than in the hands of brokers who almost push credit down the customer's throat to give themselves bigger turn-over and commissions. The margin requrements for bank loans have been very carefully worked out to leave as much latitude as possible, and, of course, there is an escape valve in 6 (d), by which the Federal Reserve Board, in certain situations, may loosen up the margin requirements beyond what the bill now provides.

Mr. PETTENGILL. Where is that?

Mr. CORCORAN. That is in section 6 (d), beginning at the bottom of page 16. The real biting language is the first new paragraph on page 17. [Reading:]

Although the limitations of this section 6 upon the extension and maintenance of credit shall, except in the extraordinary circumstances hereinafter referred to, be strictly adhered to by the Federal Reserve Board as the considered policy of Congress, the Federal Reserve Board may, notwithstanding the other provisions of this section 6, in situations where it deems such action vitally essential to the accommodation of commerce and industry and with regard to its bearing on the general credit situation of the country, by rules and regulations permit lower margin requirements for particular securities or transactions or classes of securities or transactions, and for particular periods.

It says in substance that Congress wants the Federal Reserve Board, as much as possible, to stick to the margin requirements laid down in the section, but that in emergencies when the Federal Reserve Board deems such action vitally essential to the commerce and industry of the country, the Federal Reserve Board may loosen the margin requirements.

Mr. WOLVERTON. Mr. Chairman

The CHAIRMAN. Mr. Wolverton.

Mr. WOLVERTON. Why limit the power to lower the margin requirements?

Mr. CORCORAN. There is a provision, sir, in 3 (d), which allows the Federal Reserve Board to tighten up in any situation whether or not the situation meets the requirement, that it shall be vital and essential.

Mr. WOLVERTON. Then, there is a discretion lodged in the Federal Reserve Board by this bill that will enable it either to increase or lower margin requirements?

Mr. CORCORAN. The Federal Reserve Board can increase the margin requirements very easily, and with considerable brakes to lower margin requirements.

Mr. WOLVERTON. Was there such power in the original bill?

Mr. CORCORAN. No; there was just the power to raise margin requirements.

Mr. WOLVERTON. It would seem that such provision in the bill takes into consideration the statement which was made in the Dickinson report to the effect that power should be given to devise rules and regulations on the subject from time to time after appropriate studies.

Mr. CORCORAN. Yes; although the Federal Reserve Board is circumscribed considerably in its discretion to loosen up. But it has complete discretion to tighten up.

Mr. MAPES. I think Mr. Corcoran has answered this question in reply to Mr. Merritt to some extent, but for my own satisfaction I would like to restate it and see if my understanding of his answer is

correct: That so far as this legislation is concerned, it does not interfere with a bank making a loan on any terms it sees fit to its customer or customers, except insofar as the Federal Reserve Board passes regulations to limit loans by banks coming under its jurisdiction? Mr. CORCORAN. No; that is not quite so. It says may I read this section that covers the whole thing?

Mr. MAPES. It would be so except in case the loan is made for the purpose of speculation?

Mr. CORCORAN. Unless the loan is made for the purpose of purchasing or carrying securities. Yes, your statement is correct.

Mr. MAPES. What limitation is put upon the borrowing of funds, even though they are to be used for speculative purposes?

Mr. CORCORAN. Except where the Federal Reserve Board exercises what I call the escape valve, which I have just been discussing with Mr. Wolverton, the banks are expected not to lend for the purpose of carrying or purchasing securities in amounts which represent a higher percentage of the market value of the collateral than a broker could lend. But when the loan is made not for the purpose of carrying or purchasing securities it may be made without reference to margin requirements, so long as it is made under such rules and regulations as the Federal Reserve Board prescribes to make certain that the excess loan will not be used to carry and purchase securities.

Mr. MAPES. Unless the bank knows that the funds are to be used for speculative purposes, it may make such loans as it sees fit, if it complies with the regulations.

Mr. CORCORAN. Of the Federal Reserve Board.

Mr. MAPES. Of the Federal Board. What obligation is placed upon the bank to ascertain whether or not that the loan is wanted for speculative purposes?

Mr. CORCORAN. That is up to the Federal Reserve Board.

Mr. MAPES. As to whether or not the funds are to be used for speculation?

Mr. CORCORAN. That is up to the regulations of the Federal Reserve Board.

