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81ST CONGRESS!
2d Session
f
bJMNAil!,
/REPORT
\ N o . 1689
STUDY OF
RECONSTRUCTION FINANCE CORPORATION
INTERIM REPORT
OP THE
COMMITTEE ON BANKING AND CUBBENCY
PURSUANT TO
S, Res. 219
(81st Cong.)
TEXMASS PETROLEUM CO. LOAN
M A Y 19 (legislative day, M A R C H 29), 1950.—Ordered to be printed
UNITED STATES
GOVERNMENT PRINTING OFFICE
WASHINGTON : 1950
COMMITTEE
ON BANKING
AND
CURRENCY
B U R N E T R. M A Y B A N K , South Carolina, Chairman,
G L E N H. T A Y L O R , Idaho
J. W. F U L B R I G H T , Arkansas
A. W I L L I S R O B E R T S O N , V i r g i n i a
J O H N S P A R K M A N , Alabama
J. A L L E N F R E A R , JR., Delaware
P A U L H. D O U G L A S , Illinois
R U S S E L L B. L O N G , Louisiana
C H A R L E S W. T O B E Y , New Hampshire
H O M E R E . C A P E H A R T , Indiana
R A L P H E . F L A N D E R S , Vermont
J O H N W. B R I C K E R , Ohio
I R V I N G M. I V E S , New York
A . L E E PARSONS, Clerk
J o s . P . M C M U R R A Y , Staff
Director
SUBCOMMITTEE
ON RECONSTRUCTION
FINANCE
CORPORATION
J. W. F U L B R I G H T , Arkansas, Chairman
B U R N E T R. M A Y B A N K , South Carolina
C H A R L E S W . T O B E Y , New Hampshire
J . A L L E N F R E A R , JR., Delaware
H O M E R E . C A P E H A R T , Indiana
P A U L H . D O U G L A S , Illinois
GEORGE MEADER,
Counsel
P R I C E , W A T E R H O U S E & Co., Accounting
II
Consultants
CONTENTS
Page
Preface
Conclusions of the subcommittee
Summary:
Origin and brief financial history of Texmass Petroleum Co
History of the R F C loan
The subcommittee's study
The publi c interest
Fulfillment of the purposes of the R F C Act
Availability of financial assistance from other sources
Soundness of the loan
Decisions of the Directors of R F C
Comments of the Review Committee of R F C
Appendix:
A. Proposed application of proceeds of loan
B. Members of investor groups
C. Application of proceeds of $8,000,000 loan made in 1947 by private
lenders
III
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26
81ST CONGRESS )
2d Session
SENATE
)
STUDY OF RECONSTRUCTION FINANCE
REPORT
No. 1689
CORPORATION
T E X M A S S P E T R O L E U M CO. L O A N
MAY 19 (legislative day, MARCH 29), 1950—Ordered to be printed
M r . FULBRIGHT, from the Committee on Banking and Currency,
submitted the following
I N T E R I M REPORT
[Pursuant to S. Res. 219]
The Banking and Currency Committee approved and agreed to
report to the Senate the following interim report of the Subcommittee on Reconstruction Finance Corporation:
PREFACE
The Subcommittee on the Reconstruction Finance Corporation,
having been designated by the Banking and Currency Committee of
the Senate to conduct a study of the operations of the Reconstruction
Finance Corporation pursuant to the terms of Senate Resolution 219,
adopted February 8, 1950, herewith submits its first interim report.
T h e subcommittee proposes to consider the problem of availability
of capital and credit to American industries, particularly to smallbusiness enterprises; the need, i f any, and its extent and character,
for direct lending by the Government during a peacetime, nonemergency period. I t w i l l also explore the manner i n which the lending
powers, and limitations t'hereon, as described i n the law, have been
interpreted and applied by the Reconstruction Finance Corporation.
The subcommittee w i l l also examine the organizational structure and
administrative efficiency of the Reconstruction Finance Corporation,
its procedures and costs, as well as the extent to which its policies
and activities are harmonized w i t h the broader fiscal policies and
programs of the Government.
T h e subcommittee has commenced a study of specific loans, believi n g that a discussion of broad principles and purposes unrelated to a
specific factual situation is comparatively useless i n obtaining an
accurate picture of the character of the activities of a public agency.
I t is the subcommittee's hope that by observing the actual execution
of congressional policy it can assist the Congress i n formulating and
expressing its future policy w i t h respect to the Reconstruction Finance
Corporation with greater clarity and i n greater detail.
The first of these studies is the loan to the Texmass Petroleum Co.
1
2
TEXMASS P E T R O L E U M CO. LOAN
CONCLUSIONS
OP T H E
SUBCOMMITTEE
F r o m its study of the facts and circumstances surrounding the Reconstruction Finance Corporation loan to the Texmass Petroleum Co.,
the subcommittee makes the following findings and conclusions:
1. F r o m the record before the subcommittee, i t is evident that the
Board of Directors of Reconstruction Finance Corporation gave only
casual and superficial consideration and study to the Texmass Petroleum Co. loan. Those Directors who approved this loan, and extensions thereof, disclosed inadequate knowledge of the significant facts
and features of the Texmass Petroleum Co. loan. They overruled the
findings and recommendations of their own review committee without
persuasive evidence justifying such action.
The subcommittee believes that the lending of public funds is a
function requiring at least an equal degree of care with that desirable
for the protection of the investing public. The record shows, however, that the Securities and Exchange Commission i n reviewing the
registration of certain securities of the Texmass Petroleum Co. scrutinized the representations of the Texmass Petroleum Co. and the significant facts far more thoroughly and effectively than d i d the B o a r d
of Directors of the Reconstruction Finance Corporation with respect
to the loan.
The subcommittee is of the opinion that the Directors of the Reconstruction Finance Corporation were remiss i n their duty both i n
failing to avail themselves of the f u l l facts within the control of the
Securities and Exchange Commission and i n f a i l i n g to give adequate
weight to those facts.
2. O n the record before the subcommittee it appears that the primary consideration of the Texmass Petroleum Co. loan is not the interest of the general public. O n the contrary, it is primarily a "bailout" of existing creditors of the borrower. Eighty-one percent of
the loan funds w i l l go to insurance companies, banks, other creditors,
and individual investors, minimizing their risk of loss i n a highly
speculative venture.
3. T h e Reconstruction Finance Corporation has failed to convince
the subcommittee that this loan is of the character intended by Congress to be made under the authority of the Reconstruction Finance
Corporation A c t of 1948. T h e Reconstruction Finance Corporation
i n its records, its statement to the subcommittee, and the testimony of
its officials has not made an affirmative showing that this loan w i l l (as
prescribed i n the act) "encourage small business," "help i n maintaini n g economic stability of the country," and "assist i n promoting maximum employment and production," to the extent necessary to justify
disbursement of public funds "to aid i n financing agriculture, commerce, and industry."
4. T h e Reconstruction Finance Corporation has not established that
the financial assistance to the Texmass Petroleum Co. "is not otherwise available on reasonable terms" (as required by the act). T h e
subcommittee has i n mind that the venture is of such speculative nature that financial assistance should have been provided, i n part at
least, by risk capital from private sources.
5. T h e Reconstruction Finance Corporation has not shown that the
loan is of such "sound value or so secured as reasonably to assure
retirement or repayment" (as required by the act). O n the estimates
3 T E X M A S S P E T R O L E U M CO. LOAN
of reserves and earnings most favorable to the borrower, relied upon
by the Reconstruction Finance Corporation, the loan cannot be repaid
within 10 years, the maximum period for which Reconstruction F i nance Corporation is authorized to make business loans. On the basis
of estimates relied upon by the Reconstruction Finance Corporation
of the value of the oil and gas reserves and equipment offered as collateral by the Texmass Petroleum Co. and the formula employed by
the Reconstruction Finance Corporation to determine the sound loan
value of such collateral, a loan i n the amount of $15,100,000 is not
justified.
SUMMARY
Origin and brief financial history of Texmass Petroleum Go.
