you have
permission to extend your remarks and bring in the points you wish.
Mr. MCDONALD. I appreciate that.
In accordance with that suggestion, Mr. Chairman, I do not think
that I will read this material. The members have a copy. I spelled out
in detail the names of individuals
The CHAIRMAN. That is what we would like.
Mr. MCDONALD. The names of individuals, you will find quite a
few listed here, with all of their financial interlocks.
I want to emphasize this point. This includes only power company
interlocks with financial institutions. Doubtless there are many more
with other industrial groups.
I have one final suggestion for the bill. I suggest that a provision be
inserted prohibiting directors of competing companies from Serving
as directors of the same bank. The questions of economic survival are
decided every day at bank directors' meetings. It seems obvious that
common bank directors of competing firms set the stage for tacit
valuation of the antitrust laws.
And then there is the question of conflict of interest, which is probably more responsible for the weakening and elimination of competition in the economy than any other factor.
I mention Mr. Chairman, in my prepared statement just a few of
the interlocks of companies, competing companies which are sitting
on the same bank board. Among those are Montgomery Ward, SearsRoebuck, oil companies, and so forth.
One final point. My attention was recently called to an article in
the Washington Monthly entitled "Ostracism, Blindness on the Bank
Board." The author if this article suggested that Tony Boyle, Edward
Carey and Thomas Ryan, directors of the National Bank of Washington, because of a conflict of interest, were finding it difficult if not
impossible to act as dedicated stewards of the United Mine Workers
of America.
I realize that that last point is off the subject, but I did want to call
the committee's attention to that situation in regard to dues paying
organizations and their involvement with financial institutions.
That concludes my statement.




239

The CHAIRMAN. Thank you very much, sir.
(The prepared statement of Mr. McDonald follows:)
PREPARED STATEMENT OF ANGUS MCDONALD, CONSULTANT TO THE MID-WEST
ELECTRIC CONSUMERS ASSOCIATION

Mr. Chairman and Members of the Committee, I appear here in support of
H.R. 5700, which I believe will encourage competition and prevent abuses and
restrict devices and practices which prevent competition. I do not at this time
represent any group, although I have been retained by the Mid-West Electric
Consumers Association to make a study of electric power company interlocks
and keep the association apprised of legislative developments here in Washington. Prior to my association with the Mid-West Electric Consumers I was employed by the National Farmers Union for a period of approximately 22 years
in the capacity of legislative assistant, Associate and Research Director. I
handled all legislation pertaining to monopoly, restraint of trade affecting agriculture and small business. I have appeared before Congressional committees
many times on legislative problems involving enforcement and implementation
of the Clayton Act, the Robinson Patman Act and the Capper Volstead Act.
During my service with the Farmers Union I acquired some expertise in
regard to the basing point system and its effect on industrial development in
the South and West. I became convinced it was a child of eastern bankers
designed to secure and retain financial and economic control of our economy.
The basing point controversy, revelations by the House Small Business Committee, and evidence developed by the Department of Justice prior to the enactment
of the Bulwinkle bill in 1948 and the Supreme Court decision in the cement case
convinced me that banker control of the railroads and to a great extent of
the rest of the economy resulted in a multitude of conflicts of interest, inefficiency and ultimately to bankruptcy and recessions. Several years ago in a brilliant analysis the staff of this Committee related three instances of banker
intrusion into the normal functioning the competitive system. One involved a
railroad, another a newspaper and the third a bank.
The need for this legislation is documented in these studies. Numerous authorities including the Chairman of this Committee, a former chairman of the
Federal Reserve Board, the present Chairman of the Board and others presented
facts and material which suggest early enactment of H.R. 5700.
Looking at the interlocks of a few banks it is apparent that hundreds of
conflicts of interest make competition almost impossible among financial institutions. Conflicts of interest seem to be concentrated in the East, especially
in New York City and New England.
The Chemical Bank of New York has 12 interlocks with 7 commercial banks,
5 with 4 savings institutions, 18 with 13 insurance companies and 6 with
miscellaneous financial institutions.
The commercial banks include the Continental Illinois National Bank and
Trust, the First Pennsylvania Bank, Fidelity Union Trust, the First National
Bank of Jacksonville and the Firsit Merchants National Bank of Richmond, and
Wilmington, Delaware Trust Company.
The savings institutions include the Seamans Bank for Savings, the Harlan
Savings Bank, the Empire Savings Bank and the Western Savings Fund.
Insurance companies linked with the Chemical Bank of New York are as
follows:
New York Life Insurance
Life Insurance Co. of America
Equitable Life Assurance Society of U.S.
Mutual Life Insurance
Peoples Home Life Insurance of Indiana
Mutual Assurance
Pennsylvania Mutual Life Insurance
Home Insurance
Home Indemnity
Atlantic Mutual Insurance
Royal Globe Insurance
Stock Insurance Company of the Green Tree
Chemical is also interlocked with Adela Investment, Southeastern Investment, Euro Finance, Commonwealth Fund, Christiana Securities and Soars
Roebuck Acceptance.




240
Morgan Guaranty Trust Company is interlocked with the Hartford National
Bank and Trust and the Bank of Montreal and with the Seamans Bank for
Savings.
It has interlocks with 15 insurance institutions which include :
Aetna Casualty & Insurance
Aetna Life Insurance
Aetna Life Assurance
Canada Life Assurance
Insurance of America
National Reinsurance Company
Standard Fire Insurance
Producers & Citizens Life Insurance
New York Life Insurance
Pennsylvania Mutual Life Insurance
Metropolitan Life
Continental Insurance
Fidelity-Insurance
Fidelity-Phoenix & Casualty
Excelsior Life
National City Bank of New York is interlocked with the Mercantile Bank of
Canada, Hartford Bank and Trust and the Wilmington Trust Company. Interlocks with savings institutions include the Rochester Savings Bank, the Dry
Dock Savings Bank and the Seamans Bank for Savings.
Insurance interlocks include the following companies:
New York Life Insurance
Northwestern Mutual Life Insurance
Teachers Insurance & Annuity Association
Conn. Mutual Life Insurance
J. O. Penney Insurance
J. C. Penney Life Insurance
Global Life Insurance
Global Reinsurance
Global General Insurance
National Reinsurance
Mutual Life Insurance
All State Insurance
Metropolitan Life Insurance
Federal Insurance
Vigilant Insurance
Colonial Life Insurance
Pacific Indemnity
Atlantic Mutual Insurance
Centennial Insurance
Prudential Insurance
The Chase Manhattan Bank of New York is interlocked with 6 other commercial banks including the First National Exchange Bank of Virginia, the
First Pennsylvania Banking and Trust, Wachovia Bank and Trust, Hartford
National Bank and Trust, the First National Bank of Chicago and Trust Co. of
Georgia. Savings bank interlocks include the Phil. Savings Fund and Bowery
Savings Bank.
Chase has 7 interlocks with 6 insurance companies which include the Equitable
Life Assurance Society, Jefferson Standard Life Insurance; Metropolitan Life,
Travellors, Travellors Indemnity and Hartford Fire.
Interlocks among financial institutions in the midwest and west occur much
less frequently than in New England and New York. The Continental Illinois National Bank and Trust Company has only two bank interlocks, one is with
Chemical of New York and the other is with Northwest Bancorporation. Continental has only 6 interlocks with insurance companies, 4 of which are subsidiaries of the parent company.
First Bank System is of special interest. This group of banks which dominates
financial concerns in the area controls 88 active banks and trust companies with
107 offices in Minnesota, Montana, North Dakota, South Dakota and Wisconsin.
First Bank is interlocked 7 times in four banks: the First National Bank
of St. Paul, the First Trust Co. of St. Paul, the First National Bank of Minneapolis and the Pacific National Bank of Seattle. It is also interlocked with




241
the Farmers and Mechanics Savings Bank. The First Bank System is interlocked
with 7 insurance companies: Minnesota Life, Northwestern National Life, Minnesota Mutual Life, Mutual Life, Title Insurance of Minnesota, Northwest
Life and Northwestern Life.
The Northwest Bancorporatiion controls 78 commercial banks and trust
companies with 29 offices in the States of Minnesota, North Dakota, South
Dakota, Iowa, Nebraska, Montana and Wisconsin. This institution has 5 interlocks with commercial banks, 11 with insurance companies and one with a
savings institution.
Interlocked banks are: the Northwestern National Bank, Northwest International Bank, Northwestern National Bank of Minneapolis and the Farmers
and Mechanics Savings Bank of Minneapolis.
Interlocked insurance companies are: Northwestern National Life Insurance,
Title Insurance of Minnesota, North Atlantic Life Insurance of America, All Star
Insurance, Central National Insurance Group of Omaha.
During the past few months I have been making an intensive study of interlocking directorates of all the power companies of the United States. The most
significant fact that I have uncovered in this investigation is that almost wtihout
exception power companies are invariably linked with banks. Banks and other financial institutions, I suspect, in most instances determine and prescribe power
company policy which is to prevent at any cost competition by nonprofit utilities.
I call attention to seven New England power companies which are as follows:
1. The New England Electric System Holding Company which controls 5 electric companies and 9 gas companies. It serves Mass., Rhode Island and part of
New Hampshire.
2. The Northeast Utility Holding Company which controls 3 electric companies and one realty company. It serves about 3 million people.
3. The Boston Edison Company which operates around Boston and which has
acquired 21 smaller companies over a period of years.
4. The Central Maine Power Company which supplies % of Maine's population and has acquired many small companies.
5. The Eastern Utility Associates holding company which owns several operating companies and has participated in atomic energy plans and operations.
6. The New England Gas and Electric Association which owns 8 electric
and gas companies and serves 182,970 customers in Massachusetts.
7. The Central Vermont Public Service Corp. which serves substantial portions of Vermont.
Nine executives of these seven companies are on the Boards of 21 conventional
electric power companies, 8 of which are subsidiaries of the group of seven
companies.
Seven of the nine are interlocked with Conn. Yankee Atomic Power Company.
Eight of the nine are interlocked with the Yankee Atomic Electric Power Company. Five are interlocked with the Maine Yankee Atomic Power Company. Two
are interlocked with the Vermont Yankee Nuclear Power Company. Two are interlocked with the Conn. Atomic Power Company and one with the atomic Industrial
Forum.
THae nine directors are interlocked with 12 financial institutions, 6 of these
are commercial banks, 3 are savings banks and three appear to be investors fund
houses.
The nine directors are interlocked with nine insurance companies which include 4 mutuals, 2 fire insurance companies, 2 accident companies, and one
general insurance company.
The nine directors have ties with 25 other groups which include civic associations, educational institutions, hospital, economic and cultural associations. Included are 5 colleges and universities, several educational and scientific associations, a television education broadcasting corporation and a newspaper association, a newspaper chain and the Western Union Telegraph Corporation and 4
hospitals.
The nine executives are corporately related to a miscellaneous group of
corporations, including the Rand Corporation, Arthur D. Little, Mohawk Airlines and 8 others. In all eleven.
Summarizing: These 9 men are directors of 21 conventional power companies,
have 17 interlocks with atomic energy corporations. Seven are interlocked with
12 financial institutions. It would appear that conflicts of interest would be inevitable. For example, Mr. Charles F. Avila is interlocked with one bank, one
savings institution and 2 insurance companies. All four of these institutions are




242
supposed to compete in the money market for the business of both lenders and
borrowers.
Mr. Avila is on the boards of 23 corporations including several power companies and utility publications. It is easy to see why he would not look with
favor on any proposal to build a public power facility which might have the
effect of reducing the highest power rates in the Nation in an area which suffers periodically from blackouts, brownouts and power shortages which may in
the near future paralyze the Eastern United States.
Mr. William H. Dunham, as President of the Central Maine Power Company
and director of 4 other power companies and the Electric Council of New England,
would probably take a similar position since the proposal is repeatedly made in
Congress to build a public power project in his state. As a director of Bates
College, the Higher Education Assistance Foundation and the WCBB Educational Telecasting corporation, he has an opportunity to make his views known
regarding such ''socialistic" proposals which are unavailable to most groups.
Interlocking directorates of the 3 leading New England power companies with
financial institutions may be of interest. Members of the Board of the New England Electrical System have interlocks with the Mechanics National Bank, the
People Savings Bank, the First National Bank of Boston, the Industrial National
Bank, the Federal Reserve Bank of Boston, the Old Colony Trust Company, and
the Fiduciary Trust Company of New York.
Members of the Board of this Company are linked with Mass. Bay Insurance
Co., Hanover Insurance, Worcester Mutual Fire Insurance, State Mutual Life
Insurance, the Merchants Mutual Insurance, the American Variable Life Insurance, the Guaranteed Mutual Insurance, and the Employers Fire Insurance.
They also have links with the Merrimack County Savings Bank, the Second
Federal St. Fund, the Federal Street Fund and the State Research and Investment Corporation.
Seven men on the Board of New England Electric System serve on the boards
of 21 financial institutions all supposed to be competing against each other. Four
of the seven appear to have conflicts of interest. Francis H. Burr is interlocked
with the Employers Fire Insurance, the Old Colony Trust, and the Fiduciary
Trust of New York, Dudley Wainwright Orr is interlocked with the Mechanics
National Bank, the Merrimack County Savings Bank, Merchants Mutual Insurance, and United Life and Accident Insurance.
Paul Revere O'Connell is interlocked with the Peoples Savings Bank, the
State Mutual Life Assurance Co., the American Variable Annuity Life Assurance Co., Guaranty Mutual Insurance, Worcester Mutual Fire Insurance, Hanover Insurance, Hanover Life Insurance, and Mass. Bay Insurance.
George F. Bennett is interlocked with the State Street Research and Investment Corp., the Federal St. Fund, John Hancock Mutual Life Insurance, the
Second Federal St. Fund, and the U.S. and Foreign Securities Corp.
Seven men on the Board of the Boston Edison Company are interlocked with
3 banks, 5 savings banks and 7 insurance and mutual companies. The banks include the Boston Safe Deposit and Trust Company, the State Street Bank and
Trust, and the First National Bank of Boston.
The insurance companies and mutuals include Liberty Life Assurance, Libferty
Mutual Insurance, John Hancock Mutual Life Insurance, Liberty Mutual Mre,
Liberty Mutual Protection and New England Mutual Life Insurance.
The savings banks include Provident Institution for Savings, Union Warren
Savings, Boston Five Cents Savings and Newton Savings Bank. Interlocks
among financial institutions which might result in lessening of competition are
as follows:
Charles F. Avila (mentioned above) : National Shawmut Bank of Boston, Liberty Mutual Insurance Co., Boston Five Cents Savings Bank and John Hancock
Mutual Life Insurance Company;
Edward F. Hanify: State Street Bank and Trust, John Hancock Mutual Life
Insurance, and Provident Institution for Savings ;
Sidney R. Robb: Boston Safe Deposit and Trust, Liberty Mutual Fire Insurance, Liberty Mutual Protection Co., and Johnson Mutual Fund;
Frank L. Farwell: First National Bank of Boston, Liberty Mutual Insurance,
Liberty Mutual Fire Insurance, Life Assurance of Boston and Newton Savings
Bank;
Thomas J. Galligan, Jr.: First National Bank of Boston and Union Warren
Savings Bank.




