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Senator KEAN. And Governor Black has already said that he thought the Federal Reserve could regulate these margins, as they were charged with regulating credit.

Senator GOLDSBOROUGH. Governor Black, referring to margin requirements, which you outlined so definitely a moment ago, is not the understanding current among the bankers and brokers and customers throughout the country that they have always figured their margins on loans on the debit basis?

Mr. BLACK. I think that is correct.

Senator GOLDSBOROUGH. If that is correct, sir, do I understand that 60 percent of the current market price would be 150 percent of the debit?

Mr. BLACK. The way they figure it; yes.

Senator GOLDSBOROUGH. And 40 percent would be 662% percent?

Mr. BLACK. Figured on a debit balance, yes, on their present practice. There is not any question about these margin requirements requiring more cash paid on stock, Senator. That is the purpose of it.

Senator GOLDSBOROUGH. I think that is very evident by the requirements.

Mr. BLACK. That is the purpose.

Senator COUZENS. Is not the provision of this bill more liberal than the present rules and regulations of the stock exchange?

Mr. BLACK. Senator, I cannot answer that question.

Senator COUZENS. I thought you in part answered it when you gave us those figures awhile ago.

Mr. BLACK. Well, I would not say they are more liberal. You mean as to marginal requirements?

Senator COUZENS. Yes.

Mr. BLACK. I would not say they are more liberal.

Senator COUZENS. Is there any great difference between the rules and regulations of the stock exchange on margins and as provided in the bill?

Mr. BLACK. Only as I read from that memorandum.

Senator CCUZENS. That is what I thought. As I interpreted the memorandum that you read, the bill is somewhat more liberal than the present rules and regulations of the stock exchange.

Mr. BLACK. I do not think that is correct.

Senator McADOO. I understood him to say that this revised bill was more liberal than the previous bill but not more liberal than the stock exchange.

Senator COUZENS. Yes; but I think there is a margin of 30 percent. Mr. BLACK. They are not more liberal than the stock exchange. Senator MCADOO. They are less liberal, as a matter of factSenator KEAN. Governor Black, we had before us Mr. Potter, of the Guaranty Co., and Mr. Johnston, of the Chemical Bank. Mr. Johnston said he agreed with Mr. Potter. He had read the statement made by Mr. Potter, so he agreed with that statement. In that statement Mr. Potter said that if these rules for margins were put into effect at once, why, it would mean a decrease or a liquidation of loans in his bank to a very large amount, and also the Chemical Bank. Mr. BLACK. If I understand the provisions of the bill, that protection is granted for 5 years on existing loans.

Senator KEAN. If they carry a loan, but nobody is going to carry a loan-at least I never have for 5 years.

Mr. BLACK. Then they have 5 years in which to work it out.

Senator KEAN. No; because your customers buy and sell and you have got to make substitutions, and as soon as you make substitutions you come under the new rule.

Mr. PECORA. Senator Kean, Mr. Potter's observations were based upon the provisions of the original bill.

Senator KEAN. Surely.

Mr. PECORA. The revised bill contains the provision that Governor Black has alluded to, which allows virtually a 5-year period for the liquidation of existing margin accounts unless they are brought up to the standards fixed by this bill.

Senator KEAN. Unless you make substitutions.

Mr. PECORA. Substitutions have to be made, of course, in accordance with the bill.

Senator KEAN. And that changes your whole loan.

Mr. PECORA. No; it does not change the whole loan, in my opinion. It prevents a utilization of existing margin accounts for the purpose of evading the provisions of this bill. It maintains margin accounts now existing in their present status. It preserves their status, but will not permit of the utilization of those accounts as a means of evasion of the bill. The fear expressed by Mr. Potter and by other opponents of the original bill, as I interpret their opposition here, was that under the original bill a forced liquidation would be compelled by the time the bill went into effect, which was October 1 next. Now, that period has been extended to January 1939.

Senator KEAN. Mr. Chairman, most of these brokers' loans are made day-to-day loans. They are callable any time from 11 in the morning till 1 in the afternoon; and I assert, and I think I am correct, that there is no broker that has a loan that has run for 5 years or 3 years or 2 years. All loans are paid off long, long before that, unless it is a special loan made on special terms with the institution. Therefore, all brokers' loans would come within a year under this clause.

Senator COUZENS. Yes; but you referred awhile ago to the bankers' objections, and that has been overcome.

Senator KEAN. No; I do not think it has, because these loans would not run that time. They are brokers' loans.

Mr. PECORA. Senator Kean, may I call your attention to the provisions of the revised bill appearing on page 18 of the House draft, subsection (f):

The provisions of this section shall not apply on or before January 31, 1939 to any loan, renewal or extension thereof, made on any security or securities prior to the enactment of this act. or on any exempted securities and/or securities registered in a national securities exchange substituted therefor.

So that that provision is certainly broad enough to take care of the situation that you have in mind, sir.

Senator KEAN. Mr. Chairman, I cannot agree with the counsel for the committee that that broadens the question that I have in mind, because a client comes in today and buys a hundred shares of stock and we borrow the money for him, and within 2 weeks or 3 weeks he comes in and sells that stock and buys another share of stock or something or other. Those loans do not run for the periods

that I am telling you are in the bill, and they cannot possibly run. We have got to make substitutions for new customers. We have got to make substitutions under the loans. And therefore the loan becomes a new loan or it is called.

