noncitizens to be directors providing they did not aggregate more than a minority of the number of directors necessary to constitute

a quorum.

The Court of Appeals for the Fourth Circuit has granted a motion of the Committee of American Steamship Lines to appear as amicus curiae in support of a petition for reconsideration of its decision filed by the Chemical Bank, and has ordered the other parties to the case to file briefs in response to the petition for reconsideration. It is possible that the court may revise or even restrict its decision so as plainly to be inapplicable to title XI insured mortgages and bonds. The Maritime Administration may also grant some form of clarifying approval to future title XI insured bond issues. However, neither of these possibilities can completely resolve the problems raised because (1) two of our lines must make immediate decisions and arrange firm commitments for their vessel financing, (2) further delay of some 12 to 18 months may result if the original decision of the court of appeals or its decision on reconsideration is taken by certiorari to the Supreme Court, and (3) favorable action on reconsideration by the court of appeals, or some general approval given by the Maritime Administration, cannot guarantee that this issue will not arise again in some other circuit. This is particularly true with respect to bond issues heretofore insured and now outstanding.

S. 2118 is retroactive and will apply to bonds issued and out standing prior to the decision. This is necessary to protect such bonds from possible attack, and is required in the interest of the Government, the bondholders, and the shipowners. I believe the statute, as amended by S. 2118, will conform with the clear intent of Congress in the enactment of title XI. A brief review of the legislative history of title XI will emphasize the congressional intent. The history of this legislation demonstrates clearly that Congress intended title XI bonds to be fully negotiable and that they reach the broadest market possible. The decision in the Westhampton case, if held applicable to title XI bonds, may destroy the negotiability of the bonds.

1. When the large-scale replacement program commenced in 1953, Congress enacted Public Law 288 (83d Cong., 1st sess.), making major changes in title XI. As stated in this committee's report to the Senate (S. Rept. 821), these changes were necessary because

Title XI in its present form has not proved effective in attracting private capital. This bill is intended to remove some of the shortcomings of the existing mortgage insurance provisions of the act in an effort to accomplish its original purpose to encourage the use of private funds. * * *

2. Public Law 781 (83d Cong., 2d sess.) was enacted in September 1954. As stated in the committee's report (S. Rept. 1804):

This bill is the result of the committee's effort to overcome the shortcomings revealed by experience in Public Law 288.

3. It developed that there were still shortcomings in the law insofar as the financial community was concerned. To overcome the problem, Public Law 613 (84th Cong., 2d sess.) was enacted in June 1956, to provide that "The faith of the United States is solemnly pledged to the payment of interest on" and 90 percent of the unpaid balance of mortgages generally and 100 percent of the unpaid balance of mortgages on special purpose vessels.

4. One of the most significant amendments was Public Law 1017 (84th Cong., 2d sess.), enacted in August 1956, extending the insurance from 90 percent to 100 percent on all vessels because of the reluctance of potential investors to assume the uninsured 10 percent risk.

5. In July 1958 it became apparent that receipts from mortgage insurance premiums were insufficient to build up the Federal ship mortgage fund to the point where the solemn pledge of the faith of the United States could be complied with in the event of default. This was impeding the program. Public Law 85-520 was thereupon enacted, granting authority to the Secretary of Commerce to borrow funds from the Treasury if sufficient funds wre not otherwise available to honor insurance obligations.

6. Public Law 86-123, enacted in July 1959, further broadened the title XI program by permitting the insuring of mortgages on existing new vessels to finance the future construction of additional new vessels.

7. In July 1959 Public Law 86-127 was also passed. The amendment provided for the creation of escrow funds to be held by the Treasury Department. This permitted full title XI insurance for the financing of ships under construction. Prior to this amendment Government insurance under title XI as to ships under construction was limited to the amounts actually paid to the shipyards. Companies which desired to issue bonds while the ship was still under construction experienced difficulty in marketing the bonds at the most favorable interest rates because of incomplete insurance.

The foregoing amendments demonstrate the continuing desire and intent of Congress to improve the program for financing new ship construction by meeting the practical problems which arose in the administration of title XI. The principal purpose of the amendments was to broaden and strengthen the market for title XI insured bonds, and hence obtain the most flexible form of private financing at the lowest rate.

