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He's worked with the committee here and I think he's a fine lawyer, but there is some suggestion there might be a conflict of interest. That does have an impact on public confidence.
Mr. ROFSKY. I'd like to have Paul Mohn, chairman of the audit committee, answer that question.
Mr. Mohn. Mr. Wylie, I'll be happy to respond to that question.
The Board believed that there was no improper activities that were undertaken. However, because we did obtain funds and funds were generated from the public, we felt it necessary to dispel any hint that there were improper actions; therefore, we engaged a person who has high credentials in the ethics area and was an independent counsel, because first of all, the general counsel of the bank was the enforcer of our conflict of interest orders, and we wanted to assure all of us and the public that there was not any problem.
We have an oral report from this. I have been told that he has determined that the outside counsel was selected in a proper manner, their work was competently performed, and that the fees that were charged were appropriate.
Mr. Wylie, we did think that that was necessary. Even though we reviewed it in our own context within the bank, we did feel it was necessary to have someone outside, someone who had experience in ethics.
Mr. WYLIE. I agree it was necessary for the bank to take steps to make sure that there was no real or perceived conflict of interest. Mr. Sollars, in Mr. Comerford's prepared statement, he said that the change of policy regarding regional offices has been long delayed, a policy of less contact between the bank and the borrower. What is your comment to that? Will that policy be reexamined? Mr. SOLLARS. I'm not sure that's what Mr. Comerford said. Mr. WYLIE. Maybe he ought to clarify it.
Mr. COMERFORD. Congressman Wylie, in my statement I said that the cutback in the regional offices from eight to three would result in longer delays in processing loan applications, as well as greater distances to cover, and result in less personal relationships.
I changed that to say “may” in my remarks today when I was referring to title I, sir.
Mr. SOLLARS. If he's referring to title I loans, I think he's wrong because I think it was done for just the opposite reason, to speed up our whole decisionmaking process.
It came from the recommendations of Peat, Marwick & Mitchell. It was taking us too long to make decisions, and we didn't think we were getting our money's worth, and we didn't think the co-opswe think the co-ops deserve fast, accurate decisions. We think this will accomplish that.
I just happen to disagree with John.
Dr. Greenwald, you've testified that it has taken the bank a while to find the proper mix between risk taking and creditworthiness, while protecting the bank's assets at the same time.
Looking back, I know this is funny money. Columbus discovered America in 1492, but if it were applied to the Bank's loan portfolio, how many loans would or would not have been made?
Do you have a ball park estimate of the percentage?
Dr. GREENWALD. Mr. Wylie, I don't think I actually said that the bank has already determined what is the proper mix. I think that's an ongoing thing.
I think the bank is trying to determine finally what are the rules that will be relaxed for small business lending, but it is an evolving process. How many loans would have been made?
Let me try to say it two ways: One, I think it's very unfortunate from my point of view that the bank had to make its initial lending in an adverse recessionary period, almost a depression.
I think some of these rules that were relaxed were all right to relax, if there had been anything like a normal housing market. Instead, since you have a bad experience, you move back and you can't decide—you can't relax that.
I'm talking about downpayment requirements on housing. If units had sold as projected there would not have been a problem. Since they didn't, the bank has raised its downpayment and other requirements.
Naturally, we acted by raising the standards on the commercial side, which I think is rather easy to justify. Again, results were very much affected by the recession. We were going to have difficulty in startup situations to meet their projected business plans and sales goals, because nobody was meeting sales goals during a recession.
I think what the bank has done is to raise the equity through title II, to put in as a cushion. How far do you have to go back to where the banking standards are? I don't really know yet.
I hope the bank stays flexible; it has to. I can't tell you exactly how many would be made.
Mr. WYLIE. My 5 minutes are up. I was going to make a comment here. In your statement on page 4
Dr. GREENWALD. About learning from mistakes. I think it was a mistake to rely as heavily on projections for sales, especially for startups and not requiring greater equity.
The same thing in housing, relying on the fact that the housing in our opinion will sell, it is good housing and well priced, but not having very much equity.
That lack of a deep pocket. Tenants are not going to make the mortgage payment, they can't carry half an empty building. They just don't have the money to do it.
So you raise your equity requirements. The bank has been doing that. We're going to have to stay flexible on where it finally ends up. Chairman ST GERMAIN. Mr. Carper.
Mr. CARPER. Thank you, Mr. Chairman. I'd like to welcome our panelists this morning and to begin my questions by prefacing my remarks by saying I wasn't here 5 years ago when this bank was created.
I want therefore, to ask some background questions as I begin. Could perhaps Mr. Sollars address my first question?
Who was providing the credit needs of the group that's being serviced here prior to 1978? What were the sources of funding when the cooperatives were looking for capital? Where did they go for that capital?
Mr. SOLLARS. The only place they had to go was their own informal sources. There wasn't any other place for them to go, that I know of.
Mr. CARPER. I presume that the Congress and the cooperatives deemed that those sources were inadequate.
Mr. SOLLARS. Yes.
Mr. SOLLARS. I think the cooperative movement is so unique in the way they're owned and the way that is secured, that the commercial banking industry would rather do it with a conventional structure than a cooperative structure.
Now if the cooperatives were very strong and had a lot of money, that wasn't much of a problem, but the bank was created to help many of those that weren't very strong, plus I guess you've got to help the good. Get some money to help the ones that aren't so strong
But on the other hand, we really started to help those who couldn't meet the professional test of the commercial banking system.
Mr. CARPER. So the strong cooperatives had no difficulty getting capital, even in the pre-1978 timeframe?
Mr. SOLLARS. I wouldn't say that they didn't have any difficulty; I'd say it was more difficult for them than conventional businesses.
