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The CHAIRMAN. Is it your contention, Mr. Black, that these securities of the International Bank stand in the same category as United States Government obligations?

Mr. BLACK. They do as long as the bonds do not exceed the United States participation. The Government is obligated to put this money up, as I said before, regardless of what any other nations do. And the money has already been appropriated.

The CHAIRMAN. On what theory do you justify going beyond that and giving an exemption to these bonds that do not have the same category as United States obligations?

Mr. BLACK. I do not think that we should go above that point unless conditions are such that we should; unless the National Advisory Council would be willing to permit us to do that. You go right back to that, that at the time the bank might want to sell additional bonds, the National Advisory Council at that time refuses to allow us to do that. And even if they allowed us to do it, however, it would be a question whether or not the market would take the bonds, because the market is interested primarily in the American participation and the safeguard of the American guaranty.

So that there are two sides to it. There is the question whether or not you would be allowed to do it and the second question is a practical question; even if you were allowed to do it, could you do it? As I say, my concern is not to try to exceed the point, but my concern is how to get up to that point.

The CHAIRMAN. In view of the fact that up to that point these bonds do have the appearance of Government bonds, what is your difficulty getting to that point, then?

Mr. BLACK. I have just said that the difficulty is, in the first place, that the banks cannot deal in these securities as they can in other securities; and in order to place large amount of bonds and to broaden our market, we think it is imperative that the banks be allowed to Ideal in these securities; and unless the securities are classified as exempt securities the banks would be unwilling to deal in the securities. The CHAIRMAN. Are International Bank securities legal for investment by national banks?

Mr. BLACK. Up to a 10-percent limitation. And this bill, by the way, continues that limitation; and regardless of whether the banks buy them for investment to put in their portfolio, or whether they buy them as a dealer-dealer position-the total amount that they could hold would still be 10 percent.

The CHAIRMAN. Is that by statute or by regulation?

Mr. BLACK. That is by rule of the Comptroller of the Currency. The CHAIRMAN. When you say rule, is that a rule on a statute or is it a regulation?

Mr. BLACK. Ten percent is statutory and the ruling itself is by the
Comptroller.

The CHAIRMAN. On what basis does the Comptroller approve?
Mr. BLACK. Approve the bonds?

The CHAIRMAN. Yes.

Mr. BLACK. Well, he thinks they are good bonds. The bonds also are eligible to secure United States Government deposits.

The CHAIRMAN. Is that approval of his based on a limitation of the obligation to $3,175,000,000?

Mr. BLACK. No, sir.

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The CHAIRMAN. In other words, he thinks they are good bonds, no matter in what amount they are issued?

Mr. BLACK. That is right. And if he does not think so, he can withdraw the ruling. You have another check there, that any time the Comptroller of the Currency wants to, he can withdraw that ruling.

The CHAIRMAN. Then the only effect of the proposed amendment is to enable the banks to act as dealers?

Mr. BLACK. That is the main point; yes, sir.

The CHAIRMAN. What is the particular reason for having banks as dealers?

Mr. BLACK. The reason is this: If a bank can deal in securities, it means that they can buy and sell those bonds whenever they want to. If a bank, for example, wants to buy a railroad bond, a utility bond or an industrial bond, they cannot resell that bond unless there is an awfully good reason to do it; in other words, there has got to be something that affected the security.

They naturally are unwilling to put very much money in any type of bond that they cannot sell when they want to. As I said in my statement, I was formerly in charge of investments for the Chase Bank and at that time we were quite reluctant to buy substantial amounts of bonds except those types of bonds that we could deal in; because otherwise we might have our funds frozen or immobilized, which we did not want. We want to be able to buy and sell our securities when we like.

Now, the banks would buy some of our bonds if they could not deal in them, but they would not be willing to buy very many, and if we cannot sell substantial amounts of the bonds to banks, then we cannot sell substantial amounts of the bonds.

The CHAIRMAN. Would it be possible for the banks, upon purchasing, to sell to their trust accounts securities of the International Bank? Mr. BLACK. No, sir.

The CHAIRMAN. It would not?

