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are diversified as a general rule, very much diversified, and that there are constant substitutions being made in them, and whether we recognize a loan of six months from now that was made today as the same loan is questionable. I do not know how you would cover that. But if you could cover the point, Mr. Pecora, in a practical way, it ertainly would be better than the arrangement of the bill, as I see

it now.

Mr. PECORA. Can you think of any more practical or immediately available method than by allowing a period of time for the adaptation of existing loans to margin requirements of the bill, whatever -uch margin requirements eventually might be?

Mr. POTTER. No; I have not been able to think of a better device, but neither have I been able to see how that device is quite practical unless you number the loans and you call a loan for a half million dollars no. 25, and it is a half-million-dollar loan, no more and no less, regardless of what collateral is substituted for the original collateral. It seems to me that would be a little difficult, but perhaps it could be worked out.

Senator ADAMs. Mr. Potter, in your inquiries or study have you been able to form any estimate as to the extent or the proportion of the speculation which was based on marginal transactions as against that which was based on actual ownership and borrowing and other ways?

Mr. PECORA. In connection with that, Senator, we have considerable data that has been compiled from the returns to questionnaires that were addressed by us from members of various stock exchanges throughout the country. The data will show the number of accounts of customers carried by brokers on margin and the number of accounts that were on a cash basis. I think they will perhaps show or indicate that situation much more definitely than any other figures that are obtainable. We will have those data before the committee very, very shortly.

Senator ADAMS. Mr. Potter, you spoke of being an amateur in speculation. Do you know anybody who really qualifies as an expert now?

Mr. POTTER. No, sir; I do not know as I do. But there are certainly some who know more about it than I do.

The CHAIRMAN. Are there any other questions?

Senator GOLDSBOROUGH. Mr. Potter, you disclaim being an expert on the stock exchange. Might I ask you if you have any opinion n the question as to whether section 9, I think it is, might prohibit hort sales and stop-loss orders?

Mr. POTTER. Senator I do not have a copy of that bill before me. (A copy of the bill was handed to Mr. Potter.)

Senator GOLDSBOROUGH. I think it is page 20, sir. If that does prohibit such sales or stop-orders, do you think that is wise? Mr. POTTER. Well, you refer to paragraph (b) ?

Mr. PECORA. (a) and (b) both.

Senator GOLDSBOROUGH. (a) and (b) both.

Mr. POTTER. You will have to pardon me if I look at this a minute, because I have not put my mind on this before.

Senator GOLDSBOROUGH. Yes.

Mr. POTTER (after perusing sections of the bill). Senator, I take it that this is a prohibition against short sales, is it not?

Mr. PECORA. Yes, except in accordance with such rules and regulations as may be prescribed.

Senator GOLDSBOROUGH. Some people I think rather interpret it as a prohibition.

Mr. POTTER. You are asking me something that I am not very well prepared on, but as I read it, it gives me an impression that it implies a prohibition or a suggested prohibition.

Senator GOLDSBOROUGH. I am asking your opinion as to the wisdom or unwisdom of that.

Mr. POTTER. I do not think my advice to you on that score, my opinion, would be worth much. It is a very big subject, and it is one that has been discussed by a great many people who know more about it than I do. In my business experience, entirely apart from speculation, but in the handling and deliveries of securities, not only my own but others, it has many times been almost a life saver to be able to use the market on the short side, in hedges and in other transactions. The common use of the words "short sales against the box" is an almost every-day occurrence, and it is practically convenient and necessary.

Senator GOLDSBOROUGH. Then as a matter of fact it is not without some good result?

Mr. POTTER. I should think not. But I do not want to pose as a proponent of the short sale, because I do not think I know enough about it to go very deeply into the subject.

Senator KEAN. Well, you do know that you get cables from

abroad?

Mr. POTTER. Oh, yes.

Senator KEAN. And that it takes sometimes as long as

Mr. POTTER (interposing). Two weeks.

Senator KEAN. Two weeks before you can receive the securities from abroad.

Senator GOLDSBOROUGH. Mr. Potter has touched that in his statement.

