Full text of Marriner S. Eccles Papers : To Governor Eccles, Box 14, Folder 5, Item 14

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Office Corresponcrence
Governor Eccles.
rom

FT.DKRAl. KIM U\T.

V

Dato
Subject:

July 50, 1955.

Section 344 of the Banking Act
of 1935 <fi p»flfip(i by the Senate.

Mr. Paulger.

REC'D IN FILES

Jj j

MAR 2

/ / / • 7^/ J
Attached is a memorandum from Mr. Cagle to me relating to
section 344 of the Banking Act of 1935 as passed by the Senate which
attempts to cure capital impairment by definition.
Outside of the criticisms of the section as set out by
Mr. Cagle and pointing out that it is wrong in principle and does
not conform to the facts, I, also, feel that such action is unnecessary in any circumstances.

Its passage would apparently preclude

the affected supervising authorities from enforcing demands for corrective action because of capital impairment. Yfhile it may not
affect the form of our present call report and contemplated published
statements, I have some misgivings, in the event of the section's
becoming law, regarding the authority of the Board or the Comptroller
to prohibit a bank in its own published statement from showing a
misstatement of its capital account.
I am hopeful that the section may be stricken out in conference.




Office Correspondence
^_:^
From

fl.

_r
E.

FF.DF.RAI. RF.SERVF.
COARD

Datt

.

Subject: __Section 2j4'1

le

Ant of 19,". .

As I i; .

:. •

Lndj

I t o yo

of this section are unnecessary (e •
co

ULy, I feel t
>ssibly in i

Lthout resori i
constitute an unso

#

'

•

•

In subst)

•

.

•

•

'• ,

e too

o f .

| <

Lent of

ntly the same — to provide for
1 stock of b
thi

'

'

rithout

t i e s or the out.

banks concerned.
The second sentence (r
) IF unfortunatel;
•

actually cured, where)
•. 1

•

'

. ' ivolvin
i

» loan limits,

•

.

• '.

•

Impaired c

• >n the •;• r*t o f ! creditor or

Lm.
It




'•

*ar

— if in

.

.

t be

• or for ot

.

.

.

.

, if sOj

Lve certain re '

. ' ' .ions or rei

st:-'

' .
»

ity in

•

I

b.

If sue

'

•

-

.

,

•

•

solutely nee•

• '

'

'

*e not

Lacing of

'

'ship, ;

any other action r
to be more GO:

• •

i

capii

aces

'

definite

Legj

'

•

•'

• •

|o r j

•ment i s

Lnitj

restored, ceri

id c •-

•
,

•

•

_

.

i the vfo?1

'

publis

some of the St; te

hie

<:>on the
J, 13o.: ,

•

•

•

. D. I . C.

In several

'

set forth

. J . Cu Lngs a s

, (

igton, ]

,

, etc.) • •
\T

.'..••

•




:

•

•

"

•

•

.

uthorii '

st- tea
e to retain

Lly re:

.ue, if

es the Be
ice of c; >ital deb* •

.

bo the cl

'
1

strui

• protection

-

Ltors.

•

bo omi t showing
'• '

'

i

In thei

.'
"capita

;

' '

.

.• ' .

". "

Ln c
" . •' •
•

tion of losses
•

•'

-

u

In

-

-

-

•

I hi v:

ase where the par ^
•

of Sectioi

344.

I havi

'

.

.

.

debentiirer
their definite obli

'es, due on spec
bordina t

creditors bub no1

be

no •




ctio
.

4

:.es of

i

'

• •

.

In a l l sue

iblished stat<

-4the facts. The enactment of Section 344 would increase the Board1s difficulties in enforcing standard requirements in this connection and would
most probably result in serious difficulties to the Securities and Exchange
Conunission in connection with the listing of bank stocks.

1

The Board has repeatedly held that capital imp?irm^nt exists in ell

cor.

•-•ere the sound assets are not equivalent to ?11 liabilities plus
preferred
>ital stock outstanding plus the retirable value of all/stock out-

anding (such
per share)

ar value of, say, $100 per share but retirable at .'300
provision has been Bade for such situations in the call re-

port form and instructions relating thereto. This position I have concurred
in only in c-

here the retirable amount is a definite, fixed obligation

of the bank, which must be paid on 8 definite date and which is not affected
by contingencies.

In a case where

- value of $100 per shi
only Trhen. j i and j I recov? •'
of the airec

ik has issued preferred stock i t a
i :h
|

• ~r be retired at $300 per share
are sufficient in the ^_

nt

>? the bank concerned, and concurred in *by the appropriate

supervisory ruthorities,
upon

must be retire

ion of the bank, I dor

to require such bank to

'• >

desirabilit

r share only
btempting

Ln the money column of its current reports and

published strte*nents a liability Tor the entire $500 retirable value.

The

holders of such stock ctnnot now force the bank into liquidation for failure
to retire such stock.

