management and personnel problems, new equipment, merchandising methods, and manufacturing techniques, research problems, automation, nationwide distribution, advertising, atomic development, foreign competition, Government regulation, and taxes. SBA would be authorized to hire private organizations to help in making these studies. Finally, it would be required to make detailed, semiannual reports on present and contemplated research programs. The second of Senator Humphrey's bills, which I wish to comment on, this morning, is S. 2185, which would make funds available for loan to nonprofit development groups. SBA has, to its credit, recognized the desirability of making loans to such groups. But, lacking specific legislative authority, this program has been neces sarily tentative and limited in scope as well as in amount. Therefore, loans are made only when a specific, ascertainable firm is the beneficiary of the loan. The amount is held down to $250,000 for any one nonprofit development group, whether it is to aid 1 firm or 20 firms. Mr. Barnes, in testimony before the House Banking and Currency Committee, stated that my proposal, identical to S. 2185, may have merit. He added, however, that a preferable approach for financial help to development organizations would be through the proposed Administration Area Assistance Act, H. R. 5459. I ask you, gentlemen, why, if the SBA regards this type of loan sufficiently desirable to stretch its authority to make them, does it hesitate to have its authority sanctioned and extended by Congress? Why should the SBA suggest that this authority be given to some other agency under legislation and a program which does not yet exist? Moreover, financial help under the areaassistance bill is restricted to areas where there has been at least 8 percent unemployment for the major portion of 2 years. I wish to emphasize that this bill does not envisage this program as one for depressed areas. This type of activity is one of the best guaranties that communities will not become depressed areas. It encourages self-help and places the responsibility on the community. It enables the development-credit corporations to get financing for community programs in a planning stage, regardless of whether they have firm commitments with a particular small-business firm. Since the bill does not limit the amount of loans which can be made to one development corporation, it will provide more realistic financing to groups performing a community service on a wide scale. In other words, the support of a community industrial program will depend on its inherent soundness, rather than on an artificial quota. In Maine we are trying, through our State Department of Economic Develop ment, and through the efforts of individual communities, to encourage the strengthening of existing businesses and the establishment of healthy new enterprises. There are some 71 communities actively participating in this program at the present time. Nationwide there are 3,000 such communities, of which about 2,000 are active. This is a very healthy development of a townmeeting approach to economic problems. Such enterprise on the part of civic leaders deserves encouragement and support. Sooner or later most of these communities are going to need financial assistance for the establishment or improvement of businesses. Existing private sources will not always meet the need. Something has been made of the State development-credit corporations, such as we have in Maine. It is true that these institutions have supplied a new source of long-term credit, not previously available. However, even this is not enough. If our experience in Maine is any indication, the loan policies of these corporations tend to approximate those of the member banks, eliminating the applications which involve more risk than the ordinary bank is willing to take. A good example of this type of risk is the Colonial Aircraft Corp. of Sanford, Maine, which has received two loans from the Small Business Administration. This small company has, in a new plane of its own creation, found a demand which has outstripped its current ability to produce. It is now searching for additional skilled labor, and it needs further financing for expansion. So long as there is "tight money" and so long as the various problems I have mentioned continue to press on small businesses, there will be need for more imaginative approaches than is to be found in traditional, conservative_credit thinking. I believe these two proposals of Senator Humphrey which I have discussed today provide room for a substantial improvement in the necessary operation of the Small Business Administration. I have This is not the first time I have discussed these ideas at this session. been on record three times on these matters. I have studied the testimony of others. I have yet to hear or read an effective argument against them. To S. 2185, providing for loans to nonprofit organizations, the only argument is: We have made this type of loan a few times without clear authority, so why give us clear-cut authority to do what we admit is being and ought to be done? To S. 2184, providing for studies, the only argument seems to be: Basic attention to small business problems must be given; we don't have the time or money to give this basic attention, but why make us do what we admit ought to be done? If this type of argument is enough to prevail, then I fear that small business is in for a good long wait. I hope that this subcommittee will give favorable consideration to Senator Humphrey's bills, S. 2184 and S. 2185. Senator CLARK. At this point in the record I would like to offer a letter dated June 3, 