We ask for the accessibility to capital and as these national competitors have. We ask for the right to compete.

Thank you.

Senator BROCK. Thank you.

Mr. Burdett.

Mr. BURDETT. My name is J. Garrett Burdett. I am president of Tennesco, Inc., a savings and loan service corporation owned by 12 Federal savings and loan associations ranging from Bristol, Tenn. to Union City, Tenn. I appear before you today as a representative of the Tennessee Savings and Loan League whose board of directors has adopted a resolution of support for this proposed legislation on behalf of all 75 Federal savings and loan associations in Tennessee. The responsibility for providing the funds for housing the citizenry of our State has been, in large measure, assigned to our industry throughout the years. The funds obtained by our industry are deposited for much shorter periods than the periods required by our citizenry to feasibly plan to repay loans of a size required to purchase homes. This has continuously caused the savings and loan industry to find itself with loans comprising its portfolio which carry interest rates lower than their currents rates paid on deposits. This, of course, forces the industry to obtain rates from new borrowers or other types of investments which will offset the below cost loans in their portfolios. The housing needs of this nation must be met. More and more, we have seen the growth of multifamily housing as the most economical method of housing our average citizen. This type of housing is produced by the knowledgeable, sophisticated developer, who must carefully study his market versus current material and money costs, and then decide whether to borrow now or wait. His decision is one made by a man who knows the costs, knows the market place, and after careful consideration, makes his final decision on his ability to produce this housing at interest rates currently available in the market place. His decision is then carefully analzed by the lender with whom he negotiates, and he, too, must be fully satisfied that the rate to be charged can be supported between parties fully knowledgeable, cognizant of their business responsibilities, and desirous of filling the need for housing the people in the community.

Present capital requirements of this nation coupled with the inflationary trend with which we are all familiar, have forced the Federal Reserve to restrict the money supply. The price the banking industry must pay for daily funds has been running between 12 and 1212 percent. Should the savings and loan industry, in view of their cost squeeze, make loans on real estate when prohibited from getting maximum returns, or should they invest in outside higher yielding investments? Are we to expect our banks to make us loans for loan warehousing and other short-term needs at 10 percent, when they are paying 12 percent for overnight funds?

It appears to me that the only answer to the problem of equalization of the flow of funds throughout the economy in times requiring such remedies as we now face is the ability to lend and borrow on equal terms area by area.

The sophisticated borrower, able to negotiate at arms length, must be able to obtain funds or face the collapse of his business. For these reasons, we dutifully request your support of this legislation.

Thank you, Mr. Chairman, and members of the committee for your kind attention.

Senator BROCK. Thank you very much.

I was struck on several portions of the testimony that some of the figures were just awesome. The statement showed that we lost $200 million in investment in the state of Tennessee. That is incredible. You are talking about at least 10,000 unemployed Tennesseans that would be employed today.

Mr. MITCHELL. 14,000.

Senator BROCK. It depends on the kind of an industry. Some are more capital intensive than others but 10,000 or 15,000 for a job you are talking about, somewhere between 10,000 or 15,000 people or families that could be on the payroll today. That is incredible.

I don't know if it is possible to really give a specific answer, Mr. Mitchell, but can you give me some estimate of the outflow of funds or the disintermediation over the past 6 months as a result of the imbalance between Tennessee rates and those nationally. Mr. MITCHELL. Your questions relates to the amount of money that may have left Tennessee?

Senator BROCK. Either that or didn't come in?

Mr. MITCHELL. This would not be possible to estimate. One example, I know that in Memphis, the Light, Gas, and Water Division and properly so, several, oh, 10, 20, 30 millions of dollars were deposited in New York banks because they paid a higher rate than did the Tennessee banks, although I think they are changing that policy now. But that is just one example and I am sure there must be dozens of others but I just don't have a figure on it.

Senator BROCK. You remember back in 1966, when we had that credit crunch and we ran into some disintermediation in Tennessee. We lost, as I remember, a couple of reports, it seems to me we lost maybe $250 million, $150 million.

Mr. MITCHELL. Whatever that figure was it disturbs me that I think we are still feeling that. I don't think we have ever recovered really from that and this adds to it.