243
Directors of Northeast Utilities are interlocked with four banks, 11 insurance
companies and 4 savings institutions. The banks include: Connecticut Bank and
Trust, Colonial Bank and Trust, New Britain National Bank and Third National
Bank of Hampton County.
The insurance companies include: Hartford Accident and Indemnity, Travellors Insurance, Monarch Life Insurance, Springfield Life Insurance, Hartford
Fire Insurance, Hartford Steamboiler Inspectors Insurance, National Fire Insurance, Phoenix Mutual Life Insurance, Connecticut Mutual Life Insurance,
Liberty Mutual Insurance and Swiss Reinsurance.
Savings institutions include: Springfield Institution for Savings, Burritt Mutual Savings Bank, Savings Bank of New Britain and Mechanics Savings Bank.
Interlocks which might have lessened competition are as follows:
David L. Coffin: Conn. Bank & Trust Co., Conn. Mutual Life Insurance Co.
and Liberty Mutual Life Insurance Company ;
Donald W. Davis: New Britain National Bank, Phoenix Mutual Insurance,
Burritt Mutual Savings Bank and Savings Bank of New Britain;
Sherman R. Knapp: Conn. Bank and Trust, Hartford Accident and Indemnity, Hartford Fire Insurance and Hartford Steamboiler Inspection Insurance;
S. Dwight Parker: Third National Bank of Hampton County, Monarch Life
Insurance Company, and Springfield Institution for Savings ;
Richard B. Haskell: National Fire Insurance, Phoenix Mutual Life Insurance;
Malcolm Baldridge: Colonial Bank and Trust, Conn. Mutual Life Insurance
and Swiss Reinsurance;
Edward B. Bates: Conn. Bank and Trust and Conn. Mutal Life Insurance.
Although not included in the bill, I suggest that a provision be inserted prohibiting directors of competing companies from serving as directors of the
same bank. Questions of economic survival are decided every day at bank
directors meetings. It seems obvious that common bank directors of competing
firms set the stage for tacit violation of the antitrust laws. Then there is the
question of conflict of interest which is probably more responsible for the weakening and elimination of competition in the economy than any other factor.
Directors of U.S. Steel, American Smelting and Refining, Allegheny Ludlum
Steel, Pioneer Aluminum and Titanium Metals sit together on the Board of the
Chase Manhattan as do directors of Atlantic Richfield, Standard of New Jersey
and Standard of Indiana. A director of General Motors and a director of
Chrysler also sit on this Board.
A director of Standard Oil of Indiana sits on the Board of Continental Illinois
National Bank and Trust with a director from Universal Oil Products, Pure Oil
and Union Oil. A director of Montgomery Ward and Company sits on this Board
with a director of Sears Roebuck.
Representatives of three oil companies—Atlantic Richfield, Continental and
Standard of New Jersey—sit on the Board of Morgan Guaranty along side a
director of U.S. Steel, a director of Bethlehem Steel, a director of Ford and a
director of General Motors.
Perhaps the Committee should give some study to ties between banks and
national dues receiving organizations. Officers and Boards of such organizations
are supposed to devote their entire energy for the benefit of their members in
accordance with their By Laws and policy programs adopted at general membership meetings.
Recently my attention was called to an article in the November 1970 issue of
The Washington Monthly, titled "Moral Ostracism: Blindness on a Bank Board,"
by John Rothchild. The author of the article suggest that Tony Boyle, Edward
Carey and Thomas Ryan, directors of the National Bank of Washington, because
of a conflict of interest, wrere finding it difficult if not impossible to act as
responsible dedicated stewards of the United Mine Workers Union.
Conflicts of interest may w^ell be the cause of most of the troubles today. Conflicts of interest uot only perpetuate old and archaic schemes and organizations
and obsolescent machinery, they stifle economic development, destroy initiative
and weaken morality. Conflicts of interest are an insidious poison that eats away
the moral fiber of men.
Jesus said in the 24th verse of the 6th Chapter of Matthew :
"No man can serve two masters: for either he will hate the one, and love the
other; or else he will hold to the one and despite the other. Ye cannot serve both
God and mammom."
He thought this admonition was so important that he repeated it again in the
13th verse of the 16th Chapter of Luke.




244
POWER COMPANY EXECUTIVES W H O MAY HAVE CONFLICTS OF INTEREST IN THEIR
FINANCIAL CORPORATE DIRECTORSHIPS

Acker, T. E. Southwestern Electric Service Company. Jacksonville Building &
Loan Association. Texas Bank & Trust Company.
Adam, R. B. New York State Electric & Gas Corporation. Erie County Savings
Bank. Manufacturers & Traders Trust Company.
Adams, Allan W. Wisconsin Power & Light. Beloit State Bank. National Mutual
Benefit Life Insurance.
Amsterdam, Gustane G. Philadelpihia Electric Company. Juniper Securities Company. Western Savings Ford Society of Philadelphia. First Pennsylvania Bank
& Trust Company. Land Title Building Corporation. Bankers Bond & Mortgage
Guaranty Company of America (Chairman). Bankers Bond & Insurance Company. Bankers Securities Corporation (Chairman).
Arnold, Duane. Iowa Electric Light & Power (President, Chairman). Perpetual
Savings & Loan. Merchants National Bank. Banks of Iowa.
Amla, Charles F. Boston Edison Company. National Shawmut Bank of Boston.
Liberty Mutual Insurance Company. Boston Five Cents Savings Bank. John
Hancock Mutual Life Insurance Company.
Baldridge, Malcolm. Northeast Utilities. Colonial Bank & Trust Company. Connecticut Mutual Life Insurance Company. Swiss Reinsurance Company.
Barrett, Robert E., Jr. Connecticut Light & Power. Berkshire Life Insurance
Company. Springfield Community Savings Bank. Third National Bank of
Hampshire Co.
Bates, Edward B. Northeast Utilities. Connecticut Mutual Life Insurance Company (President). Connecticut Bank & Trust Company.
Baylis, Chester, Jr. Baltimore Gas & Electric. National Union Bank. Glen Falls
Insurance Company. Bankers Trust Company (New York).
Beck, Burton E. Indianapolis Power & Light. American United Life Insurance
Company, Merchants National Bank & Trust.
Bell, Joseph M., Jr. New York State Electric & Gas Corporation. Security Mutual
Life Insurance Company. First City National Bank. Utility Mutual Insurance
Company. Lincoln First Banks, Inc.
Bennett, George F. Middle South Utilities. Florida Power & Light. John Hancock Mutual Life Insurance Company. State Street Research & Investment
Corporation. Federal St. Fund, Inc. Second Federal St. Fund, Inc. New England
Electric System. U.S. & Foreign Securities Corporation.
Bickmorc, J. Grant. Idaho Power Company. Commercial Security Bank. Guaranty
Federal Savings & Loan Company. Idaho Bank & Trust Company (President).
Black, Fischer 8. Tampa Electric Company (President). Florida Investment
Realty Security Trust (Chairman). Founders Life Insurance Company of
Florida. Capital National Bank.
Bower, George A. Sherrard Power System. Midland Mutual Life Insurance.
American Fletcher National Bank & Trust Company.
Broak field, Button. Kansas City Power & Light. N.W. Mutual Life Insurance
Company. First National Bank.
Brown, George H., Jr. Philadelphia Electric Company, Potomac Insurance Company, General Accident Fire & Life Assurance. Fidelity Mutual Life Insurance
Company. Camden Fire Insurance Association. Commonwealth Land Title
Insurance Company (Philadelphia). Western Savings Fund Society. Gisard
Trust Bank (Chairman).
Burgin, C. Rogers. Sierra Pacific Power Company. Fidelity Groups (Mutual
Funds). Arkansas Boston Mutual Insurance Company. Quincy Savings Bank.
Cunningham Park Trust. Hartford Life Insurance Company. Quincy Mutual
Fire Insurance Company. New England Merchants National Bank.
Burr, Francis H. New England Electric System. Fiduciary Trust Company of
New York. Old Colony Trust Company. Employers Fire Insurance Company.
Cabaniss, W. J. Southern Company. First National Bank of Birmingham. Protection Life Insurance Corporation.
Calhoun, David R. Union Electric Company. Equitable Life Assurance Society
of U.S. First National Bank St. Louis Union Trust Company.
Cameron, Olin C. Hawaiian Electric Company. Bishop Trust Company. Maui
Savings & Loan Association.
Carey, H. Bissell, Jr. Connecticut Light & Power. Connecticut Bank & Trust
Company. Hartford Fire Insurance Company.




245
Carmichael, James V. Southern Company. Trust Company of Georgia. Georgia
International Life Insurance Company.
Carter, Edward W. Southern California Edison Company. Western Ban Corporation. United California Bank. Pacific Mutual Life Insurance.
Chapman, Richard P. Tampa Electric Company. New England Merchants National Bank. New England Mutual Life Insurance Company. Lumber Mutual
Life Insurance Company. Mutual Boiler & Mach. Insurance Company. Arkwright Boston Mfg. Mutual Insurance. New England Merchants Bank International (Chairman).
Coffin, David L. Northeast Utilities. Liberty Mutual Insurance Company. Connecticut Mutual Life Insurance Company. Connecticut Bank & Trust Company.
Cook, D. C. See American Electric Power System.
Cooper, Edgar W. New York State Electric & Gas Corporation. Security Mutual
Life Insurance Company. First City National Bank (Binghamton)—Chairman.
Cooper, William J. United Illuminating Company. First New Haven National
Bank. New Haven Savings Bank.
Coquillette, 8. E. Iowa Electric Light & Power Company. City National Bank.
Iowa National Mutual Insurance Company. Merchants National Bank.
Cisler, Walker L. Detroit Edison Company (Chairman). Detroit Bank & Trust.
Equitable Life Insurance Society of U.S. Chemical Bank of New York.
Costello, Charles H. United Illuminating Company. Life Insurance Company of
Connecticut. Connecticut Saving Bank. Tradesman National Bank, New Haven.
Crawford, William C. Iowa Electric Light & Power Company. Peoples Bank &
Trust Company. First Federal Savings & Loan Association. Iowa National
Mutual Insurance Company.
Cuddeoack, Samuel M.,Jr. Orange and Roekland Utilities. Port Jervis Savings
& Loan Association. Empire National Bank (Middleton).
Davis, Donald W. Northeast Utilities. Savings Bank of New Britain. New Britain
National Bank. Phoenix Mutual Life Insurance. Burritt Mutual Savings
Bank.
Davis, Jess H. Public Service Electric & Gas Company. First Jersey National
Bank. Prudential Insurance Company of America.
Day, Huntington T. United Illuminating Company. New Haven Savings Bank.
Union and New Haven Trust Company.
Drake, Francis E. Jr. Rochester Gas & Electric Corporation (Chairman). Lincoln Rochester Trust Company. Utility Mutual Life Insurance Company.
Driver, William Raymond. New England Gas & Electric. Suffok-Franklin Savings Bank. Provident Institute for Savings. Brown Brothers Harriman &
Company.
Duffy, Edward C. Long Island Lighting Company (President). Long Island
Trust Company. Green Point Savings Bank. Utilities Mutual Insurance
Company.
Dunn, R. Roy, Potomac Electric Power Company (Chairman), Riggs National
Bank, Acacia Mutual Life Insurance.
Eaton, Allen 0. Central Utility Public Service Corporation. Winchester National
Bank. Winchester Savings Bank.
Eaton, Frederick M. Consolidated Edison Company of New York. New York Life
Insurance Company. First National City Bank.
Eoerle, Edward R. Public Service Electric and Gas Company. Mrst Jersey
National Bank. Firemans Insurance Company of Newark, Commercial Insure
ance Company of Newark. Washington General Insurance Corporation.
Echols, John E. Houston Lighting and Power. Citizens of Texas Savings and
Loan Association. Citizens National Bank and Trust Company.
Edison, Irving. Union Electric Company. General American Life Insurance.
Boatman's National Bank.
Eisenhart, M. Herbert. Rochester Gas and Electric Corporation. Security New
York Corporation, Rochester Savings Bank—Trustee.
Elliott, Byron K. Boston Edison Company. First National Bank of Boston.
Provident Institution for Savings.
Engelhard, Charles W. Public Service Electric and Gas Company. National
Newark and Essex Bank. Prudential Insurance Company of America.
England, Bayard L. Atlantic City Electric Company. Prudential Insurance Company. Federal Reserve Bank of Philadelphia (Deputy Chairman).
English, George W. First National Bank, Fort Lauderdale, Florida (Chairman).
First Federal Savings Association of Broward Co. First National Bank, Margate. First National Bank, North Broward. First National Bank, Pompano
60-299—71—pt. 1




