Senator STEWART. What was the value of the silver at the time you collateralized? How did you value it?

The CHAIRMAN. Would you identify yourself for the record, sir? Mr. THOMAS. I am asking Mr. Yohanon, who is the head of our group. In late February, I would expect it was-what?-in the $30 range? So the silver would have been roughly 110 percent of our loan.

Senator STEWART. Do you place the value of what it was at that time, and then gave them 90 percent of the value for it?

Mr. THOMAS. Yes.

Senator STEWART. Is that a usual circumstance for you?

Mr. THOMAS. When you have a hedged position, yes assuming the commodity had not been hedged (a) we probably wouldn't have made the loan, and (b) if we had for some reason, it would have been at a much lower percentage of the value.

Senator STEWART. Well, since it wasn't hedged, what was the effect of that, when the price started down?

Mr. THOMAS. The effect of that was we had an undercollateralized loan in a very short period of time.

Senator STEWART. I would assume, then, that is the reason you are admiring the work of the folks from Morgan Guaranty Trust. Mr. THOMAS. I admire their work in any event. And First of Dallas.

But the fact is that our loan to Bache Metals was not repaid in any way, shape, or form, by proceeds of the loan to Placid Oil Co. The Bache position in silver was liquidated in the marketplace. We were one of a number of banks who participated in that particular credit and the proceeds from the liquidation and from the liquidation alone were used to repay that obligation.

I think the real question here, Senator, is the definition of what is a speculative loan. And that is a very difficult question.

Senator STEWART. Well, I assure you, under the Federal Reserve's testimony and your testimony, you have the right to make that decision.

Mr. THOMAS. Well, I believe that's correct.

Senator STEWART. And you monitor those kinds of things and make the determination and you allocate the credit on the basis of what you determine is a speculative loan.

Mr. THOMAS. That's true. Some of our most speculative loans, I would guess, sir, are those that are the most "apple pie" kind of loans, to the home building industry, to other risktakers. You might say they are speculative loans, but certainly the loss experience in some of that kind of activity is far greater than other kinds of lending, to the brokerage community.

LOANS TO PLACID OIL

Senator STEWART. Well, obviously, in this instance, there is going to be an effort made to assure you that you don't lose anything here. They moved heaven and Earth up here to make sure that the loan was done. In connection with that, Mr. Mason, would you indicate whether or not you all made any loans to Placid during this time?

Mr. MASON. During which period?

Senator STEWART. From October 1979 to March of 1980.

Mr. MASON. If I remember correctly, the credit agreement that Morgan Guaranty and our bank consummated in 1979, funded in November of 1979, it was for oil and gas activities plus the purchase of additional oil and gas properties. I do not believe that any of those funds could be tracked to the commodity markets or silver markets or to the Hunts individually. It was for oil and gas properties, so yes, we did extend credit to them through the consummation of a credit agreement that had been in process for several months.

Senator STEWART. But none of that money made its way to the Hunts individually? Are you aware of any loans that were made by Placid to the Hunts during this particular period of time?

Mr. MASON. Yes, I am. In early 1980-and by "early," I am going to approximate the time. I have not checked their records per se on the dates, but I would gather in probably February and March, Placid Oil Co. did extend credits to the Hunts. They came from working capital funds that Placid then had available. They did not, to my knowledge, borrow directly from our bank or any other bank for the purpose of making those loans, although they did subsequently borrow some additional funds from banks.

Senator STEWART. How closely was that related to the loans that they made to the Hunt brothers?

Mr. MASON. It was less than what they had made to the Hunt brothers, but there is another-

Senator STEWART. I am not talking about the amount. I am talking about the time.

Mr. MASON. It was within, I would say, the same 30- to 60-day period. February-March.

Senator STEWART. How much did they loan to the Hunts, and how much did they borrow from the banks?

Mr. MASON. I will give you the figures, as I understand them, and think they are reasonably correct.