Senator BROCK. What I am getting at is not only do you not have the $200 million that would have been invested in the plant development or expansion either way but you also have the outflow of funds and it just has to happen because money is going to find the price.

Mr. MITCHELL. It is like any other commodity.

Senator BROCK. Well, it is more fluid than most.

Mr. MITCHELL. I like to use the example of gasoline. If we had prices limiting us to 30 cents a gallon, I don't think we would get much gasoline and money is just as fluid.

Senator BROCK. Let me switch the question, I think Mr. McLellan raised the point that if we could pass this legislation either as it is or with some minimum figure to other than corporations as well, that what that would do would be to draw more money into the institutions and not only relieve pressure on the large corporate borrower but also would relieve pressure on small borrowers, the consumer loan type as well.

Mr. MITCHELL. Yes, I am one that really believes we should make the money market a free money market available to everyone. I know there are these psychological restrictions we have in reasoning.

I do believe, however, the present bill restricted to corporations will indirectly be helpful to other than corporations for this reason: I think that it will allow the lending institutions to lend to the corporations their purchased money, thus making more of their regular time and demand deposits available for others. And I don't believe really that consumers have been injured over the country where there are 8 percent or 10 percent limits on individual rates and you have no limit on corporate rates.

Senator BROCK. Well, the basic responsibility in this Congress is to act a good deal more responsibly in monetary affairs. But until that millennium arrives we have to deal with the specific problem of Tennessee firms and families.

I just would like to maybe throw you a broad question. What steps have you all taken in the bank to deal with this. You know, you have to be facing an enormously difficult choice. Do you continue to serve your best customers or what?

Mr. MITCHELL. It is important, of course, for a banking institution to adjust to the existing circumstances and we have had to do this. As an example, in the last 90 days, I suppose, our overall loans have been reduced $130 million.

We have to really, I guess, the word is ration credit. We have to make judgments based on other than price, based on the customer's past service with us, based on the nature of the request. But in all these measurements, we have not been able to fulfill a duty and responsibility, which we have long prided ourselves on and that is to contribute to the continued growth in the business and economic affairs of our area because it is taking all our time and effort to just stay even with what the usury requirements are. And what concerns us even more, especially in our area of the State and I rather suspect in other areas too, is that this is summertime and the loan demand usually is less then than it is in the fall and wintertime. With respect to commodities, there are literally hundreds of millions of dollars needed which will have to come from someplace to finance the marketing of the cotton and tobacco and soybean crops, as well as lending the money for increased inventories for fall and winter seasons-Christmas season as mentioned a moment ago and not at the prices they had to pay 2 or 3 years ago but the higher prices. I think the pressures are just beginning.

Senator BROCK. So do I. I think it is fair to state as a fact that you are lending money at a rate below that which you're paying for money, is that not factual?

Mr. MITCHELL. Yes, that is correct. As a result our corporation, I believe the first 6 months of this year earned about 10 percent less than it did the first 6 months of last year and for the last 3 months about 20 percent less than before.

Senator BROCK. Some people up here believe that banks have a money tree and don't have to adhere to the normal laws of supply and demand and profitability. I wonder, Mr. Mitchell, how long you can continue to loan money at a rate below which you pay for it?

Mr. MITCHELL. As I mentioned early, we are fast turning ourselves around. The banks can position themselves. It is the customers who will really suffer.

Senator BROCK. Don't you run some hazard though in terms of

liquidity? What bothers me is that you are stretching your capability to its maximum right now.

Mr. MITCHELL. Absolutely, yes.

Senator BROCK. And if you do and if we had some adverse development on a national basis, would you not be in a far greater hazard as a result of your current policy of trying to at least keep Tennessee businesses operating. To me you are stretching your reserve position, you are stretching your viability to the point where you are in more jeopardy than you would like to be or should be, I think.

Mr. MITCHELL. I think there is less resiliency. I think this must be improved and this is going to be improved.

Senator BROCK. Well, if you improve your resiliency at the price. of eliminating McClure's Department Stores, Mr. Andrews is not going to be very happy.

Mr. MITCHELL. This is exactly what will happen.

