conduct examinations. Thus, it is evident that determination of the precise administrative arrangements for conducting examinations of Federal associations will be within the discretion of the responsible agencies. The arrangements for examining insured State institutions, in cooperation with the State authorities, would appear to be primarily a matter of concern to the Corporation, since the Board's responsibility in this area is extremely limited. There are at least three possible arrangements for conducting examinations, none of which would involve duplicate Federal examinations of savings and loan associations. Each alternative contemplates a full interchange of examination reports between the Board and the Corporation. The possible arrangements are as follows: (a) All examinations could be made by the Federal Home Loan Bank Board. (b)_All examinations could be made by the Federal Savings and Loan Insurance Corporation. (c) Examinations of Federal associations could be made by the Federal Home Loan Bank Board and of insured State associations by the Corporation. In the commercial banking field, the division of examining functions among the Federal Deposit Insurance Corporation, the Comptroller of the Currency and Federal Reserve has proved to be workable and has not resulted in duplicate Federal examinations of banking institutions. The reorganization admittedly will result in a modest increase in the administrative and operating expenses of the Federal Home Loan Bank Board and the Federal Savings and Loan Insurance Corporation. This is inevitable when two organizations which have been utilizing certain common services are separated. The Corporation will have to add a small number of administrative, legal and supervisory personnel to perform services which it formerly received from the Board. It should be emphasized, however, that this will not involve either large numbers of people of sizable amounts of money. I would be the last person to minimize the desirability of obtaining administrative savings wherever practicable and in the public interest. But, in discussing administrative expenses, we must not let our attention be diverted from the major source of potential expense to the Government and the industry-the $31 billion insurance liability. A bank president who saved thousands of dollars by cutting the costs of examining loan applications, only to lose, as a result, millions of dollars in defaulted loans, would not be considered either an efficient or a prudent manager. The same principle applies to insurance. Administrative and operating expenses must be considered in relationship to the total amount of risk being assumed in connection with a program. The costs and the number of employees of the Federal Home Loan Bank Board and the Insurance Corporation have decreased drastically in proportion to the assets of member and insured associations. In 1946, for example, the Board had 32 examiners per billion dollars of assets; in 1956, it has less than 12 examiners per billion dollars of assets. In 1946, tthe Corporation had about 14 employees per billion dollars of potential liability; in 1956, it has less than 3 employees per billion dollars of potential liability. This is not to suggest that the costs of Federal supervision should be in direct ratio to the amount of assets and potential liability, but that some increase is warranted by the tremendous expansion and would not place an unfair burden on the industry. The modest increase resulting from the reorganization will be more than offset by the economies which will be obtained through the more effective protection of the Government's and the industry's very large financial stake in the insurance program. It would appear to be a simple act of prudence to relieve the officials charged with responsibility for the soundness of the insurance program from other important and possibly conflicting responsibilities. Furthermore, the reorganization will directly benefit the insured institutions and the holders of insured accounts by promoting continuing public confidence in the savings and loan insurance program. I urge that H. Res. 541 be disapproved and that Reorganization plan No. 2 of 1956 be permitted to go into effect. Mr. Chairman, certain questions have been raised in the Congress and I would like your permission-it is only just a page and a halfto read the questions and our comments on them. They are purely technical questions, and possibly answering them might make the record clear. I haven't covered them in my prepared statement. First, it has been stated that the reorganization plan does not accomplish any of the purposes for which reorganization plans may be prepared and transmitted to the Congress under the Reorganization Act of 1949, as amended. My answer is, that the purpose of the plan is to improve the management of the Federal Savings and Loan Insurance Corporation and to provide for better execution of the laws relating to insurance of share accounts by vesting management of the Corporation in a separate board of trustees with no conflicting responsibilty. The plan accomplishes, for example, the purposes specified in section 201 of the Reorganization Act: To promote the better execution of the laws, the more effective management of the executive branch of the Government