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J u l y 12, 1943* Chairman E c c l e s : F r a n p i s Brown o f t h e FDIC mad© a r i g h t i n t e r e s t i n g suggestion. T h e r e i s p e n d i n g i n t h e House J u d i c i a r y Committee H.R. 1517 w h i c h was i n t r o d u c e d by Congressman Sumners o f T e x a s . H . R . 1517 i s a b i l l t o amend an A c t e n t i t l e d "An A c t t o supplement, e x i s t i n g l a w s a g a i n s t u n l a w f u l r e s t r a i n t s and m o n o p o l i e s , and f o r o t h e r p u r p o s e s " . A companion b i l l , S. 577, f o f f e r e d by S e n a t o r O Mahoney i s p e n d i n g i n t h e S e n a t e . A copy o f H . R . 1517 i s a t t a c h e d and y o u r a t t e n t i o n i s d i r e c t e d t o s e c t i o n 7 b e g i n n i n g on t h e f i r s t page and t o t h e p a r a g r a p h i n t h e c e n t e r o f t h e page on page 4 . F r a n c i s f s u g g e s t i o n i s based on a f e e l i n g t h a t Congressman S t e a g a l l may be a d v e r s e t o p u s h i n g h o l d i n g company legislation. He s u g g e s t s H . R . 1517 as t h e framework i n w h i c h a h o l d i n g company b i l l m i g h t be i n c o r p o r a t e d . JPD Attachment CONFIDENTIAL JPD - 7 / 1 3 / 4 3 GENERAL THEORY OF CASE The B o a r d 1 s t e l e g r a m o f May 2 8 t h f o r e c a s t s a p r o c e e d i n g t o r e v o k e t h e v o t i n g p e r m i t on t h e g r o u n d s t h a t t h e company has v i o l a t e d p a r a g r a p h 5 o f i t s v o t i n g p e r m i t agreement. T h i s p a r a g r a p h , among o t h e r t h i n g s , p r o v i d e s (1) t h a t t h e management o f t h e company w i l l be " c o n d u c t e d under sound p o l i c i e s g o v e r n i n g i t s f i n a n c i a l and o t h e r o p e r a t i o n s , i n c l u d i n g s t a t e m e n t s i s s u e d r e l a t i n g t h e r e t o " , and (2) t h a t " e x c e p t w i t h t h e p e r m i s s i o n o f t h e Board o f G o v e r n o r s o f t h e F e d e r a l Reserve System, i t s h a l l n o t cause o r p e r m i t any change t o be made i n t h e g e n e r a l c h a r a c t e r o f i t s business or investments". F o r t h e purpose o f f a c i l i t a t i n g d i s c u s s i o n , c l a i m s o f v i o l a t i o n s * under ( 1 ) w i l l be d e s i g n a t e d " G e n e r a l V i o l a t i o n s " , and c l a i m s , o f v i o l a t i o n s under (2) w i l l be d e s i g n a t e d "Specific Violations". Under t h e c l a i m w i t h r e s p e c t t o G e n e r a l V i o l a t i o n s i t would be p e r t i n e n t t o show t h e e x t e n t t o w h i c h t h e management (a) i n f l a t e d and w r o t e up t h e v a l u e o f a s s e t s ; (b) j u g g l e d i n t e r c o r p o r a t e i n d e b t e d n e s s ; ( c ) f i n a n c e d e x p a n s i o n b y . i n t e r c o r p o r a t e l o a n s ; (d) f i n a n c e d e x p a n s i o n by exchanges o f i t s own s t o c k and m a n i p u l a t e d t h e market i n such s t o c k t o f a c i l i t a t e such exchanges; (e) made p r o f i t s f o r t h e management and f o r a f f i l i a t e d and r e l a t e d companies and t h e i r managements t h r o u g h such manipu l a t i o n s ; ( f ) caused unearned o r i m p r o p e r d i v i d e n d s t o be p a i d o r r e c e i v e d ; and (g) o t h e r w i s e engaged i n unsound p r a c t i c e s o r v i o l a t e d s t a t u t e s . The weaknesses i n G e n e r a l V i o l a t i o n s , s t a n d i n g a l o n e , a r e t h a t t h e y may have t o be r e l a t e d more t o p a s t p r a c t i c e s t h a n t o c u r r e n t ones and t h a t t h e s i t u a t i o n has improved r a t h e r t h a n grown w o r s e . The b a s i c f a c t s upon w h i c h t h e c l a i m o f S p e c i f i c V i o l a t i o n s w o u l d be made can be e s t a b l i s h e d w i t h c o m p a r a t i v e l y l i t t l e d i f f i c u l t y , As a m a t t e r o f f a c t , t h e y a r e a d m i t t e d . Whether t h