17

246
Beach. Guarantee National Bank, Fort Lauderdale. Plantation First National
Bank.
Epply, Joseph W. Public Service Company of New Hampshire. Amoskeag National
Bank. New Hampshire Insurance Company. Amoskeag Trust Company.
American Fidelity Insurance Company. Granite State Insurance Company.
Ewald, Earl. Northern States Power Company (Chairman). First Bank System.
St. Paul Fire and Marine Insurance Company.
Falk, Harold Frank. Wisconsin Electric Power. Marshall & Ilsey Bank. Marshall
& Isley Stock Corporation. Employees Insurance of Wausau. Northwestern
Mutual Life Insurance Company.
Farwell, Frank L. Boston Edison Company. Newton Savings Bank. First National Bank of Boston. Liberty Life Assurance Company of Boston. Liberty
Mutual Fire Insurance Company. Liberty Mutual Insurance Company.
Feigel, L. F. Southern Ind. Gas & Electric Company. Thrift., Inc. Merit Life
Insurance Company (President). Evansville Morris Plan Company. Credit
Thrift Financial Corporation (Chairman).
Fitzwater, Ottis T. Indianapolis Power & Light. Merchants National Bank &
Trust Company. Indianapolis Life Insurance Company.
Flynn, Streeter B. Oklahoma Gas & Electric Company. First Oklahoma Bank
Corporation. American First Title & Trust Company. First National Bank &
Trust Company (Oklahoma City).
Flynn, William P. Indianapolis Power & Light. State Life Insurance Company.
Indiana National Bank.
Frenzel, Otto N. Indianapolis Power & Light. American United Life Insurance
Company. Utility Insurance Company. Sentinel Indemnity Insurance Company.
Superior Insurance Company. American Econ. Insurance Company. Merchants
National Bank & Trust.
Galligan, Thomas J., Jr. Boston Edison Company (President and Directors).
Union Warren Savings Bank. First National Bank of Boston.
Gilkes, Robert F. Philadelphia Electric Company (President). First Pennsylvania Bank & Trust Company. Pennsylvania Mutual Life Insurance Company.
Griflin, William M. Texas Utilities. Hartford Fire Insurance Company. Connecticut Bank & Trust Company.
Gunlocke, Howard W. New York State Electric & Gas Corporation. Utica Mutual
Insurance Company. Steuben Trust Company. Graphic Arts Mutual Insurance
Company.
Gussett, N. Bernard. Iowa Power & Light. Equitable Life Insurance Company
of Iowa. Iowa Des Moines National Bank.
Hagemann, H. Frederick, Jr. Southwestern Public Service Company. New England Mutual Life Insurance Company. Provident Institution for Savings.
State Street Bank & Trust Company.
Hale, Stanton G. Southern California Edison Company. United California
Bank. Western Bank Corporation. Pacific Mutual Life Insurance Company
(President).
Hall, Howard Iowa Electric Light & Power. City National Bank (Chairman).
Iowa National Mutual Insurance Company. Merchants National Bank.
Hallis, Franklin Exeter & Hampton Electric Company (Interlocked with Concord) . Concord Savings Bank (See Concord).
Hamilton, William. United Illuminating Company. Second National Bank of
New Haven. Connecticut Savings Bank.
Hanify, Edward B. Boston Edison Company. State Street Bank & Trust. John
Hancock Mutual Life Insurance Company. Provident Institution for Savings.
Hansoerger, R. V. Idaho Power Company. First Security Corporation. Penn.
Mutual Life Insurance Corporation.
Hartil, Albert V. Otter Tail Power Company (President). Pioneer Mutual Life
Insurance Company. Security State Bank.
Harton, Jack King. Southern California Edison. Pacific Mutual Life Insurance.
United California Bank.
Harvey, Lester S. Public Service Company of New Hampshire. New Hampshire
Insurance Company. Merchants Savings Bank (President). Merchants National
Bank.
Harvin, Lucius H. Carolina Power & Light. Citizens Bank & Trust Company.
State Capital Life Insurance Company.
Haskell, Richard B. Northeast Utilities. Phoenix Mutual Life Insurance Company.
National Fire Insurance Company. Mechanics Savings Bank (President).




247
Hatch, Edwin I. Southern Company. Foundation Life Insurance Company. Federal Reserve Bank of Atlanta (Chairman). Home Insurance Company.
Hay, Stephen J. Texas Utility Company. Great National Life Insurance Company. American Savings & Loan Association.
Heard, Marston. Public Service Company of New Hampshire. New Hampshire
Insurance Company. Amoskeag Savings Bank. Amoskeag Trust Company.
Amoskeag National Bank.
Hunt, Reed O. Pacific Gas & Electric Company. Canadian Imperial Bank of
Commerce. General Reassurance Company. Crocker Citizen National Bank.
Pacific National Bank, Seattle.
Hurson, Daniel L. Potomac Electric Power. National Savings & Trust Company. Acacia Mutual Life Insurance Company (Chairman).
Hyer, Daniel B., Jr. Central Telephone & Utility Corporation. Minnequa Bank
of Pueblo. Railway Savings & Loan Association.
Jackson, Glenn L. Pacific Power & Light. Standard Insurance Company. U.S.
National Bank of Portland.
Jeffery, Walter J. Baltimore Gas & Electric Company (Director) Savings Bank
of Baltimore. Fidelity & Guaranty Insurance Underwriters Insurance (President). Mercantile-Safe Deposit & Trust Company. Fidelity Insurance Company
of Canada (Chairman). Fidelity & Guarantee Life Insurance Company
(Chairman). U.S. Fidelity & Guarantee Company (Chairman).
Jeffrey, Balfour 8. Kansas Power & Light (President). First National Bank
of Topeka.
Jennings, Lewellyn A. Potomac Electric Power. Metropolitan Life Insurance
Company. Riggs National Bank (Chairman).
Johnson, William J. Northern Indiana Public Service Company. Salem Insurance Agency. Salem Bank & Trust Company.
Kaiser, Paul R. Philadelphia Electric Company. Central Penn. National Bank.
Penn. Lumbermans Mutual Casualty Insurance. Fidelity Mutual Life Company.
Kasten, George F. First Wisconsin National Bank. First Wisconsin Trust Company. First Wisconsin Bankshares Corporation. Northwestern National Insurance Company. First Wisconsin National Bank of Milwaukee First National
Bank of Madison.
Kemper, Rufus Crosby United Utilities, Incorporated. Old Security Life Insurance Company. Kansas City Life Insurance Company. Businessmens Assurance Company. Kansas City Fire & Marine Insurance Company. City
National Bank & Trust.
Kennedy, Charles F. New York State Electric & Gas Corporation. Security
Mutual Life Insurance Company. Marine Midland Trusts of Southern New
York.
Knapp, Sherman R. Northeast Utilities (Chairman -f- 7 other). Hartford
Accident & Indemnity Company. Hartford Fire Insurance Company. Hartford
Steam Boiler Inspection Insurance Company. Connecticut Bank & Trust
Company.
Koch, Robert L. Southern Indiana Gas & Electric Company. Citizens Realty &
Insurance Company. Citizens National Bank.
Kuhns, William W. General Public Utilities Corporation, Marine Midland Grace
Trust Company of New York. Home Life Insurance Company.
Lane, C. Howard. Pacific Power & Light. First National Bank of Oregon. Standard Insurance Company.
Lanotte, Lloyd M. Southwestern Public Service Company, Transport Insurance Company of Dallas. First National Bank of Lubbock.
Larkin, Frederick G., Jr. Southern California Edison Company. Western American Bank (Europe) Ltd. Pacific Mutual Life Insurance. Security Pacific
National Bank (Chairman).
Lay, Herman W. Southwestern Life Insurance Company. First National Bank
in Dallas. Third National Bank in Nashville.
Leach, Ralph. Niagara Mohawk. J. P. Morgan & Company. National Reinsurance
Company. Morgan Guaranty Trust Company.
Lewman, J. Wilson. Consolidated Edison Company of New York. Chemical
Bank of New York. Mutual Life Insurance Company of New York. Atlantic
Mutual Insurance Company.
Lindseth, Elman L. Cleveland Electric Illuminating Company. Equitable Life
Assurance Society of U.S. National City Bank of Cleveland.




248
Lloyd, John A. Cincinnati Gas & Electric Company. Central Ban Corporation.
Central Trust Company. Union Central Life Insurance Company (President).
Luce, D. C. Public Service Electric & Gas Company. Howard Savings Institution.
Fidelity Union Trust Company. Prudential Insurance Company.
Lyon, William A. Allegheny Power System, Inc. Savings Bank Life Insurance
Fund. Drydock Savings Bank (Chairman).
McAfee, J. W. Union Electric Company. St. Louis Union Trust Company. General American Insurance Company. First National Bank of St. Louis.
MoCall, Howard
W. Ebasco Services. Chemical Bank
(President).
Chemical International Banking Corporation. Mutual Life Insurance Company.
McDaniel, Thomas M., Jr. Southern California Edison Company (President).
American Mutual Fund. Bank of America. Bank America Corporation.
McDevitt, V. P. Philadelphia Electric Company. Beneficial Mutual Saving Bank.
Continental Bank & Trust Company.
McNealy, John Lawrence. (See Columbus & Southern).
MacFarlane, Robert Stetson First Bank System. First National Bank of St.
Paul. First Trust Company of St. Paul,, Minn. Mutual Life Insurance.
Mallary R. Dewitt Central Vermont Public Service Corporation. Valley Bank
& Trust Company. Massachusetts Mutual Life Insurance Company.
Mansfield, D. Bruce. (See Ohio Edison).
Margetts, Walter T., Jr. UGI Corporation (Pension Finance Chairman). Franklin Bank Company. American Mutual Liability Insurance Company. Security
National Bank. Foundation Life Insurance Company of America.
Martin, Alfred Delvach Missouri Utility Company. American Hospital &
Life Insurance Company. Security Life & Accident Company. First National
Bank of Dallas. Exchange Savings & Loan Association. Trinity National Bank.
Allied Bankers Life Insurance. Public Savings Insurance Company.
Martin Bennett Central Telephone & Utility Corporation. First Continental
National Bank & Trust Company. Fidelity Title Insurance Company
(Chairman).
Mathershed, Wilson Indianapolis Power & Light. Indiana Life Insurance Company. Indiana Water Insurance Company. Indiana National Bank (Chairman).
Maull, Baldwin. Niagara Mohawk Power. Utica Mutual Insurance Company.
Marine Midland Trust Company of Western New York. American Reinsurance
Company. Marine Midland Banks. Marine Midland Grace Trust Company.
Maxwell, Arthur F. Central Maine Power Company. First National Bank (Chairman)—Biddeford. Biddeford Savings Bank (President).
Meredith, L. Douglas. Central Vermont Public Service Corporation (Chairman).
Vermont Mutual Fire Insurance Company. Ntort'hefrn Security Insurance
Company—check. Chittenden Trust Company. National Life Insurance
Company.
Morrison George L., Jr. UGI Corporation. Commonwealth National Bank—Harrisburg, Pa. Amer-Sentinel Insurance Company.
Mosher, Edward J. Houston Lighting & Power Company. Bank of the Southwest.
Texas Employers Insurance.
Mumford, Milton C. Consolidated Edison of New York. Equitable Life Assurance
Society of U.S. Federal Reserve Bank of New York.
Murphy, Morgan F. Commonwealth Edison Company. Talman Federal Savings
& Loan Association of Chicago. Central National Bank of Chicago.
Neal, Julian 8. Baltimore Gas & Electric Company. Savings Bank of Baltimore.
American General Insurance Company. Maryland Life Insurance Company.
Maryland National Bank. Fidelity Deposit Insurance Company of Maryland
(President).
Newton, Blake T., Jr. Allegheny Power System. Chemical Bank of New York—
Trustee. Institute of Life Insurance (President).
Norris, John W. Iowa Electric Light & Power Company. Iowa Des Moines
National Bank. Bankers Life Insurance.
O'Connell, Paul Revere. New England Electric System. State Mutual Life Assurance Company. Peoples Savings Bank. American Variable Annuity Life
Assurance Company. Guaranty Mutual Insurance Company. Worcester Mutual
Fire Insurance Company. Hanover Insurance Company. Hanover Life Insurance
Company. Massachusetts Bay Insurance Company.
O'Donnell, H. G. Iowa 111. Gas & Electric Company. Guaranty Bank & Trust
Company, Cedar Rapids, Iowa.
Ogden, Squire R. Kentucky Utilities. Commonwalth Life Insurance Company.




