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November 26, 1958
Hon. II. S. Eccles, Chairman
Board of Governors of the
Federal Reserve System
Washington, D. C.
Dear Mr. Chairman:
I have just finished reading your remarks made at the
conference of Federal Reserve Bank Examiners on Tuesday afternoon, November 1, and I wish to congratulate you on the
position you take.
I have not read anything for a long time
which impressed me as much.
My only regret is that it is not
for release or publication.
It is unfortunate that our member banks do not have
knowledge of your views concerning the matter of examinations
and of the great work you have done toward preserving the
Federal Reserve System.
Your remarks relative to paper other than the old so-called
"eligible" paper interested me greatly.
My experience as
manager of the local agency of the Reconstruction Finance Corporation in 1932 has been of great value to me.
Looking back
upon those loans, I believe that in the application of purely
cold figure facts a great many injustices were done simply because we were confined to markets and without any consideration
for intrinsic values.
Markets, you know, controlled loan values
in so far as securities were concerned, either directly owned
by or offered as collateral on loans made by banks.
An arbitrary
percentage was set up for loan values on unsecured paper and on
mortgages, the latter, of course, running from about 75% down to
a very small percentage.
I made the statement early in the
days of the local agency that the unsecured paper would pay out
Some of my advisory committee did not agree with me
but history has proven that I was right.
Getting back to the question of intrinsic values, let me
cite an instance - the Cleveland Cliffs Iron Company, which is a
very large and, today, very strong corporation in this district;
the company owns, perhaps, the second largest amount of available
ore in the country.
In 1952 the stock was down to $3.00 per
share; today, it is quoted $61.00 to $63.00 per share. At that
time, the company had obligations held by banks amounting to
approximately twenty some odd million dollars and, if I remember
correctly, about four million dollars of interest.
When notes
of this company were submitted to me as collateral on an R. F. C.
loan, I was very much concerned.
The application for the loan
was made in June of 1952, the company's notes maturing in January
of the following year.
I had visions of the control of the


Hon. M. S. Eccles




company passing out of the city of Cleveland but, luckily,
through renewals and better conditions the last eight million
dollars odd was paid by the Cleveland Cliffs Iron Company in
liquidation of the obligation.
lie had statements of the
various affiliates of the company; the trust indenture was
about two inches thick, and as the demand was insistent for a
loan upon these notes, I arbitrarily placed a value of 60$
of the face value of the notes, not having sufficient time to
make a real investigation of all of the constituent companies.
This may not be entirely clear to you, but what I am endeavoring to show is that there was, and is, a very large amount
of intrinsic value in the ownership of the Cleveland Cliffs Iron
I have been firmly convinced since 1932 that the procedure under v:hich the loan agencies operated went a long way
toward deflating values.
Many banks sold securities at prices
which were slightly in advance of loan value in order to procure
more money than they would have procured from the R. F. C. Real
estate mortgages were sacrificed and I have been of the opinion
for a long time that if the Federal Reserve System had been in
position, by law, to have done a "real job" in 1952, the System
would not have been so unfairly criticized during the last few
Isn f t there some way that the System can place before the
country its position in so far as all assets of a bank are concerned?
If this can be accomplished, we will have gone a long
way toward improving the standing of the System.
Bankers should know that the 10(b) section of the Act is
now permanent; it has been brought to their attention many times,
but the businessman and the public generally have no knowledge
of this facility, which I believe would go a long way toward
preventing a recurrence of such terrible conditions as arose in
1951 and 1932.
I was particularly pleased with your reference to the matter
of men in the field refraining from making criticisms. I do not
know how many examiners there are in the System but I presume
there must be close to three hundred, and I am glad you have
suggested these examiners be "fact-finding" men, referring matters of policy and criticism back to the officer in charge of
examinations at the Federal reserve banks.
This procedure would
confine differences of opinion to possibly only twelve men, where,
under the present procedure, every man in the field has his opinion
and, in many cases, does not hesitate to state it.


Hon. M. S. Eccles




with so large a force, it is impossible to have a clear understanding of policy.
The procedure you outline would go a
long way toward eliminating criticism of the examination
function of the Federal reserve banks.
Yours very sincerely,

VL//3. Fleming,



lioveaber SO, 195S

Mr. Is. J. Fleaing, President
Federal Reserve Bank of Clevelaacl
Cleveland, Ohio
Dear Mr. Fleshings
This will acknowledge your l e t t e r or Soveajber IS in *hlch you coarueut o& the remark* I wade at
Conference of Feder&l Reserve Exaaiaere here in
on Novt-sal ^r 1, copies oi' say rfejiarke liarii^
recently heea distributed to each of the Reserve banks.
I t it. > ( • ! t i j j gratifying to m% %o have you compliant
si? brief address so highly-•
While my raaarke at the Sxaadaers* Coafereace were not iateacied ior publication, I do not see
tlEitt the miitt'sro cotit&inad thareii* are coaf'lu
i a f&ct, I tlii&k i t would be helpful if bankers
erally tsere «««re of tho o^isr^riflf principles behind
tks revised eareminfe^ion procedure. Therefore, I fiee
r*o cbjfcctioa wktAtn/90 to your I'uraifchiafc copies of the
paper to &xty bankers who you think nould be iaterested
f i t h kia4 reg&ras, I am

M. S. Eccles