STUDY OF RECONSTRUCTION FINANCE CORPORATION

TEXMASS LOAN

THURSDAY, APRIL 13, 1950

UNITED STATES SENATE,

COMMITTEE ON BANKING AND CURRENCY,

SUBCOMMITTEE ON RECONSTRUCTION FINANCE CORPORATION,

Washington, D. C.

The subcommittee met, pursuant to notice, at 10 a. m., in room 301, Senate Office Building, Senator J. William Fulbright (chairman of the subcommittee), presiding.

Present: Senators Fulbright, Maybank, Frear, and Douglas.

Also present: Mr. Meader, chief counsel, and Mr. Herz, director of staff of subcommittee.

Senator FULBRIGHT. The committee will come to order.

This is the first public hearing of the Banking and Currency subcommittee on the Reconstruction Finance Corporation pursuant to the terms of Senate Resolution 219, the Eighty-first Congress, ordering a study to be made of the operations of the Reconstruction Finance Corporation.

At this point I will insert in the record a copy of that resolution. (The resolution referred to follows:)

[S. Res. 219, 81st Cong., 2d sess.]

RESOLUTION

Resolved, That the Senate Committee on Banking and Currency, or any duly authorized subcommittee thereof, is authorized and directed to conduct a thorough study of the operations of the Reconstruction Finance Corporation, and its subsidiaries, with special attention given to the recommendations of the Commission on Organization of the Executive Branch of the Government with respect to such Corporation and its subsidiaries.

SEC. 2. The committee shall report its findings, together with its recommendations for such legislation as it may deem advisable, to the Senate at the earliest practicable date but not later than June 1, 1950.

SEC. 3. For the purposes of this resolution, the committee, or any duly authorized subcommittee thereof, is authorized to employ upon a temporary basis such technical, clerical, and other assistants, as it deems advisable, and is authorized, with the consent of the head of the department or agency concerned, to utilize the services, information, facilities, and personnel of any of the departments or agencies of the Government. The expenses of the committee under this resolution, which shall not exceed $50,000, shall be paid from the contingent fund of the Senate upon vouchers approved by the chairman of the committee.

Senator FULBRIGHT. The Senate Banking and Currency Committee has adopted a resolution designating this subcommittee as the one to conduct the study of the operations of the Reconstruction Finance Corporation directed by Senate Resolution 219. I will also place this resolution in the record at this point.

1

(The resolution referred to follows:)

RESOLUTION ON STUDY OF THE RECONSTRUCTION FINANCE CORPORATION

Resolved, That the Subcommittee on the Reconstruction Finance Corporation, heretofore appointed as a standing subcommittee of the Committee on Banking and Currency of the Senate, consisting of Senators Fulbright (chairman), Maybank, Frear, Douglas, Tobey, and Capehart, is hereby authorized and directed to conduct the study of the operations of the Reconstruction Finance Corporation and its subsidiaries, authorized and directed by Senate Resolution 219, Eighty-first Congress, second session.

Resolved further, That such subcommittee is hereby authorized to conduct hearings and meetings in executive session in the discretion of the chairman of such subcommittee. This resolution shall be effective as of February 8, 1950, and all action of such subcommittee to the date hereof is hereby ratified and affirmed.

Senator FULBRIGHT. The committee proposes to consider the problem of availability of capital and credit to American industries and particularly to small-business enterprises and the need, if any, and its extent, for direct lending by the Government during a peacetime, nonemergency period.

It will also explore the manner in which the broad principles and standards of lending authority, and limitations thereon, as described in the law have been interpreted by the Reconstruction Finance Corporation.

The committee will also examine the organizational structure and administrative efficiency of the Reconstruction Finance Corporation, its procedures and costs, as well as the extent to which Reconstruction Finance Corporation policies and activities are harmonized with the broader fiscal policies and programs of the Government.

Although the committee will solicit the views and opinions of informed persons, both within Government and without, on the problems before it, for the most part, the committee will seek to ascertain the facts with respect to the operations of the Reconstruction Finance Corporation by an examination of specific decisions by the Reconstruction Finance Corporation upon business loan applications presented to it. The committee will concentrate upon the business lending activities of the Reconstruction Finance Corporation, examining other functions only to the extent necessary to obtain a comprehensive view of its operations.

Today the committee proposes to inquire into the facts and circumstances connected with the authorization of a $15,100,000 loan to the Texmass Petroleum Co. of Dallas, Tex., in which the Reconstruction Finance Corporation agreed to participate to the extent of $11,100,000.

The committee staff has spent considerable time examining the detailed features of this loan and the circumstances leading up to its authorization. The facts developed by the staff, largely derived from the files of the Reconstruction Finance Corporation, and from the files of the Securities and Exchange Commission, seem to indicate that this loan would be an appropriate one for a study of the manner in which the Reconstruction Finance Corporation has interpreted and applied its basic delegations of authority and limitations thereon.

So we may all have those powers and limitations in mind, I think it would be helpful to enumerate them as set forth in Public Law 548 of the Eightieth Congress. They are as follows:

Powers and purposes (sec. 4 (a) RFC Act):

(a) Aid in financing agriculture, commerce, and industry. (b) Encourage small business.

(c) Help in maintaining the economic stability of the country. (d) Assist in promoting maximum employment and production. Limitations (sec. 4 (b) RFC Act):

(a) No financial assistance should be extended unless it is not otherwise available on reasonable terms.

(b) Loans shall be of such sound value or so secured as reasonably to assure retirement or repayment.

(c) No loan, including renewals or extensions thereof, may be made for a period or periods exceeding 10 years.