249
Oliver, William F. Allegheny Power System, Inc. Dry Dock Savings Bank—excom.
Olson, Robert A. Kansas City Power & Light (President). National Fidelity Life
Insurance Company. Employers Reinsurance.
Orry Dudley Wainwright. New England Electric System. United Life and Accident Insurance Company. Merchants Mutual Insurance Company. Merrimack
County Savings Bank. Mechanics National Bank.
OH, Elmer B. Madison Gas & Electric Company. First National Bank (Madison,,
Wisconsin).
Parker S. Dwight. Northeast Utilities. Third National Bank of Hampton County.
Springfield Institute for Savings, Springfield Life Insurance Company. Monarch Life Insurance Company.
Patterson, George Vaughan. (See American Electric Power Company.)
Patterson, William P. Third National Bank & Trust Company. State Fidelity
Federal Savings & Loan.
Paynter, Richard K., Jr. Consolidated Edison of New York. Seaman's Bank for
Savings. Chemical Bank. New York Life Insurance Company. Life Insurance
Association of America.
Perera, Guido Rinaldo. Eastern Utility Associates. Massachusetts Investors
Stock Growth Fund. Massachusetts Investors Trust.
Peterson, Lloyd L. Interstate Power Company. First National Bank—Clinton,
Iowa.
Phipps, Gerald H. Southern California Edison Company. First National Bank
of Denver. First National Bank Corporation. Western Federal Savings & Loan
Association.
Porter, Joseph Franklin, Jr. Kansas City Power & Light Company. Mutual Interests, Inc.
Pratt, J. Scott B. Hawaiian Electric Company. Hawaiian Trust Company, First
Insurance Company of Hawaii.
Pyne, Eben W. Long Island Lighting Company. First National City Bank. U.S.
Life Insurance Company of New York. Phoenix Assurance Company. U.S. Life
Holdings Corporation. Bankers & Shippers Insurance Company.
Rabb, Sidney R. Boston Edison Company. Johnston Mutual Fund. Liberty Mutual!
Protection Company. Liberty Mutual Fire Insurance. Boston Safe Deposit &
Trust.
Rabel, Irvin Brownell. Puget Sound Power & Light. Pacific National Bank.
Ranch, R. Stewart, Jr. UGI Corporation. General Accident Fire & Life Assurance. Philadelphia Contributionship for the Insurance of Houses from loss of
fire. Pennsylvania Mutual Life Insurance Company. Pennsylvania General Insurace Company. Pennsylvania Contributionship Insurance Company. Potomac
Insurance Company. National Association Mutual Savings Banks. Camden Fire
Insurance. Philadelphia Savings Fund Society.
Reeves, Dick W. Public Service Company of New Mexico. First National Bank
of Farmington. Albuquerque Federal Savings & Loan Association. First National Bank, Albuquerque.
Renchard, William S. Consolidated Edison of New York. New York Life Insurance. Chemical Bank of New York (Chairman)—check. Chemical Bank of New
York Corporation. Chemical International Banking Corporation. Chemical
Overseas Financial Corporation.
Rice, F. Lee, Jr. See Allegheny Power System.
Rich, John F. New England Gas & Electric Association (President). Liberty
Mutual Insurance Company. Home Savings Bank. Harvard Trust Company.
RincUffe, Roy G. Philadelphia Electric Company. Philadelphia National Bank.
Philadelphia Savings Fund Society.
Robins, Edwin Claiborne. Virginia Electric & Power Company. Central National
Bank. Life Insurance Company of Virginia.
Robinson, Dwight P., Jr. Central & Southeast Corporation. Boston Five Cent
Savings Bank. Suffolk-Franklin Savings Bank. John Hancock Mutual Life
Insurance.
Root, Gilbert W. Hawaiian Electric Company. Pacific Insurance Company. First
Hawaiian Bank & Trust Company.
Samins, W. H. (See Ohio Edison).
Sandheim, Walter, Jr. Baltimore Gas & Electric Company. Baltimore Life Insurance Company. First National Bank. Provident Savings Bank.
Schachte, J. Edwin, Jr. South Carolina Electric & Gas Company. American
Agency Life Insurance Company. Citizens & Southern National Bank of South
Carolina.




250
Schubert, Arthur W. Cincinatti Gas & Electric Company. Ohio National Life
Insurance Company. First National Bank of Cincinatti.
Seifreid, D. B. Orange & Bockland Utility (President). Savings Bank of Rockland County. First State Bank of Rockland County.
Shook, Alfred M., III. Southern Company. First National Bank of Birmingham.
Appalachian National Life Insurance Company.
Shutz, Byron Theodore. Kansas City Power & Light. First National Bank of
Kansas City. Employers Reinsurance Corporation.
Slichter, Donald C. Wisconsin Electric Power Company. First Wisconsin National Bank. First Wisconsin Bank Shares Corporation. Northwestern Mutual
Life Insurance Company.
Starr, H. Danforth. Central and Southwest Corporation. American Reinsurance
Company. Dry Dock Savings Bank.
Stauffacher, Charles B. General Public Utilities Corporation. American Mfg.
Mutual Insurance Company. Chase Manhattan Bank. Lumbermans Mutual
Casualty Company.
Stevens, Raymond. Eastern Utilities Associates. Wilmington Trust. Wyman
Street TrufJt.
.Stillman, Tt. Paul. Public Service Electric & Gas Company. U.S. Savings Bank
of Newark. Mutual Benefit Life Insurance Company. First National State
Bank of New Jersey (Chairman).
Stuart, James M. Dayton Power & Light Company. Winters National Bank &
Trust Company. State Fidelity Federal Savings & Loan Association.
Tait, Watson F., Jr. Public Service Electric & Gas Company. U.S. Savings Bank.
Mutual Benefit Life Insurance Company. First National State Bank of New
Jersey—check.
Talbolt, Philip M. Potomac Electric Power Company. Northern Virginia Bank—
Springfield. Suburban Savings & Loan Association—Annandale, Virginia.
Tenney, C. H., II. See Concord.
Tenney, Rockwell C. See Concord Electric.
Thompson, A. Paul. Iowa Power & Light (Chairman). Bankers Trust Company.
National Travellers Life Insurance Company. Hawkeye Ban Corporation
Investment Management.
Tuepker, D. J. Central and Southwest Corporation. First National Bank & Trust
Company. Atlas Life Insurance Company.
Tuohy, John J. Long Island Lighting Company. Utility Mutual Insurance Company. Franklin National Bank.
Turner, W. O. La. Power & Light. Whitney National Bank. La. & Southern Life
Insurance. Continental Building & Loan Association.
Uihlein, Robert A., Jr. Wisconsin Electric Power Company. First Wisconsin
National Bank. First Wisconsin Bankshares Corporation. Northwestern Mutual
Life Insurance Company.
Utermohle, C. Edward, Jr. Baltimore Gas & Electric Company (President). First
National Bank of Maryland. United State Fidelity & Guaranty Company.
Savings Bank of Baltimore.
Wallace, Anthony E. Connecticut Light & Power. Connecticut Mutual Life Insurance Company. Society for Savings.
Watlington, John F., Jr. Carolina Power & Light—check. Bank of Reidsville, N.C.
Mass. Mutual Life Insurance Company. Wachoria Bank & Trust (president).
Wehr, Frederick L. Baltimore Gas & Electric Company. Baltimore Equitable
Society. Title Guarantee Company. First National Bank. Monumental Life
Insurance Company.
Wilhite, Richard D. See Concord.
Wills, S. Hayward. Pa Power & Light. Franklin National Bank of Allentown.
Equitable Savings & Loan Association (Chairman). Eastern Industries Insurance. Trans Oceanic Insurance Company (Chairman). Tran Oceanic Life
Insurance Company (Chairman). Stuyvesant Life Insurance Company
(Chairman).
Wilson, Herbert H. Kansas City Power & Light. City National Bank & Trust
Company. Safety Federal Savings & Loan Association.
Wilson, Joseph G. Rochester Gas & Electric Corporation. Mass. Mutual Life Insurance Company. First National City Bank, New York. Rochester Savings
Bank. Lincoln Rochester Trust Company.
Wood, Henry A., Jr. Eastern Utility Associates. Suffolk Franklin Savings Bank.
Equitable Fire Insurance.




251
Woodson, Benjamin N. Houston Lighting & Power. American General Insurance
Company. American General Life Insurance Company. Hawaiian Life Insurance Company. Pataios Life Insurance Company. Lincoln American Life Insurance Company. Maryland Casualty Company. Northern Insurance Company.
Maryland General Insurance Company. Maine Banking & Casualty Company.
American General Life Insurance Company (Del.). National Standard Insurance Company. Bank of the Southwest. Life and Casualty Insurance Company.
Fidelity & Deposit Insurance Company. Title Insurance Company.
Wright, Cyrus Gordon. Otter Tail Power Company (Chairman). First National
Bank of Fergus Falls.

The CHAIRMAN. I will reserve my time and yield to Mrs. Sullivan
for her convenience.
Mrs. SULLIVAN. Thank you, Mr. Chairman. And my questions are
for Professor Herman.
Professor, your statement this morning gives a concise explanation of the interrelationships between savings and loans and banks,
and is narrowly directed to specific issues in Chairman Patman's bill.
But it gives us none of the flavor of the very comprehensive study you
made for the Home Loan Bank Board several years ago into the
details of savings and loan conflicts of interest. I believe your study
w^as published as part of the four-volume Friend report. But I am
sure that very few members of this committee have read, or even
seen, that voluminous report. In your part of the Friend report, you
document many instances in which savings and loan boards were
dominated by a small group of real estate dealers, title company
executives, builders, speculators, bank officials, settlement lawyers,
insurance dealers, and so on, many of them using the mortgages orginated in the savings and loan as an important adjunct to their own
private businesses, and profiting very handsomely thereby.
But before I ask you any question on that, would you tell us, if you
know, how many copies of this report were ever printed, and how
they were distributed, and whether they are available in any form
to the libraries or universities, and to the general public.
Mr. HERMAN. I do not know how many were published, but there
were thousands. And they are available at a price from the Superintendent of Documents. The four-volume set, I think, costs $7.50 or
$8. I don't think they were published in separate form. I personally
have about 40 copies left of the conflict-of-interest study as a separate
volume. And in fact the Federal Home Loan Bank Board is using
that as an educational device for its own examiners. I think they have
several hundred copies. I am sure it is in libraries. I am sure this
thing has been fairly widely disseminated.
Mrs. SULLIVAN. But they are available through the Government
Printing Office, so they could be able to answer that question for me.
I will find out.
In view of the fact that I am only allowed 5 minutes for questioning, I would like you to summarize in perhaps 2 to 3 minutes of my
5 just how a typical conflict-of-interest situation has operated—who
does what, how does it pay off to insiders, and what does it do to the
individual who comes to the savings and loan for a mortgage. I am
sure you could speak for hours on this, but if you could just give us
the flavor of it, and then, if you like, expand your remarks later in
writing when you look over your transcript, citing some of these
excellent specific illustrations used in your report.




252

Mr. HERMAN. The problem with that, Mrs. Sullivan, is that you
could do it for any particular kind of conflict. Would you like me to
do it, for example, for the bank interlock or some other kind of
transaction ?
Mrs. SULLIVAN. We are going into both banks and savings and
loans so will you take either one and just give us, as briefly as you
can, an example.
Mr. HERMAN. What happens in the case of the bank domination,
to give you an illustration—which I could multiply by maybe 10
or 15 from my own specific knowledge—if a bank is dominant in
a complex which includes a savings and loan association, especially
mutual savings and loan association, the people who control the
mutual are not able to get profits out of the mutual, because as you
undoubtedly know, the mutual does not pay anything but a dividend
to its owners and shareholders which is a standard dividend, and
therefore any net income which is not paid out to the owners simply
accrues in the association as a surplus, whereas for the bank, which
is a stock company, if it is able to make more money it can raise dividends, the stock can rise in value too, the equity of the bank. So if you
own a mutual savings and loan association and a bank, if you channel
the profits into the bank you can get rich. If they stay in the mutual
you do not gain much by it.
Mrs. SULLIVAN. IS there anything wrong in that ?
Mr. HERMAN. There is nothing wrong in it except that if there is
that joint domination by a single control group, then they might very
well exploit the mutual, in other wordf% they would channel the funds.
For example, if there was a construction loan and there were fees to
be got out of the construction loan, if it were to be taken by the mutual
then it would be out of the hands of the control group, but if they
could channel that fee, even though legally the mutual association
was entitled to it, if they could channel the fee to the bank, then it
would enhance bank profits, and they would really make a substantial
gain from it.
Mrs. SULLIVAN. Could they do that because they might control the
construction company ?
Mr. HERMAN. NO ; they would do that as the lenders, they would
be able to instruct the construction company as to where the fee should
go. They could say, although the fee would seem to be the property
of the savings and loan, we would like you to pay it to the bank. I t
would not be that crude, but if you control the loan, you have the power
to determine where the fee will go.
Now, you could say that is not damaging anything. But if systemically a control group sees to it that fees go to the bank and not to
the savings and loan, what happens is that the savings and loan has a
very small surplus, a protective element for any risks that are undertaken. And if the savings and loan company should run into difficulty
and fail, then ultimately what would happen is that the Federal
Savings and Loan Insurance Company would have to shell out a lot of
money, which means that the taxpayer would have to shell it out. In
other words, the protective margin might be minimized in the interest
of the profits of this control group that had the control over the association and the bank.




