We charged all of that up in one quarter, rather than putting it out over a period of years.

Mr. HINSHAW. You say agency commissions, then you do not dispose of these bonds in the normal way that bonds are disposed of.

Mr. BLACK. We do not have underwriting. We dispose of our bonds in exactly the same way that the Federal land bank disposes of theirs. We sell our bonds through a large list of dealers throughout the country, and we pay them what you call an agency commission. They took no liability in the bonds. They merely went out and sold the bonds, and we paid them the commission to do that. That is exactly the same system employed by the Federal land-bank system in their distributing.

Mr. SCOTT. Is that one-quarter of 1 percent?

Mr. BLACK. We had two issues of bonds. We had $100,000,000 of 10-year bonds, and we paid one-quarter of 1 percent per thousand agency commission, and on the 25-year bonds, $150,000,000 of them, we paid one-half of 1 percent commission.

Mr. HINSHAW. Were they sold at par?

Mr. BLACK. Both sold at par; yes.

Mr. HINSHAW. Are these bonds at par now?

Mr. BLACK. The 3-percent bonds sold as high as 103. The 24percent bonds, 10-year bonds, sold as high as 102. They went down to around 94% when the bond market declined, and they are now selling around 98% and 9934.

I would like to offer for the record, if I might, an article discussing the market action of our securities, if you would like to have it. The CHAIRMAN. It will be made a part of the record at this point. (The article is as follows:)

[From the New York Times, the American Banker, the Wall Street Journal, the New York Herald Tribune, the New York Journal of Commerce, the Times-Herald, the Washington Post, the Washington Star, the Washington News, the Baltimore Sun, the Chicago Journal of Commerce, the Commercial and Financial Chronicle, May 24, 1948]

WORLD BANK BONDS INURED TO MARKET-TWO MAJOR TESTS SEEN PASSED IN 10 MONTHS AND INVESTMENT BASIS ESTABLISHED-WIDE FIELD IS OPENED-LEGISLATION IN MASSACHUSETTS INFLUENTIAL-MOVEMENTS OF OTHER ISSUES COMPARED

(By Paul Heffernan)

Bonds of the International Bank for Reconstruction and Development have come of age. Last week, after 10 months of seasoning in the most uncertain and convulsive bond market in two decades, the bank's obligations could be said to have passed two major tests-that of comparative market performance and that of acceptability for legal investment in the Nation's major institutional investment centers.

As the bank's long-term 3's inched upward last week to within a small fraction of their issue price of 100-with the 10-year 24's about a point behind-there became effective in Massachusetts a law making the bank's bonds legal for investment by insurance companies. At the same time, moreover, the Massachusetts Legislature adopted a further law, not yet effective, making the bonds a legal investment for the Commonwealth's mutual savings banks, which hold 17.8 percent of all mutual savings deposits in the Nation.

RESULTS OF LEGISLATION

The effect of the Massachusetts action will be to make the bank's bonds a legal investment for life-insurance companies in States holding 88 percent of all life insurance and fraternal association admitted assets, and a legal investment for mutual savings banks in States holding 94.58 percent of such deposits. As for commercial banks, rulings by the Comptroller of the Currency and State legisla

tion have been effective thus far in making the bank's bonds a legal investment for both National and State banks in States holding 91 percent of all commercialbank deposits.

A lot of water has gone over the dam since last midsummer, when the bank's officers set about pricing the first issue of new bonds so that they would be an attraction to investors, yet not a notorious bargain for knowing speculators. A 3-percent-yield basis-midway between the prevailing Moody average yield for A-rated and BAA-rated corporate bonds-was finally decided upon for the 25year issue, Initial market premiums moved the 3's right away to the yield standing of A-rated bonds, but many market men held that even this adjustment did not reflect fully the prime rating that the bonds could claim by reason of the United States Treasury's pledge to back the bank to the extent of about $3,175,000,000. However, nobody then sensed that the market for all gilt-edge issues was already on the skids, poised for its sharpest downslide in two decades.

FIRST INVESTORS CAUGHT

What followed was a repeat performance of one of Wall Street's oldest and most ironic pieces. Sophisticates bought up the new bonds at substantial premiums, only to be left stranded when the bond market went down the chute in its first real break since the depression, Since then, bonds unloaded by speculators at a loss moved at discount-from-par prices to the same institutional investors who had been unable to subscribe initially to all the bonds that they wanted.

