CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

TUESDAY, JANUARY 26, 1932

UNITED STATES SENATE,

SUBCOMMITTEE OF THE COMMITTEE ON

BANKING AND CURRENCY,

Washington, D. C.

The subcommittee met at 10 o'clock a. m. in the hearing room of the Committee on Interstate Commerce, pursuant to adjournment on Thursday, January 21, 1932, Senator Cameron Morrison presiding. Present: Senator Morrison (presiding).

Senator MORRISON. We will proceed with the hearing, Mr. Adams.

FURTHER STATEMENT OF E. J. ADAMS, CHAIRMAN SPECIAL BOARD OF INVESTIGATION, FEDERAL TRADE COMMISSION, WASHINGTON, D. C.

Senator MORRISON. Give the reporter your name, address, and occupation, please.

Mr. ADAMS. E. J. Adams; I am associated with the Federal Trade Commission as chairman of the special board of investigation. My legal residence is in Oregon; temporary residence in Washington.

Mr. Chairman, for the sake of brevity, to avoid misunderstanding and misquotation, I have committed what I desire to say to writing. The Senator the other day submitted some questions to bring out what my interest might be in this matter. I desire to submit that I have no interest, except that I would like to see a law enacted that would be of real help and relief for the home owner. I have had some experience. Just to show the qualifications and the experience that I have had that might qualify me to criticize the bill before the committee and make suggestions, I am pleased to submit a brief résumé of that experience:

1884 to 1892, associated in making real estate loans, writing insurance, preparing and examining abstracts of title and conveyancing; 1894, admitted to the bar, practiced in Grand Rapids, Mich., Aberdeen and Seattle, Wash.; 1897, member of the Michigan Legislature; 1899, Speaker of the Michigan House; 1907, member Michigan constitutional convention; 1917, associated in preparing Oregon law to finance highway building. Oregon was the first State to devote motor-license fees to the payment of highway bonds. This method has been copied by many States since. I was the first to suggest a gas tax to secure funds for the upkeep of the highways, now adopted in practically all States. 1892 to 1917, planned, designed, and built about 100 residences in Grand Rapids, Mich., and Eugene, Oreg.; 1921, cooperated with United States Senator Townsend in the

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preparation of the Senate bill which is now the Federal highway law; and prepared a home loan bill introduced by Senator Stanfield in the United States Senate in 1926 (S. 3256).

Mr. Chairman, I am heartily in favor of the recommendations of the President for a Federal system of finance that will relieve home owners in their present distress and provide assistance to aid them in acquiring and paying for homes of their own.

Such assistance can be provided that will not cost the Government a penny; indeed, a system that will be a source of revenue for the Government.

A system can be devised, such as I shall later outline, that will require a very small amount of Federal funds to initiate it.

I have examined the provisions in Senate bill 2959; and while I hesitate to criticize this bill, I must, in all fairness, say that it does not in any respect comply with the recommendations of the President, and I doubt if he has ever read it. There is not a dollar's worth of relief or help in this bill for the home owner.

First, this bill provides for a capital set-up that limits the private subscription of capital to a very limited class and number, and all stock subscribed by private parties must be paid for in full at the time of making application for the stock. All capital not subscribed for within 30 days after the books have been opened for stock subscriptions must be subscribed for by the Secretary of the Treasury.

The bill also provides (p. 10, lines 8-11) that no dividends shall be paid on stock subscribed by the United States. It also provides for repayment to the Government out of earnings and, by inference, provides for dividends to private stockholders who, in any event, will own the entire assets of the system when the Government stock has been redeemed, without interest.

These provisions limit the private-stock ownership to a few insurance companies and a few large banks that may at this time have funds to invest and are able to buy this stock and pay in full for it at the time.