They loaned to the Hunts approximately $110 million. They borrowed from banks, as I understand it, approximately $80 million. But there was an intervening transaction, whereby Placid agreed to buy some North Sea oil properties and whether or not the borrowings from the bank directly went to pay for the North Sea properties, or the extension of the credit to the Hunts, would be difficult to track and determine.

But all of those occurred within about a 2- to 3-month period, so you would simply have to sort out time and disbursement of the proceeds to answer that precise question.

Senator STEWART. Is it not true that if all of the silver transfered to the Placid and Hunt partnership, were liquidated at today's silver prices, the receipts would be insufficient to repay the $1.1 billion line of credit?

Mr. MASON. That is correct.

Senator STEWART. How much of it would it pay?

Mr. MASON. Well, there are 63 million ounces of silver involved, and I assume the price today is in the range of $13 to $14, so $7 to $800 million. But there is obviously other-there are other assets and collateral in that partnership, and the silver is not directly pledged to the banks. So it is not part of the collateral that the banks are looking to to secure the Placid indebtedness.

Senator STEWART. But it will have to be liquidated?
Mr. MASON. Yes.

Senator STEWART. To your knowledge, is that all of the silver holdings that is held by the Hunts?

Mr. MASON. Directly, yes. They do still have, through a related entity, which you referred to during the earlier panel that took place here as IMIC, a 50-percent ownership of a company which is held by one of their related entities, and that company still has a silver position.

Senator STEWART. There have been indications that after-or around the end of March, they had somewhere in the neighborhood of 100 million ounces of silver. To your knowledge, have they liquidated all but the 63 million ounces that you mentioned they had ownership of through IMIC?

Mr. MASON. To the best of our ability to determine, and I think we have taken diligent steps to answer that question, I would say yes.

The 63 million ounces of silver, which includes the forward contracts I referred to earlier, plus their futures contracts, their bullion position, in silver coins-to my knowledge, they do not have any silver positions on a direct basis, outside of the numbers that we are referring to. The IMIC entity is not included in the numbers I referred to.

Senator STEWART. I do have some other questions that I would like to ask, but I will submit those, if you will respond to them in writing.

Mr. MASON. Senator, may I offer one comment in response to a question you raised earlier, and that is whether or not this credit or related matters, has resulted in a denial of credit to small businesses, to farmers, and what-have-you.

VOLUNTARY CREDIT RESTRAINT PROGRAM

I think it should be made abundantly clear that, certainly speaking on behalf of our bank, that is not the case. When the voluntary credit restraint program came in, Chairman Volcker and the Federal Reserve Board specifically exempted agriculture-related loans, small business, and urged the banks to maintain support of those

areas.

We put out a policy statement in our bank that made it absolutely clear that we were not to deny credit to small business and agriculture on a credit-worthy basis during this period of time. So the statements that have been made-not by you, but elsewhereto the effect that there is a trade-off between this credit and availability of credit for small business, consumers, agricultural, in my estimation is not a correct portrayal of the relationship. And I do not believe that credit-worthy demands within those sectors have in any way been denied by most of the banks with which I am familiar during this period of time.

Senator STEWART. Well, the only thing I was concerned about, and I think others are concerned about, was whether or not that Federal Reserve policy is equally applied across the board. I have still got some serious question about that. You may not have, but I do.

There are some people experiencing serious financial difficulty during this period of time. And I doubt very seriously if I called the Chairman of the Federal Reserve Board or any member of that Board, that they would have left to their aid and assistance as they have done in this particular instance.

Mr. MASON. I certainly want to continue to emphasize that the Federal Reserve did not suggest this credit. They did not approve the structure of it. Had there not been a voluntary credit program-—

Senator STEWART. Chairman Volcker told us yesterday that he had been extensively involved in making sure that the structure of the credit fit what we were concerned about, as far as meeting his requirements.

Are you saying he just didn't have any involvement in it at all? Mr. MASON. No; I said in my statement that he had no involvement in the structure of the credit, except as it related to use of proceeds and restraints on any speculative position by the Hunts or these related companies during the term of the credit.

