Senator CouZENS. I never understood before that a bank could invest in common stocks.

Senator MORRISON. They can in my State.

Mr. O'BRIEN. I understand that there is a further complication in that respect. I understand that in some States some of these institutions would be eligible to subscribe for stock of banks, etc., organized under the laws of that State, but they can not subscribe for stock of a corporation established in another State; so, you see, if the bank happened to be established in New York, and a New Jersey institution wanted to subscribe, while if the bank were established in New Jersey it could subscribe, since the bank is established in New York the institution can not.

Senator MORRISON. In the case of this recent private association that they are subscribing to, to give this relief pending the enactment of the emergency finance corporation measure, that question came up in a great many of the States, about taking stock in that association. In our State, our State banks subscribed to the full amount; and, by the way, with all the talk about it, they got the full amount of aid provided for, $9,000,000, and they invested in that association in most of the States.

Mr. O'BRIEN. I might explain the manner in which stock is paid for. When I speak of stock in this connection I also speak of the manner in which the amount which is to be paid by these institutions which can not subscribe for stock is to be paid. That is covered on page 5, lines 16 to 23. The payments are to be made in cash or by certified check, except in so far as that is modified, of course, by authority to deposit Government securities and short-term debenture bonds in case of these institutions which can not subscribe. The first payment is to be made at the time the application for stock comes in.

Senator WATSON. Does this section provide how the United States. shall pay?

Mr. O'BRIEN. Not this section.

Senator WATSON. That is provided in another section?

Mr. O'BRIEN. An election is given the subscriber to put down onefourth of the amount of his stock subscriptions at the time of his application, and to pay the rest of it in installments over a period of a year; but it is provided that he shall have paid not less than onefourth more at the end of each succeeding period of four months. Senator WATSON. Please state that again.

Mr. O'BRIEN. There are several elections to the institution which wants to subscribe for stock. It can put down the whole amount at once; it can pay it off in two installments; it can pay it off in three installments. It has to pay it off at the end of a year, but it can make any arrangement by which it will have paid, on filing its application, one-fourth and will have paid at least one-fourth more at the end of each succeeding period of four months.

Senator COUZENS. Does that constitute any controlling factor in relation to the amount of mortgages it may discount?

Mr. O'BRIEN. That is taken care of in another section. It is provided that no institution shall be able to obtain advances in excess of twelve times the amount of capital stock which it has paid in. That is paid in, not subscribed for.

Senator COUZENS. I understand. Did the House hold any hearings on this bill?

Mr. O'BRIEN. No.

Senator Watson asked about the subscription on behalf of the United States. That is treated on page 7, lines 19 and following, over on to page 8. The Secretary of the Treasury subscribes, on behalf of the United States, for the amount of the original capital stock of each bank which is not subscribed by institutions eligible to subscribe at the end of 30 days.

Senator MORRISON. Where is that?

Mr. O'BRIEN. Page 7, lines 19 and following.

Senator MORRISON. What, in your opinion, would be the objection to providing that the Government shall receive 4 per cent interest on its money, or some interest fixed by the board?

Mr. O'BRIEN. I am sorry, Senator, but I have nothing to do with the policy.

Senator MORRISON. You are just the official draftsman?

Mr. O'BRIEN. Yes; that is all.

Senator MORRISON. There is no provision here for the Government to get any interest on any capital it advances, as suggested by Senator Couzens?

Mr. O'BRIEN. There is an express provision to the contrary, that the United States shall get no dividends.

Senator WATSON. We can ask some of these other gentlemen on that question of policy.

Senator COUZENS. Just what is the reason, if the witness knows, for putting in this bill, as it is put in the reconstruction finance bill, a provision that these stock subscriptions can only be paid with the approval of the Secretary of the Treasury?

Mr. O'BRIEN. I am sorry; that is a question of policy.

Senator COUZENS. I thought perhaps in drafting the bill there were some reasons advanced. I am not talking about the policy for putting that in.

Mr. O'BRIEN. As I recall the conferences, there was no discussion at all of that point. At least, that was not brought to our attention as a thing that might need to be fixed as far as phraseology was concerned, and we had too many other things to consider.