The amount of stock borrowers are required to purchase is very small. For example, a bank or building and loan association desiring, in their distress, to borrow from the Federal bank must purchase $2,500 worth plus 1 per cent of the unpaid principal on the quantity of home mortgages owned by it that are eligible as collateral at the bank. In other words, if the banks owns $100,000 worth of these small home mortgages, it would be required to purchase $3,500 worth of stock and put that up with its mortgages as collateral to a loan, and in all probability would be either compelled or pleased to sell the stock back to the bank or some large stockholder at the time of paying its loan.

Senator MORRISON. Mr. Adams, is your entire statement in writing?

Mr. ADAMS. Yes.

Senator MORRISON. Unless you want to add something else to it, it seems to me perfectly foolish to sit here and read it. If you file it with the committee, and supplement it by any oral observations you want to make, I think that would be satisfactory. I do not want to prevent you from reading it, but I would rather read it than hear you read it myself, and I believe the other members of the committee will read it.

Mr. ADAMS. The only purpose in reading it at all would be to bring the points to the attention of anyone present who might desire to submit questions at this time.

Senator MORRISON. How long is it?

Mr. ADAMS. It would take about 15 minutes.

Senator MORRISON. If it is your pleasure to read it, you may do so, but I really do not see much good in a witness testifying that way,

myself.

Mr. ADAMS. The only purpose, as I said, is that those present might submit questions to bring out the points. But I have no desire to read it, Mr. Chairman, except for that purpose.

Senator MORRISON. If you are prepared to do it that way, perhaps you had better go ahead with it in that way. It just seems to me that it is a waste of time.

Mr. ADAMS. That would be true if there was not anything else but that. I would like to provoke questions on the part of the members of the committee, or anybody else, so that it all might be brought

out.

Senator MORRISON. Go ahead. We usually ask questions as we go along on each point, but with a written statement, it is difficult.

Mr. ADAMS. When the Government-owned stock is retired the few private stockholders will own all the stock in the system. They will have the exclusive right to use the name "Federal Home Loan Bank," issue and sell bonds, and these bonds, together with the capital reserve, surplus and income derived therefrom, except real estate owned, shall be exempt from Federal, State, municipal, and local taxation (sec. 11).

In other words, this system is to be established with Government money and a very few favored private stockholders. If $25,000,000 worth of capital stock is provided by private parties, and this is an excessive amount to anticipate, and the balance, or $125,000,000, provided from Federal funds, it means that all interest and earnings on the entire $150,000,000 will go to the owners of the privately owned stock. The Government will be reimbursed eventually, but without interest or any part of the earnings.

During the time the Government is a stockholder, the confidence of the people may be won to the point of buying the bonds freely and at a low rate of interest and the use of the word "Federal" is of great value. Eventually the private stockholders will own the system, have the confidence of the people and the advantage of doing business as a Federal bank exempt from all forms of taxation except on real estate owned, and be an unfair and formidable competitor against all mortgage companies, savings banks, and others that make real estate loans of this character.

Senator MORRISON. Why can not any other bank in the United States, under the provisions of the bill, join it that wishes to?

Mr. ADAMS. For this reason. Very few banks at this time are prepared to invest capital, as an investment.

Senator MORRISON. But they could do it if they wanted to and had the resources.

Mr. ADAMS. If they will make application, and pay cash within 30 days from the time the subscription books are opened. Otherwise, they are closed.

Senator MORRISON. How can you contend, then, that it is for just a special few, when by its terms it embraces every bank and every building and loan association, or anybody else mentioned in it that wants to join?

Mr. ADAMS. If the desire is to secure private capital to operate this system, why should not the books be thrown open to any investor, instead of limiting it to a few?

Senator MORRISON. Why could not that same question have been applied to the Federal reserve system or the farm loan system?

Mr. ADAMS. The Federal reserve system is in a little different form. That is for the special relief of commercial banks, and they were asked to contribute capital, which they did, in full, although Congress authorized an appropriation.

Senator MORRISON. Congress provided the funds to organize it originally.

Mr. ADAMS. Just the expense funds, I think, but no part of the capital. It did authorize appropriations for capital purposes in the Federal reserve system, but they were never required. The private banks supplied all the capital required.

