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Now, I deal with those people; I have dealt with them for years, and they are hard-boiled investors, and they would not be willing to aid and abet us in diluting their investment, the investment they have got, unless they felt that by allowing us to do that they could buy a perfectly good security.

That is a practical answer to your question. I cannot prove this. I can just give my opinion, based upon experience in dealing with these people.

Now, as a matter of fact, I also was in charge of the investment portfolio of the Chase Bank before I came here. I handled the securities of the bank and made investments in securities of the bank. I would hesitate, if I had a large amount of those bonds, to do anything to hurt the bonds my bank owned, unless I felt that the new bonds they were offering were perfectly safe bonds. There is one other answer to your question.

You asked the difference in our bonds after we exhausted the American participation point, between those and any other foreign government bonds. Let us compare our bonds after that point is reached, with any government you pick; any foreign government you might pick.

In one case you have an obligation of one government. Til on case you have an obligation of 16 governments. Lots of those governments have had excellent credit records and you have got 46 governments in comparison to the 1 government you are talking about. In addition to that you would have back of our securities, besides the obligation of these 46 governments, you also have back of these securities collateral consisting of $3,000,000,000 worth of loans.

Now, I do not believe that this bank is going to make $3,000,000,000 worth of loans, none of which is any good; nor do I believe all of the 46 nations of the world are not any good.

So, you have, in my opinion, quite a different comparison between the obligation of 1 government and here in this case where we have got the obligation of 46 governments, plus collateral consisting of $3,000,000,000 worth of loans, which by the articles of agreement by the bank we have to make with great care.

Mr. BENNETT of Michigan. But you still have the situation, when those bonds are issued, that they become the obligation of these 46 countries.

Mr. BLACK. That is correct.

Mr. BENNETT of Michigan. Well there is no way of forcing the individual countries either to pay assessments or pay the loan, unless you have got some tangible securities.

Mr. BLACK. There is no way to force it, Mr. Congressman, I admit. If they do not pay they are in default. But, the assumption is being made here that none of the loans we make is any good.

Mr. BENNETT of Michigan. I do not want the record to show that I am making any such assumption. I am merely taking the position that we ought to proceed with a thing like this with extreme care.

Mr. BLACK. I think that is correct.

Mr. BENNETT of Michigan. In the interest of the fellow in the United States who is going to put up his money. It is his money that you fellows are dealing with.

Mr. Black. I agree with you completely.

Mr. BENNETT of Michigan. No matter how honest you are—and I know you are honest, or how efficient the administration of your bank is—you are going to make some good loans and some poor loans. Everybody makes mistakes in judgment—honest mistakes of judgment.

The thing I want, and I think everyone else wants to be sure of, is that the American investor has advantage of all of the protective facilities that can be afforded him by this Government in the purchase of these securities. That is my whole point.

Mr. Black. I am with you 100 percent. I cannot agree with you any more.

Mr. BENNETT of Michigan. That is the reason there is considerable doubt in my mind as to whether we should, whether Congress should take away from the investor in these bonds any of the protective rights that he now has. There is serious doubt in my mind and I think perhaps in the minds of some of the other members of the committee.

The CHAIRMAN. May I comment right there, to bring it to the attention of the committee, and Mr. Black, that I have before me a report by the Securities and Exchange Commission on the Study and Investigation of the Work, Activities, Personnel, and Functions of Protective and Reorganization Committees, pursuant to section 211 of the Securities and Exchange Act of 1934.

This particular report relates to protective committees and agencies for holders of defaultive foreign governmental bonds. In that report I find these words:

In some cases of secured loans, particularly where secured by physical property, the documents spell out the steps which creditors may take to realize on the value of the security by foreclosure or by reduction to possession. These and other provisions contained in the loan documents specify the bondholders' rights and remedies are set forth in the conventional language of the domestic loan agreements, but are coupled with a jargon of new phrases to cover additional aspects peculiar to international finance. These provisions give the appearance of affording the bondholders the protection of ironclad covenants. The protection to be had from these agreements, however, is illusory. For, as we have stated, a significant characteristic of a bond claim against a foreign government is the absence of any legal remedies which as a feasible matter the creditors can enforce by court action.