I don't want to get involved in semantics, but when we talk about "structure," we're talking about collateral, terms, and conditions-this type of thing. But I think it ought to be for the record clearly indicated that this was a credit done by the banks and the Hunts, and not the Federal Reserve.

Senator STEWART. Thank you.

The CHAIRMAN. Gentlemen, I want to thank you very, very much. You've been most helpful.

Our final panel is Mr. Howard Stotler, chairman of the board, Futures Industry Association, accompanied by Dr. Henry Jarecki, director, and Mr. Leo Melamed, director; and Mr. Roger Shay, Public Securities Association.

Gentlemen, we apologize for the late hour. You are very gracious to appear. Mr. Stotler, is Dr. Jarecki with you, sir? And Leo Melamed?

Mr. STOTLER. Leo Melamed is here. Dr. Jarecki is not.

The CHAIRMAN. All right. Fine. I am going to ask Senator Stewart to make a statement about Mr. Melamed.

Senator STEWART. Mr. Chairman, if I may, I would like to personally welcome Mr. Leo Melamed to this committee. He is a leader in the futures industry in addition to his other accomplishments. He was a moving force behind the establishment of the International Monetary Market on the Chicago Mercantile Exchange. He has been duly recognized for his innovations and leadership in the national financial press, and I personally happen to believe that this recognition is well-deserved.

I think he personally can give this committee some insight into the concerns that the chairman has expressed and others have expressed about that particular aspect of the futures market. And I don't mean to demean the testimony of any of the other witnesses who have been presented here, but I think they would also recognize him as an innovator in this field.

And I apologize that I can't be here to listen.

The CHAIRMAN. Thank you, Senator. Mr. Stotler, go right ahead.

STATEMENT OF HOWARD STOTLER,

CHAIRMAN OF THE

BOARD, FUTURES INDUSTRY ASSOCIATION, ACCOMPANIED BY LEO MELAMED, DIRECTOR

Mr. STOTLER. Thank you. I am Howard Stotler, chairman of the board of the Futures Industry Association.

The Futures Industry Association opposes S. 2704 for the same reasons that the exchange representatives so well articulated here today. And I will not repeat the same reasons, but I would like to make a few points and tell you a little bit about what the association is about.

The Futures Industry Association is a national association representing 66 commodity futures brokerage firms, both large and small, who are engaged in the business of dealing in futures on behalf of customers. We estimate that our members handle over 80 percent of the customer business.

The association also represents 75 associate members who are interested in various aspects of the futures trading industry. They include the major banks, many of the major banks, accounting firms, law firms, 10 futures exchanges, and others.

We would like to make just a few points and deviate from our written testimony just to make a few points. We don't quite understand why the silver situation should have precipitated the imposition of margins in Federal regulatory control because it was really not the problem-the futures margins were raised regularly to very high level by the exchanges. In addition, the firms raised margins faster and higher than did the exchanges. The result was that participation in the market dropped, but prices continued upward, anyway. And the market became extremely thin and lacked liquidity.

A second point I would like to make is that there seems to be a misunderstanding about how margins really function, and also, the difference between the way margins function in commodities and in securities, and I would like to insert for the record what was involved in the Congressional Record presented by Dr. Mark Powers, who is a well-known authority in futures trading, that Congressman Neal Smith submitted in the Congressional Record on May 14. This explains basically the difference between commodity margins and securities margins.

We also would like to state that we do not believe the Government should have standby authority. We believe that the Government agency has standby authority, some will find an excuse to use it for the same reasons. We would like to stress also that there is `no distinction to be made between margin controls for financial futures and for agricultural commodities.

I have been involved in the agricultural cash grain business for some 40 years, and know its usefulness, and can see no reason why the functions are different for financial futures.

SPECULATIVE ELEMENT

The speculative element has been discussed. The function performed by the futures markets need speculation to permit the lowcost, efficient marketing system that we have in commodities. In so doing, the register of forces of supply, demand, and open free trading-they allow the processors, producers, exporters, and users