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Buffalo, Manufacturers & Traders Trust Co., the Marine Trust Co.; Chicago, the First National Bank, Harris Trust & Savings Bank, the Northern Trust Co.; Cincinnati, the Fifth Third Union Trust Co., the Provident Savings Bank & Trust Co.; Cleveland, the National City Bank; Kansas City, City National Bank & Trust Co., Commerce Trust Co.; Los Angeles, California Bank; Memphis, the First National Bank ; Minneapolis, First National Bank, Northwestern National Bank of Minneapolis; Mobile, First National Bank; New Orleans, the National Bank of Commerce; New York, the First National Bank, J. P. Morgan & Co., Inc.; Philadelphia, the Philadelphia National Bank; Portland, First National Bank; St. Louis, the Boatmen's National Bank, Mississippi Valley Trust Co.; St. Paul, the First National Bank of St. Paul; San Francisco, American Trust Co., Bank of America N. T. & S. A.; Seattle, the National Bank of Commerce of Seattle, Seattle First National Bank; Winston-Salem, Wachovia Bank & Trust Co.

The Housing Act of 1949 (H. R. 4009) projects a tremendous expansion of low-rent public housing construction. If the bill is adopted in its present form the way is open for local housing agencies to borrow, through sale of their bonds, upwards of $8,000,000,000 during the next 6 years to finance the building of 1,050,000 family units.

The purpose of this memorandum is to point out the advisability, in the interest of efficient and economical financing, of retaining in the bill the authorization (contained in sec. 502) for commercial banks to participate in the underwriting and distribution of such local agency bonds.

As under the Housing Act of 1937, these bonds will be secured by pledge of the annual contributions to be paid under contract by the Public Housing Administration. However, the 1949 act makes two important changes in the public financing provisions. First, it improves the security of the bonds by authorizing contractual assurance of Federal contributions sufficient to pay all debt service, not subject to any of the escape clauses or provisions for reduction of subsidies which have clouded the market for housing agency bonds in the past. Second, the act a mends section 5136 of the Revised Statutes to permit commercial banks to underwrite and deal in housing bonds having the security just described.

Should Congress authorize this program under which $8,000,000,000 of public housing is to be financed over the next few years, and for that purpose creates a form of public security supported by the credit of the United States Government, then every provision should be made to encourage the widest possible distribution of such securities at the lowest possible interest rate. The cost of borrowing is a direct concern of the Federal Government, as it affects the amount of subsidy required; and the size of the new program in itself calls for a greatly expanded market for housing bonds.

The 1937 act permitted local housing agencies to issue bonds pledging annual Federal contributions as security, but it retained a prior lien on such subsidies in favor of bonds sold to the United States Housing Authority (now Public Housing Administration). It also included various clauses under which the subsidies might be terminated or reduced, whether because of contract violations by local agencies or because of certain other changes in circumstances, without regard for the effect of that action on the security of the bonds. Those bonds were not exempted from the restrictions imposed by section 5136, and commercial banks therefore could not underwrite them. However, some investment dealers proceeded to underwrite bonds issued by local agencies under the 1937 act at varying rates of interest related generally to the municipal credits represented by the local agencies.

After a few years, with only about $200,000,000 of bonds sold to investors, the attempt to continue long-term financing under these conditions was finally suspended. (The Public Housing Administration has since encouraged the local agencies to finance by means of temporary loan notes refunded for periods usually varying from 6 to 12 months. It may be of interest to know that of the more than $3,000,000,000 temporary loan notes offered for sale over the last 10-year period, a group of banks, including many of those which appear on this statement, purchased more than two-thirds of all notes that came to the market.) At present there is a very limited market for such housing bonds and this only at depressed prices. Against this market history it is obvious that the launching of a large volume of new securities will require the combined efforts and interest of all dealers now active in State and local Government securities, both investment dealers and commercial banks.

Nevertheless some investment dealers are working to exclude commercial banks from underwriting and dealing in the proposed housing bonds, by urging elimination of section 502 of H. R. 4009. We feel that their position may be attributed to a desire to limit competition, and this, we believe, is against the public interest.

Since 1933 commercial banks have not engaged in the business of dealing in securities of private corporations, but by authority of Congress they have been and now are permitted to underwrite and deal in "obligations of the United States, or general obligations of any State or of any political subdivision thereof, or obligations issued under authority of the Federal Farm Loan Act, as amended (12 U. S. Code 641), or issued by the Federal home loan banks or the Home Owners' Loan Corporation or obligations which are insured by the Federal Housing Administration pursuant to section 207 of the National Housing Act, if the debentures to be issued in payment of such insured obligations are guaranteed as to principal and interest by the United States, or obligations of National Mortgage Associations." (Quotation is from sec. 5136, Revised Statutes.)