Mr. BLACK. I do not know what the laws of the various States are. I know the policies of the banks that I am familiar with and they would never consider such a thing at all. If the trust accounts wanted to buy bonds of the International Bank, they certainly could not buy them from their own bank. They would have to buy them in the market, somewhere else.

The CHAIRMAN. In other words, the objection would be that they were not the character of bonds that should go into trust accounts?

Mr. BLACK. Not at all. I think they should go into trust accounts, but I think the policy of the banks is not to do business with their own trust departments, no matter what the bond is. It is no reflection on the bond at all; it is just a question of the policy of the bank.

The CHAIRMAN. To eliminate that objection that you have just made, would it be possible-in other words, in view of the fact that you have just stated that it would not be the practice, in your opinion, to permit them to sell to themselves as they would be doing, in a sense, if they put the bonds in their own trust accounts, could that be eliminated by the bank filing a petition with the court requesting the court's approval of the purchase of these bonds for trust purposes? Mr. BLACK. I think that is possible, but I do not think, even if they had the right to do it, that they would do it. I think it is a very

dangerous practice for a bank to sell any securities to its trust department.

The CHAIRMAN. What would be the basic reason that would impel you to speak so strongly on that subject?

Mr. BLACK. I do not think a bank that is dealing in securities should sell securities to its own trust department. I think the trust department should act entirely independent of the bank.

The CHAIRMAN. But you have emphasized the fact that banks are continually being asked for advice by their customers?

Mr. BLACK. Yes.

The CHAIRMAN. And you feel the banks should be in a position to sell to their customers?

Mr. BLACK. That is correct.

The CHAIRMAN. Is there any difference in principle? In other words, you think it is all right to sell to somebody else's customers, or to somebody else who is a customer, but not to your own trust department?

Mr. BLACK. I think they have a fiduciary capacity there, that they should not make any profit out of selling to their own trust accounts. I think it is not a question of the security at all, regardless of what the security is.

The CHAIRMAN. That is the reason I asked the question about getting the court's approval, if you were basing your statement upon the fiduciary relationship.

Mr. BLACK. That is right; yes. I think if you had specific court approval it might be different, but I rather doubt even if you got that, that many banks would do it.

The CHAIRMAN. That is all.

Mr. BUSBEY. Mr. Black, let us take this example. The trust department of the Chase National Bank buys securities from the investment department or the bond department of the National City Bank, do they not?

Mr. BLACK. They could; yes, sir.

Mr. BUSBEY. They do, do they not?

Mr. BLACK. I think they do at times; yes, sir.

Mr. BUSBEY. And likewise the trust department of the National City Bank buys from the bond or investment department of the Chase National Bank?

Mr. BLACK. From the bond department, yes: that is right.

Mr. BUSBEY. So if the Chase Bank buys a million dollars worth of bonds, or the trust department of the Chase bank buys a million dollars worth of bonds from the bond department of the National City Bank, and the trust department of the National City Bank buys a million dollars worth of bonds from the bond department of the Chase National Bank, is that any different than a bank selling to its own trust accounts directly?

Mr. BLACK. I see your point; that is, if you matched up

Mr. BUSBEY. Well, as a matter of fact, that is what happens, is it not?

Mr. BLACK. No, I do not think so. When I was with the Chase National Bank, the trust department bought bonds for their trust accounts wherever they could buy them on favorable terms. I mean, there was no disposition to buy them from the National City Bank. As a matter of fact, the disposition would be to buy them from the

investment bankers, probably, because the National City Bank would be a competitor of ours. I think we would probably prefer to deal with the customers of the bank. I do not think that happens very often. You asked me if it was ever done and I think it is done on some occasions. But the main point that I am making is that I do not think a bank that has a bond department should sell bonds to its trust department and make a profit out of it.

Mr. BUSBEY. As a matter of fact, the bond departments of various banks do sell to trust departments of other banks?

Mr. BLACK. To some extent; yes.

Mr. BUSBEY. That is all.

Mr. DOLLIVER. I hope the witness will pardon me for injecting myself into this discussion; I am not a banker and for my own thinking I want to get a little background on the institution which you represent. You are engaged in making loans to countries, nations, organized governments, or public enterprises in a good many places; is that correct?

