I would call your attention, about the middle of page 4, and I would like to read from the statement because there has been a problem raised by several of the States. We have some special action dealing with it.

While the production credit associations have been doing the major portion of business with the Federal intermediate credit banks in recent years, there have been socalled other financial institutions which have been using the loan and discount facilities of the Federal intermediate credit banks.

In the pending bills it is proposed that the production credit associations provide the initial capital necessary to begin the retirement of the capital investment of the Federal Government. They would also become, in the event of ultimate liquidation or dissolution of the banks, the beneficiaries of the accumulated surpluses in both the production credit corporations and the Federal intermediate credit banks.

We recognize that the bill provides these surpluses existing at the time of the merger are prohibited from being distributed as patronage dividends. There remains, however, discrimination as between the production credit associations and the "other financial institutions" with respect to surplus funds existing at the time of the merger, in the event of liquidation or dissolution of the banks while in a solvent condition.

In addition to discrimination on this point, there has arisen concern relative to the voting rights and privileges of the "other financial institutions" as compared with production credit associations.

To correct this, the executive committee of the American Farm Bureau Federation on April 16, 1956, adopted the following motion:

"That we support the bill with an amendment to give farmer owned and controlled financing institutions which operate on cooperative principles, and which have been using the facilities of the Federal intermediate credit banks, an election to acquire stock ownership, including voting rights and privileges, and the right to participate in any ultimate distribution of the surpluses existing at the time of the merger, on the same basis as the production credit associations, this election to be exercised within a reasonable time prior to the effective date of the proposed merger."

Mr. Chairman, we recognize that part of this language here might be incorporated as an amendment to the bill, and we also recognize that part of the information in this language will have to be an administrative matter in that there has to be a determination of those institutions which operate on a cooperative principle.

We simply bring this to the attention of the committee.

It has been brought to our attention sufficiently for us to call a special meeting of the executive committee to give it consideration, and we would recommend that the committee give consideration to this proposal in your final consideration of the bill.

Senator HOLLAND. I note that you tie together the two things, the giving of an election to the OFI's which operate on cooperative principles to acquire voting rights and privileges and stock ownership, and also to participate in ultimate distribution of the surpluses existing at the time of the merger.

The two do not have to be tied together, do they?

Mr. LYNN. No.

Senator HOLLAND. In other words, the recognition of sound cooperative principle almost insists upon the recognition of the second of those items, because the present surplus or reserve has been created by nonstockholders as well as stockholders, and without in any way handicapping the use of that fund as a continuing cushion or reserve up to the time of liquidation. It seems to me that if we are going to have a sound cooperative principle recognized, that you must recognize that those who contributed to setting it up, creating it, ought to be equally entitled to participation in the event there is a liquidation.

Do you support that principle?

Mr. LYNN. Yes.

Senator HOLLAND. And do you also support the principle that that conclusion is not necessarily tied to the first part of your position, that is giving them the right to come in and acquire proprietary interests in the capital structure of the organization?

In other words your position applies only to organizations and OFI's that are operated as cooperatives?

Mr. LYNN. As cooperatives.

Senator HOLLAND. And the latter part is broader than that which applies to everybody who has participated in setting up the surpluses on hand at the time of the merger?

Mr. HALL. May I comment, Senator Holland?

Senator HOLLAND. Yes, Mr. Hall.

Mr. HALL. I think that the intention-having heard the discussion of this matter in the committee-was to limit this to farmer owned and controlled cooperatives.

Senator HOLLAND. As to the first part?

Mr. HALL. Well, as to both parts.

In other words, I gather that your thought is that noncooperative borrowers have contributed something to this surplus too, that is, the existing surplus.

Senator HOLLAND. Yes.

Mr. HALL. Now our thought was, however, that inasmuch as we want this to be a farmer owned and controlled institution, that it would not be possible to accord those people rights in the institution.

Now you are drawing our attention to the fact that possibly we might have meant to have included them in some rights in the value of the surplus.