The banks do not carry these loans. The banks vary every day. One day they are debited a million dollars at the clearing house. The next day they are credited with a million dollars at the clearing house. They send that money down to the exchange to be loaned for their account. That money is loaned for their account, and they call 1 day for the loans or a part of their loans. The next day they loan so much money. So that the loans are swinging back and forth between different institutions all around the street.

Mr. PECORA. If it were your purpose to preserve existing margin accounts in the fashion that you indicate, you would be announcing right now to the world that any margin accounts established prior to the enactment of this act on any margin basis lower than the provisions called for by this act with respect to new margin accounts could be utilized for all time to come.

Senator KEAN. No.

Mr. PECCRA. As the credit basis for the operation of that account; and you would take all existing margin accounts and constitute them wide-open doors to evade the provisions of this act.

Senator KEAN. No. What I am saying is

Mr. PECORA (interposing). You might just as well not enact the act, because anybody could establish a margin account between now and the date of the act going into effect, unless this bill were properly drawn to prevent such an evasion, and thoroughly escape the consequences of this act so far as margin provisions are concerned.

Senator KEAN. Not at all, Mr. Chairman. That is not what I am driving at at all. Counsel is trying to put words in my mouth which I did not say, which I do not mean. What I say is that these loans will all be paid off and changed within a year, so that this 5-year plan does not mean anything.

The CHAIRMAN. We get the point, Senator.

Senator GOLDSBOROUGH. May I ask Governor Black just one more question? Governor, may I direct your attention to section 6 (a), on page 13? Does this section still leave unprovided for all unregistered securities?

Mr. BLACK. May I read it, Senator?

Senator GOLDSBOROUGH. Certainly.

Mr. BLACK (after perusing section). It appears to do so.

Senator GOLDSBOROUGH. It does. That is all.

Senator TOWNSEND. Governor Black, does the Federal Reserve bank, or banks, often find it necessary in order to stabilize Government obligations to buy and sell Government securities?

Mr. BLACK. Senator, you mean do we buy and sell Governments

for the purpose of making a market?

Senator TOWNSEND. In order to stabilize the market.

Mr. BLACK. I do not think we do that, sir.

Senator McADOO. The Treasury does that, doesn't it, Governor! Mr. BLACK. Well, if it is done, the Treasury does it. Let me put it that way, Senator.

Senator GORE. It would not be a proper function of the Federal Reserve bank?

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good. What individuals do is presumed to be done for their individ ual good.

Senator TOWNSEND. That may be true and it may not be true. Senator ADAMS. Mr. Pecora, were you saying that it exempte the Government or it exempted dealers in Government securities Mr. PECORA. It exempts Government securities from the provi sions of this act.

Senator ADAMS. There is no provision prohibiting a banker o a broker from buying and selling Government securities for the pur pose of stabilizing or affecting the market?

Mr. PECORA. I think that is correct, sir.

The CHAIRMAN. There is no evidence that that practice prevails Senator McADOO. Governor, I would like to ask just one mor question, and I would like to revert to the administrative featur that we discussed a bit ago, the difficulty of administering thes margin requirements and all.

Would it in your opinion simplify that machinery and add to the effectiveness of the policing if on each stock exchange in the country there were a Government representative, in other words, Government agent or a Government director or Government gover nor, who had no responsibility for the operation of the exchange bu who was there to represent the public interest to see that the exchanges complied with the law?

Mr. BLACK. Senator, I personally would dislike to see that don very much.

Senator McADOO. We do that with the banks, because we have a Federal Reserve agent and a chairman of the board, and he has three Government directors on this board.

Mr. BLACK. Senator, I believe the exchange is going to comply with your rules.

Senator McADOO. I think they will.

Mr. BLACK. I would hate to think of the necessity of a man having to see it done.

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would put a great deal of reliance on the statement of those two men. I think they are both perfectly straight and perfectly honorable and perfectly capable. But that may be one of the things that is desired in connection with this bill, Senator-I don't know.

Senator KEAN. What study did the Department make of this bill? I am talking now from the stock-exchange standpoint. What study did they make about the practices, and so forth, of the stock exchange?

Mr. BLACK. You mean the Federal Reserve Board?

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Mr. BLACK. And the representatives of the committee?
Senator KEAN. Yes.

Mr. BLACK. Well, we consulted with some experts. We are not experts on this question, Senator. And if you will note in my statement, I have put a provision in that I would like to make such suggestions relative to the technical parts of the operation of this bill as may seem necessary.

Senator KEAN. And in regard to these call loans, why, you think that this provision of 5 years would really not be effective from the causes that I have named?

Mr. BLACK. I think probably it would affect them very considerably, relative to brokers' loans in banks.

Senator KEAN. In other words, all loans would be changed in the course of a few weeks?

Mr. BLACK. I think that is correct, Senator.

The CHAIRMAN. Any other questions of Governor Black? If not

Mr. BLACK. Mr. Chairman, may I bring up one other matter that the Board has asked me to submit to the committee?

The CHAIRMAN. Very good, sir.

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