(d) Reconstruction Finance Corporation participation shall be limited to 70 percent of the balance of the loan outstanding at the time of disbursement where the total amount of the loan is $100,000 or less, and 60 percent where the total amount is over $100,000.

In Report No. 974, Eightieth Congress, second session, by the Reconstruction Finance Corporation Subcommittee of the Senate Banking and Currency Committee two additional standards are set forth. They are as follows:

(a) In deciding whether to grant a loan, the primary consideration should be the interest of the general public rather than the interest of the individual borrower.

(b) Under normal conditions the activities should be conducted so as to make them self-sustaining insofar as it is possible.

I want to make clear at the outset that the committee is an agency of inquiry of the Congress and does not propose to recommend decisions on specific cases to the Reconstruction Finance Corporation.

If there is an influence upon the action of the board in the Texmass case, it must proceed from the facts and not from the views and opinions of the committee. As we understand it, the funds authorized to be loaned to Texmass have not as yet actually been disbursed-in other words, this loan is in process and not a completed transaction. We think there is an advantage in examining administrative decisions while they are current, while the facts and reasons are freshly in mind and before irretrievable steps have been taken. The Truman committee investigating war contracts during World War II was an outstanding example of the advantage of investigating public matters currently rather than conducting post mortem examinations.

Although the committee does not intend to advise the Reconstruction Finance Corporation as to what its action should be on this loan, the committee does now serve notice that it will concern itself with the decisions made by the Reconstruction Finance Corporation in its effort to learn the manner in which the broad delegations of authority made by the statute have been, and are being, applied by the directors of the Reconstruction Finance Corporation, and that the committee will call the directors and officials of the Reconstruction Finance Corporation to account to the Congress and to the public for the administration of the broad public trust which they hold.

Based upon the preliminary exploration by the committee's staff, which will be inserted in the record (appendix, p. 200), a letter was drafted calling the attention of the Comptroller General of the United States to the facts and circumstances concerning the Texmass Petroleum Co. loan and requesting an expression of opinion by the Comp

troller General as to the legal authority of the Reconstruction Finance Corporation to enter into this transaction. That letter is dated March 28, 1950. I insert a copy of my letter to the Honorable Lindsay C. Warren of March 28, 1950, in the record at this point.

(The letter referred to follows:)

Hon. LINDSAY C. WARREN,

Comptroller General of the United States,

Washington, D. C.

MARCH 28, 1950.

DEAR MR. WARREN: As you know, the Subcommittee on Reconstruction Finance Corporation of the Senate Committee on Banking and Currency is making a study of the lending policies of Reconstruction Finance Corporation. As chairman of the subcommittee, I would like to have your opinion on a matter of considerable importance.

On September 29, 1949, the Board of Directors of RFC adopted a resolution approving a $15,100,000 10-year loan to Texmass Petroleum Co., RFC to participate to the extent of $11,100,000 and two insurance companies to participate to the extent of $4,000,000. The loan is to be secured primarily by developed and undeveloped oil- and gas-producing properties.

At the date of this letter no disbursement had yet been made under the commitment. The period during which disbursements may be made was originally set at 60 days and it was extended from time to time until now it ends at about the close of April 1950. Most of the conditions of the loan have been met and in all probability the first disbursement will be made before the end of April, unless new factors of importance are injected into the picture. The first disbursement may be made much earlier than the end of April.

During the course of its consideration of the loan, RFC employed the services of a consulting geologist who undertook to examine the collateral and to advise the Corporation on its worth. This geologist has rendered a report in which he estimates that there are oil reserves of approximately 12,500,000 barrels and that proceeds of some $28,650,000 may be expected from operation of the properties which had been developed at the date of the report. On the basis of these reserves and this potential revenue it is the considered opinion of the geologist that the loan cannot be paid off under its terms in less than 20 years. He has so advised RFC in letters dated September 15, 1949, one of which reads in part as follows:

"As it now stands, the net income to all companies is $1,320,000. During the first year of the loan, interest payments and proposed development would use this entire amount and there would be no Federal income tax. If development continued, this status would prevail over the first 3 years. During that time, unless the loan were set up above the $14,950,000 figure there would be no retirement of principal. After development expenditures were completed, Federal income taxes would be effective and with a large taxable income and interest charges I am unable to see where any large application on principal can be made at any time.

"On a 2 to 1 ratio of net revenue to loan the collateral is sufficient to justify a loan of $14,325,000. On the ability to pay no loan of sufficient size to take care of the company's indebtedness is in any way justified. Only a rapid expansion of both assets and income would justify the loan at the figure given. This can only be effected by placing the loan at a figure so high that it would not be secure."

Another engineer engaged by the Securities and Exchange Commission has made a review of the properties comprising the collateral and he has had the opportunity to examine the estimates submitted by the RFC geologist. This man estimates that the oil reserves would come to only about 7,000,000 barrels as compared with the RFC geologist's 12,500,000, and he considers this a conservative estimate. Based on the calculations of the SEC engineer the loan would take considerably more than 20 years to pay off.

It is interesting to note in this connection that the management of Texmass Petroleum Co., in a prospectus filed with the Securities and Exchange Commission, has stated "On the basis of current income and operating and overhead expenses of the presently developed properties now owned by Texmass and proposed to be acquired pursuant to the plan, with a reasonable allowance for prospective decline in production, the cash available from operations would be insufficient to cover the interest and annual principal installments of the RFC loan."

Under the RFC Act loans to business enterprises may not be made for periods longer than 10 years. It was undoubtedly the intent of Congress when it enacted