253
Mrs. SULLIVAN. In channeling the profits to the bank, would this
deprive the mutual shareholders in the savings and loan from getting
a better run on their money ?
Mr. HERMAN. Not really, because that is already controlled by
regulations. So that this might make the institutioji a little weaker unless capable of making mortgage loans.
Mrs. SULLIVAN. I understand that.
Mr. HERMAN. Another thing that could happen and which has happened in a significant number of cases is that the bank may transfer
assets to the association that are weak assets, or it may make loans
and take the more profitable loans and leave the less profitable loans
to the association. So the association may build up a weak portfolio.
Again, that is not going to affect the borrowers or the depositors,
but it is going to make the institution weaker, and if we ever had a
serious financial situation and these institutions started to fail, ultimately the American taxpayer, you see, through the FSLIC is undertaking the risk.
Mrs. SULLIVAN. Mr. Chairman, in view of the fact that there are only
a few here, may I ask unanimous consent
The CHAIRMAN. May I suggest that we extend the time for all who
are here now. Under the new rules of the committee we can recognize
those who are present at a certain time first. And that being true, we can
extend the time for each one of us. Suppose we extend it, say to 8 or 10
minutes. And that includes Mrs. Sullivan and Mr. Widnall and Mr.
Brown.
Mr. ARCHER. Mr. Chairman, inasmuch as there are so few of us today,
why don't we go on and keep the 5-minute rule. We can all get through
and then get back to the unlimited time.
The CHAIRMAN. That will be all right.
Mrs. SULLIVAN. I will abide by that.
The CHAIRMAN. Mrs. Sullivan is compelled to leave. Could we ask
unanimous consent for her to proceed for a certain length of time ?
Mrs. SULLIVAN. Five minutes,
The CHAIRMAN. Under the circumstances Mrs. Sullivan asks unanimous consent to proceed for 5 minutes.
Is there objection ?
The Chair hears none. Go ahead.
Mrs. SULLIVAN. The thing I wanted to bring out, Professor Herman,
was that in some of your studies did you not find that some of the
savings and loans—the officers of them rather—were funneling loans
to businesses of their own that would bring money back into the savings and loan, of course, but they profit themselves in a greater way
because of businesses they own that are not tied to the savings and
loan ?
Mr. HERMAN. Yes, undoubtedly this is true. There have been construction companies that have been owned by officers or directors or
their families, and they have gotten privileged loans. But this has not
been anywhere near as important as ordinary realtor relations with
savings and loan associations, that is far more important, because it is
illegal according to the regulations for a member of the board or an
officer of a savings and loan association to get a loan for his own construction company.




254

There are several exceptions. If he has a very small percentage of the
stock in that company, and there have been violations of the law, you
can do it legally through family members, which is not included in the
law or the regulations. So it does exist, that kind of funneling. But it
has not been quantitatively anywhere near as important as the use of
associations by real estate agents as a means of financing loans which
they want to make.
Mrs. SULLIVAN. I wish in the transcript you would enlarge upon that
so that we can have an explanation of these situations right in the
hearings, because I doubt if we could get permission to print the entire
report that you made. These are the things that we need to have
something definite on, in case the members cannot go back to the
original study.
Mr. HERMAN. One thing I might do is, there is a little summary in
the last chapter of this report that summarizes the whole thing. It is
about 8 pages long. It gives a summary of the conflict study in general.
I could put that in as an appendix to my paper if you think that would
be useful.
Mrs. SULLIVAN. For something that short, if the chairman would
give us permission I think it would help.
The CHAIRMAN. Without objection go ahead and put it in.
(The summary referred to by Mr. Herman follows:)
CONFLICT OF INTEREST REFORM
INTRODUCTION AND SUMMARY

Although conflict of interest is a pervasive characteristic of private (and
public) enterprise, it is perhaps more deeply embedded and institutionalized in
the savings and loan business than in most other industries/ What makes this
extensive development of conflict particularly worthy of attention is the fact that
the savings and loan industry is regulated by the Government., which has given
he industry special privileges and protection in order to encourage its accomplishment of certain defined objectives.
The enormous growth of the industry, and in the size of the individual firm,
has tended to professionalize management and reduce the need for ancillary
business income and thus one basis for dependency on outside enterprises. This
conflict-reducing factor has been offset by the rise of promotional interest in
savings and loan associations, most prominently manifested in the influx of
speculative groups into Chicago and Maryland and in the holding company boom
of the 1955-65 decade. The promotional association and its rapid development
constituted what was probably the most serious conflict-relaetd threat to association solvency and stability in the past-World War II period, and the passage
of holding company containment legislation in 1959 and 1967 was the most notable
PHLBB achievement in the area of conflict-of-interest regulation.
While there has been some tightening up of regulatory standards on selfdealing, especially in the insurance conditions required of newly insured associations, regulatory policy has made little progress in breaking down the traditional patterns of extensive interlocking relationships with both competitive
and complementary outside businesses. A great many associations are still
affiliated with (and sometimes captives of) banks, insurance agents, and assorted
other ancillary interests. The regulatory authorities have been content, or forced
by pressures and restricted powers, to confine themselves to trying to prevent a
further enlargement of the already extensive structure of outside relationships.
Although the resurgence of the promotional association was partially contained
by holding company legislation, a major regulatory gap still exists because of
limited supervisory powers over entry via acquisition. Only recently did the
Federal authorities obtain the power to require notification of changes in control
of an association, after the fact. This situation would be alleviated by permitting




255
the insuring authority to pass on transfers of ownership of substantial blocks of
permanent stock.1
Builder-developer financial connections with managements of savings and
loan associations have long been an important source of the more acute and
sometimes disastrous conflicts of interest. The central characteristics of these
conflicts is the acceptance of large and uncompensated risks by the association
in the interest of windfall profits prospectively accruing to an outside venture of
an affiliated person. This type of conflict is not easy to keep in check, because the
inducements to management involvement in development are strong, and participation (as in the form of kickbacks) tends to go underground in response to
more severe restrictions. We have seen that existing regulations in this area are
weak, but together with moral suasion and regulatory leverage they have
enabled the authorities to exercise some restraint over management involvement
in such ancillary activities. There are some pressing changes needed in the regulations, discussed in the following section, that would improve these constraints.
Although commercial banks compete with savings and loan associations for
savings deposits and mortgages, a majority of associations have at least one
officer or director in common with a bank and many have multiple interlocks
strongly suggestive of common control. A substantial number of associations
are interlocked with mortgage brokers, finance companies, and with other savings
and loan associations. These interlocks
may sometimes contribute managerial
talent in places (especially small towTns) where this is in short supply. At the
present stage of development of the industry, however, this factor would seem
to be overbalanced by the fact that these extensive interlocks, with built-in
conflict characteristics, are -contrary to public policy in at least three major
respects: (1) They are likely to impair competition, an outcome which can be
observed in some cases in the form of less aggressive and noncompetitive behavior
by the controlled association; (2) they may involve fee and asset allocations and
transfers detrimental to the interests of the association, and (3) they enhance
the burden of regulation, which cannot2 assume arm's^length bargaining in transactions between the interlocked firms. Although overall conflict damage resulting from financial interlocks has not been demonstrable on the basis of our
limited data and resources, it is my judgment that this is an area deserving
priority in conflict-of-interest reform.
Real estate, insurance, and attorney interlocks with savings and loan association managements are of long standing and remain of considerable importance.3
A great many associations are controlled by individuals with one or more of
these ancillary business connections. In the larger associations there is some
tendency to abandon these outside activities, or at least to relegate them to a
position of income-generating "side-cars" handled mainly by others. These types
of ancillary interests on the part of top management do not often generate critical
problem cases, although this is not unheard of. More frequently their damaging
effects are more subtle and long term, resulting from management inattention,
high operating expenses,4 a diversion of income that might have been taken
into the association
but which flows instead into insurance and realty affiliates
and legal fees,5 and sometimes losses reflecting6 risk transfers to the association
offset by loans profitable to an outside affiliate. These ancillary linkages are also
1
It is unreasonable that the FSLIC is compelled to insure the accounts of an association
whose control has been taken over by someone they would strongly disapprove if they had
any
3 choice (as they do on the case of a de novo applicant for insurance).
8 These points are discussed further in sees. 5 and 7.
4 See sees. 5 and 6.
Exceptionally high operating expenses are related to real estate financial affiliations,
reflecting both relatively high compensation and fixed asset expense. The fact that associations with affiliated perso/ns in both land ownership and development (subclass 2) and real
estate finance and investment (subclass 5) have significantly higher fixed asset expense
suggests that in the handling of association-occupied real property what we might call the
"expert
advice effect" is not offsetting the "conflict-of-interest effect."
5
For the most part, management groups with real estate brokerage, insurance, law, and
other ancillary connections and skills, are content to use their strategic position with
sufficient restraint to pose no threat to association solvency. The discussion and illustrations
of compensation arrangements in sec. 8 (and app. C) indicate that, especially in sizable
associations, managerial self-dealing can be pushed rather far without posing any such
threat.
6
Our regressions show high risk to be related to holding company affiliations, multiple
ancillary interests of association management, and class IV type of ancillary relationships,
which include insurance and the law. The risky loan may have permitted a high-priced
sale made by a realty affiliate, or the sale of a fat insurance packnge by an officer's insurance
agency, or the accommodation of long-standing client of the dominant attorney.




256
socially detrimental in their effect of reinforcing rather than countervailing the
power of quasi-monopolistic groups in other sectors, especially in insurance and
the law.
Management involvement in ancillary activities carried on outside the
association appears to be more extensive in stock than in mutual associations.
This is offset at least in part by the fact that these ancillary activities involve a
more clear-cut conflict of interest, with fewer apparent correctives against abuse,
in the mutual sector.7 Diversion of income into an affiliate, at the expense of
the net worth of a mutual association, is pure gain to a manager who owns the
affiliate. Furthermore, the shareholders are not informed of this diversion and
are generally not in a position to assert their legal claims to such income. The
.manager of the stock company drains the association at the expense of a reduction
in value of the permanent stock, of which he is likely to be a substantial holder.8
Other permanent stockholders also tend to be alert to their interests, so that at
least some protection against management diversion exists in a stock company.
This is not to say that dominant owners of permanent stock will not find it
advantageous to utilize the association for some outside venture; 9 in fact, as
evidenced by their somewhat lesser involvement in ancillaries, and the lower
risk level associated with mutuality, the conservative forces influencing the
managements of mutuals10 have apparently outweighed the effects of these
weaker shareholders constraints and the absence of any management claim
on net worth.
In spite of this mitigating effects of conservatism, it seems evident that
the structure of power, rights, and incentives in the mutual sector of the
industry involves a vast gap between theory and reality and is in serious need
of reassessment. Power is in the hands of small management groups with
minimal ownership and with control depending almost exclusively on strategic
position. These groups in theory are fiduciary representatives of the mutual
shareholders, who possess the legal rights to control the organization, to receive
its net income, and to obtain a pro rata share of net worth in the event of a
liquidation. In fact, the mutual shareholders generally function as wholly nonparticipating depositors; and mutual managers give every indication of being in
business mainly for personal gain, although certain structural and selection
characteristics of the mutual form has tended to make them less aggressive
profit-seekers than the leaders of permanent stock companies. But the spirit
of mutuality is of little force, and in the context of extreme shareholder exclusion
from information and power, and the absence of any system of trusteeship
limitations and responsibilities, many mutual managers come to regard the
association as their personal property.11 This has contributed to the relatively
more extensive nepotism found in the mutual sector, to the higher levels of
compensation and other expenses, to the frequent diversion of income into
officer-director owned affiliates, and to under-the-table sales of mutual associations. Briefly, the system of mutual organization of savings and loan associations does a poor job both in the establishing of appropriate incentives and in
gearing together legal rights and interests and the locus of actual power.
The weakness of the structure of power and responsibilities in mutuals has
been enhanced by regulatory policy, which not only has cooperated in the almost
total elimination of the shareholder as a participant in association affairs, but
has also contributed to reducing the shareholder to creditor status by its policies
toward dividend rates. Instead of permitting them to be increased where net
income is high (as is done with real dividends) the authorities have tended
7
There is, theoretically, less conflict where ancillary income is captured by a permanent
stock owner who would have obtained a good part of such income anyway as association
stock owner. This overlap may be far from complete, however, and even if it is complete
there remains a potential conflict of interest between the permanent stock holder and the
risk-bearing
FSLIC. These matters are discussed more fully in sec. 8.
8
The point may be illustrated as follows: If a bank is under common control with a
mutual association, since the net income and net worth of the association accrue to the
advantage of the mutual shareholders, policies discriminating in favor of the bank (say
taking a disproportionate share of loan fees into the bank) benefit the controlling stockholders of the bank without at the same time reducing any asset value in the mutual
association
that can be legally claimed by the common control group.
9
It is mainly other people's money they are risking, of course, and the outside endeavor
or institution may be far more important than their investment in the association. The
whole point of their control over the association may be to use it as a tool of other
activities.
10
n Discussed in sec. 8.
They may in fact have bought control of the association from an earlier control group.




257
to look at them as a competitive weapon, to be constrained and kept in line. They have been widely standardized, and a ceiling has been imposed, all of
which are incompatible with the idea that the mutual shareholder is entitled
to receive the association's residual income. If the shareholder is a creditor,
with a ceiling income, his moral claim to net income and net worth becomes
further compromised.
While the present state of mutuality is the best argument for the stock form
of organization, the latter has been the vehicle for the most aggressive promoters in the industry, and the most acute conflicts of interest. Furthermore, in
spite of the seemingly more powerful incentives for mutual managers to divert
potential association income to outside affiliates, in fact there seems to be at
least as extensive use of (and diversion of income to) external interests in
stock companies as mutuals. A stock dominated industry would be likely to
grow more rapidly, but it would also probably be more sensitive to unfavorable
general developments than an industry of mutuals; and while it would probably
be more responsive to economic change, it might also be over-responsive and
less readily subject to regulatory constraint, which would contribute to a higher
level of ancillary activities and conflicts of interest.

