Senator STEWART. Yes. I just wanted to voice that.

The CHAIRMAN. That was in Wisconsin, but that wasn't a bailout. [Laughter.]

Mr. Boisi. Some of us do have recollection, though, Senator, of some periods in the past when corporations were unable to meet their particular obligations-in some instances, far less than $1 billion-and the effect those factors did have on the economy. Mr. THOMAS. May I comment?

The CHAIRMAN. Go right ahead, sir.

Mr. THOMAS. I think, first of all, the premise that $1 billion was somehow taken out of availability for other corporate uses is a fallacious assumption. And I don't really understand how all these so-called shorts came into possession of the proceeds of this credit. I don't have the information, but I believe Mr. Mason or Mr. Boisi have it, as to who received the proceeds, in some detail, from that loan. This was basically-

The CHAIRMAN. Well, you have forward buying, and then you have shorts. If the longs lose, the shorts pick up; don't they? Mr. THOMAS. I don't think it is that simple. In this case the proceeds from this loan that were used to retire Hunts' indebtedness, I believe, was largely for the purpose of repaying loans that had been incurred by the Hunts from brokerage firms and an assortment of banks and other lenders. This was a restructuring of credit obligations, and there was not any net new credit extended, in my understanding.

The CHAIRMAN. Well, the loans were used to pay off the margin calls. The shorts won, and the forwards lost.

Mr. THOMAS. Well, you can look at it that way. I think the way I would prefer to look at-and, I think, the accurate way-is that the Hunts had a serious liquidity problem, and in the nervous market we were confronted with at the time, we felt that the ramifications of their not being able to honor their commitments to their lenders could be potentially serious.

There was a vehicle available to solve this problem, and, in terms of the potential risks to the country and in terms of the potential risks to a number of assorted lenders, to the Hunts, and the ripple effects that might have taken place-not to the large banks, but for a lot of smaller concerns throughout the countrywe felt that this was certainly a constructive thing to do. It helped a customer that has been a very productive customer for all of us over the years, and we think there was a public interest served. The CHAIRMAN. All right. Fine. A position that you and Mr. Boisi have both taken, as I understand it, is that this was a near miss that might have been damaging to the economy as a whole. You may very well be correct. Doesn't that represent pretty eloquent testimony that what we need is the kind of legislation we are proposing for regulation of the futures market?

Mr. THOMAS. I don't think so.

The CHAIRMAN. Why not?

Mr. THOMAS. I think it certainly has created a need to learn more about what has transpired. And as I think I indicated, I think we are all a little wiser today around this table than we were two months ago.

The CHAIRMAN. Well, I wonder if we are using that wisdom, however, to make policy that will enable us to be more constructive in the future so that we won't have to have a $1 billion bailout of the next big speculator who might otherwise cause ripples in the economy.

Mr. MASON. Senator, I would like to make one comment. The word "bailout" continues to be used. And I find it difficult to understand why this is looked upon as a bailout in the sense that, yes, the Hunts had a liquidity problem, they had had losses in the marketplace, and they were under pressure; but fortunately, within the framework of their family and related entities, they were able to solve their problems.

The banking system did this on a private-sector basis. I think it can be demonstated that it was not the creation of new debt, and therefore it is not inconsistent with what the Federal Reserve has been trying to achieve. It was an after-the-fact type development. And I find it difficult to look upon what occurred within the private sector-I am not talking about what led to the problem; I am talking about the refinancing-as being something that needs to be looked upon in an adverse way, in that it was something that could be solved within the private sector and without damage to the marketplace.

The CHAIRMAN. I am talking about what led to the problem. That is the question of whether or not we should take a look at the regulations and see if they are adequate.

LOANS TO FINANCE COMMODITIES, FUTURES

Mr. Thomas, does your bank as a regular matter make loans to finance commodities, futures, or forward positions or brokerage house cash needs?

Mr. THOMAS. We are located in a city that is very important to the commodities business. We don't have as much of that business as we would like, and frankly we are in the process of building up our capability to serve those industries.

The CHAIRMAN. You want to do even more? Do your loan officers question the purpose of these loans?

