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Mr. O'BRIEN. That is the limit contained in-
Mr. O'BRIEN. Yes; in the farm loan bank act. The board can take any limit on notes and other obligations, but the bonds or debentures can not bear a rate of interest in excess of 572 per cent and if issued within seven years thereafter, not in excess of 5 per cent. If the bank next month contemplated a bond issue and issued it, the rate of interest would be fixed by the board, but it could not be in excess of 5% cent. If seven years after the enactment of the act the bank is issuing bonds, the rate of interest would not be over 5 per cent.
Senator COUZENS. I want to interrupt with a question right there. There is a provision for tax exemption?
Mr. O'BRIEN. Yes. Senator COUZENS. I hear a great many protests from the advocates of this bill that there should be a stoppage on the tax exemption.
Mr. O'BRIEN. Yes.
Senator COUZENS. And many persons who have written me indorsing this bill say they favor it only on the theory that the debentures and bonds are not tax exempt. I want to make that a matter of record so we can consider it later on.
Senator Watson. You say they are not tax exempt?
Senator COUZENS. I mean, they do not favor it if the bonds and debentures issued under it are tax exempt.
Senator WATSON. Yes.
Mr. O'BRIEN. The same subsection, lines 14 to 21 on page 19, sets up a guide to the board in its determination of the margins between its rates on advances made by the bank and interest rates paid on loans to the bank. That guide is the margin in the interest rates, the difference, shall be such that it will cover the expenses of the operations of the bank and create reserves. There is further provision in line 20 that "some part of such reserve may be devoted to retirement of the stock subscribed by the United States."
Senator WATSON. I wanted to ask about that.
Mr. O'BRIEN. Again, that is just one of these things we tried to take care of at the time, but this was left in as an atavism from the old bill, so on that one part we are not altogether sure what part of the reserve shall be devoted to retirement. We just left it in without having time to think it through and see what part it was.
Senator WATSON. We ought to definitely know that.
Senator COUZENS. There are other witnesses to appear and I would like to have them tell us something about any objections they would have to providing for the full retirement of the stock subscribed by the United States before any dividends are paid.
Mr. O'BRIEN. Page 19, the next subsection, beginning on line 22, and running over to page 20, provides for all of the banks being jointly and severally liable on the bonds of each bank. In addition to that, they are jointly and severally liable on the notes and other obligations issued by each bank and the interest thereon. But the proviso, which begins on line 1, page 20, permits the board specifically to authorize a bank to borrow funds temporarily, and under the terms under which they are borrowed it must be stated expressly that the liability for that borrowing is limited to the issuing bank.
Senator COUZENS. That is very objectionable and I just want you to make a note of it now. We can discuss it later on.
Mr. O'BRIEN. The banks are given authority to make arrangements among themselves, under the rules and regulations of the board, for meeting the payment of obligations on which they are jointly and severally liable. But those arrangements can not limit the statute in its provision, express provision, that they are to be jointly and severally liable.
Senator COUZENS. But you do make an exception in this paragraph where they are not jointly and severally liable.
Mr. O'BRIEN. Yes. There is a narrow class of cases in which they are not.
Senator COUZENS. I think that is very objectionable, and I want the other witnesses to straighten us out on that one, as to the reason or need for it.
Mr. O'BRIEN. (g) authorizes the bank to accept deposits made by members or made by other banks. They can not accept deposits from anybody else. The deposits are not to be subject to check and they can not bear a rate of interest in excess of 3 per cent per annum. That is to be considered in connection with the final sentence of that subsection, which provides that the bank can not transact any business not authorized by the act. There is no contemplation that this bank is going to be a regular commercial bank, neither can it transact any business which is not expressly authorized by the act.
Senator COUZENS. When some of the other witnesses come in I would like to know the reason for that provision, because it seems to indicate that the bank is to receive deposits, and yet in lines 21 and 22 there seems to be specific inhibition against accepting them. If it is not engaged in the banking business, it seems to me the mere acceptance of deposits is engaging in the banking business.
Senator Watson. Made by members of such banks, or by other Federal bome loan banks.