An important factor in this situation is the immunity of a sovereign foreign government from suit without its consent. And even if such consent be forthcoming the creditor has not improved his position materially by obtaining a judgment against the obligor country, as no legal machinery is ordinarily available for the collection of the judgment. He merely has altered the form of his claim.

That is pretty strong language, and is contained in the report of the SEC on this very subject.

Mr. Black. I think it is perfectly true that it would be more difficult to collect a foreign debt than it would a debt in this country. I readily admit that. I would like to add

The CHAIRMAN. Before we leave that question—I do not want to preclude you from making further answer—you speak of these people to whom you sell the bonds as being hard-boiled. Are not these the same people who sold so many bonds of foreign governments to our people who lost so heavily on?

Mr. BLACK. I am talking about the buyers for insurance companies and buyers for savings banks.

The CHAIRMAN. I know you are talking about the banks that buy them, and you say that they are hard-boiled in their consideration of the advisability of making these purchases.

Mr. BLACK. Yes, sir.
The CHAIRMAN. Did not these banks sell these securities?
Mr. BLACK. They did, sir.

The CHAIRMAN. Were they hard-boiled in the protection of the investors then?

Mr. BLACK. I think they were wrong. They made mistakes.

The CHAIRMAN. That is just the point we are getting at. When you emphasize the hard-boiled character of these individuals, it seems to me that you have got to think of that in terms of what our past experience has been.

Mr. Black. Well, I would like to make a point there, sir, if I could. The Research Department

The CHAIRMAN. Before I leave that subject, the Chase National Bank, at least, the Chase Securities Corp. managed syndicates selling $39,400,000 worth of European bondsno; that is German bonds-of other European countries, $1,500,000; Latin America, $152,000,000 plus; and participated in other syndicates making a total of $1,897,104,500 principal amount of foreign bonds during the 1920's.

Now, I take it that the Chase National Bank comeş within the classification of being termed hard-boiled, and yet they put out those securities and sold them, and we know what the result was.

Mr. BLACK. That was before I was there, Mr. Chairman.

The CHAIRMAN. Well, I am glad to know that there has been some improvement in that respect.

Mr. BLACK. I would like to make one statement, sir. The Research Department of our bank made a study and came to this conclusion, which I preface by stating is somewhat theoretical, but I think very interesting, and that was that if the International Bank had been in existence in the period from 1920 to the present time and if the International Bank had been the vehicle through which all foreign bonds were sold to the public; all foreign loans were made; in other words, if no loans had been made at all by investment bankers and so on to the public; if the International Bank had made all these loans-and I include in that the amount of loans made to Germany; loans made to Japan; loans made to those two countries which are not members of the bank which we could not loan to today; if the International Bank had made all of those loans, no investor in this country would have lost 1 cent either in principal or in market deterioration.

Mr. BENNETT of Michigan. If the United States Government had backed them up?

Mr. BLACK. I say if the International Bank had done it with the safeguards that it has today, those safeguards would have been sufficient.

A very interesting thing about it is this, that the amount of those loans sold during that period of time amounted to about $8,000,000,000, and if there had been no other way for borrowers to get money except through the International Bank, no investor would have lost 1 cent, principal, interest, or market depreciation.

That is why I advocate this bank, and that is why I think this makes sense, and that is why I think this bank should have the support and benefit of this amendment, and if we can get this bill we can function more effectively.

Mr. BENNETT of Michigan. In connection with the statement that you just made about investors not losing money. You mean if the American Government had guaranteed the loans?

Mr. BLACK. I say if we had had the International Bank and it had been the vehicle and we had had the protection we have and it would not have been necessary to use the total guaranty of the United States Government.

Mr. BENNETT of Michigan. The investor is the taxpayer.
Mr. BLACK. That is correct.

The CHAIRMAN. Coming back to my original question, I would not want you to think that I am singling out the Chase National Bank, because the figures I have before me show that the Equitable Trust put out approximately $1,137,172,000 of foreign bonds during the same period. I do not know what the situation was there. But, I was under the impression that the Canadian bonds were not in the same class as these others. Maybe I am wrong about that.

Mr. Black. The Equitable Trust later merged with the Chase, so that you might as well put them all together.