Senator MORRISON. Was that not changed in the other bill, Senator Couzens?

Senator WATSON. I do not think so.

Senator MORRISON. I thought the committee changed it on their own motion.

Senator WATSON. Go on, Mr. O'Brien.

Mr. O'BRIEN. The stock subscription of the United States is to be paid for by the Secretary of the Treasury, and will be subject to call in whole or in part by the board, with the approval of the Secretary of the Treasury, at such times as they deem advisable. That does not mean that the Secretary of the Treasury has to put in the whole $150,000,000 the first day. The payment is subject to call by the board, with the approval of the Secretary.

Senator MORRISON. They will subscribe all right.

Mr. O'BRIEN. Subsection (g) of that section, on page 8, lines 13 and following, on page 9, provides for the retirement of stock held by the United States. The provision is in some respects similar to the

Federal land bank act. It is provided that whenever the subscribers to stock have put in an amount equal to the amount which the Secretary of the Treasury put in, then the bank is obliged annually to apply to the retirement of shares of capital held by the United States 50 per cent of the amount which is paid in as capital by new subscribers or old subscribers who are increasing their stock subscription.

Senator COUZENS. That is the proper place to put in the provision suggested by Senator Morrison of a return on the capital of the Government, is it not?

Mr. O'BRIEN. No; I think you can put that in where it speaks of dividends.

Senator WATSON. Further over.

Mr. O'BRIEN. There is an additional provision in this same subsection by which the bank, if it wants to, with the approval of the board, can pay off the stock of the United States at any time; and the board in the same sentence is given the power to require the stock of the United States to be paid off at par, if in the opinion of the board the resources of the bank are available for that purpose.

Senator MORRISON. Right there, as I understand the bill, it is contemplated that this institution will loan this money so that they will make money out of it, but the Government does not get any of it. Mr. O'BRIEN. That is correct.

Senator MORRISON. That is the point.
Mr. O'BRIEN. That is certainly so.

Senator MORRISON. Would it be in order for me to ask you to prepare an amendment at the right place there for me, where Senator Couzens first suggested it or brought it up, to provide for paying the Government 4 per cent interest, or whatever it is?

Mr. O'BRIEN. Whatever the dividend is.

Senator MORRISON. Not to exeed such an amount. This bank is going to make a heap of money if it is successful, and I do not see why the Government should not get its interest as well as anybody else. It will make a sight of money if it is successful. You will prepare that? Mr. O'BRIEN. Yes, sir.

Subsection (h) in the same section, page 9, lines 3 to 6, provides that stock subscribed for by the institutions can not be transferred or hypothecated except as therein provided, which means that it can not be transferred except as the board permits it to be transferred.

Senator COUZENS. Is there any yardstick providing how the board may permit the transfer of stock?

Mr. O'BRIEN. That has not been thoroughly gone into, I am sure. Senator WATSON. What is your question, Senator?

Senator COUZENS. I asked if there was any yardstick provided in the legislation to guide the board of directors in determining when stock may or may not be transferred.

Senator WATSON. I understand not. There was not in the old bill, as I remember.

Mr. O'BRIEN. There was a provision in the old bill, but that is just one of the things we did not have time to go into for the purpose of fixing it up thoroughly. There are some provisions about it.

Senator MORRISON. Ought it not to be made clear that they can not transfer to anybody except one eligible under the terms of the bill?

Mr. O'BRIEN. That is so provided in this bill; they can not transfer to anybody other than another stockholder.

Senator MORRISON. That seems to take care of that.

Mr. O'BRIEN. On the same page, subsection (i) takes care of withdrawals of a member from the home loan bank, and also takes care of removal of a member in case a member does not comply with the act or comply with the regulations of the board made pursuant to the act.

In the case of involuntary withdrawal, the member is entitled to a hearing by the board.

In the case of voluntary withdrawal, the member must file six months' notice of intention to withdraw. He can not withdraw until he has liquidated his indebtedness. That is true in every case; and in addition to that, upon his withdrawal, his capital stock is surrendered, and the value of his capital stock is paid him. There are limitations on the case in whch there is an impairment of the capital of the bank by which the institution which is withdrawing does not get any more than his subscription less the pro rata impairment of the capital.