As detailed above, banks may now underwrite and deal in the obligations of all Federal agencies which issue marketable securities. Since Congress has declared construction of low-rent housing to be a public purpose, securities issued for this purpose are affected with a public interest just as much as are the obligations of Federal agencies or State and municipal governments. Accordingly, the housing bonds to be issued should be included with the other public securities now eligible for bank underwriting and dealing.

From the viewpoint of banking policy, the proposed housing bonds to be secured by subsidies for which the good faith of the United States Government is pledged will be in the same high-grade investment category as the obligations which are now exempt under section 5136. Conversely, failure to permit banks to deal in the housing bonds not only would restrict their marketability but also might be interpreted as classifying their security as less desirable than that of other obligations backed by the same credit.

For many years commercial banks and investment dealers have worked jointly and harmoniously in raising capital funds for States, municipalities, and Federal agencies (Federal land banks, Federal intermediate credit banks and Federal home loan banks). This partnership should be continued to assure the success of the public housing program. The bonds to be issued by local housing agencies will be sold under the laws of the several States, and their interest rates will be determined by competitive bidding at advertised sales just as is the case with other local government securities. Increased competition in bidding for these bonds will tend to lower the cost of borrowing. If the competition is unnecessarily narrowed by excluding banks, it will tend to raise the cost of the entire housing program,

It has been stated that the banks are not needed in view of the considerable capital funds controlled by investment dealer firms; but the question is not whether a certain volume of bonds can be underwritten, but rather how to market them at the lowest interest cost; and to this purpose, the public interest demands the broadest possible participation of underwriters and investors.

It has been contended by some investment dealers that banks should not be permitted to underwrite housing bonds because of the limiting effect of the rule against self-dealing by trustees. The only possible significance of that rule in the present connection is that a bank, in its capacity as trustee, might be prohibited from purchasing, on original issuance, bonds being underwritten by a syndicate of which the bank is a member. There is nothing to prevent a bank trustee, however, from buying any such bonds in the open market after the termination of the syndicate selling operations. It would be absurd to suggest that the ability of banks to underwrite municipal issues has kept municipal bonds out of trust portfolios, and it is equally absurd to contend that such a result would follow in respect of housing bonds if the banks are authorized to underwrite them.

Another very important consideration bears on the point of trust investment policy. The requirement of marketability is second only to safety as a factor in the choice of securities for trust funds, because udden termination of a trust is always possible and the lack of a good market would seriously embarrass the trustee whose choice of investments could not be readily liquidated. Competition determines the price in the secondary market, just as in bidding for new issues. So, contrary to the argument advanced by those who oppose bank underwriting of housing bonds, the fact is that permission for bank dealing in these securities will broaden the secondary market and thus make housing bonds more attractive for the investment of trust funds.

In conclusion, billions in new housing bonds are to be marketed under the slum-clearance and low-rent housing program. These securities will be backed by the credit of the Federal Government. The public interest demands their

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widest possible acceptance at the lowest possible cost. This can be assured by enactment of section 502 permitting commercial banks throughout the land to participate with investment dealers in the marketing and distribution of housing bonds.

In this view we have the unqualified support of a large number of investment dealers throughout the country.

Our position in this matter was concurred in by Mr. John Egan, Commissioner, Public Housing Administration, when he appeared before the Committee on Banking and Currency on April 7, 1949, and we quote the following excerpt from his testimony:

“In order to secure the most attractive interest rates, the largest possible investment market must be available for the sale of these housing obligations. Moreover, the participation of the largest number of underwriters will be advantageous in securing wide distribution and low interest rates. The flow of securities will be so substantial that there will be no dearth of them available to all eligible underwriters. There should be no hesitancy in according to these housing obligations the same market facilities that are available for other issues of comparable security.”

Chemical Bank & Trust Co., William G. Laemmel, Vice President;

Bankers Trust Co., E. Fleetwood Dunstan, Vice President; Chase
National Bank, John S. Linen, Vice President; Guaranty Trust
Co. Robert H. Craft, Vice President; National City Bank of

New York, Delmont K. Pfeffer, Vice President. (Whereupon, at 12:50 p. m., the committee recessed, to reconvene in executive session at 10 a. m. Tuesday, May 10, 1949.)


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