Mrs. SULLIVAN. Professor, are you familiar with the investigation
which my ad hoc subcommittee on home financing practices and procedures conducted here in the Nation's Capital in the last Congress,
and our recommendations for legislation?
Mr. HERMAN. NO, I am not. Sorry.
Mrs. SULLIVAN. We will see that you are given one of these reports.
Mr. HERMAN. I would like to have that. Thank you.
Mrs. SULLIVAN. Some of our recommendations were enacted as a
part of the Housing and Urban Development Act of 1970, and some
were not, including the provision we recommended to expand the
Home Loan Bank Board's authority for the regulation of conflicts
of interest.
We also called for regulation of the use of straw parties in government-related mortgage transactions, and for requiring full disclosure
on the face of any such mortgage of the actual purchase price.
This year I have again introduced, as H.K. 7440, the amendment
of last year on savings and loan conflicts of interest, to provide added
authority to the Home Loan Bank Board to regulate the practices
we found and which you also found. Chairman Patman's bill would
outlaw some of them entirely. Do you think we can write a bill which
is sufficiently clear and effective to prohibit all questionable practices,
or should we leave it up to the regulatory agency to deal with these
various practices by regulation and enforcement ? I would like to have
your view—but I think that you could give it to us in correcting
your transcript. One approach would be by a law prohibiting specified
practices and the other would be by regulation.
Mr. HERMAN. I can give you a very brief answer to that now.
Mrs. SULLIVAN. All right.
Mr. HERMAN. I would say that on something like interlocks the law
w^ould be a feasible solution, because that requires a simple cutting of
the Grordian knot. But for an awful lot of the detailed regulation on
kinds of loans that can be made, you have to do it by regulatory
process.
Mrs. SULLIVAN. One of the witnesses scheduled for yesterday who
did not appear indicated in his prepared statement that he wants to
see the mutual savings and loans given the opportunity to convert
themselves into stock companies. I had intended to ask him—and I will




258
also ask you now—whether a federally insured savings and loan
should be regarded under the law primarily as a private business,
obligated only to provide honest loans to those to whom it chooses to
lend, or as an institution endowed by Federal benefits and protections
and thus having special responsibilities to the public, in the public
interest. If that is too much to digest, you can answer it later
in writing.
Mr. HERMAN. I agree with the last part of the statement, that this
very significant insurance proviso does make them public interest
bodies to a significant degree.
Mrs. SULLIVAN. Thank you.
If I still have time, the staff just, gave me as an example of a conflict
of interest described in a letter sent to one of the Congressmen. It says:
My work in home building has brought me into contact with a situation that
requires attention. Some officials of building and loan associations have interests
in lumber yards. When a member of the public wants to build a house with a
company other than the interested lumber yard, they are effectively prevented
from doing so through the use of various stratagems and subterfuges. In the
course of my years of traveling in the home building businesses I have encountered this situation several times. Since savings and loan associations
operate under a Federal charter, it would seem to me that the matter is
properly a subject for attention at the Washington level.

So here is an example of a conflict of interest that prevents a
legitimate businessman from doing business with people who want to
build a house but who are directed to deal with someone else in order
to get a mortgage.
Thank you very much, Mr. Chairman, for giving me the extra time,
and I also thank the other members for their forebearance.
The CHAIRMAN. Mr. Widnall.
Mr. WIDNALL. Thank you, Mr. Chairman.
I would like to welcome both of the witnesses before the committee.
You are making a constructive contribution toward the work of the
committee. And I am sure it will help us to get the sound findings that
we hope to arrive at out of these hearings.
On the interlocks, Professor Herman, I think you have commented
mostly on the personnel interlocks, isn't that so ?
Mr. HERMAN. Yes—personnel interlocks? Yes.
Mr. WIDNALL. HOW about interlocking through ownership of voting
shares ?
Mr. HERMAN. I comment on that too, Mr. Widnal. In fact, one of
my main themes is that that is more important in fact than personnel
interlocks, that that really amounts to structural transformation that
is permanent, and involves real power, I call that primary power. So
I consider that even more important than personnel interlocks, which
are looser and in fact can be gotten rid of by rather easier tactics, I
believe, than structural change which wouid be involved in stock
ownership.
Mr. WIDNALL. I think that this is what has impressed me in consideration of the problem, that it is more important to control the
voting shares than the board. I note in both of your statements that
you comment on page 4 of your statement, for instance, you say:
In my study I discussed a number of cases where bank domination of savings
associations seemed to have had an adverse effect on competition or damaged
the association otherwise. It should be pointed out, however, that no significant




259
adverse effects of bank affiliation where found in the aggregated statistical
analysis that I was conducting. This may have been a result of some serious
weaknesses in the data.

You have supposed certain things, but you are not sure.
Mr. HERMAN. That is scientific caution. I am really quite convinced
that there are several dozen bank cases where the bank relations are
demaging—in this world, as you undoubtedly know, absolute proof
is almost never possible. And if I find a little association in Mississippi
which I have information on which has been dominated by a bank
since 1934, and spends $20 a year advertising, and has the same assets
as another association 50 miles away that was formed 3 years ago, one
gets the very strong impression that this association is not competing
aggressively with the bank and the other institutions of which it is a
subordinate member. But absolute proof would really be quite impossible. In fact, even if the president of the bank said, we have been
oppressing the savings and loan, he could be lying. It is scientific caution. I do not think there is any question but what there are a couple of
dozen bank association relationships where the association has been
damaged. But the proof is not absolute. In the aggregate you are quite
right. But frequently even on stock ownership it is extremely hard to
show effects. It is a very complex financial system under continuous
change. And one of the reasons why it is extremely difficult to study
these things effectively is that the authorities have never really even
collected very good data on these questions, so one is working with very
crude information. So I think the board may be going to carry out a
more serious study that would use more adequate data.
I agree with your point. I am not contesting it at all. I was unable
to give what I would consider definitive proof on an aggregated basis.
I have a fair number of individual cases that seem to me that any
reasonable man would consider cases in which a bank association had
damaged the association and caused it to behave very uncompetitively.
Mr. WIDNALL. I am personally deeply disturbed about the attitude
of the American public and their reactions, and sometimes they are
well justified. But actually their fears are being; played upon today in
po many directions that they are losing their faith and confidence in all
kinds of institutions in business and government. They are told that the
politician is a crook, or the banker is a crook, or the savings and loan
man is a crook. Who do you get to serve on a board of directors ?
If somebody could lay down the rule as to who you pick to be on a
board of directors or board of trustees, who you could have absolute
faith and confidence in, who would not have warped judgment in one
direction or another, I am sure that the committee would be grateful
to have the suggestions alone* that line. As long as you have human
beings with a little bit of fallibility, it is going to be pretty difficult
to get somebody who is 100 percent perfect.
Mr. McDonald, I was noting in your own testimony the same type
of approach which I just commented on with Dr. Herman. On page 6
you speak about "The most significant fact I have uncovered in this
investigation is that almost without exception power companies are
invariably linked with banks. Banks and other financial institutions, I
suspect,"—you say "I suspect"—"in most instances determine and
prescribe power company policy, which is to prevent at any cost
competition by nonprofit utilities."




260

On page 11, I think, is the next reference ]X)int. You speak about
"interlocks which might have lessened competition are as follows." The
inferences are there, but there are no direct accusations and no direct
reference material there as proof in this direction. Do you think the
committee ought to subpoena people and get them in there and direct
questions on this, do you think that would be helpful ?
Mr. MCDONALD. I am sorry, I missed the last few words, sir.
Mr. WIDNALL. Do you think a subpoena should be issued by the
committee to get people in to answer questions directly on this ?
Mr. MCDONALD. NO, sir. I believe the approach of this bill would
solve the problem.
Of course, it has been pointed out in these hearings that it might
result in some hardship in various instances. But I believe if you
divorce these financial institutions, these interlocks, that you would go
a long way toward removing the possibility of abuse of power, and
you certainly would remove the conflict of interest which is really the
crux of the problem.
I do not think that this is a matter of dishonesty so much, it is a
matter of interest. If a man has a bank, an insurance company, a savings institution, the same man, then he is going to have to make a
decision as to who is going to get the best deal. And in many instances
I would, as I say, suspect that competition is eliminated because the
individual is wearing at least three hats, two or three or four hats. And
I agree with the professor that it is impossible to prove it. That is the
reason I did not want to get out on a limb here and say that there were
violations, or would be under this bill, because I do not know.
Mr. WIDNALL. My time is up. Thank you.
The CHAIRMAN. Wth the tolerance of the committee, I would like
to ask Mr. Herman to comment on the question Mr. Widnall raised
about where we will find the directors.
Mr. HERMAN. I think he raises a question of the integrity or honesty
of the people, which I believe is really totally irrelevant to the issue
now, because the bill addresses itself to preventing interlocks among
people who are supposed to be competing, and all that we are talking
about, therefore, is not prohibiting people who are honest or dishonest,
but affecting the structure in a way that will prevent competitors or
people who do significant business from aligning themselves in cases
where the structural situation itself is likely to have damaging results.
So it seems to me that in no sense is it a question of honesty and integrity, it is a question of preventing structural change or structural
relations that would appear to be highly inconsistent with the competitive regime. It is a negative—the provisos are negative, they are
saying, pick any honest, competent man except one who has a vested
interest for which there would be a conflict if he was on the board of
directors.
That leaves a lot of people, Mr. Chairman.
The CHAIRMAN. Mr. Mitchell, Mr. McKinney has to leave to meet
some high school students.
Mr. MCKINNEY. I have to leave, Mr. Chairman.
The CHAIRMAN. Without objection we will permit Mr. McKinney
to question next.
Mr. MCKINNEY. Professor, it seems to me that we are swatting
a mosquito with a sledge hammer in this bill. And we have been ban-




261
dying back and forth, I think, in all the testimony in front of this
committee, very loosely the terms officer interlock, director interlock,
stock ownership interlock. It would seem to me that we have to make
a very clear, definitive definition of the difference between the officer
of a corporation or bank and a director; wouldn't you say so ?
Mr. HERMAN. Yes, I think that is an important distinction.
Mr. MCKINNEY. Now, officers are normally very highly paid employees of a corporation; correct ?
Mr. HERMAN. Yes, I think that that is true.
Mr. MCKINNEY. And therefore we would obviously have a total
and complete interest in any competitive advantage they could get
by being interlocked into another corporation that would reduce
competition for the corporation of which they are an officer. I would
agree with you on that.
Mr. HERMAN. Yes, I think that is true, I think that would be far
more important than a director interlock.
Mr. MCKINNEY. This is the problem I come to. A director interlock—if we look at an insurance company, most of the directors in
insurance companies are basically responsible for reviewing officers'
decisions and investments and in the growth of the portfolio of the
insurance companies which insures its solvency; correct ?
Mr.

HERMAN.

Yes.

They are policymakers, too, Mr. McKinney. That is usually defined
as one of the functions of the board, to make broad policy.
Mr. MCKINNEY. Could we agree that they are policy reviewers
for the officers, more than likely, rather than makers?
Mr. HERMAN. It varies a little, but in fact that is frequently the
case.
Mr. MCKINNEY. Wouldn't you also agree that this is the job of
a mutual savings bank or a savings and loan association board of
directors also?
Mr. HERMAN. Frequently, yes.
Mr. MCKINNEY. The problem I have, quite frankly, that I want
to ask you about is, I think we are assuming in this bill that everybody is corrupt. I do not believe that.
The other problem I have is, I have been intricately involved in
the business world in the past 20 years. And I have absolutely no
intelligence, no brains as far as stock portfolios, the investment world,
or that part of the business world. It would seem to me that insurance companies, bank, power companies, which are heavily capitalized
businesses, need the financial expertise in the investment world that
only people who are cognizant of this world can supply. Would you
agree with that or not?
Mr. HERMAN. NO, I would not agree with that. But the first point
seems to me much more important. I myself am very averse to taking
a moralistic view of these matters and looking upon it as a question
of whether we are saying that these directors who are interlocked
are scoundrels and therefore are going to do something bad. It seems
to me the fundamental point is that directors are not likely to be
scoundrels, they are likely to be gentlemen. And gentlemen respect
other gentlemen with whom they are closely associated. And that is
far more profound a problem than scoundrelism. The problem is that
60-299—71—pt. 1




18

262

if gentlemen associate on boards, they are not likely to do something
really hostile to the interests of the other gentlemen with whom
they were associated. It is in fact that gentlemanly relationship
which may constrain a board member, for example, from voting for
a policy that would involve committing competitive violence against
somebody else with whom he is associated.
So it seems to me that it is begging the question to put it in that
moralistic framework, that that is really illegitimate, and that the
fundamental issue is that if people associate closely and develop personal ties, this is not going to constrain them from really behaving
in the highly hostile fashion which is supposed to be the normal
practice in the competitive system.
Mr. MCKINNEY. That is fundamental.
Let me bring you to a case which interests me. Say you are serving
on the board of a mutual savings bank. You have two responsibilities,
since it is a nonprofit organization. One is that you put the maximum
amount of money into good real estate investment within a community, since the State law—at least in our State—limits you on that
field of operation.
The other one is that you increase the worth of the bank so that
it can therefore put even more money out.
Now, if you do not have on your board real estate expertise, investment expertise, you must at that point, then, as the institution, buy
that advice, is that not correct?
Mr. HERMAN. YOU either pay for it or you try to get it from
sources that will provide it at nominal prices.
Mr. MCKINNEY. We are eliminating the voluntary sources in this
bill, because we are eliminating the brokerage people, the people that
supply this expertise for insurance companies, the people that supply
it for commercial banks, they are eliminated.
Mr. HERMAN. YOU are not right there, because there are tremendous
number of potential volunteers outside of these institutions. For
example, in the universities, the CREF brought in this gentleman
Roger Murray, who is a professor of finance at NYU, or something like
that, who is a very competent investment person. And all through the
investment system, in fact right at the Wharton school we have some
very competent people who train people to go out in the brokerage
communities. In fact, many of them are now onboard. And that potential has hardly been tapped for reasons that the existing system does
not put a premium merely on quality of personnel, it puts a premium
on other kinds of relationship.
Mr. MCKINNEY. My time has expired. But it seems to me that it is
far more dangerous for these institutions to buy this type of advice
than it is to have it given voluntarily by people who are involved in it.
The CHAIRMAN. Mr. Mitchell.
Mr. MITCHELL. I am delighted to meet both of you gentlemen. I
have come across your names many times in the reading, which I have
done. I am delighted to meet you and welcome you to the committee.
^ I have three questions, I possibly can only ge^ two into my 5-minute
time, but I will try.
My first question is to you, Professor Herman,