I n 1944, M r . Homer W . Snowden, a Dallas oil operator, and M r . A .
W . Smith, of Boston, Mass., induced a group of wealthy Bostonians
to invest i n oil ventures. F o r the most part, these investors acquired
fractional participations i n working interests i n oil- and gas-producing
properties. This type of investment is attractive to taxpayers i n high
Federal income-tax brackets because of tax-savings possibilities.
Fifteen separate ventures were organized, involving about 350 individuals/trusts, and institutions (appendix B ) . The amount invested exceeded $8,000,000, most of which was paid to Snowden and
his partners for drilling oil wells. The payments totaled approximately twice the actual drilling costs. Snowden and his partners also
received overriding royalty interests in the properties.
Texmass Petroleum Co. was organized i n October 1946 as successor
to the Snowden partnerships. A t the outset it was heavily burdened
with the partnership debts which it assumed. During 1947 Massachusetts Mutual L i f e Insurance Co., J o h n Hancock Mutual L i f e Insurance Co., and Mercantile National Bank of Dallas loaned Texmass
a total of $8,000,000 (appendix C ) . Additional loans were obtained
from other sources. The proceeds of these loans were used primarily
to pay obligations or to buy out the ownership interests of Snowden
and his partners.
I n January 1948 some of the original investors supplied $1,000,000
i n additional capital to bring new life to the enterprise. A t that time,
Snowden was relieved both of his responsibilities as a manager and
his interests as an owner. The Texmass Petroleum Co.'s financial
statements as of August 31, 1949, indicate that Snowden owed the
company $436,000. This amount was charged off as a bad debt.
B y August 31,1949, some $22,480,000 had been paid into the predecessor partnerships and into Texmass Petroleum Co., and only
$3,890,000 remained i n the form of property interests and tangible
assets. This remainder was made up primarily of the cost of properties
owned by Texmass, a large portion of which consisted of overriding
royalty interests i n leaseholds i n which the working interests were
owned by others.
History of the RFC loan
March 30,1949, Texmass Petroleum Co. applied at Dallas, Tex., for
a loan of $22,500,000 from the Reconstruction Finance Corporation,
$18,500,000 to acquire properties and to pay debts, and $4,000,000 for
working capital. June 7, 1949, the application was reduced to
4
T E X M A S S P E T R O L E U M CO. LOAN
$18,950,000, of which $4,000,000 was to be used as working capital.
The Dallas agency examiner recommended decline of the loan. The
Agency Review Committee concurred. June 22,1949, the Dallas A d visory Committee and agency manager recommended a loan for
$15,925,000.
E a r l y i n August 1949 the Board of Directors of R F C employed
M . M . Garrett, of Dallas, Tex., a geologist and petroleum engineer,
to estimate and report the value of the property offered as collateral.
Based upon Garrett's report, made i n early September 1949, the applicant filed a supplemental application.
Loan Agency Examiner C. E . Herrington reviewed the supplemental application i n the light of the Garrett report and again recommended on September 12,1949, that the loan be declined. T h e Review
Committee recommended that the loan be made. September 21,1949,
the manager and the advisory committee recommended a loan of
$15,638,513.
Washington L o a n Examiner W . J . Rochelle recommended decline
of the loan from a credit standpoint. T h e five-man Washington Review Committee unanimously recommended decline.
September 29, 1949, the Board of Directors adopted a resolution
approving a loan of $15,100,000 upon the condition, among others,
that $5,000,000 thereof be supplied by existing secured creditors of
Texmass Petroleum Co. Less than $1,500,000 was for working capital,
$12,438,513 was to pay off existing secured and unsecured indebtedness,
and $1,200,000 was to be used to acquire additional o i l and gas properties (appendix A ) . O f the five Directors of R F C , Directors Gunderson and Dunham voted for the resolution. Director W i l l e t t opposed
it. Chairman Hise was present but disqualified himself. Director
M u l l i g a n was absent because of illness.
The plan of Texmass called for the acquisition of certain outside
oil properties and the working interests of individual investors i n
Texmass Petroleum Co. acreage. These were to be bought partly
out of the proceeds of the loan and i n part by the issuance of securities.
Since the latter involved a public offering, it was necessary to register
the proposed securities w i t h the Securities and Exchange Commission.
I n its prospectuses, Texmass Petroleum Co. set forth certain facts with
respect to its past history and that of its affiliated enterprises, and it
described the proposed plan of reorganization and operations thereunder. Pursuant to S E C procedures, T e l l T . White, petroleum engineer and geologist for the Securities and Exchange Commission,
made an analysis and evaluation of the company's oil reserves.
White's evaluation was substantially lower than that of M . M . Garrett, the R F C petroleum engineer. Learning this, R F C asked the
Texmass Petroleum Co. to obtain the opinion of another petroleum
engineer. C. H . Keplinger, approved by R F C , was employed by
Texmass. H i s report was submitted M a r c h 6,1950.
The original resolution of September 29, 1949, provided that the
commitment for a loan would expire 60 days thereafter, namely, November 28,1949. Extensions of time within which the borrower might
fulfill the conditions of the loan resolution were made from time to
time, as follows:
December 1,1949, the Board adopted a resolution extending the time
for an additional 90 days, expiring February 28,1950.
5 TEXMASS P E T R O L E U M CO. LOAN
February 23,1950, an additional 30-day extension was granted.
March 20,1950, after the proceedings before the S E C and after the
R F C had obtained the geological engineering report of M r . Keplinger,
the time for performance of the conditions by Texmass was extended
for an additional 30 days, expiring A p r i l 27,1950.
A p r i l 27, 1950, after the subcommittee's hearings, a further extension of 30 days was granted.
The subcommittee's study
A f t e r a preliminary study of the facts by the staff of the subcommittee, the Comptroller General of the United States was asked
to review the facts, to express his opinion as to the legality of the Texmass loan and to advise the subcommittee of the comment he would
make with respect to it, pursuant to his duties under the Corporation
Control Act. This act requires the Comptroller General in his audit
report—
to show specifically any program, expenditure, or other financial transaction
or undertaking observed in the course of the audit which, in the opinion of the
Comptroller General, has been carried on or made without authority of law.
The Comptroller General replied that unless additional evidence refuted the facts before him he would report the Texmass loan to be a
transaction without authority of law (hearings, p. 9).
A p r i l 13,1950, the subcommittee heard the testimony of the Comptroller General, officials of the Securities and Exchange Commission
and the chairman and other officials of the Reconstruction Finance
Corporation. The R F C officials requested and were allowed time for
preparation of a statement justifying the Texmass loan. A p r i l 22,
1950, the subcommittee heard the further testimony of officials of the
Corporation and the report on Texmass properties of the petroleum
engineer of the Securities and Exchange Commission.
A p r i l 26, 1950, the subcommittee transmitted to the Senate Banking and Currency Committee its statement of conclusions with respect
to the Texmass Petroleum Co. loan, as hereinafter set forth i n this
report.
A p r i l 27, 1950, M r . John H . Murrell appeared before the subcommittee under subpena. M r . Murrell is a professional geologist and
petroleum engineer, a partner i n the firm of De Golyer & MacNaughton of Dallas, Tex. H e described the accepted principles and practices i n the estimation of reserves of oil i n the ground, the estimation
of market values of oil properties by prospective buyers and the determination of loan values of oil properties by prospective lenders.
T H E PUBLIC INTEREST
On the record before the subcommittee it appears that the primary
consideration in the Texmass Petroleu/rn Go. loan is not the interest
of the general public. On the contrary, it is primarily a "bail-out"
of existing creditors of the borrower.
I n Report 974, Eightieth Congress, second session, the predecessor
to this subcommittee recommended as an additional "control" upon
the lending powers of the Reconstruction Finance Corporation the
following:
Second. In deciding whether to grant a loan, the primary consideration should
be the interest of the general public rather than the interest of the individual
S. Rept. 1689, 81-2
2
6
T E X M A S S P E T R O L E U M CO. L O A N
borrower. * * * The committee believes that R F C should not engage in lending of a purely private character where the benefit to the general public is remote,
whether the loans be large or small.
