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. Senator WATSON. Yes. 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? Senator MORRISON. It is required? 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. Yes. Senator MORRISON. Designating the bank that shall do it? Senator WATSON. It is mandatory, under this language. 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 MORRISON. Yes. Senator COUZENS. I do not think that is excluded under the terms of this, but we can go into it further. Senator WATSON. Yes. Senator MORRISON. That is very important. 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 per cent of the net earnings thereto annually. But whenever the reserve has been impaired below 100 per cent of the paid in capital, it is to be restored before dividends are paid. Senator COUZENS. I want to make a note here to ask subsequent witnesses just why the Government should not have its capital paid off before any dividends are paid. Mr. O'BRIEN. The bank is required to establish additional reserves or to make charge offs on account of depreciation and so forth, as the board may require. It provides that no dividends shall be paid except out of net earnings remaining after all reserves and charge offs. This is the provision with respect to the investment of reserves that I spoke of before. Page 25, lines 5 to 8: The reserves of each Federal home loan bank shall be invested subject to such regulations, restrictions, and limitations as may be prescribed by the board. And then follows the one provision about the dissolution and liquidation of a bank. Senator COUZENS. What page is that on? Mr. O'BRIEN. Page 25, lines 8 to 15, the last sentence in that section. If a bank is dissolved and goes into liquidation without transferring its assets to another bank, the United States is paid any reserves or surplus remaining after the payment of all debts and remaining after the payment to members of the amounts paid in by them for stock, but they are not to be paid exceeding the par value of the stock, and after that there is paid to them the accrued dividends on the stock. Senator COUZENS. That is a very important section. As I understand your interpretation of it, it is that in case any one of these banks liquidate, the private stockholders get theirs before the Federal Government gets its money. Mr. O'BRIEN. That is, they get the amount they paid in for stock, not exceeding $100 for each share, and the amount of accrued dividends on such stock. They get that before the United States gets anything out of the surplus or reserves. I do not think, however, that they come in ahead of creditors. Senator COUZENS. I understand that. In other words, the Federal Government seems to be the goat. That is, if one of these banks fails and liquidates, all of the private stockholders are to be paid off, and then if there is anything left the Federal Government gets it. Senator WATSON. There won't be anything left. Senator COUZENS. I don't expect so. Senator WATSON. There will not be anything for the Federal Government. Senator COUZENS. There will not be anything for the Federal Government, that is just it. Senator WATSON. There never was. Mr. O'BRIEN. Section 15, page 25, lines 17 and following Senator MORRISON. Would it hurt to provide that the Government should get its money? Senator COUZENS. Let us take that up later, Senator. Senator WATSON. Let us take that up later, yes; and consider whether it can be done without injustice to the main purpose of the measure. Mr. O'BRIEN. Section 15, page 25, lines 17 and following down to and including line 11 of page 27, establishes the board. It is to consist of five members, appointed by the President, by and with the advice and consent of the Senate. There is no restriction upon the appointment of an officer of the United States as a member of the board. There is a restriction, however, that the salary of such an officer, plus his salary otherwise as a Government officer, shall not exceed $12,000. Senator COUZENS. I want to point out, in case there are any candidates for the job in the room, that the Senate in all probability will fix that salary at $10,000. That may affect their candidacy. Mr. O'BRIEN. The terms of the members of the board are for six years, and the usual provision is made for staggering the terms, so they won't all go out at once, and the usual provision is made that a member appointed to fill an unexpired term shall only be appointed to fill the unexpired term of his predecessor. Senator MORRISON. Have you anything in there about dividing them as between political parties? Mr. O'BRIEN. Not a word. The President designates the chairman of the board, and the chairman is the head executive officer of the board. The chairman is given authority to designate a person to act as chairman in his absence or disability. On page 27, lines 1 to 6, there is contained a general provision with. respect to the board exercising general jurisdiction over the administration of this act. The board is required to supervise the banks and to perform the other duties specified in the act and to adopt rules and regulations where necessary for the carrying out of the purposes of the act. The board is also given the authority to remove or suspend any officer or agent of the bank, but they have got to communicate the cause in writing if they contemplate removing him. Page 27, section 16, begins the procedure for getting act started. Five hundred thousand dollars is authorized to be appropriated for the usual purposes, such as salaries, traveling, subsistence, and so on, and is to be available until the end of the calendar year 1932. Subsection (b) of that section is very important. That is page 27, line 22. The board is to make a semiannual assessment upon the banks to pay the estimated expenses of the board for the half year succeeding the assessment. That begins with the half year after the end of the calendar year 1932. The expenses of the board beginning January 1, 1933, are to be paid from such assessments. and the board is given authority to make up deficiencies by additional assessments. If a surplus remains at the end of the half yearin the amount which has been assessed, that is deducted from the next succeeding half year assessment. Section 17 gives the board the authority to appoint its officers and employees without regard to the civil service act, also, I think, without regard to the classification act. The board is given franking privileges under the postal laws. There is one provision on page 29, section 18, wherein the board at least twice annually, and at such other times as the board thinks necessary, shall require examinations and reports of the condition of all Federal home loan banks, and the board is authorized to appoint. examiners for this purpose. The next section deals with unlawful acts and penalties. |