and its agencies and functions, and the more expeditious administration of the public business. Second, that the plan would create an additional agency. The plan merely changes the management of the existing Savings and Loan Insurance Corporation and does not create a new corporate entity. The third statement, that no term of office is specified for trustees, even though the Reorganization Act prohibits increasing the term of office beyond that provided by law for such office and in no event in excess of 4 years. My comment is that section 4 of the Reorganization Act provides that a plan— may include provisions for the appointment of compensation of the head and one or more other officers of any agency. The act further provides that the head so provided for may be an individual or a commission and that in the case of such appointment, the term of office shall not be fixed at more than 4 years. No plan may increase the term of office beyond that provided by law for such office. Now, the offices of trustee of the Federal Savings and Loan Insurance Corporation are new offices created under the plan. Therefore, the section of the Reorganization Act prohibiting an increase in the term of an existing office beyond that already established by law is inapplicable. The Reorganization Act does not require in the case of new offices created by a plan that a term of office be established, but merely authorizes the President to provide for a term of office not in excess of 4 years when such a provision is considered appropriate. It may be noted that no term of office is specified for the directors of such Government corporations as Commodity Credit Corporation, ExportImport Bank, Federal Crop Insurance Corporation, Federal National Mortgage Association, Panama Canal Company, and others. The fourth statement is that section 3 (b) of the reorganization plan providing that the insurance corporation shall be subject to the direction and control of the President of the United States would require the President to ratify the acts of the Board of Trustees of the Federal Savings and Loan Insurance Corporation. My comment is that that section merely emphasizes that the Corporation shall not be subject to the control and direction of any official or agency of the executive branch other than the President. It in no way bypasses or impairs the authority of Congress. Even in the absence of such section 3 (b), the authority of the President as Chief Executive would extend to the Insurance Corporation, in the same way that it does to all other executive-branch agencies. Section 3 (b) does not require the President to ratify the acts of the Board of Trustees or in any other way to become involved in the detailed affairs of the Federal Savings and Loan Insurance Corpora Mr. BROWN. Yes, Mr. Chairman. First of all I would like to comment that I appreciate the fact that a great deal of concern has developed over the country among various building and loan associations as to the content and purpose of this reorganization plan No. 2 as submitted by the President. Next, I would like to mention that while the plan submitted by the President is not on all fours with the recommendation of the Hoover Commission, it does follow in sum and substance those recommendations. Next, I would like to say that I, too, have received many communications from my friends in the various loan associations of Ohio and the Midwest sector. I have also received a communication from the United States Savings and Loan League and a copy, as I presume most of the members of this committee have received, a copy of the letter of the president of the United States Savings and Loan League to President Eisenhower. I have also received copies of letters addressed to the Committee on Banking and Currency of the House of Representatives by other savings and loan associations in favor of the plan. I don't know why they were sent to me. I also have received a copy of a telegram which was sent to Mr. Dryer, the head of the United States Savings and Loan League, protesting against the position taken by the League in opposition to this reorganization plan. and attached thereto is a copy of the list of persons to whom Mr. Morton Bodfish-he was the man who first signed this protestMr. Bodfish sent copies of his protest to Mr. Dryer, and lo, the very first name on the list of copies sent was Mr. Spence, chairman of the House Banking and Currency Committee. I do not know Mr. Bodfish. I think for years he was head of this same Savings and Loan League. He may have been in some other organization. I know he is quite active in Capitol Hill in connection with various housing bills and lending agencies and so forth. I would also like to state for the record if I had been drafting this reorganization plan I would not have written it exactly as it appears here. However, I do think that there are some facts that we ought to bring out because this is a serious problem in my opinion as to what is to be done about the present situation. First, let me say that I have had considerable experience in legislative matters and am rather practically minded and I think I know the effect that messages received on Capitol Hill will have on this proposal when it hits the floor of the House, but I do feel that we ought to simply go into it