This test was not intended to add to the lending powers of the Corporation, nor to minimize or weaken the statutory restrictions and limitations. O n the other hand, i n this subcommittee's view, it was intended as an additional limitation to be considered and applied only
when a loan had otherwise qualified for assistance f r o m public funds
by coming within the statutory purposes and powers, and meeting
the test of the statutory restrictions and limitations. I n other words,
after a loan has clearly qualified under the statute then, and then
only, should the question of public interest be raised or considered.
The subcommittee realizes that the test of public interest is a broad
one, susceptible to many varieties of meaning. Used as an additional
reason for granting a loan, it would serve to expand the Corporation's
authority immeasurably and preclude any clear accounting for the
exercise of such power. Used, however, as an additional check upon
the powers of R F C , the test, although broad, may have utility.
The subcommittee is disturbed that i n the Corporation's official
statement to the subcommittee, and i n the testimony of the E F C
officials, the concept of public interest seems to have been employed
as an addition to the statutory lending powers. T h e comments i n the
statement under "Public interest" point to the importance of o i l to
our national economy, the need of conserving o i l resources and possible
repercussions i n a locality from business failures. T h e statement includes brief statements from bank officials i n Dallas, Tex., commenti n g generally upon the Texmass loan ([hearings, p. 62).
Director Gunderson, according to his testimony, seems to have been
moved to vote affirmatively for the loan primarily on the ground that
for national defense i t is imperative to conserve o i l resources, and
he had been informed that rehabilitation of the Texmas wells would
accomplish this objective.
The subcommittee is of the view that subordinate officials of the R F C
came nearer the proper employment of the concept of public interest
as contemplated i n the committee report i n the Eightieth Congress.
The f u l l comments of the Washington Review Committee are presented
i n this report at page 14.
A major accomplishment of the loan to be made to Texmass Petroleum Co. by the Reconstruction Finance Corporation w i l l be the
bail-out of two insurance companies which now hold loans of doubtful
value. I n the readjustment financed by the loan, the insurance companies w i l l recover i n cash a little more than 50 cents on every dollar
now owed to them by the borrowers. T h e i r position as creditors of
Texmass after the readjustment w i l l be less favorable relatively than
their position as creditors before the readjustment because the R F C
loan w i l l have the effect of raising other items of indebtedness to a
parity w i t h that held by the insurance companies, whereas those other
items of indebtedness are now subordinate to the insurance company
loans. T h i s disadvantage, and the further disadvantage that the loans
w i l l be serviced by 50 percent of the proceeds from o i l runs where 60
percent is now being applied, i n the opinion of the subcommittee, are
not factors of compelling importance when compared with the primary factor that 50 percent of the present loans w i l l be recovered i n
7
T E X M A S S P E T R O L E U M CO. L O A N
cash by the insurance companies immediately, and a balance of only
$4,000,000 w i l l remain at risk.
The insurance companies had not been firmly committed to particiEate i n the Texmass loan at the time of the subcommittee's public
earings. They have indicated to the subcommittee that they intend
to participate, though they have had the opportunity to study the
facts disclosed by the hearings and should know that the loan which
they w i l l hold after consummation of the plan of readjustment w i l l be,
according to the estimates of the R F C geologist, Garrett, considerably
below their own standards of lending on oil properties and also considerably below the standards required of them by insurance commissioners (hearings, p. 195). Their decisions not to withdraw from
the plan after considering these facts confirm to the subcommittee its
view that the insurance companies are happy to have the R F C bail
them out of a bad situation.
Under the loan agreement 81 percent of the total of $15,100,000 w i l l
be used to repay existing debts and $500,000 out of the remainder w i l l
go to purchase property interests held by the original investors who
were attracted to the venture by the prospect of speculative profits
and the certainty of tax savings. Under the plan of which the R F C
loan is a part, 60 percent of the common stock of Texmass w i l l be issued
to two persons for no cash consideration, but i n connection with employment contracts.
On the evidence before it, the subcommittee is of the opinion that
the Texmass loan is primarily i n the interest of the Texmass Petroleum
Co., its creditors and investors and not i n the interest of the general
public. The subcommittee cannot find evidence that any public purpose w i l l be served by the Texmass loan or that any reliable information was presented to Directors Gunderson and Dunham, who voted
affirmatively for this loan, that should have led them to conclude that
a public purpose would be served.
I f this "bail-out" serves a public purpose under present conditions,
the subcommittee has difficulty i n visualizing any situation where a
l o a n otherwise qualified under the statutory standards could be de^
clined because it fails to serve the public interest.
F U L F I L L M E N T OF T H E P U R P O S E S OF T H E R F C A C T
The Reconstruction Finance Corporation has failed to comince the
subcommittee that this loan is of the character intended by Congress
to be made under the authority of the Reconstruction Finance Cory oration Act of 194S.
The business-lending powers and purposes are set forth i n section 4
(a) of the act. They are as follows:
(а)
(б)
(c)
(d)
To aid in financing agriculture, commerce, and industry.
To encourage small business.
To help in maintaining the economic stability of the country.
To assist in promoting maximum employment and production.
I t is the view of the subcommittee that the records of R F C should
affirmatively show i n what manner, and for what reasons, the maki n g of the particular loan w i l l "aid i n financing agriculture, commerce, and industry," how it w i l l "encourage small business," how it
w i l l "help i n maintaining economic stability^" and "assist in promoting
8
TEXMASS P E T R O L E U M CO. LOAN
maximum employment and production." Unless there is a convincing showing that the particular loan under consideration w i l l accomplish such purpose, there is no basis for public assistance through the
R F C and no authority i n the R F C to loan public funds to the
borrower.
I n the view of the subcommittee, it is only after establishment of
such a case that the restrictions set forth i n the act need to be considered. Neither i n the statement presented by R F C w i t h respect
to the Texmass loan or the testimony before t'he subcommittee, nor
i n the records of the Corporation is there evidence showing i n what
manner the loan w i l l encourage small business, maintain economic
stability, or promote maximum production and employment.
I t is true that these principles are broad. A p p l i e d to a specific
factual situation, the minds of reasonable men may differ w i t h respect
to their meaning. I t is also true that the presence of these factors
i n any given situation is one of degree. O n t'he record before it, the
subcommittee is of the view that i f these features are present at all
i n the Texmass loan, they are present only miscroscopically. I f the
Texmass loan w i l l encourage small business, maintain economic stability, or promote maximum production and employment, the subcommittee is at a loss to conceive of any proposed loan which would not
be eligible for public aid through the R F C . T h e subcommittee does
not believe that the Congress intended to provide public aid i n situations such as t'hat surrounding the Texmass loan.
The subcommittee is of the opinion that there is no showing that
the Texmass loan w i l l encourage small business. Indeed, this reason
was not advanced by the directors of R F C who voted for the loan, as
justification for their decision.
Similarly, the subcommittee finds no facts i n the records before it
which convince i t that the loan to Texmass w i l l contribute i n any
appreciable way toward maintaining the economic stability of the
country. T h e loan may help maintain the economic stability of the
Texmass Petroleum Co. However, the subcommittee cannot visualize
any perceptible effect upon the economic stability of the country, whatever may be the fate of the Texmass Petroleum Co.
Likewise, there is no showing i n the record before t'he subcommittee that the loan to the Texmass Petroleum Co. w i l l promote maximum employment and production. L . B . Glidden, agency manager
of the R F C i n Dallas, Tex., testified that the Texmass Petroleum Co.
employs only 90 persons (hearings, p. 53). T h e subcommittee notes
that these employees are located i n scattered oil fields i n six States
where there is likelihood of their employment by others i n the oil-producing business, i n the event of cessation of Texmass operations. F u r thermore, there is likelihood that the producing wells of Texmass w i l l
continue to be operated whether Texmass Petroleum Co. owns them
or not.
