Mr. THOMAS. Yes, we did.

Senator STEWART. And were they hedged positions?
Mr. THOMAS. They were not.

Senator STEWART. Are there any other loans that you made? Mr. THOMAS. The loans were advanced on the basis that they were hedged positions, however. And I will have to state that there was certainly a misunderstanding as to the terms of that particular loan.

Senator STEWART. Did you ask at any time contemporaneously with making the loan as to whether or not these loans were for the purpose of aiding the Hunts in particular?

Mr. THOMAS. I did not, certainly. I was not directly involved in that. And in talking with our account officers, that specific question was not asked, Senator. These were loans that were advanced in the normal course of business under a facility that had been set up as we do with a number of the large brokerage firms in the country.

Senator STEWART. Who made the loan at the bank?

Mr. THOMAS. Well, we have three gentlemen who were involved in our commodities group. I'm not sure which one made the loan. The facility-

Senator STEWART. Would you give me their names?

Mr. THOMAS. Well, Mr. Yohanon. Robert Yohanon is the head of our commodities group, and it certainly would have had his approval, and he later on became very active in the handling of this credit as the true nature of it emerged.

Mr. Putko was very active in the handling of the credit, and an experienced lending officer. And Mr. Ray Groselak is the name of the third account officer. That's G-r-o-s-e-l-a-k, I believe it is.

Senator STEWART. Mr. Chairman, my time has expired. I do have a number of other questions that I would like to ask.

The CHAIRMAN. Do you have a plane you would like to catch, and would you like to finish up? That's why I yielded to you first. Senator STEWART. Well, I do have a plane I would like to catch, and I would like to finish up. I don't have to leave here until 1:45. The CHAIRMAN. How long will it take you?

Senator STEWART. I can go as hurridly as I possibly can. I do have a number of questions, though.

The CHAIRMAN. Well, I think we had better go ahead.

Senator STEWART. That's fine. You go ahead. That's why I yielded back.

The CHAIRMAN. Senator Stevenson?

Senator STEVENSON. Well, this was the line of questioning that I was going to get into, and perhaps you ought to continue it.

First, I think we ought to hear from the other banks about their relationships, if any.

BROKER RELATIONSHIPS

Mr. MASON. In response to the question on broker loans, we have no broker lines in our bank where we can determine that they have any relationship to the commodity markets. They are not commodity related lines. They are customer securities lines.

We have reviewed the records for the period of time the Senator asked about, and I can find no indication that any funds extended

to any brokerage firms found their way into the commodity markets.

Senator STEVENSON. Were loans extended by your bank to Bache during this period beginning in August through April?

Mr. MASON. No.

Senator STEVENSON. And no other brokerage firms, so far as you could tell, were benefited indirectly?

Mr. MASON. That is correct.

Mr. Boisi. Senator, we do have a brokerage relationship with many of the large brokers in the city. Indeed, Bache is a client of ours. We did not have a loan to Bache secured by silver. I cannot tell you precisely how many loans were made during that period. Loans are made every day. They are made, however, in the usual method of dealing with brokerage houses. They are secured loans, secured by securities, marketable securities.

The fact is that we have had no relationship with Bache for silver loans or any other brokerage house.

Senator STEVENSON. You do not?

Mr. Boisi. Do not.

Senator STEVENSON. For silver loans?

Mr. BOISI. That's correct.

Senator STEVENSON. Mr. Thomas, was the $50 million loan you referred to, which First National extended to Lamar Hunt, made to enable him to meet margin calls from Bache?

Mr. THOMAS. I'm not certain, Senator Stevenson, where the margin calls originated, but that was the purpose of the loan that was requested of us. It was to enable him to avoid precipitous liquidation of a position that he had attained-the desire, that we were advised of, that he should exit the silver business in an orderly way, and this loan was to help facilitate that objective. Senator STEVENSON. Well, Mr. Chairman, I think the banks, in putting together this credit facility, are doing what they have to do. I don't have many questions about that.