rather seriously because regardless of what the House does on this particular reorganization plan or the other body either, some attention sooner or later will be given to this problem and must be given. If I understand Mr. Brundage correctly, and I want to ask him a few questions as I jot them down here, some are his remarks and some were made yesterday. You stated on page 2 of your statement that the surplus and reserves of the Federal Savings and Loan Insurance Corporation have decreased from 1.2 percent to 0.6 percent of insured liability since 1946; is that correct? Mr. BRUNDAGE. That is the proportion. You see, the relation of the capital reserves to the insured liability has gone down. The totals have gone up but the insured liability has gone up much more rapidly. It is just like a bank that starts in with a hundred thousand dollars capital and then it starts to Mr. BROWN. Well, isn't it the usual procedure for any insurance company to build up its reserves as its liabilities increase, instead of decreasing the reserves or letting them drop down in relationship to the total liability. Mr. BRUNDAGE. I think it is desirable, yes, sir. Mr. BROWN. May I ask you this question? If a corporation does not build up its reserves during the boom period which we have had, when it would have few if any losses, when, in your opinion, can it be expected that the reserves will be built up? Mr. BRUNDAGE. I think they should be built up in boom periods, Mr. Brown. Mr. HOLIFIELD. Will the gentleman yield on that point? Mr. BROWN. Yes, just for a question. I don't want you to take over the examination. Mr. HOLIFIELD. You proceed, then, and I will question at my own time. Mr. BROWN. If I am correct and understood your testimony properly, the Federal Deposit Insurance Corporation, which is an entirely separate operation from any other operation, maintained insured liability ever since 1945 at a ratio of 1.4 percent to its liabilities, while the reserve in the Federal Savings and Loan Insurance Corporation has gone down from 1.2 to 0.6 percent. Is that correct? Mr. BRUNDAGE. The second part of your statement is correct. I don't happen to have the FDIC figures here, but I believe that is about right. Mr. BROWN. Let me ask you whether or not in your opinion, in view of the fact that the assets of these loans consist mainly of insured and unrealized insured mortgages, if the Insurance Corporation is not taking a greater risk than the FDIC which has a larger spread on collateral of a different type. Mr. BRUNDAGE. At the present time, it does, yes. Mr. BROWN. This is the $64 or $64,000 question- Mr. BROWN. You may be more right than you think you are, Mr. Fascell. If the Federal Savings and Loan Insurance Corporation should ever get into a situation where it cannot pay its accumulated claims from its accumulated insurance and reserves, and that is what we referred to a moment ago, won't the taxpayers of the United States, including those in my own district, be called upon to meet those losses? Mr. BRUNDAGE. That would be the effect. Mr. BROWN. In other words, we have a stake of $31 billion- Mr. BROWN. That we have guaranteed to pay if the Insurance Corporation would pay the losses in case we should have a recession or depression, or downturn in business activity or real-estate values, or whatever you wish to call it. Now, you have an outstanding reputation, Mr. Brundage, or did have, when you came to Washington. Usually most of us leave Washington without much reputation. You may be the same as the rest of us, but at least when you came here you had a reputation as an outstanding certified public accountant, one of the leading men in that field in America. As a public accountant, would you be willing to certify that a system which placed responsibility for promotion, chartering, and insurance underwriting on the same individuals, provided adequate protection to the Government and the industries and deposits and taxpayers; in other words, the people that will promote these things also run the insurance end of it. Mr. BRUNDAGE. I don't think that is sound management; no sir. Mr. BROWN. And you, of course, have not made any study yourself of the various loan associations. Now, there are many fine ones and then there are some that may not be so good, I don't know. I recall back in the thirties, when I was a State official in Ohio, that we had quite a number of these associations that got into serious financial trouble and it created a great problem; not only for the State, because they were chartered in the State at that time, but for the Federal Government, too, because people were losing their homes and of course none of us want that, regardless of what we may think about any reorganization plan or anything else; and I don't think any building and loan official wants that. I think they are just as interested in the safety of the money that the depositors have and the financial soundness of the institutions as they can be, but do you think a life insurance company, for instance, should permit its salesmen to also give the medical examination and pass on whether the person he is selling the life insurance to is going to get the policy? Mr. BRUNDAGE. No. This conflict of interest theory, of course, is very important in Washington, and maybe we get too much concerned |