W i t h respect to the promotion of maximum production, the officials
of R F C have pointed out the importance of the o i l industry and the
importance of preserving our national resources. They do not contend
that more oil production is needed now. They assert, however, that
the wells of the Texmass Petroleum Co. have been neglected, that
neglect of oil wells tends to limit the amount of oil which can ulti-
9 TEXMASS P E T R O L E U M CO. LOAN
mately be lifted from them and they contend that a part of our
national oil reserves w i l l be lost forever unless rehabilitation of the
Texmass wells occurs soon.
T h e subcommittee believes i t is important to conserve our national
resources. However, this desirable objective is not one of the purposes
and powers specified i n the act as a basis for the lending authority
of the R F C . Neither can it be maintained w i t h reason that such a
purpose can be discerned i n the stated powers. T h e subcommittee is
concerned that the R F C officials have seen fit, seriously and officially,
to present to the subcommittee a new purpose and power, however laudable the objective, which cannot conceivably be found within the provisions of the act.
Although persuaded that the loan might contribute toward conservation of the Nation's oil resources, the Directors of R F C had
little evidence that the conservation would actually be accomplished,
and they had no evidence that there would be conservation commensurate w i t h the amount of public funds to be expended under the loan
agreement.
I n the statement made to the subcommittee by R F C with respect to
the Texmass loan, it is also suggested that this loan is " i n conformity
with the spirit of the Reconstruction Finance Corporation Act."
I t is the subcommittee's view that the Texmass loan is not i n conformity w i t h the spirit of the act as interpreted i n Report No. 974,
Eightieth Congress, second session. T h e subcommittee believes that
the spirit of the act should be interpreted i n the light of the report and
that so interpreted it should lead the Corporation to curtail its lendi n g functions at the present time, and not to expand them. This can
be done, i n part, by requiring a stronger showing on the part of the
applicant that a proposed loan is eligible under the purposes and
limitations of the act, not a weaker showing.
A more recent statement of this policy is contained in a report of
Subcommittee on Monetary, Credit, and Fiscal Policies of the Joint
Committee on the Economic Report (S. Doc. No. 129). That report
days, at page 47:
By lending and guaranteeing loans on liberal terms during depressed periods
and by following more restrictive policies i n periods of high employment they
(Federal credit agencies) can be an influence toward general economic stability
and can assist flexible monetary and fiscal policies. But by following quite
liberal policies at all times they may actually contribute to instability and at
least partially defeat appropriate monetary and fiscal policies.
Viewed i n this light, it is the subcommittee's opinion that the loan
to the Texmass Petroleum Co. is an expansion, not a curtailment, of
R F C activities. Except i n a minor way, the Corporation has not previously i n a peacetime, prosperous period engaged i n the business of
financing oil-producing ventures. The Directors do not claim to be.
and they do not appear to be, particularly well-informed i n the oil
business, nor i n the business of making loans to oil-producing companies. A t its best, the Texmass loan is marginal. I f the lending
operations of R F C are to be curtailed i n peacetime prosperous periods,
doubts should be resolved against marginal loans.
O n the whole, it is the subcommittee's conclusion that the loan to
the Texn^ass Petroleum Co. does not come within the purposes sought
to be achieved by Congress i n continuing the Reconstruction Finance
T E X M A S S P E T R O L E U M CO. LOAN
10
Corporation during a peacetime, nonemergency period, nor within the
lending powers delegated i n the R F C Act.
Most of the testimony and most of the statement of justification by
R F C dealt with the statutory limitations on lending powers. Apparently the Corporation assumes that it has the power to make any loan
it desires unless the statutory restrictions prevent it.
I f this is, i n fact, the considered position of the Corporation, the
subcommittee does not accept it. The subcommittee believes it should
affirmatively appear that the purposes intended by the Congress w i l l
be effectively served before the power to make a loan arises.
A V A I L A B I L I T Y O F F I N A N C I A L A S S I S T A N C E F R O M O T H E R SOURCES
The Reconstruction Finance Corporation has not established that
the financial assistance to the Texmass Petroleum, Co. "is not otherwise
available on reasonable terms" (as required by the act).
Section 4 (b) of the Reconstruction Finance Corporation A c t provides, among other things, that no financial assistance shall be extended unless it is not otherwise available on reasonable terms. The
financial assistance required by Texmass Petroleum Co. could have
been supplied i n one or more of a number of ways. There could have
been a further injection of risk capital by the persons who w i l l be the
equity owners of the enterprise when the plan of readjustment is consummated. There could have been a composition of the claims of
all existing creditors accompanied by an agreement for the orderly
deferment of maturities so that the burden of payments might be
eased during a rehabilitation period. There could have been a readjustment of the collateral on existing indebtedness so that the company might make use i n its business of an increased portion of the
revenues from oil runs, applying a lesser portion to repayment of debt.
There has not been a conclusive showing that the present creditors
and investors w i l l make a contribution to the financing of the Texmass
Petroleum Co., commensurate with their means or with their interest
in its rehabilitation and successful future operation. Director Gunderson testified that existing creditors could have supplied more assistance
than they have undertaken to supply. H e said (at p. 146 of the hearings) :
* * * i f they had done that there would have been no necessity for this loan
being made.
It is the opinion of the subcommittee that the restriction i n the law
with respect to financial assistance from other sources was not applied by the Directors of R F C with the vigor appropriate under the circumstances. The requirements of this restriction cannot be met by
simple reliance upon the adamant position of existing creditors, particularly when they are the principal beneficiaries of the loan.
S O U N D N E S S OF T H E L O A N
The Reconstruction Finance Corporation has not shown that the
loan is of such "sound value or so secured as reasonably to assure retirement or repayment" (as required by the act).
11 T E X M A S S P E T R O L E U M CO. L O A N
T h e T e x m a s s P e t r o l e u m C o . i n i t s f i n a l prospectus, filed w i t h t h e
Securities a n d E x c h a n g e Commission, said the f o l l o w i n g :
Based upon recent reports made by petroleum engineers, it appears that tjie
developed oil and gas reserves and the reserves contained in the proven but
undeveloped acreage controlled and to be controlled by the company are insufficient to create a present value for the securities offered hereby.
Accordingly, the only hope for value accruing to such securities in the future
appears to be based upon the possibility of future important discoveries in unproven acreage (of which the company has relatively little) or at unproven
levels.
Even if during the 10-year loan period the company makes the minimum payments required by the loan agreement, there w i l l remain at the end of such
period an unpaid principal amount of approximately $6,150,000, which w i l l then
be due and owing. If this amount is not paid or refunded, the securities offered hereby, all of which rank junior to the loan, w i l l in all probability be wiped
out. Considering the above, investors should realize that the company's securities offered hereby are highly speculative, that they have no present value, and
that any future value thereof is very remote and is dependent upon future development of substantial additional oil and gas reserves which cannot be counted
upon.
T h e f o r e g o i n g , together w i t h t h e h i s t o r y a n d t h e prospects o f the
T e x m a s s P e t r o l e u m C o . as d e v e l o p e d i n t h e prospectus, a n d the character o f the T e x m a s s p r o p e r t i e s disclosed b y t h e r e p o r t s o f t h e pet r o l e u m engineers, i m p e l s t h e c o n c l u s i o n t h a t t h e v e n t u r e is a h i g h l y
s p e c u l a t i v e one.