Mr. O'Brien. I might point out in that connection, if you look over on page 21, in paragraph (i), lines 10 to 18, there is a provision under which there is established an investment requirement with respect to the capital stock subscriptions of members. Now, I think it is contemplated in this bill that the stock subscriptions of members and the amount of deposits from members shall be invested only in a very, very narrow class of obligations. The class is United States Government securities, interest bearing deposits in banks or trust companies, and advances with a maturity not greater than one year made to members. The theory under which that is written and that is to be taken in connection with the deposits in (g) on page 20—is this: In addition to this bank being a bank which will provide credit for home loan lenders, that is, these institutions, the bank is to have on hand a lot of liquid assets, which can be readily capable of being lent to these members. Part of the funds which they are to invest in liquid assets are these deposits which are made under (g). Not only are the capital stock subscriptions to be invested in these liquid assets, but also the deposits.
Senator COUZENS. I want to point out in that specific relation that under the provisions of this act, as the witness has just testified, it is quite within reason to expect that if these member associations can deposit moneys with the Federal home loan banks and receive up to
3 per cent, and avoid the possible shrinkage that does occur in United States Government securities. Surely, for example, it would be more advantageous financially for a member of this organization or a stockholder in this organization to deposit money and get 3 per cent guaranteed than it would be to buy 3 per cent Government bonds and then have them go down to 82. So I think that is a very dangerous provision in the bill and it must be considered by this committee and the other witnesses when we go into the matter. I would prefer to put my money in that bank at 3 per cent when I knew it was assured, with the assurance of getting it back, than to buy 3 per cent Governments and have them go down to 82, so if I wanted to get my money I would have to take an 18 per cent reduction, where I would not have to take a reduction if I put it in this.
Mr. O'BRIEN. The next is subsection (h), line 23, on page 20, whereby the board is given authority under this section to do two things, two general things. To authorize or permit whenever in the judgment of at least four members of the board an emergency exists requiring such action, the board may require one Federal home loan bank to rediscount the notes of another, or may require that bank to purchase the bonds issued by another, or to make a deposit with another bank.
In those cases—that is, cases in which the board requires the purchase of bonds or the acceptance of deposits—it fixes the price at which the bonds are to be purchased and it fixes the security for the deposits.
The board is also given the authority to permit banks to do all these three things. In any case in which the bank is either permitted or required to rediscount the discounted notes of members or other banks, the rediscount rates, and the rates of interest to be paid on deposits, are going to be fixed by the board.
Senator COUZENS. That is in the interest of liquidity.
Mr. O'BRIEN. That is, if one bank gets in trouble, it can call on another bank. The board can, if an emergency exists, require one bank to buy the bonds of another bank or rediscount the notes of another bank or accept deposits of another bank, but in other cases there is nothing to force one bank doing these things for another bank unless it is desired.
Senator COUZENS. It is obvious that that is desirable, if you are going to make this system liquid, but I want to direct the attention of those who will perhaps testify later that it might have a tendency to penalize the conservative bank to the advantage of the careless or more liberal bank.
Senator MORRISON. It is just permitted to do it, is it not?
Mr. O'BRIEN. Whenever four members of the board think that an emergency exists.
Senator MORRISON. Required? They can make them do it?
Mr. O'BRIEN. The bank can do it if it wants to; but it is required to do it, if four members of the Board vote that way.
Senator COUZENS. I am only calling attention to these matters so that other witnesses may dwell upon them later.
Senator WATSON. That is right, Senator.
Mr. O'BRIEN. Line 10, on page 21, (i), is the subsection which deals with the investment of capital-stock subscriptions of members and deposits made by members. The investments are very, very narrowly limited. They may be made only in Government securities, interest-bearing deposits in banks or trust companies, and advances with maturity nor greater than a year, and even in the case of those advances, advances made to members.
Senator COUZENS. That is probably correct; but again I want to repeat the question of deposits being included there.