1957, addressed to the Committee on Banking and Currency of the United States Senate, from the Connecticut Development Credit Corp., expressing their views on S. 2160 and commenting on the Arkansas plan. (The statement referred to follows:) THE CONNECTICUT DEVELOPMENT CREDIT CORP., COMMITTEE ON BANKING AND CURRENCY, United States Senate, Washington, D. C. (Attention Mr. J. H. Yingling, chief clerk.) GENTLEMEN: Thank you for the copy of Senate bill, revised as S. 2160. I am sorry that our activities preclude my appearance at the committee hearing, but I shall endeavor to furnish you with the views of some of our officials with reference to the bill. The purposes appear sound and essential, but the methods to effect them may be difficult to consummate. The provision to supply equity capital is an element of unusual risk, particularly to new businesses, as the best laid plans of any businessman can go awry. Our corporation can make equity investments under its charter but that provision has not yet been used, and the same result, furnishing usable funds, can be obtained with long-term loans. It is noted that the sources of capital for the national investment companies are the respective Federal Reserve banks, but the formation of such companies appears to be permissive rather than mandatory. The availability of $5 million for loans is a desirable factor but that amount may be too large for some States and too small for others. The advantages of conversion by a State development-credit corporation appear to lie in the increased amount of loanable funds available in the national investment company and the specific tax advantages enumerated. However, it is difficult to visualize a Federal Reserve bank supplying $5 million capital with the expectation that it would be repaid from the eventual resale of such stock to banks and other private investors. The incentive to buy the stock would be absent as the prospective investors would take the attitude that they would be repaying the Reserve bank rather than aiding the economic growth of the State. Perhaps an arrangement which would have the Federal Reserve bank match the capital of private investors with preferred stock or long-term bonds might be more workable as it would enable the bank to be repaid on a more definite basis. I trust I may be pardoned for looking the gift horse in the mouth, but this phase of the bill appears to be the one which may be the difference between a workable bill and one which may be enacted and not used. Sincerely, J. D. LINEHAN, Manager. Senator CLARK. The next witness will be Mr. David J. Duggan, vice president and general secretary of the New York Business Development Corp. We are happy to welcome you here, Mr. Duggan. STATEMENT OF DAVID J. DUGGAN, VICE PRESIDENT AND GEN- Mr. DUGGAN. Thank you very much. I am happy to be here. Mr. DUGGAN. Thank you. I will try to follow the little outline Mr. Cash, your counsel, gave me. Senator CLARK. The outline the witness refers to is the list of questions having to do with the organization and present status of the development corporation. Mr. DUGGAN. The New York Business Development Corp. was created through an amendment to the State Banking Act, chapter 863, which permitted all of the financial institutions in the State to become members of this organization; not necessarily stockholders, but members. We then embarked on a small stock sales program. Senator CLARK. Mr. Duggan, what was the date of the legislation? Mr. DUGGAN. It was on April 20, 1955. We were authorized to sell 20,000 shares of stock at $100 a share, giving us a potential of $2 million paid in. Senator CLARK. Common stock? Mr. DUGGAN. Common stock. We have sold to date $429,300 in stock. Our particular program is not tied in with paid-in capital. We may lend up to 10 times our paid-in capital, or $50 million. That is the way our legislation is designed. Our charter reads that way— 10 times, or $50 million. Senator CLARK. Could you give us some general idea of the kind of stockholders who bought your stock? Mr. DUGGAN. Yes. Utility companies, industrial companies, Pete Smith, Johnny Jones. It has gone right through from the big utility to the individual. Savings banks bought our stock, and one insurance company bought our stock. Senator CLARK. Is your corporation organized for profit? Mr. DUGGAN. Yes, sir. In addition to the stockholders, we derive money from our financial members, who have agreed generally to place on call with us 2 percent of their capital and surplus. That is a general figure. With a mutual company, of course, it is guaranteed funds as against the capital and surplus of a bank. Today we have 180 financial members who have placed on call with us $13 million. Senator CLARK. Is that without any restriction as to the amount of your capital? Mr. DUGGAN. Without any restriction. Senator CLARK. Tell me, if you will, Mr. Duggan, about this $50 million. Is there some sort of a State guaranty, or how did that $50 million come into being? Mr. DUGGAN. When putting this thing together originally, we computed what the total would be on a 2 percent basis of capital and surplus, or mutual funds, of all those eligible institutions in the State if they would come in. That would happen to work out at $56 million. Senator CLARK. Did that include insurance companies? Mr. DUGGAN. Yes, sir. Senator CLARK. And commercial banks? Mr. DUGGAN. Yes, sir. invest more than $250,000. 