Senator HOLLAND. You do it after January 1, 1957, because people who are not stockholders that are dealt with, you require to have the same interest in reserves and surpluses created after the merger as will the associations, and I think that is sound approach.

That is the cooperative principle. But in my view you are not on sound ground if you are unwilling to apply that same cooperative principle to the reserves now on hand.

And it won't disturb the operation at all. You could have the same conditions that the reserve surpluses now on hand should be abandoned by the Government, should become an asset, be maintained as a reserve, may not be used in connection with the dividends or the like, and can be distributed only on liquidation, but when distributed on liquidation, that they shall be regarded as belonging to the people who created them, whether they were members or nonmembers. I see no way to get away from that.

Mr. HALL. I think that it is possible to give this construction to the language, and I do not think that there would be objection to it. Senator HOLLAND. You have no objection to making the broader principle applicable to the second part of your recommendation? Mr. HALL. That is right.

Senator HOLLAND. You stand by your recommendation No. 1, the first part of it, that those OFI's that are bona fide cooperatives should have the right at the time of merger to come in and become stockholders; is that it?

Mr. HALL. And have voting rights in that regard.

Senator HOLLAND. I think I understand your suggestion.

Senator MUNDT. We had testimony yesterday that a big percentage, I have forgotten how large, of the OFI's who had helped to create the surplus had subsequently gone out of existence. What was the percentage you gave us, Governor?

Mr. TOOTELL. There are 84 OFI's at the present time who do business with the credit banks out of a total of about 1,200 that at some time or other since 1923 have done business with the credit banks.

Senator MUNDT. Had the remainder of those 1,200 continued in operation, they would be entitled under this interpretation that you have agreed to with the Chair, to their pro rata share of the surplus in case of dissolution.

Since they no longer exist and no longer function in that capacity, what is your suggestion as to who is entitled to pick up the dividend that they would have gotten had they been in existence?

Mr. HALL. I think as a very practical matter it had to be left in there for the benefit of those who remain. I see no other alternative to that.

Senator HOLLAND. And if there are some who do not have legal existence or legal representation, the Government can reach in and expropriate that part of the undistributed assets at the time.

They have done it in the States time after time after time with reference to banks that have been liquidated, and I have no doubt that precedents exist in the Federal law, though I am not familiar with that.

Senator MUNDT. You mean that the Government would take that part of it?

Senator HOLLAND. Oh, yes. Many States have laws to the effect that unclaimed deposits after so many years are expropriated by the State.

Senator MUNDT. That is right; but I understood them to say that they felt it should be included in the pool to enlarge the dividends of those who continue.

Senator HOLLAND. That is what I am afraid it might be construed as, and I think that you are asking for trouble when you put that kind of a provision in because it is a departure from the soundly cooperative practice that is recognized in your operation after January 1, 1957. You recognize everybody from that time forth equally

Mr. HALL. That is right.

Senator HOLLAND (continuing). That creates any reserve, and I think that that same principle should apply to this watermelon that is here that you are going to cut, but upon which you are going to build to create a larger, continuing reserve.

Why ask for trouble by applying in your legislation an unsound rule to the ultimate distribution of that reserve, if it should ever be distributed?

Senator MUNDT. That was my question as to that slice of the watermelon loan which is unclaimed because of the fact that some of these OFI's have ceased to function.

Now, as I interpreted what you said, you said you just put that back in the watermelon and give each of the participants a bigger slice, and I understood the chairman to say that is not so..

That particular unclaimed slice should be returned to the Federal Government as in the case of unclaimed deposits in a lot of banks which are closed.

Senator HOLLAND. What I said is that that remedy is available to the Government at that time if it wants to exercise it.

It does not have to exercise it. The thing I do not want is for us to include a formula in the legislation when we pass it that obviously conflicts with sound cooperative legislation.

In other words, at that time, 50 years from now or 100 years from now, when a few of us who are here won't be much interested in what is going on, is the time to take care of its own problem of distribution, but I do not want to see an unsound principle of participation in that distribution incorporated in this legislation.