263

You say that interlocks between commercial banks and savings and
loan associations are contrary to public policy. What are the areas
of public policy you see being violated by these interlocking
relationships ?
Mr. HERMAN. Well, I think one area of public policy that is violated
is that this is an anticompetitive relationship, so that the whole antitrust philosophy, that there should be competition between financial
institutions who are potential competitors, is violated where you have
these potential and actual competitors coming under the same rule via
interlocks.
Another thing that I give a lot of weight to from having worked on
this thing in the savings and loan area is that when you have this kind
of interlocking relationship, it becomes almost impossible to regulate,
because you do not have arm's length bargaining, or at least you
cannot assume it, sometimes you do. Sometimes the relationship is not
such as to cause phony fee allocations or the dumping of assets, but
once you permit companies to start to fuse in this way, the regulatory
burden becomes very severe. You cannot assume that if bank A sells
assets to association B with whom it is interlocked, that that was an
arm's length trade. Therefore the regulators have to go in and appraise
it and evaluate it. And if a lot of such transactions occur, it becomes
extremely burdensome.
So in order to economize on regulatory efforts you cannot have networks of control systems which make it possible to shunt assets around
in roundrobin fashion, it makes for burdensome regulations. And I
would say that regulatory policy requires that you have autonomy of
the enterprises that are regulated, otherwise you have a regulatory
monstrosity.
Mr. MITCHELL. Thank you very much.
My second question is directed to both of you gentlemen, The present administration, in a series of highly publicized statements, has
spoken about developing black capitalism and encouraging the development of black-owned banks and black-owned savings and loan associations. The experts appear to be somewhat divided in terms of this
black capitalism approach. On the one hand, a man like Prof. Ed
Herman would look on the feasibility of these ventures with favor, but
Mr. Andrew Brimmer apparently would be skeptical about the success
of such ventures. Assuming that we do move ahead with the idea of
black-owned banks and black-owned savings and loan associations,
given the extensiveness and the pervasiveness of the interlock system,
would you give a prognosis about such ventures—either Mr. Herman
or Mr. McDonald or both ?
Mr. MCDONALD. Well, it is almost impossible, at least for me, to
answer that question. I can speculate a little bit, if you wish.
Now, the body of American capitalism is made up of white men—
mostly men, not even women. They are on these boards. And I would
say that it would be very difficult to set up a black institution. As
has been pointed out, these are gentlemen, and gentlemen friends of
gentlemen, on the board. And when you start a new institution, I
presume, a new business, you apply to a bank in the vicinity. And
doubtless there are many applicants. The gentlemen who are friends
of the gentlemen who are on the white board would be inclined to con-




264

sider more favorably the white applicant if he were setting up the kind
of a business which the black applicant had in mind.
Now, this is sheer speculation. But it seems to me that, as has been
pointed out, these boards tend to perpetuate themselves, the practices
tend to perpetuate themselves, prejudices tend to perpetuate
themselves.
Now, we are in a great era of liberalism; but when it comes down
to actually getting money out of banks, I would speculate that the
white applicant would have a better chance to start a new business.
Mr. MITCHELL. Thank you, Mr. Herman.
Mr. HERMAN. That is a very difficult question to talk about intelligently, because I suspect that the structure and the kind of criteria
that are used for making loans and supporting other institutions is
such that anything on the outside has a tough time breaking in. So
that there is an inherent bias as against the development of black
capitalism in this structure as well as other outside
Mr. MITCHELL. Excuse me. But more specifically would you say
that the interlocking system itself makes it even tougher for new
entrepreneurship developments in this area?
Mr. HERMAN. Yes, sir; I think so, because it means a community of
spirit; and that as long as certain attitudes prevail, they prevail even
more widely.
Of course, there is the possibility that it will be felt by this community that we are speaking of, the community of interlocking gentlemen, that black capitalism is necessary, and it is desirable, and
ought to be stimulated and sponsored, for whatever reason, moral, or
public relations, or strategic or because of economic viability. And if
that decision were made, then it would facilitate such development.
Mr. MITCHELL. Thank you.
I have a third question. Do I have time, Mr. Chairman ?
The CHAIRMAN. One minute.
Mr. MITCHELL. I can get it in this 1 minute.
Again to you, Professor Herman, on page 5 of your statement you
say:
Prohibiting vertical interlocks with borrowers or portfolio companies would,
I suspect, have little value in limiting the extent and exercise of power.

How would you suggest that the Congress, if it should choose to do
so, limit the extent and exercise of such power ?
Mr. HERMAN. The part of my statement that really bears on that,
Mr. Mitchell, is the statement on close knits; my argument is that this
is dealing with subsidiary, less important developments, as Mr.
McKinney was saying, and as Mr. Widnall was saying, too, that the
fundamental changes are basic structural changes that pertain to ownership, and the development of power entities, and that therefore the
way that Congress must handle this situation is to put some constraints
on close-knit combinations, meaning mergers, stock ownership, and
the development of huge aggregates that are capable of exercising
what I call primary economic power. I think this must be the fundamental approach.
Mr. MITCHELL. Thank you very much. My time is up.
The CHAIRMAN. Mr. Brown.
Mr. BROWN. Thank you, Mr. Chairman. And thank both of you
for being here this morning.




265
Professor Herman, it seems to me that following your testimony to
its utlimate conclusion would require a divorcing of financial and commercial and certainly the intrafinancial relationships which exist. And
to do this it seem to me we would always have to turn to campuses of
this Nation to acquire the competence, the personnel with the competence, that would be necessary to be able to give to our financial institutions the guidance and the background and so on that they now get
by having people in directorships, who are also engaged in commerce
or finance.
If I may be facetious for a minute. I would ask, do you think that
possibly, therefore, you have a conflict of interest here this morning?
Mr. HERMAN. That is a nice question.
Mr. BROWN. But more seriously, Professor Herman, why have director interlocks especially become so prevalent today ? Has there been a
conscious effort to accumulate control and domination over other conflicting economic pursuits ?
Mr. HERMAN. NO ; I do not think that is what has done it. I think it
is partly a desire on the part of powerful institutions to know, they
want to know, they want to keep close tabs on institutions with which
they have relations, they may own stock, they may be lending. They
get privileged information. They also get to know much more profoundly the managements that they have to deal with, and that is
good to know, because a lot of them put very heavy weight on the
quality and the character of management, and they would like to be
on very intimate terms with them so that they are absolutely on top
of the picture where any changes occur. And it also gives them some
little special additional power position that they can exercise.
Also I think the system tends to gravitate toward putting on boards
people that you already have relations with. And unless therefore the
Congress steps into the picture and says that you cannot push this to
the limit, the system itself pushes to the limit bringing into boards
people with whom you have already extensive contact. So if a bank
lends to a customer and has a relationship with it, then it is a very
simple device to get on boards people you already know and have
relationships with and have some kind of community of interest and
trust with so that you bring them further into the picture. So the system, it seems to me, has evolved in a much more complex way, not
through—I do not think you were suggesting that was true—not
through the conscious striving for control, but through a process of
wanting to know and wanting to be really on top of the facts, and also
the natural gravitation toward one's friends and business associates as
allies on boards.
Now, let me just make one further side comment here that pertains
to what you are saying initially about who we would get for the board.
An awful lot of people who are put on boards in this way do not do
much, they do not contribute much. They are there because you want
your friends and colleagues and people with whom you can talk and
communicate effectively there on the board. I would not by any means
say that these people are not frequently able and do not contribute
ideas, but often that is not the dominant consideration. You need somebody, why not have Joe, whom you know, and who is your banker, and
with whom you already have relationships ?




266

Mr. BROWN. YOU would certainly agree, then, that there is a contribution made, a benefit derived by having people with special expertise
and experience, and so on, in the field of finance sitting on the board
of maybe more than one financial institution. Your statement and testimony would seem to say that there is no benefit derived whatsover by
having some of these people on the board when they are directors of
other boards, but only that there is a detriment and abuse.
Mr. HERMAN. I agree with you that there is some possible benefit,
that in many cases the people who are interlocked are very competent
people and maybe lending real expertise. I think that this not an all-ornothing proposition, it is a problem of balancing different weighted
things.
Mr. BROWN. And you do not believe that legislation can be enacted
that would take care of the instances of abuse which sometimes occur ? The only way you can attack the problem according to your statement, as I understand it, is through prohibiting of the occurence of the
relationships so that the instance could not occur, is that it?
Mr. HERMAN. I see no rational basis that would not be absolutely
arbitrary that would distinguish between cases where competition was
going to be reduced, where you had competitive institutions with interlocks, or where power was going to be enhanced and exercised in the
case of vertical interlocks. It seems to me that it really is a fantastic
technical problem. Tt would be ideal, as you are suggesting, if you
could only segregate somehow those interlocks which were detrimental and those which are not. But I do not see any possible
Mr. BROWN. YOU do not think there is anything wrong per se with
an interlocking directorate
Mr. HERMAN. NO; except insofar as it has these structure implications where it has competitors. There is something wrong with interlocks in themselves if the interlocks are between firms that are supposedly competing, I would say, a priori there, yes. But if you say.
is there anything wrong with interlocks between two firms that are
not competitive, or do not have any relations with one another, I would
sav there is not.
Mr. BROWN. Your study sometime back, does it go into the actual
instances of what you would consider the evil arising out of interlocks, or the categorizing of them as to what they are and how they
occur? For instance, the thin<r you mentioned to Mrs. Sullivan this
morning about a bank taking the fees, et cetera, from what I assumed
were services performed by personnel of the savings and loan, now,
I cannot feature that happening. I would like to see some of the actual
cases of that occurring, because it seems to me that you have got a
clear case there of an improper diversion of profits or fees or income.
Mr. HERMAN. That has happened. The difficulty is, where vou have
fees and where you have asset transfers, it is extremely difficult for
outsiders to appraise their value. Usually on the construction loan
cases where the fees come into question, what happens is that the bank
makes loans for construction, and it gets a commitment from the association, and there is a whole set of fees for getting the commitment
and for taking the loan. And it is not easy to follow all these accounts.
Also, if you tried to regulate them, it would be extremely easy, I
believe, to cover them up, to hide them somewhere. And if you sell




266a
assets from one controlled institution to another, again it would take
some very, very extensive regulatory work to figure out what the
worth of a mortgage was that was sold from the bank to the savings
and loan association. Of course, we are talking about extreme cases.
I would not ask that interlocks even among competitive institutions
would usuallv result in this kind of abusive behavior.
Mr. BROWN. My time has expired. But you now are getting back to
what I was talking about at first. If we are talking about very extreme
cases, I think we have got to look at the benefit side of what is contributed by directors, and so on, even though they may be interlocking.
Thank you, Mr. Chairman.
The CHAIRMAN. Mr. Archer.
Mr. ARCHER. Dr. Herman, you primarily, as I understand the thrust
of your testimony to the committee today, are concerned about impediments against a free competitive process, is this basically a correct
statement ? This is your primary concern ?
Mr. HERMAN. That is correct.
Mr. ARCHER. And what do you think that this bill will help to remove
as far as the potential threat to a competitive situation ?
Mr. HERMAN. Yes.

Mr. ARCHER. NOW, are you testifying, then, that these interlocking directorships are reducing competition between banks ? Does your
testimony basically state that, or has the potential of reducing competition between banks, one to another ?
Mr. HERMAN. Insofar as these are interlocks between banks yes.
Mr. ARCHER. Thank you.
I notice you also cite some figures in your presentation relating to
Houston, Tex., which is my home. And so I am a little bit interested
in that. You of course are familiar with the fact that we do not have
branch banking in Texas ?
Mr. HERMAN. Yes.
Mr. ARCHER. And as

a result, there are interlocks, that is, personnelwise, between banks there. Are you saying that this presumes a threat
to the competition, that one of these banks will therefore not compete
with the other bank ?
Mr. HERMAN. Yes, if they are in the same competitive area. I think
that that possibility is there.
Mr. ARCHER. I happen to be personally familiar with a number of
these instances, and I can tell you that the competition is intense. Now,
I do not know whether you have been down to Houston and checked the
actual facts in relationship between the competition of banks, but I
have seen absolutely no instance of a failure to compete aggressively
for the benefit of the individual bank even though there have been
members on the board of one bank that are members on the board of
another bank.
Mr. HERMAN. I think that that may very wrell be the case, that in
particular instances board interlocks do not damage competition.
But I think there would seem to be a very unhealthy state of affairs
when you have multiple interlocks between companies that are supposed to compete.
Mr. ARCHER. YOU do not see any offsetting benefits on the basis of
a bank being out in a neighborhood trying to serve the needs of that




266b
area and being unable to perhaps take care of a loan of significant size,
and being able to have a participation with another bank which is
facilitated through these interlocking directorships ?
Mr. HERMAN. I do not think interlocking directorates are necessary
to get participation.
Mr. ARCHER. NO, they are not necessary, but you do not feel that
there is any beneficial effect from this of a cooperative effort ?
Mr. HERMAN. Certainly, yes, I think that is highly desirable.
Mr. ARCHER. Don't you think that it also contributes to the efficient
management of the bank by virtue of having some sort of connection
with a bigger bank to use computers and other expensive pieces of
equipment which are not available to smaller banks today ?
Mr. HERMAN. I think that is highly desirable, Mr. Archer.
Mr. ARCHER. SO really there is no positive proof that there has been
any sort of diminishment of competition between banks by virtue of
the fact that an individual, or two or three individuals, perhaps, in
the most expanded situation, being on one bank board ?
Mr. HERMAN. In many cases it is not legal now. And section 8 of
the Clayton Act does prohibit a fair number of interlocks in competitive areas. So I think this bill is directed more at interlocks outside of
the banking sphere.
Mr. ARCHER. The same situation would apply basically ?
Mr. HERMAN. I think the original Clayton Act, section 8, was passed
because there was some pretty solid evidence in the Pujo
Mr. ARCHER. That issue has already been taken care of by statute,
where you have a basic competitive area that is occupied by more than
one bank or lending institution, or financial institution, the Clayton
Act has struck directly at that, has it not ?
Mr. HERMAN. I am not sure of the details of the Clayton Act, but t
think it only deals with national banks, member banks, so it would not
deal with other cases. And of course it only deals with interbank competition. It does not extend as far as the sections of the present bill.
The present bill is not competitive with the Clayton Act.
Mr. ARCHER. Also you seem to have stated that because it would be
difficult to regulate, that a statutory prohibition would therefore
accomplish the job. And I am just wondering, whether you are talking
about this phase, and how difficult it is to prove it, how you feel that a
statutory prohibition would be enforceable. Wouldn't you need a massive number of enforcement personnel ?
Mr. HERMAN. NO. That is the beauty of the bill. The beauty of the
bill is that it is extremely easy to force abandonment of interlocks.
What is impossible is to enforce the regulation as to transfers of assets
between companies which may appear to be independent, as you suggest, but may not be. So that what you do is, if you do not have this
kind of prohibition, you ask for big bureaucracy to regulate relations
between companies that may or may not be independent. I would say
that this is an antibureaucratic bill.
Mr. ARCHER. I will have to say that I am opposed to the growth of
the bureaucracy. Is this bill, in your estimation, the best way to bring
progressive accomplishment in America ? Is this the best tool that we
can use to get at a potential defect, considering how it circumscribes
more admitted advantages and benefits ?