Mr. CARPER. We have seen major changes in the structure of financial institutions over the past few years, and we have seen major changes in what banks can and cannot do, savings and loans can and cannot do.
How do those changes impact on cooperatives and their ability to raise money?
Mr. SOLLARS. Well, I think you are talking about the thrift institutions. Yes, the weaker the thrift, the tendency makes it more difficult for the cooperatives to get financing because of their financial strength.
Mr. CARPER. If this bank ceased to exist, could you just take a minute to explain to me what impact that would have on cooperatives-strong, weak, large, small?
Mr. SOLLARS. Of course, I think we have visions of this bank being the cooperative bank, especially consumers, because the farm credit system that handles most of the agriculture on the consumer side, we hope, making enough sound loans with proper leveraging, we can end up being the bank for the consumer movement.
I note that we haven't progressed as fast as everyone wishes, and I can assure you that the board shares that, that we haven't progressed as fast as we should. We want to be the consumer cooperative bank in the United States which makes credit available to the consumer cooperative businesses as well as to conventional businesses.
Mr. CARPER. Presumably, a number of the changes that have been made within the bank over the last several years will allow the bank to realize the goals set for it by Congress.
What further changes need to be made, in your judgment, if you are to indeed achieve those objectives?
Mr. SOLLARS. Of course, now you are going to get me to reveal my prejudices.
I think the two real needs in the United States of the consumer movement that meet both the financial and social tests are health and housing.
Health-all we need to do is to build the tools to be able to do that and expand it, because I think the health needs of this country—the costs for health care in this country have gone up at a rapid pace, so that a lot of people just can't afford it. And I think prepaid health care systems in the cooperative movement have made it clear that they can stabilize those costs.
In housing there is a tremendous need. One of the changes I would recommend is that I hate to see the cap we are working under because we have a big demand for apartment housing.
Mr. CARPER. Thank you. Thank you, Mr. Chairman.
Chairman ST GERMAIN. Mr. Gross is not at the table, but nonetheless, he is aware of the fact that we are going to ask him some questions. I do have a few questions for him that I would like to ask him at this point.
Could you take a seat at the end of the table, and we will get you a microphone.
Mr. Gross, you are a Harvard graduate-law school that is?
Chairman ST GERMAIN. What was the date of your law school graduation, or completion of your law studies?
Mr. GROSS. 1973.
Chairman ST GERMAIN. You worked for the attorney general's office in Massachusetts right after that?
Mr. Gross. Not immediately. I was in the Legal Service Corporation.
Chairman ST GERMAIN. Youth services first. Then you went to the attorney general's office in Massachusetts when?
Mr. GROSS. 1975 through 1979.
Chairman ST GERMAIN. 1975 through 1979, the attorney general's office in Massachusetts.
How is their rate of pay? Did they pay well? Just average? In other words, approximately what were you making in the attorney general's office in Massachusetts?
Mr. Gross. My memory was that when I left there I was making about $35,000 a year.
Chairman ST GERMAIN. Then you came to Washington and you went to work for the Consumer Product Safety Commission?
Mr. GROSS. Yes, sir.
Chairman ST GERMAIN. There your level-you were paid what when you completed your stint there?
Mr. GROSS. I believe my salary at the time I left the Consumer Product Safety Commission was $52,000 a year.
Chairman ST GERMAIN. From there you came to work for the National Consumer Cooperative Bank?
Mr. Gross. Yes, sir.
Chairman ST GERMAIN. And you had worked with Dr. Greenwald when she was also in the employ of the State of Massachusetts? You met her there?
Mr. Gross. Yes, I did.
Chairman ST GERMAIN. When you came to work for the co-op bank, your entering salary was $50,000?
Mr. Gross. That is correct.
Chairman ST GERMAIN. That is unusual. Had the work in the Consumer Product Safety Commission come to an end, or did you have the fervor of the co-op movement or what?
Would you explain to us why you took the drop in salary?
Mr. Gross. Dr. Greenwald asked if I would come to provide some interim help to the bank. I had already announced my plans to leave the executive directorship of the Consumer Product Safety Commission.
I came for that period of time, and the board offered me an elected position as vice president and general counsel in the December meeting in exchange for a 1-year commitment to stay at the bank.
Chairman ST GERMAIN. So you were on a 1-year contract at that point?
Mr. Gross. I was not on a contract, sir.
Chairman ST GERMAIN. And you left in 1983. So you were with the bank for approximately a year and a half?
Mr. GROSS. Almost.
Chairman ST GERMAIN. While at the bank you made a recommendation that outside legal counsel should be retained for closings, is that correct?
Mr. Gross. No, sir. Chairman ST GERMAIN. I thought I read a memorandum to that effect.
Mr. Gross. In fact, when I came to the bank it was my recommendation that the General Counsel's Office, which then contained six lawyers, be expanded and that legal closings be undertaken inhouse. The board of directors rejected my recommendation.
Chairman ST GERMAIN. I wish they hadn't. I think you were correct.
Mr. Gross. I believe, sir, I was correct. The board of directors rejected my recommendations and instructed me to fire the legal staff and instead hire outside counsel. I did both.
Chairman ST GERMAIN. So you started out at three, grew to six, and are down to four in the legal staff is the information I have. There are now two counsel there.
Mr. Gross. I am not aware of the figures.
So you were in the bank a year and a half at $65,000 a year, and now you are with a private law firm?
Mr. Gross. Yes, sir.
Chairman ST GERMAIN. Now we are all aware of the fact, and we will discuss this at length, but initially let's just look through it.
There are some who question the propriety of your going to that particular law firm in view of the fact that the law firm had been paid rather substantial amounts of money by the bank.
Is that not correct?