I think we are just asking for trouble if we do.
Mr. LYNN. We would agree thoroughly.

Senator HUMPHREY. What happens, Mr. Chairman, is that this accumulated reserve becomes a part of the general new capital for the consolidated operation, the intermediate credit bank operation. Senator HOLLAND. Subject, however, to the condition in the legislation that it may not be used for dividends.

Senator HUMPHREY. That is what I mean.

Senator HOLLAND. It is a continuing reserve.

Senator HUMPHREY. A continuing reserve of working capital, so to speak.

Senator HOLLAND. A continuing reserve to be drawn upon in the event there are losses that destroy your capital structure.

Senator HUMPHREY. Now let's assume that something should happen so there would be dissolution of this whole enterprise. That socalled, as you put it, continuing reserve would be eligible for distribution on a priority basis first to the PCA; would it not?

Senator HOLLAND. First to the people who created it, and most of it would have been put in there by the PCA's. I think our testimony yesterday showed 80 percent had been put in by the PCA's. Certainly nobody else would have any claim to that.

Senator HUMPHREY. But it would be eligible for distribution to the people who bought the initial stock in this farm intermediate credit bank operation.

Senator HOLLAND. To the people whose operation as interest payers created the reserves.

You see, this reserve would never have come into being if the concern had just run on an even line here not to create any reserves. Senator HUMPHREY. Yes, I understand.

Senator HOLLAND. It has been created by people who paid more than they had to pay to keep the organization merely solvent. So the general application of a cooperative law to this situation would require our recognizing this as belonging to the people who created it. Senator HUMPHREY. That is right.

Senator HOLLAND. Eighty percent of it having come from PCA sources as I understood the testimony yesterday, is that right, Governor Tootell?

STATEMENT OF R. B. TOOTELL, GOVERNOR, FARM CREDIT
ADMINISTRATION-Resumed

Mr. TOOTELL. That is right.

Senator HOLLAND. Approximately 20 percent from other sources. I do not think there is anything for us to worry ourselves about here except to be sure that the provision we have in the legislation is unassailable in the soundness of its application of cooperative law to this situation.

Senator HUMPHREY. The only point I was trying to suggest and it may only be a theoretical point, later on unless this is made rather clearly in the legislative history concerning this bill or in express statutory language, that you are apt to have one of these OFI's that apparently went out of existence or ceased to function come back by some thin thread of continuity of life and try to stake out some kind of a claim, even though it has not been an operating financial institution for a considerable period of time. You sometimes find the charters along with officers in sort of cold storage, and when there is a melon to be cut up, why they seem to have new life.

Now we have witnessed this in terms of even such things as rebates on telephone rates and gas rates where apparently a business institution went out of business, but you would be surprised how quickly there is resurrection of the economic body here on this.

What I was concerned about was whether or not we are spelling this out by intent or legislative history to obviate such a chance. Senator HOLLAND. You cannot preclude that chance. (Discussion off the record.)

Senator MUNDT. May I ask a question about the other phase of your recommendation?

We seem to be in general agreement about the second part and I did not sense any objection to that of any serious nature on the part of those testifying yesterday for the Farm Credit Board, but the Farm Credit Board did suggest that this matter of including voting rights and privileges be not extended to the OFI's but that you participate as people would participate in dividends of a co-op to which they did not belong. They would get the patronage dividends and benefits but not have voting rights.

How seriously do you regard your insistence on voting rights and privileges?

Mr. HALL. Our feeling was that those other financial institutions which are farmer-operated, farmer-owned and controlled, should have the opportunity to put up their pro rata share of the initial cost, and get a certificate, a class of stock for so doing, and in conjunction with it would flow ownership including voting rights and privileges that usually appertain to such evidences of contribution.

We felt that that was desirable. That does not impair or diverge in any way from the concept of farmer ownership and control.

It so happens that in addition to production credit associations which are farmer owned and controlled, that there are other cooperative associations which have, for some time, used the services of the intermediate credit banks which are also farmer owned and controlled. We felt that they ought to be brought in to that degree.