D u r i n g t h e course o f t h e h e a r i n g s b e f o r e the subcommittee the E F C
Directors w h o voted to approve the Texmass loan frequently referred
t o a n a m o u n t o f $42,906,290 a n d a n a m o u n t o f $28,650,007 s a i d t o be
t h e v a l u e o f c o l l a t e r a l w h i c h w i l l be p l e d g e d t o secure r e p a y m e n t o f
t h e $15,100,000 l o a n . T h e s e totals d o n o t represent t h e l o a n v a l u e o f
the c o l l a t e r a l ; t h e y a r e e x p l a i n e d as f o l l o w s :
(1) Future net revenues to be derived from proved developed oil
reserves—this is not the present value of the future revenues
and it is not adjusted for possible oil-selling-price declines— $28,650,007
(2) Estimated realizable value of undeveloped oil reserves—made
up primarily of reserves which, according to the borrower
and others, cannot be recovered at a profit by presently developed methods
10,101,480
(3) Book value of machinery, equipment, and other tangible property—this is not an estimate of realizable values
4,154,803
Total
42,906,290
R e f e r r i n g t o t h e f u t u r e net revenues o f $28,650,007, i n a letter w r i t t e n t o R F C o n September 15, 1949 ( h e a r i n g s , p . 3 5 ) , t h e engineer,
Garrett, said:
The foregoing figures can in no way be termed the value. The fair market
value would be the present trading price on properties of this character. A n
estimated average fair market value would be $1 per net barrel for the oil
and 3 cents a thousand cubic feet for the gas. The value given for the compressor
plant is its fair market value. On the foregoing basis, the present fair market
value for the properties would be as follows:
Company:
Texmass (includes compressor plant)
Investors group
Swiss-Midway
National Co-op
Petroleum reserve
Total
Fair
market
value
$7,923,454
1,909,323
1,054,622
756,441
2,701,639
14,345,479
12
TEXMASS P E T R O L E U M CO. LOAN
I n the same letter (hearings, p . 36), M r . G a r r e t t s a i d f u r t h e r w i t h
respect t o t h e c o l l a t e r a l :
As previously stated the current long-range outlook is for lower prices for
crude oil. It is believed that such a decline in prices w i l l not exceed 50 cents
per barrel. The effect of a 50-cent-per-barrel cut will be as follows:
Present estimated future total revenue from oil
Effect of 50-cent-per-barrel reduction
Net future revenue on oil after cut
Total net revenue after cut
$26,721,055
6, 565,652
20,155,403
22, 084,355
In addition to the cut in revenue, it is my opinion that the fair market value
would be lowered by at least 10 percent on the oil properties. This would
result in lowering this figure from $14,345,479 to $12,906,725.
M r . G a r r e t t d i d n o t f u r n i s h t h e R F C a n estimate o f s o u n d l o a n
value o f the T e x m a s s p r o p e r t i e s . T h e subcommittee subpenaed J o h n
H . M u r r e l l , a m e m b e r o f the f i r m o f D e G o l y e r & M a c N a u g h t o n , pet r o l e u m engineers o f D a l l a s , T e x . M r . M u r r e l l d e s c r i b e d t h e p r i n ciples a n d practices g o v e r n i n g t h e a m o u n t p r u d e n t lenders customa r i l y l e n d o n o i l properties, a n d he e s t i m a t e d t h e s o u n d l o a n v a l u e
o f the T e x m a s s p r o p e r t i e s o n t h e basis o f evidence i n t h e subcommittee's record.
M r . M u r r e l l t o l d the subcommittee (hearings, p. 195) t h a t —
A l l banks whom I have consulted with regard to loaning money on oil and all
lenders, including large insurance companies whom I have consulted, always
take into consideration a risk of a drop in the price of the commodity on which
you wish to borrow or put up as collateral.
H e testified f u r t h e r , as f o l l o w s :
Senator DOUGLAS. NOW, what ratio will be the amount that the prospective
lender will lend in relation to fair market value?
Mr. MURRELL. Most—the New York Insurance Commission, which governs,
issues regulations or procedure as to loans by insurance companies operating
under their laws up there, have allowed those companies to loan up to 60
percent of the fair market value per barrel of oil in the ground, recoverable,
and that fair market value per barrel recoverable for oil in the ground must
be set by a competent petroleum engineer according to their rules and regulations.
Now, certain banks, when they know the management of a company and they
know the company has other credit besides the property which they loan on,
might loan as much as 100 percent.
Senator DOUGLAS. But that is unusual?
Mr. MURRELL. That is very unusual and there must be other collateral behind
the corporation.
I would say that 60 to 75 percent of fair market value is all that a prudent
lender should loan if the only collateral—if there is no recourse beyond the
collateral of oil in the ground.
The reason I say 60 to 75 percent of the fair market value, which I would
determine as one-half of the present worth of future net revenue discounted
at 4 percent, is that when I figure my future net revenue I am figuring on the
present price of oil, and there is a possibility that price of oil can go down.
There is a risk there.
There is a further risk that one as a loaner must look at, and that is my
petroleum engineer might be 5 or 10 percent high in his estimates, rather than
5 or 10 percent low. That is a risk the lender is taking and he must take tnat
into consideration.
So I would say that between those things, I do not think that a prudent lender
would loan more than 75 percent of the fair market value of a commodity (hearings, pp. 195-196).
13 TEXMASS P E T R O L E U M CO. L O A N
W i t h respect t o the s o u n d l o a n v a l u e o f t h e T e x m a s s p r o p e r t i e s ,
M r . M u r r e l l testified:
Senator DOUGLAS. NOW, the highest estimate of the proved developed reserves
behind the Texmass loan made by the geologist for the R F C , Mr. Garrett, was
12,500,000 barrels and proved undeveloped reserves on Texmass properties
totaled about 2,000,000 barrels. Added together without any distinction they
would amount to about 14,500,000 barrels.
Now, to any prudent lender, Mr. Murrell, wtfuld reserves of 14,500,000 barrels
today be sufficient to secure the repayment of a loan of $15,100,000?
Mr. MURRELL. I know of no lender that could even consider a loan of that
type, sir, not because the loan involves a lot of money but because it would be
loaning more money than they could step out and sell the properties for, actually
sell them for, in my opinion.
Senator DOUGLAS. How large a loan could 14,500,000 barrels of scattered oil
reserves command among ordinary commercial lenders who make loans on oilproducing property, and I will assume that the average production from these
scattered wells under consideration runs to about 9 barrels per well per day and
the yield has been declining?
Mr. MURRELL. A prudent lender, in my opinion, would under no circumstances
loan as much as 60 cents a barrel on the 14,500,000 barrels, and it would more
probably be closer to 50 cents a barrel, or $7,250,000.
Senator DOUGLAS. YOU think that would be not far from a fair loan value,
assuming that these facts are correct?
Mr: MURRFLL. Assuming those facts are correct, $7,250,000 would be a very
good loan value.
Senator DOUGLAS. Well, now, I would like to point out, Mr. Murrell, that thesie
are estimates based on the figures estimated by the geologist for the R F C which
were the highest of the three, 14,500,000; the estimate of the SEC man, Mr. Tell
T. White, on the proved developed reserves totaled about 7,000,000 barrels; and
for the Texmass reserves on undeveloped properties totaled about 900,000 barrels.
Now, this is the low figure. If you lump them without distinction, and you
have emphasized you should distinguish, this would be about 7,900,000 barrels.
F<fr properties of this same type would you, estimate how much of a loan could
be obtained from a commercial lending source on oil reserves of 7,900,000 barrels?
Mr. MURRELL. Well, I would say the same yardstick would apply, and that is
between 50 and 60 cents a barrel could be loaned. I am assuming in my answers,
however, that both estimates are correct and obviously one is based on different
assumptions from the others.
Senator DOUGLAS. Yes. Well, if these estimates are correct of 9 barrels per
day per well with a declining yield and the reserves lie between the upper and
lower estimates, namely, 14,500,000 and 7,900,000 barrels, respectively, the lenders should not lend, according to your estimate, more than $7,250,000 and might,
if you take the White estimate, loan only $4,000,000? (hearings, pp. 198-199).
T h e m o s t o p t i m i s t i c estimates o f T e x m a s s o i l reserves a n d f u t u r e
revenues at the d i s p o s a l o f the D i r e c t o r s o f R F C w e r e those p r o v i d e d
b y the engineer, G a r r e t t . H o w e v e r , h i s letter o f S e p t e m b e r 15, 1949,
addressed to a n employee o f t h e C o r p o r a t i o n ( h e a r i n g s , p . 38) rep o r t e d specifically t h a t the l o a n c o u l d n o t be r e p a i d i n 10 y e a r s u n d e r
t h e circumstances foreseeable a t t h a t time, a n d h i s l e t t e r o f t h e same
date addressed t o the C o r p o r a t i o n ( h e a r i n g s , p . 37) r e p o r t e d :
On a 2-to-l ratio of net revenue to loan the collateral is sufficient to justify a
loan of $14,325,000. On the ability to pay no loan of sufficient size to take care
of the company's indebtedness is in any way justified. Only a rapid expansion
of both assets and income would justify the loan at the figure given. This can
be effected only by placing the loan at a figure so high that it would not be
secure.