Mr. KENNEY. Mr. Chairman

The CHAIRMAN. Mr. Kenney.

Mr. KENNEY. What section are you referring to?

Mr. CORCORAN. We are talking, sir, about subsection (e) of section 6, which begins on page 17.

Mr. WADSWORTH. May I ask a question?

The CHAIRMAN. Mr. Wadsworth.

Mr. WADSWORTH. To clear it in my own mind, Mr. Corcoran, I call your attention to the sentence which commences in line 6. The CHAIRMAN. Where?

Mr. WADSWORTH. On page 18.

The provisions of this subsection shall not apply to a person making a loan other than in the ordinary course of business.

Mr. CORCORAN. Yes.

Mr. WADSWORTH. Will you clarify that, clarify my mind on that? Mr. CORCORAN. That was to meet the situation, sir, suggested here of a friend wanting to lend money to a friend to help on a margin account, not as a business loan but to make sure that the account could be carried-a father making a loan to his son, where the trans

action is not really a commercial loan in the ordinary course of business.

Let me be clear about one thing. You will notice that this section, subsection (e) limits banks only on the amount they can lend on listed stocks. On unlisted stocks, the banks can lend anything they want to. The bank examiner takes care of the problem of overvaluation of unlisted stocks.

Mr. MAPES. Even though the funds are to be used to speculate with?

Mr. CORCORAN. Yes. A broker cannot lend on unlisted stocks at all.

Mr. MAPES. So that the limitations in the other draft, that were put upon banks making loans for use primarily for business purposes are substantially removed?

Mr. CORCORAN. Yes; that is true.

Mr. MAPES. There is no limitation in that respect in the new draft? Mr. CORCORAN. You see, value of unlisted securities is never exactly known, except in unusual cases of a highly organized market such as the New York bank stock market. In the case of little family corporations, such as we have in New England, there is really no market for that unlisted stock. It is too closely held. A bank which lends on it has to be outside the scope of any specific margin require

ments.

Mr. CROSSER. Mr. Corcoran, would you mind restating as concisely as possible your justification for applying this bill to transactions that have already occurred?

Mr. CORCORAN. The provisions of the bill do not apply to transactions that have already occurred.

Mr. CROSSER. Well, you are giving 5 years.

Mr. CORCORAN. Five years?

Mr. CROSSER. I mean, why apply that at all?

Mr. CORCORAN. You mean, why the 5-year limitation?

Mr. CROSSER. Yes.

Mr. CORCORAN. That was inserted

Mr. CROSSER. I do not mean that, at all. You have misunderstood me. Why have it apply to these matters at all, even by requiring them to be closed up at the end of 5 years?

Mr. CORCORAN. That limitation, sir, was put in at the suggestion of the banking authorities in the Treasury, who thought that the banks should be given warning that at the end of 5 years they would have to have made some final adjustment on accounts now under water. The banks would have 5 years in which to work out those loans, but would definitely understand that at the end of 5 years the loan had to be out of the bank.

Mr. CROSSER. Why, particularly, did you provide 5 years?

Mr. CORCORAN. A suggestion, sir, was made for 3 years and then it was loosened up to 5. I should think the Treasury wanted, sir, as part of the new banking program, to prevent banks carrying bad loans indefinitely. At the end of a certain period the bank would have to wipe the loan off its books.

Mr. CROSSER. Then it is for the purpose of taking care of the banks, rather than the stock exchange.

Mr. CORCORAN. Oh; yes, sir. Brokers will get out long before the 5 years.

Mr. MARLAND. Do you not think that that will have a tendency to freeze these loans?

Mr. CORCORAN. What do you mean by that, sir?

Mr. MARLAND. A borrower will point out to the bank that he, the banker, does not have to call the loan for 5 years.

Mr. CORCORAN. The bank examiner may keep shaking down the bank, sir.

Mr. MARLAND. Well, do you not think that that might happen? Mr. CORCORAN. I have never before heard the objection made to this bill that it was too lenient. It is a very hopeful sign.

Mr. HUDDLESTON. May I ask about the application of this requirement on margins? The bill applies the provision to all past transactions, except that it gives the banks a special time of 5 years to close these transactions out?

Mr. CORCORAN. Yes, sir.

Mr. HUDDLESTON. Now, then, as I understand you, that is a banking provision, and has no bearing on the regulation of the stock exchanges. In short, the purpose of this limitation on margins is to prevent speculation?