Mr. THOMAS. Yes, they do.

The CHAIRMAN. What proportion of your loan portfolio now would fall within the category of financing commodities, for example?

Mr. THOMAS. Well, I don't have the precise answer to that, Senator, but it would certainly be in the neighborhood-it would be less than 5 percent.

The CHAIRMAN. How about futures, futures in forward positions? Mr. THOMAS. Nominal.

The CHAIRMAN. Nominal?

Mr. THOMAS. Yes, sir. Most of the loans to the commodities sector would go to the large grain dealers, to the large trading companies; and a much smaller percentage to the brokerage firms.

The CHAIRMAN. Mr. Mason, how about in the case of your bank; what proportion of your loans would go to finance commodities for futures or forward positions?

Mr. MASON. Extremely nominal.

The CHAIRMAN. Is that true of Morgan Guaranty?

Mr. Boisi. In comparison to our total assets, yes, sir, that's true. The CHAIRMAN. Let me ask you this, then, Mr. Thomas: what steps did your bank take in October and in March in support of the Federal Reserve's request that loans for speculation, especially in commodities, be avoided?

Mr. THOMAS. In October we circulated Chairman Volcker's letter to our senior lending officers, discussed the implications of that policy directive, and asked them to so advise the account officers under their jurisdiction. And it was certainly the intent and the policy of the bank from that time forward not to engage in loans for so-called speculative purposes.

In March, when the subsequent steps were taken, we distributed that letter to every lending officer in the bank, together with a covering memorandum explaining in somewhat more detail what our policy would be under that more rigorous directive.

The CHAIRMAN. My time is up.

Senator Stewart.

Senator STEWART. In connection with the question the chairman asked about this directive of the Chairman of the Federal Reserve, when, in connection with that directive that you received in October, did you make the loans to both the Hunts and the brokerage houses?

Mr. THOMAS. I am not sure I understood the last part of that question, Senator Stewart.

Senator STEWART. When did you make the two loans to the Hunts in relation to the October directive by the chairman of the Federal Reserve?

Mr. THOMAS. Well, we have been lending money personally to Nelson and William Herbert Hunt in substantial proportions, dating back to 1974.

Senator STEWART. When did you make the loans to the Hunts in relation to the directive by the chairman of the Federal Reserve, the $50 million loans; when did you make them?

Mr. THOMAS. There weren't two $50 million loans. That's what I was trying to describe. There was one $50 million loan, and it was made in February.

Senator STEWART. February of 1980?

Mr. THOMAS. Yes. And that, as I pointed out, was not for the purpose of acquiring a speculative position in any commodity. Senator STEWART. What was the purpose of it?

Mr. THOMAS. The purpose was to meet margin calls, to facilitate an orderly liquidation of the position that had already been accumulated.

Senator STEWART. Now, you had made the loan to Bache when? Mr. THOMAS. This loan was to Bache Metals, to the Bache Metals subsidiary.

Senator STEWART. The $75 million loan to Bache Metals, when did you make it?

Mr. THOMAS. That was a facility that was available either to the parent or the broker dealer or the Metals subsidiary. It was drawn down initially in the fall of 1979.

Senator STEWART. Was that after October or before?

Mr. THOMAS. I am not sure about that.

[Pause.]

Mr. THOMAS. I am sorry. May of 1979, when it was started. Senator STEWART. But when did they begin to use that line of credit to any extensive degree? Was it after October?

Mr. THOMAS. It was not-in my recollection, it did not mount up into substantial proportions until after October, yes, sir.

Senator STEWART. Did you think the directive that the chairman had issued with regard to speculative lending had any relationship to that at all?

Mr. THOMAS. No; none whatsoever, Senator.

Senator STEWART. It just didn't have any relationship?

Mr. THOMAS. No. We think the carrying of hedged commodity positions is not a speculative activity.

Senator STEWART. But it was not the carrying of a hedged position; was it?

Mr. THOMAS. That was the basis upon which the loan was made, Senator.