O n t h e evidence, i t appears t h a t t h e D i r e c t o r s o f R F C a p p r o v e d t h e
l o a n t o T e x m a s s P e t r o l e u m Co., n o t w i t h s t a n d i n g t h a t t h e l o a n , a c c o r d i n g t o accepted p r i n c i p l e s o f l e n d i n g o n t h e s e c u r i t y o f reserves o f
o i l i n the g r o u n d , is not, as r e q u i r e d b y l a w , o f s u c h s o u n d v a l u e o r so
secured as reasonably t o assure r e t i r e m e n t o r r e p a y m e n t .
14
T E X M A S S P E T R O L E U M CO. LOAN
DECISIONS
O F T H E DIRECTORS OF R F C
From
the^ record
before the subcommittee,
it is evident
that the
Board of Directors
of Reconstruction
Finance
Corporation
gave only
casual and superficial
consideration
and study to the Texmass
Petroleum Co. loan.
T h e l o a n to Texmass Petroleum Co. was approved b y R F C o n
S e p t e m b e r 29, 1949, b y a 2 - t o - l vote o f three B o a r d members.
Dir e c t o r s D u n h a m a n d G u n d e r s o n voted t o approve. D i r e c t o r W i l l e t t
v o t e d a g a i n s t a p p r o v a l . C h a i r m a n H i s e w a s present w h e n t h e a p p l i c a t i o n w a s d i s c u s s e d a n d t h e a c t i o n taken, b u t he d i s q u a l i f i e d h i m s e l f
f r o m v o t i n g because h e i s r e l a t e d to the w i f e o f a p r o s p e c t i v e official o f
t h e b o r r o w e r . D i r e c t o r M u l l i g a n was absent f r o m t h e meeting. D i r e c t o r D u n h a m feels t h a t C h a i r m a n H i s e ' s attempt t o d i s q u a l i f y h i m s e l f f r o m t h e v o t i n g o n t h e l o a n m a y h a v e been ineffective ( h e a r i n g s ,
p . 7 8 ) . H e reasons, p e r s u a s i v e l y , t h a t the C h a i r m a n ' s presence m a y
h a v e been t a n t a m o u n t t o p a r t i c i p a t i o n i n a p p r o v a l o f t h e l o a n since
t h e C h a i r m a n d i d n o t cast t h e negative vote w h i c h w o u l d h a v e deadlocked the B o a r d a n d prevented approval.
A t t h e t i m e o f t h e m e e t i n g o n September 29, 1949, t h e B o a r d h a d
received a report o n the Texmass application prepared b y the R e v i e w
C o m m i t t e e o f t h e W a s h i n g t o n office o f R F C . T h e R e v i e w C o m m i t tee w a s m a d e u p o f five m e n described t o t h e subcommittee b y C h a i r m a n H i s e as s e n i o r e x a m i n e r s w h o h a d been w i t h t h e C o r p o r a t i o n f o r
m a n y y e a r s a n d w h o w e r e r e g a r d e d as able, reputable, a n d competent
m e n . A l l five m e m b e r s s i g n e d the r e p o r t . N o n e dissented f r o m the
findings e x p r e s s e d i n i t . T h e committee a d v i s e d t h e B o a r d as f o l l o w s :
C O M M E N T S OF R E V I E W C O M M I T T E E OF T H E RECONSTRUCTION I U N A N C E CORPORATION
The committee recommended decline of this applicant's previous request for a
loan of $18,950,000. The purpose was felt to be much less in the public interest
than it was in the financial interest of some banks and insurance companies, and
for the potential benefit of a group of individuals, neither of whom offered a
participation i n the loan or was willing to inject new cash into the enterprise.
Adequacy of the collateral and ability to repay from operations were, in the
committee's opinion, questionable.
In its present request the applicant, in our opinion, has not improved these
factors sufficiently to justify a favorable recommendation notwithstanding that
the loan amount has been reduced to $15,638,513 and certain of the bank and
insurance-company creditors have offered to participate approximately 30 percent. Reduction of the loan is largely at the sacrifice of working capital which
is vital to the enterprise and would have to be provided later.
The proposal to consolidate these several interests is a very complex and confused deal. The interested parties advise that after the reorganization the company w i l l owe approximately $26,000,000, and without drilling any additional
wells, Mr. Garrett, the geologist, estimates that there should be a future net
revenue of about $28,000,000. Further, these parties say that unless something
is done immediately, the value w i l l be lost to them. After the reorganization is
completed and if the loan is approved, two individuals will own 60 percent of the
equity interest without any cash investment.
One of the interested parties, Mr. A. W. Kincade, is now president and chairman of the Fourth National Bank, Wichita, Kans. It is expected that he w i l l
resign and become active in the reorganized company. H i s bank is to receive
some $600,000, which the Swiss Oil Co. and Midway Oils, Inc., are now owing that
institution. Also, National Cooperative Refinery Association is indebted to his
and another bank in the approximate amount of $1,000,000; $700,000 of the loan
is going to be used to buy leases from National Cooperative Refinery Association.
Mr. Kincade's bank may receive a substantial part of this sum. When asked if
his bank would participate, he stated quite definitely that it would not. The
15
TEXMASS P E T R O L E U M CO. L O A N
reason given was that he was leaving the bank and, therefore, i t would not be
interested in carrying these loans any longer, nor would they be interested in
participating with the R F C . Further, he did not feel it would be proper to have
his bank participate in a loan to a company that he was becoming interested in.
One million dollars of the proceeds of the loan is to be used to pay the Investors
Group. These people are comparable to stockholders in a corporation today.
The same is true of the National Cooperative Refinery Association. Further,
$400,000 of the loan is going to be used to pay a bank i n Boston. A t the present
time this loan is endorsed by four wealthy individuals. Under the proposal, the
bank will participate to the extent of $200,000. These individuals would continue
to endorse the $200,000, but would be released from the guaranty on the balance.
A statement was made on September 26, 1940, by one of the interested parties
that Texmass Petroleum Co. is in a precarious position. Creditors are pressing;
Republic Steel, a creditor to the extent of $1,800,000, has threatened suit. I n
the reorganization Republic Steel is to receive $800,000 cash and stand by on
$1,000,000. Republic Steel at the present time has a second mortgage on Texmass
properties, which are encumbered with prior liens of $7,500,000.
It is difficult to understand, and we question whether we have the full story
why a man of Mr. Kincade's caliber would resign his position in the bank to
take over the management of an oil company without compensation when on
the face of it, unless sale is made as referred to below, it w i l l take some 20
years before he can expect any return on the stock which he is to be given
when the reorganization is completed.
The Garrett report brings out the following points:
(1) Fair market value of the properties offered as collateral w i l l be
approximately $14,300,000.
(2) The rehabilitation contemplated w i l l not increase the total income
materially but will accelerate it.
(3) There is a trend toward overproduction which w i l l result i n greater
restrictions and lower prices.
(4) The drilling of new wells, if done i n an orderly manner, w i l l not
materially increase the production, but it w i l l maintain it at the present
level.
(5) On the ability to pay, no loan of sufficient size to take care of the
corporation's indebtedness is in any way justified. Mr. Garrett modified
this statement by saying that he was wrong in his estimate on income
taxes and that the figures submitted by the company, showing that a loan
of $14,200,000 could be reduced to $5,000,000 by applying all of the net income
to the loan, were, in his opinion, a fair estimate.