o s e f a c t s c o n s t i t u t e such v i o l a t i o n s as w o u l d m r r a n t t h e r e v o c a t i o n o f a v o t i n g p e r m i t i s a n o t h e r matter. I f t h e v i o l a t i o n s were p u r e l y t e c h n i c a l and i f t h e r e c o r d was one o f sound and c o n s t r u c t i v e management, t h e answer m i g h t be one way. But i f t h e r e c o r d was one o f i n f l a t i n g and w r i t i n g up t h e v a l u e o f a s s e t s , o f m a n i p u l a t i n g t h e m a r k e t i n t h e company1 s s t o c k , o f i n d u l g i n g i n e x c e s s i v e and unsound i n t e r c o r p o r a t e f i n a n c i n g , and o f d o i n g t h e o t h e r t h i n g s ment i o n e d u n d e r G e n e r a l V i o l a t i o n s , t h e answer m i g h t be d i f f e r e n t . I t follows, t h e r e f o r e , t h a t e v i d e n c e as t o G e n e r a l V i o l a t i o n s i s e q u a l l y p e r t i n e n t and e q u a l l y necessary t o support t h e claims o f S p e c i f i c V i o l a t i o n s . The B o a r d * s t e l e g r a m a l s o r e f e r s t o i t s o p p o s i t i o n t o t h e e x p a n s i o n p o l i c y p u r s u e d by t h e company. The company c h a l l e n g e s t h e l e g a l r i g h t o f t h e B o a r d , o r f o r t h a t m a t t e r any s u p e r v i s o r y agency, t o have a p o l i c y o f o p p o s i t i o n t o i t s continued expansion. I t i s a l s o f a i r t o say , - 2 - t h a t t h e immediate o c c a s i o n f o r t h e B o a r d ' s t e l e g r a m o f May 2 8 t h was t h e company's a c t i o n i n f l y i n g i n t h e f a c e o f t h e B o a r d ' s p o l i c y . Theref o r e , q u e s t i o n s a r e a l m o s t bound t o a r i s e as t o e x a c t l y what i s t h e B o a r d ' s p o l i c y on t h e q u e s t i o n o f e x p a n s i o n and as t o w h e t h e r t h e Board has any l e g a l r i g h t t o e x e r c i s e such powers as i t has i n e f f e c t u a t i n g i t s policy. I n t h i s c o n n e c t i o n i t may be n o t e d t h a t some oppose expans i o n because o f t h e i r advocady o f t h e u n i t bank system and t h e i r o p p o s i t i o n t o branch b a n k i n g o r any arrangement w h i c h has t h e same e f f e c t . Some t h i n k o f t h e company as b e i n g " j u s t t o o b i g " ; some t h i n k o f i t i n i t s monopolistic s e t t i n g ; i n . i t s a c t i v i t i e s i n d r i v i n g out competition; i n t h e r e s u l t i n g c o n c e n t r a t i o n o f power; and i n t h e r e s u l t i n g c r e a t i o n o f an empire beyond t h e c o n t r o l 1 o f any r e g u l a t o r y a u t h o r i t y . The f a c t i s t h a t t h e r e seems t o be u n a n i m i t y upon t h e p a r t o f a l l o f t h e a u t h o r i t i e s as t o whet t h e broad p o l i c y s h o u l d be b u t t h e r e may be r e a l d i f f e r e n c e s as t o t h e p h i l o s o p h i c a l reasons f o r h a v i n g such, a p o l i c y . However, i n t h i n k i n g about t h i s phase o f t h e m a t t e r , i t does n o t seem t o me t h a t i t i s p a r t i c u l a r l y h a r m f u l t h a t everybody s h o u l d have h i s reasons and t h a t t h e r e a s o n s a r e n o t t h e same. T h e r e i s a p o s i t i o n o u t s i d e t h e p h i l o s o p h i c a l a p p r o a c h where i t seems t o me a l l may a g r e e b o t h as t o t h e p o l i c y $nd t h e r e a s o n s t h e r e f o r . T h i s p o s i t i o n would be based on t h e p r e m i s e t h a t , i n any e v e n t , t h e r e s h o u l d be no e x p a n s i o n u n t i l t h e house c l e a n i n g j o b i s completed and t h e n o n l y o u t o f r e a l e a r n i n g s o r i n c r e a s e d c a p i t a l secured o u t s i d e t h e f a m i l y c i r c l e . T h i s m i g h t , o f course, i n v o l v e exp l e n a t i o n s o f t h e t i m e l a g and perhaps a d i s a v o w a l o f r e s p o n s i b i l i t y f o r t h e e x p a n s i o n d u r i n g t h e O'Connor r e g i m e .