Mr. CORCORAN. Yes, sir.

Mr. HUDDLESTON. Now, then, so far as past transactions are concerned, the bad effect has already resulted and there is no purpose with reference to speculation that can be served by dealing with past transactions at all?

Mr. CORCORAN. You are quite right, sir. This provision has been put in as a matter of banking policy.

Mr. HUDDLESTON. Why do we assume also to deal with banking legislation when we are dealing with an entirely different subject?

Mr. CORCORAN. Well, sir, when the representatives of the Treasury and of the Federal Reserve Board come down here, they can probably answer that question for you better than can I.

Mr. HUDDLESTON. But it was in the original bill?

Mr. CORCORAN. No, it was not in the original bill. The original bill applied to all transactions after October 1.

Mr. HUDDLESTON. Which you say has no relation to the regulation of stock exchanges, attempts to deal with past transactions has no relation to stock exchanges.

Mr. CORCORAN. It has a relation, sir, because you have to permit substitution in accounts, and unless at some point you apply the new margin provisions, a man with an account now being carried at very low margins, could substitute in and out and really be running a continuing margin account on the old margin basis.

Mr. HUDDLESTON. I am talking about the provision applying to past transactions, would have no bearing upon speculation for the future.

Mr. CORCORAN. You suggest taking out the January 1, 1939, date?

Mr. HUDDLESTON. No, I do not refer to that at all. I am referring to the principles back of the original bill which you are undertaking to apply to margin limitations for past transactions.

Mr. CORCORAN. Not to past transactions, sir, hut to existing accounts, which are still alive, of course.

Mr. HUDDLESTON. You have not confined it to substitutions, or to the repledging of collateral, or new collateral, or anything like that. You have applied it to previous pledges, by the original bill.

Mr. CORCORAN. I know, sir, but an account is apparently existing fact. It is an account, no matter when

Mr. HUDDLESTON (interposing). It is not an account you are dealing with. It is collateral pledged for an account.

Mr. CORCORAN. Yes.

Mr. HUDDLESTON. And to that you apply in your original bill, and with this exception, in this bill, to past transactions.

The CHAIRMAN. Well, is it not rather to new transactions in the old matters?

Mr. CORCORAN. There are constant changes in accounts.

Mr. HUDDLESTON. But it is not the new transactions, or the current transactions, that you forbid by the bill that was brought in here originally. It was forbidden that a loan previously made be continued on a certain margin of collateral previously pledged.

Mr. CORCORAN. That is true, sir. Now, do you want to go from there to the question about this bill?

Mr. HUDDLESTON. That is all I wanted to ask.

Mr. CORCORAN. May I go on now and talk about these margin provisions as a whole?"

The CHAIRMAN. Yes.

Mr. LEA. I want to inquire as to the status of unlisted securities under this bill, and particularly as to their right to be sold on exchanges.

Mr. CORCORAN. Unlisted securities, sir?

Mr. LEA. Yes.

Mr. CORCORAN. You are thinking of the problem of the New York Curb?

Mr. LEA. Yes; or the San Francisco Curb.

Mr. CORCORAN. Unlisted trading privileges?

Mr. LEA. Yes.

Mr. CORCORAN. Well, we have provided for that over on page 34 in section 11, sir, page 34, subsection (f).

That section relates to unlisted securities which at the present time have been unlisted, have trading privileges on the exchanges like the New York Curb Exchange, and the San Francisco Exchange. Those securities that already have unlisted trading on such exchanges are left alone, for 1 year, so that no harm is done to the present situation. In the meantime-I think that we had better read the subsection because it is rather complicated [reading]:

(f) The Commission is directed to make a study of trading in unlisted securities upon exchanges and to report the results of its study and its recommendations to Congress on or before January 3, 1935. If the Commission deems such action necessary or appropriate, for the protection of investors, it may by rules and regulations prescribe terms and conditions under which, upon the application of any national securities exchange, such exchange may continue until March 1, 1935, or until such earlier date as may be prescribed by law, unlisted trading privileges to which a security had been admitted on such exchange prior to March 1, 1934, and for such purpose exempt such security from the provisions of this section 11 and section 12. A security for which unlisted trading privileges are so continued shall be considered a "security registered on a national securities exchange' within the meaning of all other sections of this act. The rules and regulations of the Commission relating to such unlisted trading