Such a scheme to build and acquire a great business with the use of Government money without interest and have the special privilege of using a Federal name that leads the people to believe it is an institution backed by the Federal Government, and all with taxexempt privileges, should not be approved but roundly condemned. Senator MORRISON. Is not that the same case as the farm loan banks?

Mr. ADAMS. Yes, sir; and what is the result? You have just had to provide $125,000,000 more of Federal funds to revive it, and resuscitate it, and make it possible for them to serve the interests of the farmers and carry them through the period of depression.

Senator MORRISON. That is your opinion. My opinion is that the Government found it highly profitable to do so. It was about the soundest system of banks left in the country, and it would help the country to double its capital and let it proceed to render the fine service it had been rendering.

Mr. ADAMS. I think anybody can own stock in the farm banks. It is not limited to those who borrow, and it is not limited to the little local associations that were formed to help the farmers in the community.

Senator MORRISON. They might buy some of the bonds, but nobody can borrow money from it except the farm associations.

Mr. ADAMS. That is practically, to all intents and purposes, a straight loan to the individual farmer, guaranteed by the association in that locality. This does not provide for any such system.

Senator MORRISON. Go ahead. I do not see much benefit to the committee if I do not ask you questions that occur to me as you go along. Otherwise, we will have to go over the whole thing again. Mr. ADAMS. I am very glad to have you do so, Senator. It does not disturb me to be interrupted.

Senator MORRISON. Go ahead.

Mr. ADAMS. The conditions imposed upon borrowers are excessive and will prevent any institutions other than some building and loan

associations that have borrowed money at banks and are unable to pay; banks that are loaded up with real-estate mortgages of this kind that are not liquid assets under present conditions; and a few insurance companies that are in sore need of ready funds to meet their obligations; and other like institutions in distress are the only ones that can afford to comply with the conditions imposed to secure money for immediate needs, but not one dollar will pass through the hands of either these building and loan associations, banks, or insurance companies to help any home owner to refinance a mortgage that is due and perhaps under foreclosure, even though the security is several times the amount of the mortgage, and not one dollar for a new loan to buy or build a home will find its way to a home owner. Senator MORRISON. How do you know that?

Mr. ADAMS. Just as you know anything, when you read a set-up like this and think along the course of its procedure.

Senator MORRISON. That is just your opinion.

Mr. ADAMS. That is my conclusion, my opinion, and it may not be worth anything, Senator. But that is my firm conviction that that is the situation to-day. There is not a dollar's worth of benefit in this bill for the home owner that is in distress or wants to buy a home, and there will not be until this depression period is over. Then there might be. Even so, the conditions imposed on borrowers are so strict that the outsider, even though eligible to borrow, could not afford to do it. The insiders might.

The only ones that will receive any benefit are building and loan associations, banks, insurance companies, and similar institutions that are in distress and the private stockholders that will acquire a great business at the expense of the Government.

Senator MORRISON. The banks and insurance companies will receive benefits, will they not?

Mr. ADAMS. If they can afford at this time to put up the collateral and comply with the conditions.

Senator MORRISON. Don't you suppose, if they did, that they would carry the benefit along to the borrower?

Mr. ADAMS. Not now. A building and loan association would borrow just enough to pay its note at the bank and meet its other pressing obligations. The banker would borrow just enough to liquidate a portion of his mortgages and pile money up in his vault to add to his reserves.

Senator MORRISON. Would not that enable him to go on with his business in the usual way and grant extensions and make new loans? Would not that additional accommodation tend to give him that strength?

Mr. ADAMS. No. He will not make new loans. He may grant extensions.

Senator MORRISON. He ought to be the better able to do it if he wanted to, ought he not?

Mr. ADAMS. He will get relief.

Senator MORRISON. If he gets relief, is it not quite probable that that would benefit those dependent on him for help?

Mr. ADAMS. NO; because the practical banker is not going to comply with the conditions of this system to borrow from it unless he is in distress. He is not going to borrow money there to loan again.