266c
Mr. HERMAN. I suggested that the best way would be to prevent
close-knit combinations. But it seems to me that, apart from that, it
seems to me that the advantages of interlocks among financial institutions, competitive financial institutions, is not great. I would concede
your point, that where you have a lot of little banks—I, in fact, would
be in favor of a branch banking law that would permit those banks to
be incorporated into larger system—but where you have supposedly
competitive institutions, and where the intent is that they be competitive, it seems to me that the innerlock system is an unhappy one.
Mr. ARCHER. But I would like, if I may, to have a specific answer
from you related to the terminology and the impact of this particular
bill. Do you think this, as written, is the best way to accomplish it, or
would you recommend changes?
Mr. HERMAN. I will have to repeat my statement with a little emendation. I would say that control of bank mergers is more fundamental.
Given the structure, the basic structure of primary power, it seems to
me that this bill is the next best thing. I am speaking now of interlock
control, not the other parts of the bill.
Mr. ARCHER. Thank you, Mr. Chairman.
The CHAIRMAN. Mr. Widnall would like to ask a question.
Mr. WIDNALL. Thank you, Mr. Chairman.
Professor Herman, when I talked with you a few minutes ago, you
indicated your feeling that direct control through stock ownership was
worse than the possible abuses of personnel interlocks. In H.E. 5700,
the bill we are considering, you will note that unlimited interlocks
are permitted to financial institutions and others within a holding
company complex. A number of people have indicated to us that absolute prohibition against interlocks proposed by this bill, as opposed
to administrative review and approval as proposed by many witnesses,
would stimulate the formation of holding companies. If this is so,
wouldn't you prefer the approach of administrative flexibility ?
Mr. HERMAN. I do make that point myself, as you notice, Mr. Widnall, that is a valid criticism of the bill, but only with respect to those
areas where the bill would encourage close-knit combination, that is,
for things like real estate companies and title companies, which would
be precluded from entering into interlocking relations with independent institutions. And then if you really wanted to have them integrated into a single system, the loose-knit combination not being legal,
you could do it by a holding company. So it is true that for those peripheral activities the bill would encourage close-knit combinations.
But it would not encourage them, I believe, for combinations between
major financial institutions. And it is possible that the bill—I would
have to think about this, but I think I might be in favor of some emendation along the line that you are hinting at, although I do not think
that really gets at the heart of the bill.
Mr. WIDNALL. Mr. Chairman, I would like to ask unanimous consent to give Professor Herman the opportunity to give his further
thoughts on this and submit them for the record.
The CHAIRMAN. Without objection, it is so ordered.
Mr. WIDNALL. That is all.
The CHAIRMAN. Mr. Mitchell, do you have a question at this time ?
Mr. MITCHELL. Just one last comment, Mr. Chairman.




266d
The CHAIRMAN. And then we will conclude.
Mr. MITCHELL. Just one brief comment.
Mr. Herman, in your response to my colleague, Mr. Brown's question, I just want to put in the record that despite your earlier testimony, you have really heightened my suspicion that the interlocks
cannot help but adversely affect the potential for or the future growth
of black-owned banks and black savings and loan associations. I think
in your response you made it very, very clear that the negative possibilities are far stronger than the positive possibilities.
Mr. ARCHER. Could I ask one or two short quick questions ?
The CHAIRMAN. GO right ahead.
Mr. ARCHER. Dr. Herman, I do not say this facetiously, but do you
think there should be a limitation if this bill passes, do you think there
should be an inclusion that would prevent a college professor from
serving on more than—I mean this seriously—on more than one board
which could in effect be an interlocking type of situation?
Mr. HERMAN. Yes, I think that would be sound. I think they should
not be serving on competitive institutions. If a college professor was
serving as an adviser to one mutual fund, it would seem to me extremely
contrary to sound public policy that he also be on another that was
competing with it.
Mr. ARCHER. Let me ask you one other quick question. You mentioned in here two factors, interlocking directorates and control situations. And you seem to distinguish between the two. Do you think
that it is more important to treat the control situation than the mere
instance of maybe one director? Wouldn't you distinguish and say
that this control situation is far more important than the mere fact
that you have got one person that serves on more than one board?
Mr. HERMAN.4 Control is more important than what you might call
community of interest. But you might have a community of interest
that would be detrimental to competition in the long run, although I
would concede your point, that in some circumstances interlocks might
be consistent with pretty vigorous competition. But in the long run,
community of interest and common directorships are not conducive
to very aggressive competition.
Mr. ARCHER. Thank you very much.
The CHAIRMAN. Thank you, Dr. Herman and Mr. McDonald. We
appreciate your testimony. I am sure it will be helpful to the committee.
The committee will stand in recess until 10 o'clock on Monday morning, at which time Dr. Burns, Chairman of the Federal Keserve Board,
will be the witness.
Thank you. The committee is now adjourned.
(The following letter was received by Chairman Patman from Mr.
McDonald for inclusion in the record:)
WASHINGTON, D.C., April 28,1911.
Representative WEIGHT PATMAN,

Chairman, Banking and Currency Committee, House of Representatives, Washington, D.C.
DEAR MR. PATMAN: AS indicated the material I presented to your committee
on April 23rd of the Hearings on H.R. 5700 was almost entirely addressed to
that part of the bill relating to interlocking directorates of financial institutions.
Since my survey of interlocking directorates took all my time I was not able to
analyze other parts of the legislation.




266e
I would like to respond to your invitation to "extend" my testimony to section
14, which was the subject of much discussion at the hearing today, and to one
general comment.
It would appear that "equity kicks" or "equity participations" are a rather blatant attempt to extort additional tribute from homeowners and those who pay rent
to institutional lenders and others, who arrange for a percentage of gross income
to be paid to the money lender. I am in complete accord with the statement of
John A. Stasny, President of the National Association of Home Builders, who
quoted the statement of policy of his organization which called on Congress "to
investigate the rapacious practice—now standard in insurance company lendings
and spreading to other institutions (including pension funds)—of demanding a
share of property income in addition to astronomical interest and fees."
My general comment is this: Your bill is an interest rate bill. It seeks to introduce competition in the market place, by prohibiting interlocks which because
of their nature and location put the money borrower and the money saver at the
complete mercy of a small group whose actions have proved that their sole purpose is to extract every possible drop of money from the defenseless consumer,
investor and producer.
This small group of self-perpetuating financiers have done the Nation incalculable harm. They have exploited farmers and small business. They have dried up
resources for housing. They have brought on every recession and depression in
U.S. history. There are three ways of alleviating this tragic situation. One is to
socialize money and to set up a bank which would make funds available at a
very low rate of interest. The other is for Congress to appropriate funds or to
force the Federal Reserve Board to make funds available. Such authority of the
Board resides in laws passed by the Congress. The third way to bring about
reasonable interest rates is to enact your bill. I do not believe there is any way
under the sun to bring about a socialization of money or to persuade Congress
to provide the billions needed for small business, small agriculture and housing.
Nor do I believe that the Federal Reserve Board can be persuaded to allocate
credit to those parts of the economy suffering from depression in the midst of
inflation.
The only practicable solution is your bill which if enacted would free financial
institutions from the shackles of interlocking directorates which constitute the
greatest and most pervasive monopoly in the world. Free competition in money
would work wonders. It would (since the Board at least for the time being had
abandoned its tight money policy) bring down interest rates over night. Your bill
is the only way out of the financial prison which the money changers have
fashioned for the American people.
That is one reason why I have been surprised that no farm, no labor and no
consumer organization has shown the slightest interest in H.R. 5700. During the
past few years I have been involved with various individuals and groups who
organized campaigns, published articles, made speeches and viewed with alarm
the skyrocketing interest rates which they called a great crime against the
American people, etc.
I wonder where these individuals and groups are today. Yesterday they were
in a lather over interest rates. They were almost ready to picket and join with
the other demonstrators. I wonder where they are now?
The comments in this communication which I would like made part of the
record are not necessarily the views of those with whom I have been associated.
Sincerely yours,
ANGUS MCDONALD.

(Whereupon, at 11:40 a.m. the committee recessed, to reconvene at
10 a.m., Monday, April 26,1971.)




THE BANKING REFORM ACT OP 1971
MONDAY, APBIL 26, 1971
HOUSE OF REPRESENTATIVES,
COMMITTEE ON BANKING AND CURRENCY,

Washington, D.C.
The committee met, pursuant to recess, at 10:45 o'clock a.m., in room
2128, Ray burn House Office Building, Hon. Wright Patman (chairman) presiding.
Present: Representatives Patman, Barrett, Sullivan, Reuss, Moorhead, Stephens, Gettys, Rees, Griffin, Koch, Mitchell, Widnall, Johnson, Stanton, Blackburn, Brown, Williams, Rousselot, McKinney, and
Archer.
The CHAIRMAN. The committee will please come to order.
This morning we are pleased to have before us Dr. Arthur Burns,
Chairman of the Federal Reserve Board, to give us the view of the
Federal Reserve Board on H.R. 5700 and related bills.
I think it may be helpful to both the new members of this committee, as well as to those who served on the committee in the last Congress, to very briefly review how one of the most important issues before us in tfus legislation came to be embodied in the Banking Reform Act of 1971. I refer to the provisions involving interlocking
personnel among financial institutions.
Although the weaknesses in section 8 of the Clayton Act had been
discussed by myself and others for many years, the issue was specifically raised in a letter from me to Dr. Burns on April 2, 1970, involving a question of the possible violation of section 8 of the Clayton
Act concerning an individual who was serving at the same time on
the board of directors of a major New York City bank and the board
of a major New York-based bank holding company.
Dr. Burns had a thorough investigation of this case carried out and
on May 18, 1970, Dr. Burns informed me that the Federal Reserve
Board had the previous week submitted for publication in the Federal
Register an interpretation of section 8 of the Clayton Act which stated,
in effect, that it was a violation of interlocking directorate provisions
for an officer, director, or employee of a member bank of the Federal
Reserve System to serve at the same time, as an officer, director, or
employee of a bank holding company where the interlocked two banking entities are located in the same, contiguous, or adjacent cities,
towns, or villages.
Dr. Burns further informed me that the questionable interlock which
I had referred to him in April had been terminated as illegal even
though the interlock had existed for over 5 years.




(267)

268
On June 1,1970,1 wrote Dr. Burns stating that in light of the Federal Reserve action, I felt the Board should make a thorough and
exhaustive examination of all such interlocking directorships to determine whether other violations of the law were also continuing. I also
asked that the Board study the adequacy of present provisions barring
interlocking directorships among competing financial institutions.
The Board did agree to make this investigation, and on December
16,1970, informed me by letter that their review disclosed 12 additional
cases of interlocks in violation of section 8 of the Clayton Act and that
they had taken steps to dissolve these prohibited relationships.
Dr. Burns also informed me that the Board did consider that present
law was inadequate in several respects and that the Board recommended new legislation in this area.
Subsequent to this exchange of correspondence, I had legislation
drafted which considered this issue as well as others embodied in H.R.
5700.
In order to have the record complete it seems to me that it would be
valuable to have the correspondence between Dr. Burns and myself
placed in the record at this point and I ask unanimous consent to do so.
Is there objection?
The Chair hears none. And it will be entered.
(The correspondence referred to follows:)
HOUSE OF REPRESENTATIVES,
COMMITTEE ON BANKING AND CURRENCY,

APRIL 2,1970.
Hon. ARTHUR F. BURNS.

Chairman, Federal Reserve Board,
Washington, D.C
DEAR MR. BURNS : Enclosed please find a copy of a letter sent to me from
Stuart H. Johnson, Jr., as well as a copy of a letter that Mr. Johnson sent to
Richard McLaren, Assistant Attorney General for Antitrust of the U.S. Department of Justice.
It would be appreciated if you would have your staff look into the question of
whether there is a violation of Section 8 of the Clayton Act as regards the
situation disclosed in Mr. Johnson's letter.
Sincerely yours,
WRIGHT PATMAN,

Chairman.
CHAIRMAN OF THE BOARD OF GOVERNORS,
FEDERAL RESERVE SYSTEM,

Washington, D.C, April 8,1970.
Hon. WRIGHT PATMAN,

Chairman, Committee on Banking and Currency, House of Representatives,
Washington, D.C.
DEAR MR. CHAIRMAN : With your letter of April 2 you enclosed a