Mr. POTTER. Yes. We have had a good many cases, Senator, where the customers have undoubtedly good credit, and they would ask us to transfer from their account a large block or a small block of stock, and sometimes it would take them 6 months to dig it up. I mean to say that they have been mislaid or something.

Senator KEAN. Perhaps they were abroad and it was in their box and nobody had access to their box.

Mr. POTTER. Yes.

Senator KEAN. And in the meantime you had to borrow the stock? Mr. POTTER. Yes. And I think it is perfectly legitimate for us to do that.

Mr. PECORA, Mr. Potter, you have referred to short sales against the box. Where a person holding securities at the time he makes a short sale thereof actually covers them, not through securities he owns but through the purchase of securities in the market, that virtually becomes an outright short sale, doesn't it?

Mr. POTTER. Oh, if he does that; yes.

Mr. PECORA. I might say for your possible information that in section 8 (a) (5), relating to dissemination of information, et cetera, and with respect to which you devoted a considerable part of your

statement

Mr. POTTER. Yes.

Mr. PECORA. Practically all of the considerations that have been urged by you in your statement have already received attention. Mr. POTTER. I was afraid that was so, Mr. Pecora.

Mr. PECORA. You mean you were hoping that was so?
Mr. POTTER. I was hoping it was so.

Senator ADAMS. I should say, Mr. Potter, to clear up, that my comments were in reference to section 17 (a), not this section 8 (a). Mr. POTTER. No.

Senator ADAMS. Because some of your remarks were appropriately directed at 8, and the part I was commenting on was section 17 (a), and perhaps that qualification ought to be made.

Mr. POTTER. Yes.

The CHAIRMAN. Any other questions?

Senator KEAN. I think, Mr. Potter, you covered the trust question, where you had a nominee with stock in his name so that you might control 5 percent of the company, but, of course, you would not really control it because you would have to ask the trustees whether they would vote the proxy.

Mr. POTTER. I would either have to ask the trustees or owners or beneficiaries.

Senator KEAN. Yes.

Mr. POTTER. I would like just to make one brief observation there. I differentiate between the owner of record and the actual owner, that is all.

Senator KEAN. In other words, for convenience sake, why you put the stocks in the name of a nominee?

Mr. POTTER. Yes, sir.

Senator KEAN. And you might have 5 percent stock?

Mr. POTTER. Yes, sir.

Senator KEAN. Whereas, if you came to vote, divided into the dozen accounts and so forth, you might not have one percent? Mr. POTTER. Yes; the votes might offset each other. Senator KEAN. Or they might offset each other.

One group

might vote for one set of directors and the other one might tell you to vote for another.

Mr. POTTER. Exactly.

Mr. PECORA. The ownership is to be treated as an entity with respect to the necessity rather than the nominee of record?

Mr. POTTER. It seems so to me, Mr. Pecora.

The CHAIRMAN. That is, I believe, Mr. Potter. We are very much obliged to you.

Mr. POTTER. You are very welcome, gentlemen. I appreciate the opportunity of coming before you.

The CHAIRMAN. It has been a very enlightening discussion. Mr. Johnston.

STATEMENT OF PERCY H. JOHNSTON, MONTCLAIR, N.J., CHAIRMAN OF THE BOARD AND PRESIDENT OF THE CHEMICAL BANK & TRUST CO., AND CHAIRMAN OF THE NEW YORK CLEARING HOUSE ASSOCIATION

The CHAIRMAN. Mr. Johnston, just have a seat and give your name and address, and occupation.

Mr. JOHNSTON. Percy H. Johnston, Montclair, N.J.; chairman of the board and president of the Chemical Bank & Trust Co., New York, and in my appearance before your committee as the chairman of the New York Clearing House Association.

The CHAIRMAN. We want to hear your views about this bill, Mr. Johnston.

Mr. JOHNSTON. Senator, there is very little that I can add in addition to what Mr. Potter has said. Mr. Potter and myself have collaborated on this matter. Candor compels me to say that he did most of the work, because I have been laid up with the grippe; just got out of it a day or two ago.