Senator BROCK. That is the price we pay unless something is done. Either we jeopardize the bank, its liquidity and hopefully that has to affect its solvency as well. Or you jeopardize McClure's and other small businesses in Tennessee, since we have no access to credit outside of the state. That is choice you will have to face.

Mr. MITCHELL. I think you mentioned you were facing this now to some extent.

Mr. ANDREWS. Yes.

Senator BROCK. Mr. Burdett, you are in sort of a different field, a more specialized field. As I gather, your institution serves these savings and loans.

Mr. BURDETT. Senator, our corporation was formed under certain sections of the Federal regulations a year-and-a-half ago for the purpose of expanding the abilities of this group of savings and loan. associations because this is the middle group with assets from $15 million to about $65 million. What we were trying to do is to allow them to provide in their community loans, which they individually could not do. By combining this group together this would give us a composite of about $450 million in assets, where we could make the industrial loan and the multi-family loan and so forth, which historically in savings and loans is not done.

We found, of course, great problems, with that. In 15 months from scratch things change. But I would point out one thing: And I think the situation that exists right now, as I say, the savings and loan individually has portfolios which include loans going back to 534 percent at the present time in their portfolio. As a result of the situation as it exists today in Tennessee, most of them are taking their current liquidity and increased savings and going to the Federal funds market because they can make more money in the Federal funds market than they can making loans and stay liquid at the same time. It is hard for me to at the present time to pull my people out of the Federal funds market and into the lending market, because they can't afford to borrow money at the bank. My banker is in a position, he's got to loan me money at 10 and borrow it at 12.

The thing that really concerns me is that since we are not able to make construction loans or short term loans in these bounds in Tennessee, I have gone to Georgia frankly. Three of the major loans

made in the last 2 months I have loaned to Georgia, because I can get the rate that justifies my people coming out. The thing that concerns me is that we have brought the industry to an absolute halt in the state of Tennessee and there is no way around it.

Senator BROCK. Let me ask you this question; I think there iswell at least the potential for somebody asking if we allow these corporate loans or larger loans, what effect does that have on the smaller borrower. Well, now, in your instance, what effect would this legislation have on your ability and in turn the ability of the participating institutions to make regular loans for home purposes?

Mr. BURDETT. Let me say this: of course in my operation we do no single family business. My stockholders do this and I leave them this market. Let me take two positions. Let me try to give you their position and my position. The first thing is if it is at all possible I feel that it would be highly advantageous if you went to the minimum loan amount as adverse to the corporate structure because the average builder normally is not a corporation and he's going to have to go and incorporate in order for us to do business with him.

Now, let's go to the single family loan, the single family loan today as are most project loans, at the rate position that the average citizen in the State of Tennessee has got a real problem as far as borrowing for a house is concerned. A $30,000 loan is $315 a month for principal and interest plus taxes and insurance, so he has to make $20,000 a year.

Senator BROCK. In other words, you are telling me if we pass this bill it will not make it more difficult to get a home loan. If you can't afford it now, you can't afford it then.

Mr. BURDETT. That is right. You're not going to stop anything. Senator BROCK. We're back to a very specific industry here, home building. When we are talking about commercial loans the answer that Mr. Mitchell and Mr. McLellan gave me was that this kind of approach would not only get more money for the large corporate borrower, but it would free up more money for the smaller borrower too. I don't see that happening in your instance.

Mr. BURDETT. No, sir.

Senator BROCK. Neither do I see a negative impact.

Mr. BURDETT. No, I don't think you have a negative impact. The only thing you will do is make it possible for the developer who does multifamily work. It will make it possible for him to produce multifamily projects in the State of Tennessee, where he can't do it now.

Senator BROCK. In some words, we do not affect the individual homebuyer one way or the other but we do have a potential for improving the market industry.

Mr. BURDETT. As far as the overall housing picture is concerned you have to better the individual.

Senator BROCK. Gentlemen, I am sorry, we have run out of time but your testimony has been very much appreciated.

Mr. MITCHELL. Thank you.

Senator BROCK. The meeting will be adjourned subject to the call of the chair.

[Whereupon, at 12:30 p.m., the meeting was adjourned, subject to the call of the chair.]

[Complete statements of the previous witnesses and additional material follow:]