Reconstruction Finance Corporation

“ This is no more for the benefit of the creditors than it is for the corporation itself. It tends to give permanency to the value of the stock and bonds, and is in the direct interest of a faithful administration of affairs. It simply compels the managers for the time being to do what they ought to do voluntarily. The fund to be created is not so much for the security of the creditors as the ultimate protection of the public and the corporators. ”

“ The brokers acquainted with the scheme would then introduce the corporation officials to alleged capitalists who represented they had available capital to finance business propositions, and would buy the underwritten stock, provided the corporation officers would have them underwritten by responsible guarantee companies.
It is asserted that these alleged capitalists would then advise that the work be done by the Central States Underwriting & Guarantee Company, the American Corporation & Securities Company, or the National Stock & Guarantee Company of San Francisco. ”

“ No doubt the subscribed capital stock of a corporation is a fund held by it in trust for its creditors, as is also all its other property, and had the railroad company released, without equivalent consideration, or given it away, its action would have been fraudulent, and might have been set aside by a court of equity. But certainly it was in the power of the directors to apply the subscription on bonds taken in payment to the extinguishment of debts, and, if thus applied in good faith, all being obtained for it that it was worth, no one has been wronged. ”

“ Mutual credit societies or credit unions are organized to furnish capital for production; that is, it is commercial capital, or credit for commercial purposes, not for investment purposes at all. Not a single dollar of a credit union should ever be loaned upon real estate. Not a single dollar! Not a single cent!! Such a practice would literally destroy the principle upon which they are founded; mutual aid to assist in production, not investment. ”

“ The rapid absorption of the business of the country of every character by corporations, while productive of much good to the public, is beginning also to develop many evils, not the least of which arises from their failure to pay debts and perform the duties which by the terms of their organization they assumed. One of the most efficient remedies for the failure to pay, when it arises from inability, is to place the corporation in the hands of a receiver, that its affairs may be wound up, its debts discharged, and the remaining assets, if any there be, distributerd among its stockholders. ”

“ That is why, this week, I proposed a new fee on major financial firms to compensate the American people for the extraordinary assistance they provided to the financial industry. And the fee would be in place until the American taxpayer is made whole. Only the largest financial firms with more than $50 billion in assets will be affected, not community banks. And the bigger the firm – and the more debt it holds – the larger the fee. Because we are not only going to recover our money and help close our deficits; we are going to attack some of the banking practices that led to the crisis. ”

“ The dividends are a value which passes from the hand of the contributor to the national creditor: Whether it be the national creditor or the contributor who accumulates or consumes it, is I agree of little importance to the society; but the principal of the debt—what has become of that? It exists no more. The consumption which has followed the loan has annihilated a capital which will never yield any further revenue. The society is deprived not of the amount of interest, since that passes from one hand to the other, but of the revenue from a destroyed capital. ”

“ By this plan the men who controlled the Prudential Company, and thereby the Trust Company, at the time the plan went into force, would forever continue to manage and control both institutions, although not one of them held a policy or any investment in the insurance company beyond the one share of stock required by law to qualify as director.
If this scheme had been consummated it would have borne to "frenzied finance" the same relationship that perpetual motion does to mechanics. ”

“ Our national industries, by an impoverishing policy, were themselves prostrated, and the streams of revenue flowed in such feeble currents that the treasury itself was well nigh empty. The money of the people was the wretched notes of 2,000 uncontrolled and irresponsible state bank corporations, which were filling the country with a circulation that poisoned rather than sustained the life of business. ”

“ For interlocking interests breed inefficiency and disloyalty; and the public pays,62 in higher rates or in poor service, a large part of the penalty for graft and inefficiency. Indeed, whether rates are adequate or excessive cannot be determined until it is known whether the gross earnings of the corporation are properly expended. For when a company’s important contracts are made through directors who are interested on both sides, the common presumption that money spent has been properly spent does not prevail. ”

“ Now this group in the past through their control direct or inter-related has been able to dominate the centers of credit, the money loaning institutions, such as the great banks and insurance companies. By this means they have been in a measure able to keep to themselves the great industrial exploitations dependent on the ability to finance in the hundreds of millions. More, they have been able to limit to narrow fields such men as myself and other newcomers, who wish to rise to the same financial advantage. ”

“ A maximum of returns in the shape of profits or dividends will be fixed by law. The community itself will undertake the furnishing of credits, loans and necessary capital for the establishing of a new business, charging a small rate of interest and maintaining a reserve fund to meet these operations. Private banking, insurance and the loaning of money on collateral will cease to exist. ”

“ The receipts of the companies would be uncertain, and they would be obliged to pay a high rate of interest on the capital invested in their plant, thus making it necessary for them to charge high rates for their service. The intense competition between rival companies would lead to the bankruptcy of the weaker, and the final result would be the establishment of a single corporation in the control of the whole system. Rates would then be put up to the point where the greatest profit would accrue to the corporation. ”