The Maritime Administration recognized this congressional purpose. It repeatedly approved bond issues under trust indentures without requiring sections 9 or 37 approval for each individual issuance, sale, or transfer of a bond, so long as the trustee was a citizen of the United States and the terms of the mortgage and trust indenture were approved by the Administration. The trustees were closely scrutinized, not only as to citizenship but also as to financial integrity and ability to service the mortgages and trust indentures, pursuant to which title XI insured bonds are issued, the Government retains the very highest degree of control over such vessels. In particular, a trusteemortgagee cannot, in the first instance, foreclose the mortgage; instead, it must demand payment of the mortgage insurance from the Government and assign the mortgage directly to the United States. This procedure was reported to Congress from time to time. In my opinion neither Congress nor the Maritime Administration intended or foresaw the implications of the Westhampton case on title XI insured bonds.

During the time that Mr. Davis was testifying, I had an opportunity to review the amendments he suggested in the draft bill. After conferring with my colleagues, I am prepared to state that these

amendments are acceptable to the CASL companies. They are helpful in perfecting the language to the existing statute.

Thank you for the opportunity to appear before your committee today.

Mr. Schulte and Mr. Schreiner each have a short prepared statement. It is entirely up to you gentlemen whether you wish them now or if you wish to question, if you have any questions.

Senator BARTLETT. I think we will question you first.

Mr. FOSTER. I don't have any questions.

Senator BARTLETT. Mr. Kenney?

Mr. KENNEY. I don't believe I do, either, sir.

Senator BARTLETT. Without this legislation, do you believe these ships proposed to be built by the CASL members could be constructed. Would the financing be available?

Mr. KOMINERS. I do not believe the financing could be obtained and, and in any event, I do not believe that it could be obtained at as attractive a rate of interest as will be obtainable in the event the legislation is enacted.

Senator BARTLETT. That was going to be my next question. What do you think the spread might be? I know this is speculative, highly. Mr. KOMINERS. I would speculate, but I think either Mr. Schulte or Mr. Schreiner could better answer that question because they are the gentlemen for American President Lines who will actually be on the firing line. My guess is it would cost at least a half a point, half a percentage point, and not half of what the mortgage bankers call a point.

Senator BARTLETT. Is there dissent from that conclusion?

Mr. SCHREINER. No.

Mr. SCHULTE. No.

Senator BARTLETT. Explain for my education, if you will, just what "preferred status" means in the sense you used it on page 2 when you said "Hence, the mortgage lost its preferred status."

Mr. KOMINERS. A preferred mortgage under the Ship Mortgage Act is preferred only as against certain types of later accruing liens. The statute, as Mr. Davis very properly stated, clearly specifies certain types of subsequently accruing claims, which come ahead of a valid preferred mortgage. The preferred mortgage, however, with those exceptions, is similar to a first mortgage on real estate in that it is a prior claim as against subsequently or recorded claims. The claims which are not defeated are those for wages, repairs, tort claims, and a few others which I do not have at the tip of my tongue. Senator BARTLETT. Now, you mentioned the possibility that the Maritime Administration might grant the blanket approval to which Mr. Davis alluded. What if that blanket approval were granted tomorrow, would the CASL members, in your opinion, be able to proceed then?

Mr. KOMINERS. They could proceed, but I nevertheless believe it would cost them something in the interest rate, perhaps appreciable

amounts.

The reason I say that, Senator, is this: My own experience in the early practice of the law was as a real estate lawyer, and I ran into the natural inclination of attorneys to turn titles down when there is any

53-271-65

possible doubt. That is the easiest thing to do. And the safest thing from the standpoint of a prospective purchaser. When in doubt, be safe and say it is not good. Demand something more to protect your claim. Senator BARTLETT. Plenty of bonds on the market, in other words, concerning which there is no doubt whatsoever.

Mr. KOMINERS. I would say that for the future the attorneys representing the lenders might very well take the position that they question the authority of the Maritime Administration to give a blanket approval for 25 years. I personally agree with Mr. Davis, that the Administration has the authority to grant such approval. That does not mean that all other lawyers representing financing institutions would agree with either or both of us.

Senator BARTLETT. You wouldn't be putting up the $50 million.