Thus was fulfilled the original hope of the bank's officers-that the bonds should go to "investors" at "attractive" prices. However, it was a delayed action that nobody had expected. The hunch of the sophisticates had indeed been vindicated. The World Bank bonds did succeed, not only in improving their comparative yield status among prime investments but even in outperforming the market as a whole. However, it was the institutional investor, not the in-and-out speculator, who turned out in the end to be the beneficiary of the market's action.

One way of viewing the market performance of the World Bank bonds is by comparing the spreads separating their market prices from those of nonpegged partly tax-exempt Treasury bonds of comparable maturity. A spread of 14132 points and of 1.17 yield basis percentage points separated the World Bank 3's, at issue price, from the Treasury's 24's of 1965-60 on July 15, 1947; by last week the point spread had shrunk to 10132 points, and the yield spread to 98 basis points.

The comparative market status of World Bank bonds at turning points in the bond market during the past 16 months is shown in the following tabulation of yield-basis percentages:

Market comparisons of net changes in yield and price over the period are as follows:

A like picture issues from a comparison of the movement of the World Bank bonds with that of new issues of corporate securities brought to market at about the same time. Eleven issues of long-term public-utility bonds marketed between June 1 and July 15, 1947, now show declines in price of from 2% to 71⁄2 points, the average decline being 51⁄2 points. In the shorter-term field, AA-rated railroad equipment-trust certificates maturing in 10 years were marketed in July of last year at a yield basis of 2.20 percent, compared with a recent marketing of comparable credit and term of a 2.45 percent yield basis. This yield rise of 25 basis points compares with a yield rise of only 14 basis points in the World Bank 24's from their issue price over the same period.

Mr. HINSHAW. Is there any obligation on behalf of the dealers to make a market for these bonds, or support the market?

Mr. BLACK. No, sir.

Mr. HINSHAW. Does the fund make any attempt to support the market, or the International Bank make any attempt?

Mr. BLACK. No, sir; we have not. The market has been completely a free market. We have the right to buy and sell our securities but we have not exercised it. The market is completely free.

Mr. HINSHAW. Do you know whether these bonds are held by security dealers for sale for their customers, or are they simply traded in as customer transactions?

Mr. BLACK. When we sold our bonds, we sent a questionnaire to all of the investment bankers in the country who participated in this offering. We asked them to give us a complete break-down as to whom the bonds were sold, not by name, but by classes, whether they were sold to savings banks, insurance companies, commercial banks, individuals, and so forth. This was answered by all of the dealers throughout the country, so originally we knew where the bonds went pretty well.

Since that time they have changed hands. I would say that to a large extent the bonds at the present time are owned by insurance companies and savings banks. As a matter of fact, in the State of New York, I saw some recent figures; the savings banks in the State of New York at the present time own $75,000,000 of our bonds out of a total of $250,000,000. And I would say the big bulk of the remaining bonds outstanding were owned by insurance companies. So there has been some changing in hands since they were first issued, but that is where they are now, generally speaking.

Mr. HINSHAW. Of course, it is not infrequent that a house of issue in the bond business feels the responsibility to keep the market on a fairly level keel in respect to the securities which they have sponsored, and I just wondered if this bill goes through, whether these securities dealers will support the market, or whether they will simply let the market go as it chooses to go.

Mr. BLACK. I do not think the bill will make any change in the action on the part of the security dealers at all. I think that the security dealers gave good distribution on the bonds when they were first offered. I think they will do that again. I think the security dealers have taken a very small negligible position in the bonds since the bonds were originally floated.

Mr. HINSHAW. I asked that question very largely by virtue of the fact that you are asking for exemption from certain provisions of the Securities Exchange Act, certain rules, and so forth.

Mr. BLACK. Yes.

Mr. HINSHAW. Whether or not they would come in and take a position if this act is passed, or whether they will merely deal in them over the counter for customer purposes.

Mr. BLACK. I think that will be the case. I think they will do just about what they have been doing.

Mr. HINSHAW. Deal in open accounts.

Mr. BLACK. There would be very little difference in what they have done.

