Letter to the President of the Senate and to the Speaker of the House Transmitting Bill Encouraging the Substitution of Private for Public Credit

Dear Mr. President: (Dear Mr. Speaker:)

I have the honor to transmit "The Participation Sales Act of 1966." This important legislation is designed to forward our objective of substituting private for public credit.

For many years the Federal Government has carried on lending programs to finance essential activities which would not otherwise receive adequate financial support. Under these programs direct loans are made to help the farmer, the businessman, the home buyer, the veteran, the student, our colleges, and our schools. As of June 30, 1965, the volume of these Federal loans exceeded $33 billion.

Desirable as these activities are, Federal lending neither can, nor should, shoulder the entire job.

Under our system of free enterprise it is far better for the Government to mobilize private capital to these ends.

And it is far better for the Government to stimulate and supplement private lending rafter than to substitute for it.

To do this, we sell Federal loans directly, or in some cases, sell "participations" in pools of loans, to private investors. The Government acts as both middleman and underwriter for the loans, assuring adequate and economical financing for desirable projects while at the same time attracting the maximum participation of private investors.

This substitution of private for public credit provides sound financing for worthwhile projects with a minimum of Federal participation.

In encouraging private participation in Federal credit programs, I am building on the outstanding work begun and carried forward by:

--President Eisenhower's Administration;

--The 1958 Commission on Money and Credit, chaired by Frazar B. Wilde and of which Secretary of the Treasury Fowler and many other distinguished citizens were members;

--President Kennedy's 1962 Committee on Federal Credit Programs, under the Chairmanship of former Secretary of the Treasury Dillon.

The substitution of private for public credit has many advantages: --It makes more effective use of the taxpayer's dollar.

--It offers the private investor an opportunity for sound investment and a fair return.

--It benefits business and those of our citizens who are helped by the vital programs made possible both by Federal and private investment.

In this fiscal year we expect to replace a total of $3.3 billion in public credit with private credit. In fiscal 1967, with the help of legislation such as the proposal I am submitting today, we believe that private credit can be substituted for public credit, advantageously to all concerned, in the amount of approximately $4.7 billion.

As private credit is introduced on an increasing scale, the need to coordinate the sales of Federal loans also increases. It would defeat the purpose of improving the operation of the credit market if loans offered under particular programs interfered with each other or with the orderly financing of the public debt through the sale of Treasury securities.

The Participation Sales Act of 1966 will help solve this problem in two important respects.

First, instead of the Government making a number of relatively small and uncoordinated offerings of loans in the market, the Act provides for pooling many loans together and selling participations in the pool.

The pooling of mortgages and loans and the sale of participations in the income and repayments from loans in the pool is not new. It has been used to advantage over the past several years by the Export-Import Bank, the Veterans Administration, and the Federal National Mortgage Association.

Second, this legislation would extend the pool participation technique to other lending programs, including:

--Farmers Home Administration;

--Office of Education;

--College Housing;

--Public Facilities Loans;

--Small Business Administration.

The pool technique adopted by this legislation has a number of advantages:

--It assures the Government the best possible return on the sales of financial assets;

--It provides the investor with a widely accepted and highly desired asset;

--It provides a means for attracting private participation in loans made with relatively low interest rates for special purposes;

--It reaches sources of capital which would not be available for loans or mortgages offered individually, thus widening the reservoir of credit for vital projects.

The proposed legislation has two other major provisions.

1. Rather than have each of the Agencies concerned conduct their own separate sales programs, the sale of participations would be centralized in a single agency--the Federal National Mortgage Association. This agency has already built up extensive experience with this technique in its mortgage pooling operations.

Individual agencies would continue to administer their credit programs, but the pooling of credits and sales of participations in the pools would be handled by the Federal National Mortgage Association. This centralization will greatly increase the efficiency of the sales operation and help coordinate this program with the Treasury's debt management operations.

2. In many cases the Congress has established Federal credit programs in which the interest rate charged to the borrower is below the market rate. The difference represents a net charge to the taxpayer. The Act provides that, in all such cases, the Appropriations Committees of both Houses must authorize in advance the amounts of participations which could be sold against these assets. In this way, the safeguards of the annual appropriations process can be applied to this aspect of the program.

The participation Sales Act of 1966 will permit us to conserve our budget resources by substituting private for public credit while still meeting urgent credit needs in the most efficient and economical manner possible.

It will enable us to make the credit market stronger, more competitive, and better able to serve the needs of our growing economy.

But above all, the legislation will benefit millions of taxpayers and the many vital programs supported by Federal credit. The Act will help us move this Nation forward and bring a better life to all the people.

I am enclosing a joint memorandum from the Secretary of the Treasury and the Director of the Bureau of the Budget which discusses in detail the major features of this legislation.

I urge speedy enactment of this legislation.

Sincerely,

LYNDON B. JOHNSON