Do you have an opinion as to the market value of all of the collateral that has been put up for that $1.1 billion credit facility? Mr. MASON. Senator, we do have but in the interest of respecting the financial records of a private company-I would like to describe in general some matters, hopefully avoiding unnecessary disclosure of confidential information.

First of all, if you look at the $1.1 billion loan secured or extended from the banks to the Placid Oil Co., that loan is based on oil and gas properties. This company, as Mr. Boisi has indicated, is a company that our bank and his bank-and we are both banks that have extensive experience in oil and gas lending-we have dealt with this company; we have know their properties. These are engineered, proven, oil and gas reserves and properties, related properties.

We have long been familiar with these properties. We are amply well secured with the oil and gas properties as to the loans outstanding, as well as previous loans, that this collateral will serve as collateral to, as well. So there is no question in our minds but what we have ample security in the form of oil and gas properties for the credit that will be outstanding between the banks and Placid Oil Co.

Senator STEVENSON. Any addition to that comment from the other banks?

Mr. Boisi. Well, I might go just a step further, still trying to respect the confidentiality of the information that was submitted by our client. I think it is fair to say that the value of the assets, as we have seen them, is several times the amount of the loan. Senator STEVENSON. Do you agree?

Mr. THOMAS. Yes, I do agree. And I think the agent banks have done an extraordinarily fine job of assembling the collateral and evaluating it, and we have all had an independent look at it and a chance to examine it. And I would concur completely with these comments.

Senator STEVENSON. Now, as I was saying, it sounds to me as if the banks really didn't have much choice except to put this facility together. And it appears, on the basis of what they said, that it is adequately collateralized.

This hearing has focused very little attention so far-at least during the time that I have been present-on the activities of the broker dealers and the relationship of the banks to those institutions. And on the basis of what I have heard so far, if there is a culprit, it is the broker dealers. And if there is a government culprit, it is the agency with responsibility for the regulation of those institutions.

It is getting late. Would you each give me your opinion about the activities of Bache and the other dealers in executing these transactions for the Hunts and the extent to which the SEC discharged its responsibility for the regulation of broker dealers adequately. And finally, what, if any, additional regulatory authority is needed in order to help banks better to protect themselves against such situations as this in the future?

Mr. MASON. Well, Senator, I certainly do not wish to avoid, in any respect, your question. But I would say, from the point of view of our bank and me personally, we do not have substantial involvements with the brokerage firms as relates to the commodities world. We have elected not to be involved in any significant way in that segment of the financial community.

We have in our bank, and did have during the period that you are questioning, seven broker relationships. These relationships dealt with customers' secured margin lines, and these are principally stocks on the New York Stock Exchange or the American Stock Exchange. Our credits outstanding during that period of time ranged from a low of $17 million to a high of $24 million or $25 million-certainly not reflecting any unusual pattern.

Because we have been uninvolved in those markets, I find myself in a position of not being able to offer what I would call a reasonably informed opinion on whether or not they acted inappropriately or not, because I am simply not familiar with that aspect of their operations.

So, again, without wishing to avoid the question, I would simply say that we are not sufficiently well involved to express a good opinion on it.

Senator STEVENSON. Well, Mr. Thomas, you did have a relationship. I probably should have included the CFTC when I made my reference to the SEC. What is your response to that question?

Mr. THOMAS. Well, I would not want our relationship to be colored entirely by the fact that there did exist a difference of opinion as to the basis upon which our credit was made. We were informed and advised that it was based upon collateral which was hedged. As a result, we advanced 90 percent of the value of the collateral as opposed to a much lower percentage if we had made the loan at all if it had not been hedged.

Putting that aside, I think we learned something. We will certainly be more alert to the possibility of concentrations in the future. Whether or not the names of the customers might be involved, I don't think that's entirely necessary, and it hasn't been a practice in the past for brokerage firms to divulge the names of their customers to the lending bank. I think a lot of lessons have been learned.

I believe there were concentrations in the brokerage community, not solely with one firm but with other firms as well, that in retrospect would appear to be quite large.