Senator KEAN. So that you corroborate what Mr. Potter has said! Mr. JOHNSTON. I am familiar with his statement and I am in sympathy and in accord with it.

I should like to say that I grew up in a country bank. I spent 6 years attached to the Treasury Department here examining banks from the Atlantic to the Pacific and from the Great Lakes to the Gulf. I have an apprehension as to how the country banks can get these collateral loans out. They always have them. They loan on an ice plant, grain elevator, every conceivable thing you can think of. They have no market, exchange, value anywhere.

Senator GOLDSBOROUGH. And many unlisted securities of local corporations?

Mr. JOHNSTON. Nearly all of the country banks' securities are unlisted securities. I do not believe that they can afford to list them. I am talking about the town I grew up in in Kentucky, 3,500 people, which probably have six or eight corporations, such as a lumber company, and so forth.

Senator ADAMS. Most of those securities would not qualify for listing on any exchange?

Mr. JOHNSTON. No, sir; and they could not afford to have the audits. The expense of having them certified every 3 months w some exchange would just be prohibitive.

In regard to placing the control of this subject in the Federal Trade Commission: At present my institution is subject to four different supervisory authorities: State of New York, the Federal Reserve Bank, the Federal Deposit Insurance Corporation, and the New York Clearing House Association.

Senator KEAN. And the Comptroller of the Currency?

Mr. JOHNSTON. No. We are a trust company.

Senator KEAN. Oh, yes.

Mr. PECORA, The Clearing House Association examination is purely voluntary. I mean your bank by being a member is

examined?

Mr. JOHNSTON. Yes, sir. We can withdraw from the clearing house, of course, to avoid them.

Senator ADAMS. You could withdraw from the Federal Reserve? Mr. JOHNSTON. Yes; but I should say it takes about a third of our year now to be examined and to make reports, and one does not conceive the enormous expense that is involved in all this amount of work. Now I hate to see added on another and probably conflicting authority.

I am quite sure that probably what we are aiming at here is to cure speculation. I wish there was some way to cure it. I think we would be better off. But I think you have got to change your ace of human beings, because they like to speculate.

I think you have the control now. We had the control in '25, 26, 27, 28 and '29, and we did not use it. We had the control in he power of the Federal Reserve Board, and if the Federal Reserve Board had not bent its policy to meet the wishes of the Treasury, who wanted to borrow cheap money for the Government, but had aised these rates as they should have done, we could have stopped his speculation in its incipience in 27 and '28 and avoided this olossal crash that has come with such widespread disaster to 'veryone.

Mr. PECORA. In those times, Mr. Johnston, persons whose positions and experiences gave them perhaps the appearance of having some uthority opposed the adoption of any measure that had the tendency hat you now speak of, that is, to curb any speculation. Mr. JOHNSTON. You mean the Federal Reserve Board?

Mr. PECORA. No; the persons outside the Federal Reserve Board. For instance, all that time the gentleman that was president of the New York Stock Exchange in a speech he delivered in January 1928 lecried the notion that some persons were then giving expression to he fact that we were living at that time in a fool's paradise.

Mr. JOHNSON. I do not doubt that, Mr. Pecora. I do not doubt hat there were many people who wanted that speculation to go on, but I do claim that the central banks, rather than the Federal Reserve Board, which is the central bank in effect, had that power. I think very central bank in the world has that power. But inevitably they all color their operations to suit the treasuries of their country. Mr. PECORA. And we have seen too that nonbanking corporations and individuals having large capital surpluses encouraged specuation by sending their money into the market.

Mr. JOHNSTON. Yes. That is where the bulk of the money came rom. There was very little money that the big banks in New York for their own account loaned to the brokers, but it came from ll over the world. There was a lodestone that drew this money to he high rates.

Mr. PECORA. Should not that be checked?

Mr. JOHNSTON. That has been checked now, because they have rohibited the lending of money for the account of other people ike that.

Mr. PECORA. That does not prevent the nonbanking corporations rom making the loans directly?

Mr. JOHNSTON. No; it does not.

Mr. PECORA. We have evidence here that some of them did make arge call loans directly, not through the medium of banks.

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