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December 1 1 , 1940 PBRSQKA.L AND CONFIDENTIAL M r . I r a Cleric F e d e r a l Reserve Bank o f San Francisco San F r a n c i s c o , C a l i f o r n i a Dear I r a : I was very g l a d indeed t o receive t h e snapshot of y o u r s e l f a s t r i d e a r i d i n g horse e v i d e n t l y out f o r a morning's canter on one of the g r a v e l e d roads? i n the v i c i n i t y o f S t a n f o r d . I c e r t a i n l y agree w i t h you t h a t such a c t i v i t y i s much b e t t e r than r i d i n g herd on banks although u n f o r t u n a t e l y we have too much o f the l a t t e r and too l i t t l e o f the f o r m e r . I see by the press and by the c l i p p i n g s you have sent on here t h a t the S . £ • C . and our f r i e n d s a t 1 Powell S t r e e t are again going round and. round. Each s i d e w i l l indulge i n a l o t o f e x t r a n e ous charges and counter-charges and whether the n e t r e s u l t of the contest w i l l be of any b e n e f i t t o t h e public i s extremely d o u b t f u l t o my oiind. I s t i l l t h i n k t h a t i f the Giannini s would make a s i n cere e f f o r t to compose the issues the v h o l e t h i n g could be s e t t l e d i n a v e r y s h o r t t i m e . One t h i n g t h a t i n t e r f e r e s w i t h such a s o l u t i o n , I suppose, i s the u n f o r t u n a t e development i n connection w i t h the r e p o r t o f the Committee on the B. o f A . premises. Under o r d i n a r y c o n d i t i o n s the question whether the write-down should be £ 1 . 5 m i l l i o n or $ 5 . 5 m i l l i o n would be p u r e l y a question of bookkeeping since more than s u f f i c i e n t reserves have a l r e a d y been s e t aside f o r t h e purpose. Against the background o f S . E . C. charges a g a i n s t Transamerica, however, a $ 5 . 5 m i l l i o n write-down would f a i r l y s u b s t a n t i a t e some o f the charges where a $ 1 . 5 m i l l i o n write-down mould n o t . Since I am w r i t i n g t h i s l e t t e r on a p u r e l y personal basis I am going t o ask you t o e n l i g h t e n me as to the meaning o f t h e language i n t h e agreement p r o v i d i n g f o r the Committee mentioned above. As I r e a d paragraph 5 , the Committee i s t o consider two things i n a r r i v i n g a t t h e estimated cost amount o f each premise. These two t h i n g s a r e included i n t h e f i r s t sentence o f the second paragraph under 5 and a r e ( 1 ) the f a i r v a l u e of each premise a t t h e time o f a c q u i s i t i o n and ( 2 ) the s p e c i a l conditions which had to be met i n f i x i n g the p r i c e p a i d . The n e x t sentence says, "From these c o n s i d e r a t i o n s , the Committee s h a l l determine e t c . " This language, unless g r e a t l y modified by understandings extraneous t o the agreement M r . I r a Clerk - 2 i t s e l f , leaves the Committee a considerable d i s c r e t i o n i n f i x i n g the value o f each premise. Ho doubt i n many cases a f a i r value of the premise a t the time o f acquis!ticm would c a l l f o r a d r a s t i c w r i t e down, whereas a consideration alone of the s p e c i a l conditions which had t o be met would j u s t i f y the present c a r r y i n g v a l u e . Suppose a premise i s on the books a t $ 1 m i l l i o n . The Committee might f i n d t h a t the f a i r value a t the time of a c q u i s i t i o n was $500,000. It might a l s o f i n d t h a t i n order to acquire the bank i t was necessary t o pay $500,00 more than the asset v a l u e . Conceivably the language of the agreement would permit the Committee to f i x a value anywhere from $500,000 t o $800,000 but i t would not n e c e s s a r i l y have t o be $800,000. I n discussing t h i s matter w i t h Governor KcKee, however, he would t a k e the p o s i t i o n i n the example c i t e d t h a t $800,000 would be t h e r e q u i r e d f i g u r e . He appears v e r y p o s i t i v e t h a t t h e " s p e c i a l conditions" i s c o n t r o l l i n g . I f , on the other hand, there i s the d i s c r e t i o n which i t seems t o me the language of the agreement imp a r t s t o the Committee, there i s no basis f o r a charge t h a t the Consulttee i s n o t l i v i n g up to the agreement or t h a t the f i n a l f i g u r e must be a r r i v e d a t i n Washington since the agreement c l e a r l y says t h a t a m a j o r i t y of the Committee s h a l l be b i n d i n g . The only ground on which the Committee might be charged w i t h departing from the meaning of t h e agreement would be one t h a t i t had e n t i r e l y ignored the " s p e c i a l conditions" and had based i t s findings s o l e l y on the f a i r value a t time of a c q u i s i t i o n . I n the f i l e of correspondence between y o u r s e l f and Messrs. UcKee and D r e i b e l b i s I do not f i n d t h a t t h i s matter of d i s c r e t i o n i s recognized. I note from your w i r e o f October 9 t h a t i n your opinion the Committee have not d e veloped s u f f i c i e n t i n f o r m a t i o n to e s t a b l i s h the c u r r e n t v a l u e s , e t c . This o f course would subject the Committee t o a charge of v i o l a t i n g i t s i n s t r u c t i o n s but on an e n t i r e l y d i f f e r e n t ground from the matter o f how i t s h a l l t r e a t i n f o r m a t i o n once i t has been d e veloped. I am mentioning a l l t h i s t o you as I am f e a r f u l t h a t the p o s i t i o n taken by y o u r s e l f and M r . West, w i t h which I am i n f u l l sympathy, cannot be defended s o l e l y on the basis o f the language i n the agreement, whereas I f e a r t h a t the p o s i t i o n of t h e m a j o r i t y o f the Committee can be so defended, p r o v i d i n g , of course, they can show t h a t they had developed the necessary information before e x e r c i s i n g t h e i r d i s c r e t i o n i n e s t a b l i s h i n g the estimated v a l u e s . Mr. I r a C l e r k - 5 As i t i s near t h e Xule season I wish t o take t h i s opportunity t o wish you and Mrs. Clerk a very merry Christmas and a happy new y e a r . And may I add t h a t I hope t h a t 1941 brings you more and b e t t e r horseback r i d e s on t h a t handsome mount. Tours s i n c e r e l y , Lawrence Clayton LC/frl
