Mr. WOLVERTON. Do the amendments which you have suggested or offered answer this criticism?

Mr. Whitney. It is our belief, Mr. Wolverton, they do, absolutely.

Mr. WOLVERTON. If they should delist their stocks, would it have the effect of putting them into over-the-counter trading?

Mr. WHITNEY. Absolutely.

Mr. WOLVERTON. And would it then be your opinion that this bill should include the licensing of this over-the-counter business?

Mr. WHITNEY. My private opinion is, there is no ability to so handle over-the-counter business.

Mr. WOLVERTON. You mean no ability from the standpoint of practicability, or from the standpoint of legality?

Mr. WHITNEY. Both. In other words, the street market, where one individual meets another and wishes to trade and does trade we have had many instances of it, sir, when the exchange has been closed, during the War and during the bank holiday last year.

It just cannot be, from either practicability or legality, as we believe, or let me say, as I believe, cannot be controlled.

Mr. WOLVERTON. The reason I am asking the question in connection with what you have already testified to is the report of the Twentieth Century Fund, in which they state, quoting from that report and referring to over-the-counter markets:

They are a vast proportion and they would serve as a refuge for any business that might seek to escape the discipline of the exchanges and the more exacting that discipline is, the greater the temptation to escape from it.

I rather feel that confirms the statement you have made; but the report goes on to state:

To leave the over-the-counter markets out of the regulatory system would be to destroy the effects of regulating organized exchanges.

Do you agree with that statement?

Mr. WHITNEY. Yes, in general, I would; but not taking back what I said, that I thought their regulation was well nigh impossible.

Mr. PETTENGILL. Like the eighteenth amendment?

Mr. WHITNEY. Very much so; and I stayed off of that, because I was criticized for making that reference in the Senate committee; but the street trader, bootlegger, is going to grow up and always has, gentlemen, when the organized exchanges have been closed.

Mr. WOLVERTON. Do you-
Mr. PETTENGILL. Pardon me, Mr. Wolverton.

Mr. WOLVERTON. Certainly. I do not desire to go further into the details of this report, but anyone interested will find them set forth at pages 168 and 169 of the report. I would like to have your opinion, but I realize the time will not permit us to go into that.

The Chairman. Mr. Whitney, how could the segregation provision of this bill have any influence on listing or delisting of securities, when it deals with broker-dealers, floor traders, specialists, and forth?

Mr. WHITNEY. It has not got anything to do with it. The Chairman. You said just a moment ago in reply to Mr. Wolverton, that one of the three things that would cause securities to be delisted was segregation.

Mr. WHITNEY. I beg your pardon. If I said that, that was quite incorrect. I said that the three things, primarily, that I thought

would lead to a deflationary market, bringing disaster to the country, were margin requirements contained in the bill, the segregation provisions of the bill, and the registration of securities.

Was I clear in what you understood me to say?
Mr. PETTENGILL. That is the way I understood it.

Mr. WHITNEY. I did not mean to give that impression. I apologize if I did.

The CHAIRMAN. I thought when you turned to Mr. Wolverton, that was the answer you made to him.

What is there in the margin requirements of the section that would cause the delisting of securities?

Mr. WHITNEY. Nothing, sir.

The CHAIRMAN. Then the delisting would come only under the regulatory provision? Mr. WHITNEY. Of the registration of securities; yes. The CHAIRMAN. Registration of securities? Mr. WHITNEY. Yes, sir.

The CHAIRMAN. And you think that that provision is of such a nature that it would cause the delisting of securities?

Mr. Whitney. I am sure of it. And, I would prefer, however The CHAIRMAN (interposing). Does a listed security have an advantage over an unlisted security?

Mr. WHITNEY. It has some; yes.
The CHAIRMAN. Well, is it material?

Mr. WHITNEY. At the present time I believe it is considered material, or else they would not list.

In that connection, I am sorry that the gentleman is not here to do it himself, but Mr. Corcoran the other day made a statement that was just not so, and I imagine that he made it because of lack of knowledge or just in error. He said that the New York Stock Exchange sought to prevent delisting of securities listed on that exchange, sought to prevent their being listed on other exchanges. That is not the fact. The rules of the exchange prevent securities listed on its exchange, and deals with its members, so in transacting business in such securities on any exchange in the city of New York.