Accordingly, I do not believe, in the usual case of

this sort, that a going brnk should be regarded as having an impairment of
capital but I doubt

he wisdon of attempting to cover all such situitions by

statutory definition.




This view emphasizes the difference between actual

par value, es reflected in the ou*

,

i cont

retirable value which depends upon happenings in the future and the ju
ment, or in some cases, perhaps the desires, of the directors
upon the particular contract in

e.

In situations of thii kind, trie

might be altered to authorize the Board or the Comptroller to
if i

, If ro, to m

art* in

nts, restric-

tions, or limitation a oJ" the statutes if de<

,

the circumstrnces.
Gooc3 a c c o u n t
in

o f a balance r h e e t (pre-r

•

...

) of r

going corporation o f :
(l) Bond interest co

0.

(: ) Cumulative dividends OJ
not clecL(3)

Pr

,

If pa si

e but

the dire

'

preferred sto

ccrued dlvd

.

,

. • 110 per

• October 51, 1935, in the discretion

of the director .
Good acconnting practice does
• t ol" the various types of stock outs banding
though not the

note::, i•' essential.

.

of i




•

ifferen

poration (sta1

etc.

eof,

err- '

. etc• Details of thj

(both at 1

'

•
'

)

ir] birabl<

bion of t-

.

, earnings!

Lon) is not
•

*or

In co

r

I
_

lie

, recej

it is in

.

,

•

_

•

, etc, of utilities, etc,

'

purchasers

"

,

s to i

•

'

•

Lton

"

done effectivGl.

'

'

r-uch note should contain inf

her <

In the SpoP:-

bial inf

>unts in

Ion clearly showing

i vtlue of each •
ti

bial

ordance with sound i^ccoui

,ory note ia

i

>tential

of the actuj

:

•e sheel

,

of stock or deben-

"on.

--.stem Trur?t Company ci
'' '

F ': •

cer

"

•

'i

'

(r ssuming

fOl

res for convenience):

"ILT

£L
LI/ FIT.
' ti 1
Inc.
. 1,000,000 par value capital
a to ck and -750,000 pa r VH 1 I J e ci
tures sole1 to R. 7 .c:., which '-ebentureF ?re
subordinate to the r i r h t s of ceoo^itor:other creditors.

/50,000

250,000
68,000
100,000
17,000,000
$19,168,000

Undivided profits and reserve?
Accept: n^e::, etc.

>sits
Tot- 1

"To i l l u s t r a t e the applicability of this method in ce.res of imj- irment
of




1 stock, assume that the bank hai i

Ltioi 1 losses of f400,000

be eliminated in orde • that i t s statement may correctly reflect
Ltion.

The set up then woulc be substj

follows:

n

-7"ILLUSTRATION '

_2

2IL

• '
includes £1,000,000 par value capital
stoc
760,000 prtr
entures sole to R.F.C., which
re
subordinate to the ri ;bts of depositors i
other creditors.
Accept?nees
.
Deposj
Total
"From your letters of July 18 •

.1,663,000
.
I*

100,000
17.000,000
.8,768,000

_, 191 4, i

'

understanding that under the method you described the set up in tl

tter

case would be substantially as follows:
"IL.T,USTr,'TIQI-; , •:
LI/-BILTTT
^Capital
Surplus
Undivi
-ofits i
Acceptances
Deposits

, 3,000
500,000
168,000
100,000
17,000.000
00

'
Tot--1

•Inclui
oceeds of (750,000 debentures sold to
R.F.C., which debentures ere subordinate to rights of
depositors end other creditors."
(The p.bove illustrations -re taken from the Boan fp letter of I

15,

19?4, to Mr. Hovjprd H. Hansen, Supervisor of

gton.)

'

,

;

The language of Section 344 would seem to encourage and legalize illustratic1

bove.
In any cases where the R. F. C.

•

purchased preferred stock or capital

c"el)entures at 8 stcted par vulue and now desires to reduce sue."
a raeens of eiding the bank to make necessary eliminations of depreciction
losses, udth a contract providing for the eventual retirement of the obligation at the original figure, the question of the totel &mount of




-b-

"liabilities" outstemding of the bank enu the resultant amount of net c&pi

.

iC
tal or capital impairment seems to depend entirely upon the definiteness of
the contract.

If the bank is relieved by the R. F. C. from payment of the

original amount, obviously the amount of impairment is reduced accordingly.
If the matter of the payment of the original amount is left to the discretion
of the directors, to be paid only when, es and if recoveries and earnings are
sufficient and 4£- the directors vote to make such oayments, then the eventual
payment is &t best e contingency and may be properly shov/n on the balance
sheet by pn explanatory note and in any such case the amount of any impairment could be reduced accordingly.
Trere pre situations vhere banks might be admitted to membership or per
rdttec to pay dividends or do certe-in other things v.'hich are restricted when
impairment exists but since such situations

In number

it does not seem necessary to resort to 8 soecicl law which would be "avails'1 to all other banks in the country.