000 from any 1 member. But we have a limit. No 1 member may It is 2 percent, but not in excess of $250, Senator CLARK. That would include, also, savings banks? Senator CLARK. Are those the three principal categories, that is, commercial banks, savings banks, and insurance companies? it? Mr. DUGGAN. Those are the three principal ones. Senator CLARK. You do not have any investment banking money in Mr. DUGGAN. Not at the moment. No. As I say, at the moment we have 180 financial institutions as members, and we have on call at the moment $13 million. We do not expect any great problem in creating further interest in the State for other institutions to come in and run that up to where we need it. Senator CLARK. I am interested that there does not seem to be any necessary relationship between your capitalization and the amount that you could loan. You have just under a half a million dollars of capital, and yet you have $13 million available for loan. Mr. DUGGAN. That is right. Senator CLARK. It looks pretty heavy from some points of view. Mr. DUGGAN. It could be considered that way. On the other hand Senator CLARK. And you could go to $50 million without increasing your capitalization; could you not? Mr. DUGGAN. Yes. Under our particular charter we could do that. Senator CLARK. So that in reality the institutions which are making credit available to you must not be looking to any great extent to the development corporation's financial strength as security for the loan. Perhaps you can tell us how you go about making your loans, which might answer what is in my mind. Mr. DUGGAN. Yes. I would say the portfolio developed to date is a good one. We have taken a longer risk than a bank would take, but I do not believe we have taken any extreme risks where we walk into a thing with a terrific loss facing us. I think the institutions have confidence in us that we will generally make sound loans. Senator CLARK. Can you tell us a little bit about the term of the loan, and the interest rate, and the amortization provisions, and that sort of thing? Mr. DUGGAN. Yes. Our interest rate is fixed at 6 percent. Incidentally, our borrowing rate is tied in with the prime. We pay a quarter above the prime rate from our member banks. Senator CLARK. What do you pay now? Mr. DUGGAN. Four and a quarter. Senator CLARK. The difference between the 414 and the 6 percent is what carries your overhead, and you hope to make a profit on it? Mr. DUGGAN. That is right. We figure it takes about one-half of 1 percent to handle the corporation. Under our charter I must set up and maintain a surplus before I can consider dividends. So that is, of course, some time in the future. Senator CLARK. Does that get you into any Federal income-tax problem? Mr. DUGGAN. I expect it will, sir. Incidentally, that is something I would like to talk to you about, as we go on here. In this particular bill you have, there are some good features as far as reserves and tax factors are concerned, which I think we are all concerned with. Our lending rate is set at 6 percent. We try to keep our loans to a maturity of 10 years. That does not necessarily mean that we in all cases get full amortization in 10 years. We have no objection in a good situation to taking a balloon note, and, let me say, pay off twothirds in 10 years and one-third at the maturity of the loan. We will cut the cloth to the pattern as it develops in the industries in the State. Senator CLARK. You would not buy stock; would you? Mr. DUGGAN. We have authority to do that under our charter. We have not yet bought any, but I will tell you what we have done. Senator CLARK. Yes. Mr. DUGGAN. Where we go into a new industry and consider ourselves venturers to a degree, we will take an option for stock. We will have them block out some stock at today's price, which we may pick up at any time during the life of our loan, with the object of a capital gain at some time because of our spread being so thin. We are looking for some other means of making money. Senator CLARK. In other words, you are using all of the normal devices to make this a profitable enterprise, and there is every reason that you should. Mr. DUGGAN. Yes, sir. We are. Our charter is also a good deal broader than most in that anything that enhances the economy of our State and provides employment opportunities for its citizens is eligible for us. I make that point for this reason: Resort properties and seasonal properties which are taboo with many organizations are not with us. In New York State the recreational industry accounts for about $2 billion in income. So we will consider a summer resort or a ski tow, or something like that. Senator CLARK. How about a motel? Mr. DUGGAN. We will. We have made loans on motels in a proper area. There is nothing in the way of commercial or industrial development that we cannot consider under our charter. Senator CLARK. Do you give any special emphasis to labor-surplus areas? Mr. DUGGAN. Yes, sir; we do. We have a couple in our State, and we have done a great deal of work in one area by, in one case, advancing money to a local development corporation to bring an industry in and create a large payroll. Senator CLARK. I note under the March 1957 figures which you have made available to the committee there do not seem to be any labor-surplus areas in New York as defined by the Department of Labor, but I do not doubt you have them, nevertheless. Mr. DUGGAN. I have not argued that point. There are a couple, but I think we are rapidly correcting them by the use of our particular corporation with our funds. In fact, I have to go back this afternoon to close a situation in a surplus-labor area that will bring a new industry in with a substantial payroll. Senator CLARK. Can you give us a little bit of a general idea of what kind of borrowers you loan this $13 million to? Is that the amount? Mr. DUGGAN. I have on call $13 million. I have committed at the moment about $5,400,000. |