I don't believe that in the case of Bache Metals there was direct supervisory responsibility on the part of the SEC, since Bache Metals is not a broker dealer. We did have a guarantee of the parent of the broker dealer organization, but that whole area of concentration and the relationship of a nonregulated subsidiary to a regulated company is obviously going to be a matter of some discussion.

I would urge that great care be given before any additional regulation or legislation is developed. The markets, in the last analysis, did work. I think that all participants learned something from this episode that will enable them to be more alert in the future. I am a strong believer in free markets, and I would just be very reluctant to do anything at this particular time that would prejudice the functioning of those markets that are so terribly important to the functioning of our economy.

Mr. Boisi. Senator, as I indicated to you earlier, we do have relationships with the brokerage houses in the city. But insofar as commodities are concerned, as I mentioned in my earlier statement, we have a policy that does not permit the making of loans for speculative purposes. Our policy requires that we will finance only merchants who move their commodities into the channels of trade. And even there, we require that those commodities be hedged. We believe that to do otherwise would, not to be taking a banking risk, but to be taking an equity risk; and we do not feel that we should be taking an equity risk.

My personal experience has been limited primarily to this particular transaction on which I have been working for some time, some few weeks. And I have come to learn that this is a very highly specialized area. One requires a great deal of knowledge and expertise in it. The very lexicon in the area is far different than usual banking terminology. And it seems to me, therefore, that before anything is done, that much greater study should be undertaken to really understand how the markets work and why they work the way they do.

Senator STEVENSON. My time has expired.

The CHAIRMAN. Mr. Boisi, I think Senator Stevenson is right in talking about the fragmented regulations, or implying that that's

the problem. And it is. You have the CFTC and the SEC, both of whom regulate brokerage firms, as I understand it, in this capacity, particularly. There is no requirement in the law for any coordination. They consult, but there is no coordination between the CFTC and the SEC.

As he said and as you gentlemen imply in your testimony, the conduct of the banks may very well be blameless. But when all the complications are swept aside, what happened? The banks make a loan to Placid Oil, which is the outstanding holding the Hunts have, according to everything I have read. A fine firm. Excellent collateral. And they make a loan to Placid Oil.

The provisions that the Chairman of the Federal Reserve Board has indicated publicly and to us that he intends to provide is that there be no speculation with the $900 million made available. And yet what it all comes down to is that the banks provide a credit of $900 million; the Hunts are able to pay off their debts. To whom? To the shorts, at least to the tune of over $1 billion, or the directors of the exchanges.

And the result is the Hunts have a billion less, the shorts have a billion more, and the banks have a billion dollars less of credit to loan to productive industries.

What is wrong with that simplification of what happened?

Mr. Boisi. I just think, Senator, it's not quite fair.

The CHAIRMAN. In what capacity? In what way?

Mr. Boisi. You must take into consideration the period of time in which this all came about: High inflation, credit restraints, high interest rates.

POTENTIAL DAMAGE

Looking at this from the point of view of the potential damage that could have been done to the economic fabric of the country as a whole is, I think, a fairer way of looking at this. That damage that could have happened could have extended far beyond just the Hunts and the few brokerage houses, but could have extended to their creditors, to their customers, and to the general public itself. There is no way that we could have foretold at the time we engaged in this process what that damage would be, or indeed whether there would be any. But there was the potential for it, and it was because of that potential that this bank, Morgan Guaranty, did indeed engage in the process of trying to put this together. The CHAIRMAN. Well, I wonder about that damage. This is about a $2.3 trillion economy or $2.7 trillion. Anyway, it is a fantastically big economy. And while $1 billion is a great deal, while the fate of brokerage firms and even banks, big banks, are of great concern to us, I just wonder if this tough, resilient economy that believes that when people make mistakes they pay for them and believes in the discipline of the marketplace and believes that we shouldn't bail out firms except we make the very unfortunate exceptions of Chrysler and New York City, and now we proceed to bail out the Hunts.

Mr. Boisi. Exceptions break the rule.

Senator STEWART. Senator Tsongas is no longer here, and Senator Riegle is not here. But I would just point out that American Motors had something.

The CHAIRMAN. American Motors?