On page 10, lines 5 to 7, this disposal to another member is taken care of. That is, it says that Federal home loan banks may, with the approval of the board, permit the disposal of stock to another member.

Subsection (k) is the subsection in which you are interested, Senator Morrison.

Senator MORRISON. Is that language sufficient-"dispose of it to another member"? Ought it not to negative the idea that they could dispose of it to anybody else, emphatically?

Mr. O'BRIEN. I think that is the case.

reads:

Subsection (h), on page 9,

Stock subscribed for * * * shall not be transferred or hypothecated except as hereinafter provided.

My recollection is that this is the only exception.

Senator MORRISON. Then I think it is all right to leave that part of it.

Mr. O'BRIEN. Subsection (k) is a subsection relating to payment of dividends. The stock subscribed by the United States is not to receive any dividends, but all other stock in the Federal home loan bank is to share in the divided distributions, without any preference. Senator COUZENS. That is the place to put in the amendment suggested by Senator Morrison.

Mr. O'BRIEN. Yes.

Senator MORRISON. You are not personally aware of the reason for that?

Mr. O'BRIEN. Not at all.

Senator MORRISON. Where is that?

Mr. O'BRIEN. Page 10, lines 8 to 11.

Senator MORRISON. At any particular time is it made mandatory that the Government stock shall be retired?

Mr. O'BRIEN. Yes. On page 8, lines 13 to 24, and on page 9, line 2, it is provided that just as soon as the stock subscriptions by persons other than the United States equal the amount of stock subcriptions by the United States, the stock of the United States is going

to be begun to be retired. It is to be retired at the rate of 50 per cent a year of all the stock subscriptions made by members either coming in thereafter or stock subscriptions made by members who have previously been in, but who are subscribing to more stock.

Senator MORRISON. In other words, if the Government were getting pay for it, it could not just stay in. Under that, it would naturally, at that time, just go out?

Mr. O'BRIEN. Yes. In addition to that, the next sentence provides that the bank itself, with the approval of the board, may pay off the stock of the United States at par. In addition to that, the board may require the bank to pay off the stock of the United States at par when the board thinks the resources of the bank justify its paying the United States.

Senator COUZENS. I simply wish to bring to your attention the fact that the word "may" is used instead of "shall.”

Mr. O'BRIEN. Yes, sir.

Senator WATSON. It is provided here that any member may withdraw on certain conditions.

Mr. O'BRIEN. Yes, sir; but he has to settle up.

Senator WATSON. Is there any restriction on how far the capital stock may be impaired and yet the institution go on? Suppose they all withdraw.

Senator COUZENS. It refers to the impairment of the stock.

Senator WATSON. Suppose they all withdraw. The Government does not have to make up the remainder of that stock subscription? Mr. O'BRIEN. No. There is no contemplation that the United States will be making further subscriptions after the initial subscription made by the United States. If, at the end of 30 days, the original capital fixed by the board is not subscribed by institutions, the United States makes up the difference; but there is no provision with respect to the United States buying any stock after that.

Senator WATSON. Is there any restriction then as to how far the capital may be impaired and yet the institution go on?

Mr. O'BRIEN. No; there is not, except in so far as this contemplates impairment; and this relates to the case in which there is impairment, and you consider how much the withdrawing member is going to get for his stock. The whole question of insolvency or bad financial condition of this bank is considered over in another section to which I have not devoted a great deal of attention, so I can not speak with a great deal of authority on that section.

Senator COUZENS. May I suggest to the witness, when he is preparing an amendment to section (k) on page 10, that he also make provision on page 8, beginning along with line 20, for a reimbursement of the capital furnished by the Federal Government.

Mr. O'BRIEN. Section 6, page 10, lines 13 and following, running over on page 11, page 12, and page 13, relates to the management of the banks.

Subsection (a), lines 13 to 16, provides that there are to be 11 directors, and all of them are to be citizens of the United States and residents of the district in which the bank is situated. Two of the 11 directors are to be appointed by the board. Those two directors are the Federal directors. The United States always has two directors on the board of each bank.