Quite on the contrary, we advocate the listing of New York stock securities on other exchanges, fully listed outside of the city of New York.

And I just tried to review my memory this morning, and asked the gentlemen from Chicago, and the president of the Association of Stock Exchanges, if I did not speak on that subject last June in Chicago, and they told me that I did.

We advocate, rather than try to prevent, the listing of listed securities on other exchanges outside of the city.

Mr. Corcoran, I think, is just misinformed.
Mr. MARLAND. Mr. Chairman, may I ask a question?
The CHAIRMAN. Mr. Marland.

Mr. Marland. Mr. Whitney, Mr. Tom K. Smith, assistant to the Secretary of the Treasury, yesterday made a statement in which he said that the Treasury was fully in accord with the four major objectives of this act.

You remember that the first was to establish Federal supervision over securities.

You are, or the New York Stock Exchange is, in accord with that?
Mr. WHITNEY. Yes, sir.
Mr. MARLAND. With the four principles he enumerated?

Mr. WHITNEY. Well, if you will read them. Number 1 was supervision or regulation.

Mr. MARLAND (reading). "(1) To establish Federal supervision over securities exchanges.

Mr. WHITNEY. We advocate that.

Mr. MARLAND (reading). “(2) To prevent manipulation of security prices, and to protect the public against unfair practices. '

Mr. WHITNEY. Where that is unfair; yes, sir.

Mr. MARLAND (reading). “(3) To prevent excessive fluctuations in security prices due to speculative influences.'

Mr. Whitney. Yes, sir; if it can be done.

Mr. MARLAND (reading). “(4) To discourage the use of credit in the financing of excessive speculation in securities.”

Mr. WHITNEY. Absolutely.
Mr. MARLAND. That is all.
The Chairman. We are much obliged to you, Mr. Whitney.
Mr. WHITNEY. Thank you, Mr. Chairman and gentlemen.
The CHAIRMAN. We will hear Mr. Lothrop Withington.



Mr. WITHINGTON. Mr. Chairman and members of the committee, my name is Lothrop Withington. I am not a security dealer or broker, but I am an attorney representing a committee of New England security dealers, brokers, and dealer-brokers.

In that respect, I think New England is perhaps unique in its representation, by a committee that has all of the different phases of security interests in its membership.

I speak this morning through the courtesy of this committee, not only for New England but by the courtesy and permission of the Chicago Exchange, for Chicago, because the principal matters in which Boston and Chicago are interested are fundamentally the same.

Chicago is the largest exchange outside of New York City, and Boston has the largest exchange, next to Chicago, outside of New York City.

The consideration which most vitally concerns us from the New England and the Chicago aspect is the fact that we believe there is a general misapprehension with regard to the real and sincere desire of exchanges for regulation. I have yet to find any exchange that has not only reached the conclusion that they are going to be regulated but welcomes regulation, if it is a regulation which will make them better market places and will eliminate practices which have brought down a national condemnation upon exchanges-abuses which should be corrected.

In this connection, I believe, and I want to approach this matter with the belief that this committee is not interested in unduly restricting exchanges or interferring with their legitimate functions, but is interested solely in the regulation of exchanges by laws which will permit the widest, freest, and fairest market for securities,

And, gentlemen, in that respect, may I say that in New England we are fearful that the only liquid form of wealth that is left, the security wealth of this Nation, may be by unfortunate legislation put in the same category that real estate is at the present time.

I understand that there are at the present time some 34 to 4 billion dollars loaned by banks in the United States upon securities. We are not so much concerned with the fear that banks will lose by enforced liquidation of those security loans, as we in New England and Chicago, are concerned with the fear that individuals who own securities throughout this country will become affected by the fact that banks cannot liquidate those loans, and therefore the values of those securities will disappear.

The CHAIRMAN. Just what specific provision of this bill will force that liquidation?

Mr. Withington. Mr. Chairman, the first provision of the bill which I think forces that liquidation, is the provision with regard to margins, with regard to the suggestion that it be placed

The CHAIRMAN. You are talking about loans that are already in existence?