As we stated before, the case is very complicated and many questions cannot
be satisfactorily answered. For instance, the National Cooperative Refinery
Association is selling properties valued at $2,400,000 for $700,000 in cash, and a
$200,000 deferred and subordinated obligation. The same is true of Swiss
Oil Co. and Midway Oils, Inc. In this instance they are to receive $800,000 for
properties valued at $3,500,000. The insurance loans were made i n 1947. A t
that time a great portion of the stock of Texmass was retired and the stockholders received $2,300,000 of the proceeds of the loan. Mr. Clark, a representative of the Investors Group, stated today that these funds were again loaned
to Texmass to protect the properties, or invested in Petroleum Reserve.
It is difficult for the committee to see any great public interest for from all
the figures and statements we have received, creditors and investors can be
paid a hundred cents on the dollar i f the present income remains constant
and potential oil reserves materialize. The two individuals who are to own
60 percent of all of the stock of the new company can materially benefit from a
speculative standpoint, for after the consolidation and the granting of the loan,
the properties will be integrated and it is possible that they could be sold for a
handsome profit, if drilling new wells should result i n substantial production.
The interested parties do not agree with the Garrett report i n that they think
that he should have assigned some loan value to the proven reserves, that his
statement with respect to the income over a period of years is not correct, and
the trend of lower prices is not entirely true because at the present time prices
are stiffening rather than going down. The interested parties are confident
that income will be increased substantially through the drilling of additional
wells and by the competent management that is going to take over. Apparently,
from statement made, the management has not been satisfactory, but whether
the new management can do better is still unproven. It is believed that i f a
16
T E X M A S S P E T R O L E U M CO. LOAN
loan is made it w i l l have to be increased from time to time in order to drill
the new wells and keep up production, unless the new management is able to
increase the production on lower operating costs.
Review committee recommends.—Decline for the reasons that—
1. The loan has little, i f any, public interest.
2. Proposed rehabilitation is i n reality a salvage operation for which there
should be a further injection of risk capital. A loan of an amount that would
properly rehabilitate and develop the properties is not warranted.
3. Loan is largely a bail-out of investors and certain creditors who presently
appear to be faced w i t h a loss.
4. Report of consultant, Mr. M. M. Garrett, is not encouraging as to repayment of loan from earnings and does not find sufficient tangible collateral.
G. P . LUCE.
J . C. K I T T .
F R A N K T. RONAN.
T . E . PARKS.
R . G. RHETT.
Notwithstanding the findings of the Review Committee, Directors
Dunham and Gunderson voted to approve the loan, but made no record
of the facts and reasons on which their decisions were based. Directors Dunham and Gunderson explained that they relied upon the facts
stated by subordinate officials but disagreed with their conclusions and
recommendations. Neither claimed to have knowledge of facts which
the subordinate officials d i d not have, and neither professed expertness
or substantial experience i n lending i n the oil industry.
Director Dunham, when asked to state his reasons for approving the
application over the strong negative advice of the Review Committee,
said:
I have this feeling: T h a t the oil business as such is a very fundamental business. I came from Detroit, as you know, and we would not have Detroit without
fhe oil business. Texas itself is a very important oil-production State. It produces about 33% percent of all the world, or rather in the United States. These
particular wells had been drilled. They had been neglected through the application of a bad loan, the application of mismanagement, or whatever the cause.
The expense of drilling these wells had been absorbed. They could produce a
valuably increased production i f it were properly taken care of, and I felt that
income from those properties and a continuation of the property under good
management would be ample to pay these loans, and I voted for it for that reason
(hearings, pp. 49, 80).
Director Gunderson gave as his principal reason that:
* * * the national interest was in favor of proper conservation of oil and
gas properties, and if the people who already owned the property and the people
to whom the money was already owed indicated their concurrence and belief, and
we could make a good loan, that it ought to be made (hearings, p. 86).
A m o n g the factors which were relied on by the directors i n approvi n g the loan was the affirmative advice of certain Texas bankers and
businessmen. Director Dunham testified that he had discussed the
loan w i t h personal friends who were bankers i n Texas i n whom he
had great confidence. Director Gunderson testified that he relied on
the judgment of a member of the advisory committee of the Dallas
loan agency, whom he regarded as being well informed i n the o i l business and i n whom he had great confidence.
T h e views and opinions of bankers and others outside of the R F C
who are not accountable to the Government for their decisions cannot
serve to diminish the responsibility of the Directors of the Corporation
f o r the proper exercise of its lending powers. Neither can such views
or opinions be considered as substitutes for a proper knowledge of the
facts i n forming the basis for the decisions of the directors.
17
TEXMASS P E T R O L E U M CO. LOAN
The subcommittee, on the record, concludes that Directors Dunham
and Gunderson disregarded not only the recommendations of the Review Committee, but also the facts cited i n tjie Review Committee's
report. They also disregarded the facts cited by, as well as the recommendations of, L o a n Examiner Herrington, and they ignored the estimate of R F C Geologist Garrett that the fair market value of the Texmass properties was only $14,345,000. They also failed to follow the
practice of prudent lenders i n discounting such fair market value i n
arriving at the amount which could safely be loaned on the Texmass
properties.
O n the other hand, Directors Dunham and Gunderson admittedly
relied upon the total of estimated future net revenues i n their appraisal of the properties, which is not a sound basis for evaluating oil
properties to determine whether a loan is so secured as reasonably to
assure repayment. They also relied on outside advisers and upon
agencies within the R F C who, although recommending the loan, cited
no facts and reasons to support their recommendations.
T h e facts should have impelled decline of the loan.
T h e subcommittee notes that A l l e n Freeze, Assistant Controller of
the R F C , is, according to the Texmass prospectus, the nominee of Texmass for the positions of vice president, controller, and director of
Texmass under its plan of reorganization. T h e subcommittee notes
also that M r . Freeze acted for R F C w i t h respect to the Texmass financing i n at least two matters. H e contacted the Securities and
Exchange*Commission i n connection w i t h the proceedings there (hearings, p. 17). H e was active i n the preparation of material presented
by the R F C to this subcommittee (hearings, p. 128). I t is the view
of the subcommittee that R F C should have entrusted these duties to
employees other than M r . Freeze.
Notwithstanding the original decision of September 29, 1949, the
B o a r d of Directors of R F C had three opportunities to reconsider the
commitment prior to the first of the subcommittee's hearings. T h e
time limit within which the borrower was to meet the conditions of
the loan was extended on each of the three occasions. T h e last two
extensions were granted after Texmass had engaged i n proceedings
before the Securities and Exchange Commission i n which a substantial amount of additional factual information and expert opinion was
developed.
This information included factual representations by the company,
as well as an analysis and appraisal of the Texmass properties by a
competent, disinterested petroleum engineer, T e l l T . White, a fulltime member of the staff of the S E C .
The subcommittee believes it is important to note that the facts and
expert opinions developed i n the proceedings before the S E C were for
the benefit of prospective investors among the general public, w i t h
respect to securities junior to, and therefore admittedly more speculative than, the underlying first lien obligation contemplated i n the R F C
loan. T h e subcommittee believes that the lending of public funds
should be undertaken with equal, i f not greater, care i n ascertaining
the facts than that exercised w i t h respect to the investment of the
funds of private individuals.
Notwithstanding the availability of f u l l and accurate information
with respect to the Texmass properties i n another Government agency
18
T E X M A S S P E T R O L E U M CO. LOAN
w i t h i n the city of Washington, the Directors of E F C made little use
of it. Director Dunham, upon learning of the S E C proceedings d i d
make an inquiry. A s a result of this inquiry, R F C prevailed upon
the Texmass Petroleum'Co. to employ a second petroleum engineering
firm, Keplinger & Wanenmacher, to check the figures of the R F u
geologist, M . M . Garrett. Neither Director Dunham nor Director
Gunderson read or asked f o r the prospectus of the Texmass Petroleum Co. and neither Director obtained the report of the S E C petroleum engineer.