Mr. O'BRIEN. (j) takes care of investments which are other than investments in Government securities, and so forth, taken care of in (i) and other than investments in home mortgages. The banks can not invest out of reserves, of course. They are not specifically authorized to invest out of reserves in this section, but that is taken care of some place else, which I will discuss later. These funds may be invested otherwise than in advances to members, but those investments are to be subject to the regulations of the board.
The next section, section 10, page 22, the whole page, down through page 23 and line 9 of the next page, is something I do not know very much about. It just provides that the banks shall become a corporation, file a certificate, and become a body corporate.
The bank is allowed to select and employ and fix the compensation of their officers, attorneys, agents, and so forth, and define their duties and require them to post bonds. The board of directors is also given authority to prescribe by-laws and regulations.
On page 23, line 2, there is a provision that the president of a Federal home loan bank may become a member of the board of directors, but no other officer of the bank who receives compensation may be a member of the board. It happens if they have a vice president who does not receive compensation he may be a member of the board. If he does receive compensation, he can not.
The last sentence is with respect to corporate powers.
The next section, section 11, is of extreme importance. It follows in the main the land bank act, and exempts the capital, reserve, surplus, income, and so on, from Federal, State, municipal, and local taxation, except taxes upon real estate held by the bank. So that the bank, except with respect to real estate, is completely exempt from taxation.
The next sentence takes care of bonds and debentures issued by the bank. Those bonds and debentures in the hands of their owners are exempt from all taxation, and they are deemed and held to be instrumentalities of the Government of the United States. So neither the States nor the United States can tax the bonds and debentures of that bank.
Senator COUZENS. Is there any exemption there from State inheritance tax?
Mr. O'BRIEN. No exception in the provision. I understand, however, that there is a case where the United States can not exempt everything
Senator COUZENS. In the reconstruction finance bill we put in a specific exemption.
Senator MORRISON. There is no contention, is there, that this affects the taxation of the mortgage itself; I mean the income derived from it?
Mr. O'BRIEN. I do not know what you mean by that; I am sorry.
Senator MORRISON. This tax exemption relates only to securities issued by the Federal home loan bank, it does not go back to the mortgage that they hold as collateral, does it?
Mr. O'BRIEN. I do not understand just what the contemplation is in this respect. It is taken from the land bank act and I do not know the construction of the land bank act. I really do think that is wrong, Senator, in this respect: The home land bank is exempt from taxation always, except for taxation on real estate held, purchased, or taken. Now, whether that includes the mortgages or not, I do not know.
Senator MORRISON. It ought not to. That ought to be very clear, because when a bank transfers the legal title to this mortgage as collateral security, if it ceased to be taxes or subject to taxation by the man who assigned it and it is not taxed in the hands of the Federal home loan bank, it would be exempt altogether.
Mr. O'BRIEN. I think that is so. It is contemplated, I believe, that the home owner is going to pay the tax on his land.
Senator MORRISON. He is going to pay it, but in most all of the States the man who has a mortgage note pays taxes on that note.
Senator Couzens. That is true.
Senator COUZENS. I do not think that is excluded under the terms of this, but we can go into it further.
Senator WATSON. Yes.
Mr. O'BRIEN. I do not know a great deal about it, because this is lifted almost directly from the land bank act, and whatever the construction is there, it is the same construction here.
Senator Watson. Yes.
Mr. O'BRIEN. The next section, section 12, line 21, on page 23 and following on page 24, authorizes the banks to be depositaries of public money.
Senator CouZENS. That is the same thing that was put in the reconstruction finance.
Senator Watson. The same thing.
Mr. O'BRIEN. Section 13, page 24, lines 4 to 12, provides that the obligations shall be lawful investments, and that the Federal reserve banks are authorized to act as depositaries and fiscal agents, and so forth.
Senator COUZENS. In other words, they would act as security for deposits in post offices?
Senator MORRISON. Yes.
Mr. O'BRIEN. The next section, 14, page 24, lines 14 and following, and going over to page 25, deals with reserves and dividends of the bank. It says that the bank shall carry to a reserve account semiannually 50 per cent of its net earnings until said reserve account shall show a credit balance equal to 100 per cent of the paid in capital of such bank. When it does show 100 per cent, they are to add 25