“ Loans of the credit of States, of counties, cities, and even towns, have been authorized, to furnish capital to railroad corporations, and at the same time they have been continually allowed to borrow money, at usurious and ruinous rates of interest. Securities thus obtained, doubted and comparatively valueless at home, have been pledged to the iron manufacturers abroad, and their enterprise has been excessively stimulated, while that of our own manufacturers has been disheartened and suppressed. ”

“ Relying upon their financier to meet in the first instance all extraordinary expenditure, they had no occasion to build up a reserve fund, and constantly tended to drift into debt. Organized upon a legal basis which made an act of association between the members of less importance than individual contracts entered into by sharers and hirelings alike with the capitalist, they were at his mercy if, for purposes of his own, he chose to use his powers under those contracts to bring about their dissolution. ”

“ No borrowing should run athwart the borrowings of the federal treasury, and no fundamental industrial values should anywhere be unnecessarily impaired. In the hands of many thousands of small investors in the country, as well as in national banks, in insurance companies, in savings banks, in trust companies, in financial agencies of every kind, railway securities, the sum total of which runs up to some ten or eleven thousand millions, constitute a vital part of the structure of credit, and the unquestioned solidity of that structure must be maintained. ”

“ But if we can keep things as they are until we can do some large things we have in view, we are not afraid of anything serious happening. So we form this new corporation, and have it advance the funds on the notes, so as not to weaken the trust company—and because we can’t afford to do it otherwise—and we know you would not permit it anyhow; and we ask you to give to the new corporation all the property which the creditors could reach, which will be held, and sold as opportunity offers, so as to make the loss as small as possible. But we must keep off this panic to save ourselves. ”

“ And the extension of the bankrupt act of 1867 to 'moneyed business or commercial corporations and joint-stock companies' increases the improbability that congress intended banking associations to be governed by a different rule from that governing other private corporations, as well as natural persons, in regard to the effect which a creditor's holding collateral security should have upon the sum to be proved by him against an insolvent estate. ”

“ The balance sheets for 1970-1975, however, showed an excess of assets over liabilities. This result was achieved by designating the misappropriated funds as "shareholders' loans" and listing them as assets offsetting the deficits. Although the withdrawal of the funds resulted in an obligation of repayment to Pritchard & Baird, the more significant consideration is that the "loans" represented a massive misappropriation of money belonging to the clients of the corporation. ”

“ It will require large outlays of money which should be raised through normal investment channels. But while private capital should finance this expansion program, the Government should recognize its responsibility for sharing part of any special or abnormal risk of loss attached to such financing. ”

“ Five years ago, after the worst financial crisis in decades, we passed historic Wall Street reform to end the era of bailouts and too big to fail. As part that reform, we created an independent Consumer Financial Protection Bureau with one mission: to protect American consumers from some of the worst practices of the financial industry. ”

“ A number of persons, not choosing to lend out their money privately, associate together, bring their respective capitals into a common stock, which is controlled and managed by the corporate government of a bank. If no association whatever had been formed, a large portion of this capital, a large portion, therefore, of that very debt of four hundred and seventy-five millions of dollars, would still exist, in the shape of private loans. ”

“ This power over credit is not confined to one city or to one section of the country, but it reaches every section and even extends beyond national boundaries into the foreign sources of investment funds. Local or small enterprises requiring only moderate underwriting are frequently financed independently, but it is an acknowledged fact testified to by the large bankers themselves that with rare exceptions issues of securities in large amounts, except when taken up by the stockholders, must receive at least the tacit approval of the big financial group. ”

“ The United States contribute a great part of the stock; their authority is essential to the existence of the Bank; their credit is pledged for its support. The plan would ultimately fail, if the terms were too favorable to the Company, and too hard upon Government. It might be encumbered with a debt which it could never pay, and be obliged to take refuge in a bankruptcy. The share which the State has in the profits, will induce it to grant more ample privileges, without which the trade of the Company might often be under restrictions injurious to its success. ”

“ In seasons of trial and difficulty similar to those through which we are passing the capitalist makes his investments in the Government stocks with the most assured confidence of ultimate reimbursement; and whatever may be said of a period of great financial prosperity, such as existed for some years after 1833, I should regard it as suicidal in a season of financial embarrassment either to alienate the lands themselves or the proceeds arising from their sales. The first and paramount duty of those to whom may be intrusted the administration of public affairs is to guard the public credit. ”

“ The public pays dearly for all hazards. It is wise, therefore, to pursue the conservative course in providing adequate funds to meet extraordinary conditions, and to give stability to the investment of the corporation. Moreover, such funds can be carried in a separate account which can readily be watched; any excess can be credited to future reduction in depreciation account requirements, while a prolonged deficit cannot 257perhaps be recovered by the corporation, in the light of the Knoxville decision. ”

“ Each has piled up an immense surplus which has been used through allied trust companies for stock juggling; each has paid extravagant commissions to agents; the funds of each have been managed to afford to high officials plentiful opportunities of graft; each has its real estate, fire insurance, low rent and loan favor graft; in each will be found the same type of syndicates as President Alexander and Vice-President Hyde used for their personal enrichment in the Equitable. ”