Mr. BLACK. Or private enterprises.

Mr. DOLLIVER. Ór private enterprises.

Mr. BLACK. Yes.

Mr. DOLLIVER. It is not to the governments themselves?

Mr. BLACK. We can make a loan directly to a government. We can make a loan to a government agency. We can make a loan to a private corporation in that particular country. But wherever we make a loan or to whomever we make a loan, we have to have the unconditional guaranty of the government in which the loan is located.

Mr. DOLLIVER. Just to illustrate the workings of your bank, I wish you would pick out at random from your memory a more or less typical loan that has actually been made; not the largest one or the smallest one, or the best one or the worst one, but just an average loan, so that we may have some idea of the method of your operations. Mr. BLACK. Would you want me to give it to you from the beginning to the end?

Mr. DOLLIVER. Yes; I would like to hear the whole story.

Mr. BLACK. We have made five loans. We have been in business for 2 years. We made one loan to France of $250,000,000. We made one loan to Holland for $195,000,000. We have made one loan to Denmark for $40,000,000. We have made one loan to Luxemburg for $12,000,000, and we made one loan to Chile for $16,000,000.

The procedure in making those loans is that the country applies to us for a loan. We discuss this loan with the country and we ask them exactly what the money is to be spent for. We do not just hand them all the money at one time. We have to know exactly what every dollar is to be spent for. We only can lend for a specific purpose.

When we have approved these various projects that the country would have, when we approve the loan, in general, we only make advances on receipted invoices. In other words, if a country wants to buy a ship with the proceeds of our loan, we give them the money and we see the receipted bill.

Further than that, after we have made the loan, after the country has got the money, after they have bought the things for which the loan is made, we then send some men to that country and follow up and see what happens.

It was a new approach to foreign lending. I think it is a very important way to do it; that you know that the proceeds of the loan that you make are going to be spent for the exact purpose and for the exact amount that you lend the money for. That has not been done before, as I know.

Mr. DOLLIVER. Would that be so inflexible a procedure that if conditions changed before the loan was fully expended you would not have to start all over again in order to meet a change in the situation? For instance, suppose they started out to buy ships and they found out that they wanted to rehabilitate their railroads; is the procedure so inflexible that it could not be altered?

Mr. BLACK. NO. We discuss each thing they want to buy and why they need to buy it and how much they need to pay and where they are going to buy and everything else. It may be they may find it difficult to get delivery on a ship and they might come to us and say that they want to substitute for that a small amount for agricultural machinery. I do not know whether we would be 100 percent flexible in sticking to the original terms, but generally speaking, it would cover just exactly what we approved the money for. If we did not like the substitution we would cut the credit by that much money.

Mr. DOLLIVER. Let us be specific. What is Denmark using its loan for?

Mr. BLACK. Largely for agricultural machinery. That is the main industry in Denmark. We loaned them $40,000,000, and the loan was made last August, and all they have drawn down has been about $6,000,000.

Mr. DOLLIVER. The balance is for expenditure as required?

Mr. BLACK. As required and as they can supply us with the vouchers.

Chile applied to us for a $40,000,000 loan. We studied this loan for 1 year. We sent people down to Chile. We made suggestions as to the things we thought they should do to put their house in order before we were willing to make the loan. We finally ruled out all projects that they applied for except two. Thirteen million five hundred thousand dollars was for the hydroelectric development. That $13,500,000 will probably take Chile 3 or 4 years to spend. In other words, this is a credit. They get the generators and the turbines and we will advance them the money and it will take them about 3 or 4 years before they use that $13,500,000.

We made a very careful survey of the hydroelectric needs there and the power needs in Chile. We made a very careful survey of the power business there. We found they had been very successful in it. It was well run. There was a real need for power and it would be a great help to the economy of that country, so we granted the loan.

Then we granted another loan to them of $2,500,000 to buy tractors. They are using those tractors. They are lending those tractors to their farmers. That has been very helpful because the farmers have not been able to afford to buy them.

I could go on with every one of these that we have. That is the type of thing.

Mr. DOLLIVER. Let me pursue another inquiry. Do these loans that the bank makes have any definite maturity?

Mr. BLACK. Yes, indeed.

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