Senator STEWART. The other thing that you all have said that sort of concerns me now is that this is not a new line of credit. I assume that there would be people who would be paid out that would include some of the brokerage houses: Merrill Lynch and Bache, I think, would be paid. Is that correct? Are they going to be paid out of this?

Mr. THOMAS. Are you talking now about the loan to Placid? Senator STEWART. The loan to Placid.

Mr. MASON. Yes; that is correct.

Senator STEWART. What is that? About $380 million?

Mr. MASON. Which one are you talking about?

Senator STEWART. Well, both.

Mr. MASON. I would rather be as precise as possible, so let me refer to some notes.

[Pause.]

Mr. MASON. The original disbursement which occurred in early April, as the first increment of this large loan, had payouts to Bache, ACLI, Merrill Lynch, Paine Webber. And then, with the consummation of the full-credit agreement, additional payments were made to ACLI and to Merrill Lynch.

Senator STEWART. Now, what did that payout constitute, totally, to all of those brokerage houses?

Mr. MASON. I can just give you the numbers. I have not added them up in the form you are asking. But I will be glad to give them to you.

Senator STEWART. All right, give them to me.

Mr. MASON. In the disbursements that occurred during the month of April: Bache and Company, roughly, $221⁄2 million, 22.6; ACLI, 26; Merrill Lynch, 6.2; Paine Webber, 8.5. In the final disbursements from the credit agreement: Merrill Lynch received a total of 237.7; and ACLI, 89.2. So I assume the addition of all of those would be responsive to your question.

NO NEW LINE OF CREDIT

Senator STEWART. About $380 million. And I assume that no new line of credit is going to be extended to these brokerage houses to replace that debt that they would pay. Is that right?

Mr. MASON. That is certainly right as it relates to our bank.

Mr. THOMAS. We have nothing outstanding to Bache Metals. Senator STEWART. What if they came and wanted to borrow some money; they couldn't borrow it, I assume, since there is no new line of credit being extended?

Mr. THOMAS. Well, we're talking about one of the largest broker dealer firms in the United States, Senator. I wouldn't want to make that flat statement here today. I think we would take a look at what the proposition was at the time.

Senator STEWART. Apparently, if they were sufficiently collateralized to get $380 million, they are likely going to be back looking for credit, I assume.

I don't understand your argument that there is no new credit being extended. That is what I don't understand.

Mr. MASON. May I amplify a little bit on my response? In answer to that question, when I said no, what I am referring to is I don't see any reason at all to look upon this as granting a new line or causing a new brokerage firm to come into the banks and increase whatever lines they might have.

The firms that may have lines with us have not been using them for this purpose; therefore, I would not anticipate their trying to use them for that purpose in the future.

Now, if you take the large brokerage firm, they might secure funds from their own capital accounts; they might secure funds from commercial paper market; they might secure funds from normal borrowings from banks. So it is extremely difficult to go through a transaction of this nature and come out on the other end and say that you have reduced bank debt, or you have increased bank debt by x amount, because you really have to track where all of those funds may come from, and one of these firms is a large user of the commercial paper market, so it is entirely possible that the debt that it was carrying, that was paid off, may have been funded from proceeds from the commercial paper market.

So it is not a simple thing, as I know you know.

Senator STEWART. Well, I know when you get into figures this complex and entities this complex, that it is an awfully difficult thing to follow. But it was tough for me to follow the fact that there was not the possibility that these folks would look for additional credit as they continued to operate their business, once this is paid off. It would be sort of unusual for them to do that.

And I am having a tough time explaining to my farmers and homebuilders and others who are having an extremely difficult time dealing with these credit controls-they are easing them now, because I think they recognize that they made a mistake on March 14, a very severe one-but they were having a difficult time and it's sort of hard to explain to them how somebody who can make these kind of business judgments and looses about $1 billion, is able to have the help and support of the same group of people who are saying, "well, let's hold back on speculative lending.

I would just disagree with you, Mr. Thomas. When somebody comes in and says that they want to collateralize a loan with silver, I would assume that someone at your bank would be provoked to ask a question about that, as to what they were doing. Is that a usual experience, where you all collateralize this stuff at 90 percent? Mr. THOMAS. On a fully hedged basis.