The CHAIRMAN. Then we have Harris, Ford & Co. You folks evidently all participated at that time under a joint arrangement. I do not know. But, the total would seem to be that these three houses put out about $1,558,549,000 bonds, leaving out Canadian bonds in the amount of $526,200,000; and the total by all houses was some $9,363,519,600 with $7,489,992,000 outstanding December 1935.

There is the thing we have continually before us—the experience of the past, when these hard boiled individuals, using their best judgment, went astray, and now we are passing it all on to the National Advisory Council consisting of the Secretaries of State, Treasury, Commerce; Chairman of the Board of the Federal Reserve System, and Chairman of the Export-Import Bank. I assume that they might be considered hard-boiled from the standpoint of experience, but after all they do not surpass in hardness of the boiling of those who passed on these matters in the past.

You may proceed, Mr. Bennett.
Mr. BENNETT of Michigu. I think that is all, Mr. Chairman.

The CHAIRMAN. Now, I want to take up a few questions, and I want you to feel free to come back in at any time, because you have a grasp of this subject and the comi:ittee is appreciative of your interest and of the part that you are taking in this hearing.

In Mr. McConaughey's letter to me of May 6 he speaks of other provisions of the act relating to outright fraud being applicable regardless of whether the protection of specific liabilities imposed by registration was no longer afforded to the investors. I take it you are not proposing generally that this protection should be surrendered and reliance had only on the fraud provisions such as section 17. I assume it is your position that you would forego such protection as section 12 might afford only because the National Advisory Council approves.

Commissioner McCONNAUGHEY. That is right.

The CHAIRMAN. You say in this letter thatPresumably, the policy determinations of the National Advisory Council would take into account the interests of American investors and their need for proiection

against the type of abuses which led to the enactment of the securities legislation administered by this Commission. Do you feel such presumption so strongly that you feel the safeguards of the securities laws may be withdrawn?

Commissioner McCONNAUGHEY. Mr. Chairman, we recognize in discussing this bill that the type of protection that it would leave available is a quite different type of protection from that which is provided by the Securities Act. It is less rigid, more flexible, possibly more drastic, possibly less drastic.

We do not feel that we could assume that that responsibility which would be left, if these acts were withdrawn, upon the National Advisory Council, would be treated lightly or disregarded. We felt that it would be quite clear—and it is even more clear as a result of these hearings, and presumably would be emphasized as a result of any report that is made by this committee—that there is a definite purpose and intention to afford protection to American investors in conjunction with this. We had some considerable doubt as to the propriety of our suggesting that, with the powers that the Advisory Council has, that function would not be performed, performed well and effectively. If it is performed well and effectively, there would be no detriment to American investors in withdrawing the particular sorts of protection this act of ours affords.

We have felt in connection with the types of securities to which it applies effectively that it has been the best sort of protection-better in fact than the paternalistic types which say you can or you cannot sell this or that security. It gives considerably more latitude to the individual to make up his mind and is designed to give him a basis of facts upon which he can make up his mind.

The CHAIRMAN. I can understand the reasons that prompt you to make that answer and I note that in your letter you state that

Presumably, the policy determinations of the National Advisory Council would take into account the interests of American investors and their need for protection against the types of abuses which led to the enactment of the securities legislation administered by this Commission. In other words you would not have gone even as far as you did if you had not been willing to presume that they would give that protection that you feel should be given to an investor.

Commissioner McCONNAUGHEY. That is completely correct, Mr. Chairman.

The CHAIRMAN. Now, regarding the National Advisory Council, consisting of the gentlemen I have mentioned, it would seem to me that from what I gather that the primary interest of this group is that of coordinating our lending and our foreign policies. On the other hand is it not the SEC's primary responsibility to think of the individuals who may be asked to put up the money to assist in making such loans?

Commissioner McCONNAUGHEY. We have regarded that as our responsibility. We have had throughout all of the administration of these aets, however, the necessity of balancing that protection, which can never be absolute, of course, against the impediment that some forms of protection and some degrees of protection might impose upon the flow of capital from investors into American industry, and we have constantly had, in the domestic field for example, the question of balancing the rigorousness of our regulations against the flow

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