Mr. KOMINERS. That is right. I would be representing the company which would not particularly care, apart from the additional charge to it, whether the opposing counsel guessed right or wrong. But opposing counsel in an effort to be safe might insist upon something more than a blanket approval.

Additionally, unless you get a blanket approval for the life of the bonds or the trust indenture, you would be required to come back repeatedly for approvals, which in turn would impair the negotiability of the bonds.

Senator BARTLETT. Thank you very much.

Are you ready, sir?

Mr. SCHULTE. Mr. Chairman, my name is Arthur D. Schulte. I am a partner of Lehman Bros., New York investment bankers. Our firm has been a leading manager of title XI bond financing for the subsidized steamship industry since 1958, when public offerings of such bonds first became practicable.

On previous occasions, I have had the privilege of testifying before Senate and House committees regarding certain amendments to title XI which have since been incorporated into the Merchant Marine Act. The purpose of the prior amendments was to provide the Federal Government and the American-flag shipping industry with the most effective and least expensive means for financing this country's massive vessel-replacement program.

As I recall the legislative history of title XI, some of the amendments were enabling amendments, while others represented straightforward clarification of congressional intent so that even the man-instreet investor could understand the Federal Government's full commitment to the title XI insurance program.

Prior to these amendments, merchant marine bonds insured under title XI could be sold only to a very limited group of sophiscated investors, consisting usually of savings banks and insurance companies, and the bonds had to carry a very high rate of interest. This interest rate, which was usually at least 5 percent, dropped to as low as 4.20 percent when it was possible to convince a broader segment of the investing public that the principal and interest of title XI bonds were unconditionally insured by the U.S. Government, and that there could be absolutely no question that accrued interest as well as the principal amount of the bonds would be paid when due.

We believe that if some new doubt arises as to the Federal Government's full commitment to such payments, the public market for title XI bonds will again become restricted. In that case, the low interest rates available in public financing may no longer be available thereby unduly burdening the issuers and imposing an unnecessarily high contingent liability upon the Federal Government.

In our opinion, S. 2118 represents the clarification type of amendment. We fully support the prompt passage of this bill so that there can be no possible confusion in the mind of any investor concerning the title XI program. We understand that a recent Federal court decision in the case of Chemical Bank v. The Steamship Westhampton is now creating confusion which, if allowed to persist, will, in our opinion, hinder the efficient marketing of title XI bonds at the relatively low interest rates that have been achieved to date. Such a condition would result in the sale of our Government's credit at unnecessarily high costs.

S. 2118 dispenses with all approvals of bondholders of the type required in the Westhampton case where the trustee is a citizen of the United States. In title XI cases with which we are familiar, the Secretary of Commerce not only approves the trustee and enters into an insurance contract with him, but he also effectively restricts the power of the trustee-and through him the bondholders-to foreclose upon the vessel or obtain any effective interest therein.

It appears to us that, when the trustee is a U.S. citizen there is no need to restrict any legalistic interest which a bondholder may have in a vessel-under the Westhampton case. Of course, the Shipping Act, even after this amendment, would still effectively prohibit any actual transfer of the vessel from the trustee to a noncitizen without the Secretary's further approval.

Even though my partners and I firmly believe that the confusion created by the Westhampton case is unwarranted as it relates to title XI financings, that confusion must be dissipated. To assure the successful continuation of the vessel replacement program and the most efficient financing thereof, I would commend to you the prompt passage of S. 2118.

Thank you.

Senator BARTLETT. Mr. Schulte, would you discuss a situation such as this with your partners? How many do you talk with? Mr. SCHULTE. Possibly half a dozen.

Senator BARTLETT. How many partners are there?

Mr. SCHULTE. I have 28 partners, Senator.

Senator BARTLETT. That is kind of extraneous, but I was curious. Why, in your judgment, were these bonds so unattractive before title XI came into being and was perfected, or relatively so?

Mr. SCHULTE. Because there was question in the minds of the investing public as to the Government's full faith and credit, whether or not the Maritime Administration would have the money to pay off in case of a default. That was remedied by having the bill passed which gave the Secretary of Commerce recourse to the Secretary of the Treasury. We felt that to make this bond a readily salable instrument, if I may use a simple homey expression, we had to make the investor, potential investor, realize that in case of a default of any sort, he would be paid off just like cash on the barrelhead basis. And