Evening star., 1934-05-06
USE OF FEDERAL FUNDS
TOREPAY DEPOSITORS HIT
Mcleod Bill Encourages Citizens to
Depend Too Much on Aid From
Government, Observer Says.

|
out the losses resulting therefrom.
Hoover Acts Blamed.
But where does this doctrine Of
implied obligation logically lead us?
The Hoover administration advised
the country that business was funda-
mentally sound and that prosperity
was just around the corner and a
Democratic administration, In a SIM
liar situation, would have given sub
stantially the same advice OF course,
this sort of argument means that the
general Government should bail out
the business losses generally arising
subsequent to such advice. And il
supervision is the criterion Of an i'm
piled obligation, We run then right
jam into the obligation to pay of
investors in building and loan asso-
Citations, railroad securities, public
utilities and perhaps losses sustained
in pari-mutuel gambling places, and
more recently the losses sustained in
the stocks subjected to regulation by
the Federal Trade Commission under
the securities act and such as will
hereafter inevitably be sustained un-
der the administration of the stock
market control act. Literally, there
are no terminal facilities available
when we once accept such implied
obligation doctrine.
But let us consider the situation
that would have to be met in the ad-
ministration of such a law. Now
there is substantial demand for a
successful liquidation of the assets of
closed banks, for in that the creditors,
the depositors, are interested. Their
dividend payments depend thereon.
But let the general Government act
the Santa Claus to the creditors of
the bank by bailing out their losses
and instead Of cooperation as now
there would be met the f1ercest sort
of liquidation resistance on the part
of the debtors. This redeeming Santa
Claus of a government would imme-
diately become a hated and hateful
Shylock demanding the pound of flesh
In every move and act made in an ef-
fort TO liquidate the assets out Of
which the peoples money is to be re-
turned. Before a jury the Govern
ment would not have half a China
selves, the chances are, would become
some Indifferent if not actually hos
tile. So to doubtful security. to be-
gin with, must be added human ma
ture, which means that the Govern
ment has lost before it begins to fight
for recovery.
Furthermore, under the bill, the R.
F. c. is required to use the agencies
and instrumentalities already set up
by the courts and State administra-
tive departments as to all State and
private banks. This in itself negatives
the idea of any economical or efficient
administration of the act, for it is
hardly to be anticipated that the
Governments money or property will
be satisfactorily handled by agencies
and instrumentalities not subject to its
control. Fortunately however, the r.
F. c. has had experience in this con-
nection already, which experience is
available to the Congress if it wishes
to know what to anticipate on this
score. Today the r. F. c. is having
to bear the entire cost of liquidation in
many instances where these court and
State receivers. liquidating commit
tees. etc, think there are no equities
in the collateral pledged by their
banks to the r. F. (Which means
that independent liquidating agencies
had to be set up to service the COL
lateral so pledged, thereby doubling
the liquidating expense.
Money Involved.
However, a consideration of the loss
that may be reasonably anticipated
from such an undertaking is not out
of place at this stage of the discus
sion. There are 1929 restricted or
closed banks in the country and it is
the estimate Of those most familiar
with the situation that it would re-
| quire 81 300, 900, 900 to pay the re-
naming unsecured deposit liability
under the proposed bill. On April 18
the r. F.. c. had made loans or COM
mitments to 1878 of these banks for
liquidation purposes in the total sum
of S752 ,564 900. AS of February %,
loans to the amount of 646,998,145
had been made to 1893 banks on
assets of the face value of 81 ,616.156.-
| IS, or at ratio of less than to !,
or about 40 per cent Of the face value.
There are no records readily available
showing the deposit liability of the
banks to which such loans have been
made, nor can it now be shown the
total deposit liability of the banks in
volved, though such may be obtained
by canvassing the State banking
commissions and the private banks in
dividually, which the author has not
had time to do.
But the liquidation experience under
the national banking act to date has
been that Sc per cent Of the unse-
cured deposit liability has been paid:
but such liquidation has been based
upon both the good and bad assets
alike. When, however, it is remem-
bered that the liquidation under the
proposed act will have to be made
upon class "B," or rejected assets, no
such favorable experience may be an
ticipated. In fact, since the cream
assets nave been pledged already, it
cannot be reasonably expected that
anything better than Is per cent will
be realized. or. in figures, only the
sum of 1902, 900, or a net loss Of
S1,047, 100000, assuming that the
s2,50C-and-under class represents rs
per cent of the total unpaid deposit
liabilities amounting to 81 800 900 600
of the closed banks, and that, 1t is
submitted, is reasonable estimate.
No appreciable loss should be sustained
in connection with the class In excess
of $2.500, for the loan to be made in
that connection Is limited to IS per
cent of the present (appraised) value
of the assets remaining, provided, of
course, that the liquidation costs are
reasonable.
Creditors Favor Bill.
1t is understandable, to be sure,
why the creditors, the depositors, of
these closed banks favor this bill gen.
orally. though all do not. It is well,
too, to consider the impression or
conviction prevalent to a more or less
extent throughout the country that
the Government might as well bail
out the losses of the small depositors
of the closed hanks of the coiInfrv