Mr. HINSHAW. I have not been following the bond market for quite some time. I am curious to know how the variation in the price of these bonds may be related to the corresponding section of the bond market in general. I suppose the municipal market would be a fair guide.

Mr. BLACK. Our bonds were issued July 15 last year. Since that time our bonds have declined about half of 1 percent, 992. In the same period of time, two issues of Government's of similar maturity have declined 214 points and 34 points. And I would say that if you compared the action on our bonds with high-grade corporate securities that they since that period of time have declined about 3 or 4 points, whereas ours have gone off a half point.

Mr. HINSHAW. I thought you said a moment ago that the low point was 94.

Mr. BLACK. I am talking about today, the price today.

Mr. HINSHAW. That is it today?

Mr. BLACK. Yes; that is right. The others are today, too. I said a few days ago.

Mr. HINSHAW. Did the bond market generally follow the same pattern that your bonds did?

Mr. BLACK. Yes.

Mr. HINSHAW. In falling off?

Mr. BLACK. That is right. The whole market went down, and I would say that generally speaking our bonds acted somewhat better than other bonds all during the decline. That is discussed in this memorandum that I want to leave with you. The action of our bonds since they were issued, and the comparison of our bonds with other high-grade securities.

Mr. HINSHAW. That is all, Mr. Chairman.

The CHAIRMAN. Mr. Black, will you describe for us the difference between direct sales in this country of foreign obligations through the usual underwriting process, and the marketing of the foreign obligations by the bank?

Mr. BLACK. Well, as for the direct sale, as a matter of fact there were two of them last year. The Kingdom of Netherlands, and the Norwegian Government both came to the American market, and through their investment banking connections had their bonds underwritten and sold in the American market.

The operation with us is that the countries would come to us and we would grant them a loan, if the loan was for proper reasons and we thought the loan was sound, and we would grant the loan. Then we in turn would sell our own bonds in the market.

The CHAIRMAN. I was under the impression that your bank would not be permitted to sell bonds where the nation, the foreign nation, could sell its own.

Mr. BLACK. That is absolutely correct. We have to be certain that they cannot get the money in the private market before we can agree to make the loan. We have to have that proven to us that they cannot get the money in the market, and we would be anxious and will be anxious to do all we can to help to reestablish the private market, because all we are here for is to do this until the private market can take the financing itself.

The CHAIRMAN. With that limitation would it have a tendency to bring lower-class loans to you? In other words, if the foreign nation could not dispose of its bonds, then they would come to you. Would that not indicate that you were getting a lower class?

Mr. BLACK. Well, they all are coming to us now, so it does not necessarily mean we are getting a bad loan, as I pointed out this morning.

The CHAIRMAN. I know, but you have to first ascertain whether they could obtain the loan.

Mr. BLACK. But they cannot do it today, so that we are making loans because they cannot get the money in the market. As I said this morning, our situation is very similar to the Reconstruction Finance Corporation. They made a great many loans because they could not get the money in the private market, and yet later on large parts of those loans were good loans and Jesse Jones sold the loans at a premium later on, and that is the kind of operation that we are doing. We are here to serve as a transition organization until the private market can take this paper. It does not mean we only take bad loans.

The CHAIRMAN. The loans that RFC made, that you referred to, by Jesse Jones, would they be guaranteed by the Government?

Mr. BLACK. No. He sold them just like they were, just like he

made them.

The CHAIRMAN. How much do you intend to finance the ERP?

Mr. BLACK. We do not intend to finance the ERP at all. We have no connection with it, except that we are supposed to supplement the FRP and to make loans to countries where the loans could be made for the purposes that the bank was created for, productive purposes. The ERP is supposed primarily to take care of the consumer goods, food.

The CHAIRMAN. When I asked the question, I had in mind the statement that you afterward made, that you only supplement them. Mr. BLACK. Yes.

The CHAIRMAN. I understand that. But I assume that in this scheme of ERP, there will be loans applied for and granted by your bank?

Mr. BLACK. That is right.

The CHAIRMAN. To what extent do you expect to make loans to supplement the ERP?

Mr. BLACK. Yes.

The CHAIRMAN. To what extent?

Mr. BLACK. It depends on the amount of money we are able to raise in the market, and it depends on whether or not the loans that are offered to us by ERP countries are the type of loans that we can make.