Mr. WITHINGTON. Mr. Chairman, I am talking about loans that are in existence as affected by the values of securities as they appear in the quotations of the markets of this country.

Unless those loans are so far under water that there is no use of liquidation, if there is not, and adequate market to absorb the liquidation of those securities, then those loans cease to be good loans and the values of the securities generally are certainly affected, because the loan values have disappeared.

The CHAIRMAN. What is there in this bill that will force the banker to call that loan?

Mr. WITHINGTON. If the values of securities disappear in quotations on the exchanges, those loans would have to be liquidated by banks, and as they saw the values decrease

The CHAIRMAN. They would have to be?
Mr. WITHINGTON. Well, if they could be liquidated.

The CHAIRMAN. I am not talking about that. We are not running the banks. We have nothing to do with when a bank can call its loan or tells a fellow that he has got to pay, or who is to tell them when; but is there anything in this bill that forces a man out who is in now, who has a loan now?

Mr. WITHINGTON. Yes, Mr. Chairman. If the value of the securities which are held in the portfolio of the bank as collateral for loans, values, as they appear on the market places and exchanges of the country, if they show a downward tendency, it is bound to result in the liquidation of loans on securities, and the throwing on the market of additional securities is going to further force the market down.

Mr. LEA. That statement, I take it, is based upon the assumption that the enactment of this bill would reduce the market prices of securities. Is that the idea?

Mr. WITHINGTON. Yes, Mr. Lea.

Mr. LEA. Well, why would this margin requirement force a decrease in the market prices of stocks?

Mr. Withington. Because, I am informed-I will have to take the statement of gentlemen who are more and better informed on those matters than 1—that unless there is a certain amount of speculative buying and selling of securities, that market values will be seriously affected.

Mr. LEA. Would you attribute that to the margin provisions of this bill?

Mr. WITHINGTON. It could very well be attributed to the margin provisions of this bill.

Mr. LEA. Do you have in mind these outstanding loans, or new loans?

Mr. WITHINGTON. I have in mind both. I have in mind any loan that is made on the basis of security values as reflected upon the exchanges of the country and unless those security values appear upon the exchanges of the country, the loan value of the securities with institutions is affected, and indirectly those who own securities have something in their possession which is of less value.

Mr. Lła. Well, of course, that is always the operation of a margin requirement, when the market goes down, is it not?

Mr. WITHINGTON. That is true; and in that respect, I think the provisions, as written, the margin requirements as written in this bill are more lenient than the margin requirements which are generally enforced on exchanges.

Mr. LEA. Yet you think this margin requirement would work more unfortunately than the existing margin requirements, do you?

Mr. WITHINGTON. At the present time, as I have worked it out upon stocks which are representative stocks, which were taken at random from the exchanges, the present borrowing value of securities, taking the market values, the low since July 1, 1933, would permit a margin in excess of what is required at the present time by most exchanges. That rule, however, is written in in such a way that every time that a stock is subjected to a downward reaction for whatever reason, then that margin requirement automatically tightens up until eventually, perforce of necessity, the margin requirement is so tightened that it cannot be relaxed unless there is an extraordinary circumstance which would warrnet the Federal Reserve coming in and saying what should then be the considered policy of the Congress.

Now, let me illustrate. In the case of a stock such as the American Telephone & Telegraph Co., under the margin provisions as they are now written, if that stock were a new issue, we will say, a preferred stock of the American Telephone & Telegraph Co., preferred stock ahead of the common stock, the loaning value of that stock, although it is a preferred stock against a common, if it were selling at $100, would be $40, and yet under the rules of the margin provisions as they are written, the loaning value on American Telephone common stock, taking the lowest in the past 3 years, would be $75 on the present market value, and because of the provision permitting the low since July 1, $90 today, which is more than the prevailing rates upon the exchanges.

Now, if because of the investigation or the proposed or threatened investigation of the American Telephone & Telegraph Co. by Congress, suggestions were circulated through publicity or whatnot, that the American Telephone & Telegraph Co. was a great monopoly which should be disbanded, although that thought that there was a monopoly might not be shared by the well informed, it would have a serious effect in the market. Just as the effect in the market upon the air • stocks—and I am not dragging in any political issue-but merely stating the sort of thing that can happen.

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