T h e supplemental report of M r . Keplinger, dated M a r c h 6, 1950,.
should not have fortified the confidence of R F C with respect to the
soundness of the collateral offered by Texmass. T h e Keplinger report
estimated the o i l reserves at 2,000,000 barrels or (17 percent) less
than the Garrett report. I t is also significant that Keplinger's estimate of recoverable o i l reserves included twice as much as d i d Garrett's
(30 percent as against 15 percent) with respect to the amount to be
recovered as the result of rehabilitation. I t is also significant that
Keplinger had the advantage of 6 months' additional operating history
of the Texmass wells, which was not available to Garrett.
Instead of supporting the Directors i n their earlier decisions, the
Keplinger report should have put them on guard. Nevertheless, they
d i d not seek additional information but ratified their previous position i n additional extensions granted to the applicant.
O n December 1, 1949, the Directors voted to extend the period o f
commitment to make the loan from the 60 days originally, provided
to 150 days. A t that date, the original commitment period had
already expired but the action was not regarded by the Directors to
be a new approval predicated on reconsideration of the loan. A l l five
B o a r d members were present at this meeting, and the record i n d i cated that all five had voted affirmatively on the extension. Chairman
H i s e advised the subcommittee on A p r i l 22 that the minutes of th&
meeting had been altered after A p r i l 13, 1950, so as to show that
Director W i l l e t t voted i n the negative and not i n the affirmative.
T w o additional extensions were granted before the first of the subcommittee's hearings. O n A p r i l 13, 1950, the subcommittee was i n formed that the Board's affirmative vote on the extension of a loan
does not mean that the facts and circumstances of the case have been
reconsidered. According to M r . Hise, "once the loan has been made
and approved then the B o a r d goes along as a Board on subsequent
actions to support the action previously taken," and such a vote is
not to be interpreted as a confirmation of the action originally taken
(hearings, p. 25).
Directors Dunham and Gunderson showed at the hearing on A p r i l
22 that they justified their approval of the loan on grounds, which do
not conform w i t h the generally accepted principles and practices of
lending on the security of o i l i n the ground, as heretofore noted. D i rector Dunham repeatedly referred i n his testimony to collateral value
of $42,000,000 and Director Gunderson repeatedly referred to collateral value of $28,000,000, even though, by the Corporation's own
calculations clearly set forth i n its prepared statement, the loan value
of the collateral was established by Examiner Herrington of the Dallas office of R F C at $15,300,000 by methods approximating those described to the subcommittee by the geologist M u r r e l l (hearings, p.
252).
19
TEXMASS P E T R O L E U M CO. L O A N
T h e total of $15,300,000 included $2,600,000 ascribed to properties
considered of doubtful value as collateral by the geologist employed
by R F C and the geologist attached to the S E C staff. I t included also
a total of about $600,000 for equipment to which the geologist f o r
R F C ascribed no value. W h e n the subcommittee attempted to develop the fact that the Corporation's own calculations, amended by
the findings of its own geologist, yielded a collateral value of $12,100,000, Directors Dunham and Gunderson gave unresponsive testimony
and repeatedly returned, i n Gunderson's case to a discussion of the
$28,000,000 figure, and, i n Dunham's case, to a discussion of the $42,000,000 figure. Collateral having a loan value of $12,100,000 would
be inadequate by $3,000,000 as security for repayment of the Texmass
loan.
T h e subcommittee's hearing held on A p r i l 22, 1950, brought directly to the attention of the individual B o a r d members much significant information of which they had not previously been aware.
Yet, at the conclusion of the hearing, Chairman H i s e said:
When we get through here, unless we hear something more than we have heard
so far, I think we would be compelled to tell Mr. Glidden to proceed to close the
loan * * * (hearings, p. 179).
A l l of the requirements of the loan agreement had not been met at,
A p r i l 27, 1950, when the commitment period, f o r the t h i r d time,
reached its expiration date. A further extension of 30 days' time was
granted, notwithstanding the unresolved doubt as to legality of the
loan, and notwithstanding the fact that neither the R F C nor the
Comptroller General of the United States knows of any way i n which
recovery can be accomplished for the Government i f the loan is disbursed without authority of law.
I t is the view of the subcomittee that the Texmass loan is not i n
accord w i t h the intent of Congress.
APPENDIXES
APPENDIX
A
Reconstruction
Finance
Corporation—Statement
of proposed application
of proceeds of loan to Texmass Petroleum Go. {as shown by Texmass
prospectus)
Refinancing
Funds to
Funds fur- be
put up
nished by by particiRFC
pants
Insurance
company
participation
Liquidation of indebtedness:
$2,448,203
Massachusetts Mutual Life Insurance Co
John Hancock Mutual Life Insurance Co
1,831,265
650,000
Republic Steel Corp
—
517,547
Fourth National Bank of Wichita
143,479
Jack Frost _ _ _
125,000
First National Bank of Dallas
145,545
Mercantile National Bank in Dallas
200,000
Second National Bank, Boston
-- - 20,000
Ternan, Frost & Co. and Ronnie B. Smith - 46,000
J. A. Miller
1,231,332
Others.
Subtotal
Acquisition of leasehold interests from National Cooperative Refinery Association, $700,000; Investors'
Groups (see appendix B), $500,000; Ronnie B. Smith,
and J. A. Miller, $140,000-Working capital and expenses
Total
APPENDIX
Texmass
liSai
Application of loan proceeds
New money
Total proceeds of
loan
$2,500,000
1,500,000
$4,948,203
3,331,265
1,000,000
592,547
293,479
250,000
245,545
200,000
100,000
46,000
1,251^332
4,000,000
12,258,371
80,000
20;000
7,358,371
900,000
1,240,000
1,501,629
100,000
10,100,000
1,000,000
1,340,000
1,501,629
4,000,000
15,100,000
B
Petroleum Company—Members
of investor groups to whom an aggregate
of $500,000 will be paid from proceeds of RFC loan, March 15,1950
Participation
in
original
$8,000,000
investment
A l e x a n d e r M . A l l a n a n d E d i t h G. A l l a n (sister)
$1,093.75
A m e r i c a n Associates, I n c
250,000.00
J o h n S. A m e s (wife, N a n c y F . )
100,000.00
O. K e l l y A n d e r s o n (wife, A l m a W . )
15,000.00
P a t t y C. A n d e r s o n
4,000.00
E s t . W m . Sumner Appleton, c / o Sumner A . Weld, A d m
781.25
Ichabod F . A t w o o d
50,000.00
C h a r l o t t e S. B a k e r
10, 000.00
H a m i l t o n W . B a k e r , trustee, u / i n s t . dated J a n u a r y 8, 1946
2,000. 00
E s t . H a m i l t o n W . B a k e r , c / o E v e r t s & Gallagher
2,187. 50
John M. Baker
1,000.00
J o h n M . B a k e r a n d M a r g a r e t S. B a k e r
2,000.00
Thomas Wallace Baker and Lois E. Baker
2,000.03
D r . Josephine M . B a l l
2,000.00
Nat H . Barrows
50,000.00
Joseph M . Batchelder
10,000.00
J o s e p h M . Batchelder, Trus., u / i n d . E t h e l L o u i s Batchelder, dated
December 31, 1945
20,000.00
20
21 T E X M A S S P E T R O L E U M CO. L O A N
Texmass Petroleum Company—Members of investor groups to whom an aggregate
of $500,000 will be paid from proceeds of RFC loan, March
15,1950—Con.
Participation
in
original
$8,000,000
investment
Joseph M. Batchelder, Trus., u/ind. F r e d M. Batchelder, dated M a r c h
28,1944
George M. Beamon
Richard Beamon
Mrs. Mary Bell
F . Gregg Bemis
Arnold J. Bernstein
Daniel J. Bernstein
Robert M. Bernstein
Alexander H . Blackett
Frederick N. Blodgett
John W. Blodgett, J r
Mrs. Elizabeth W. Bolster
Miss Helen R. Bowser (single)
Mrs. Martha Adams Bowser (husband, Robert Bowser)
Robert N. Bowser
E d w a r d T. Brackett (wife, Theckla J.)
Robert Braun
Dorothy K . Brown (husband, LaRue Brown, Esq.)
LaRue Brown, ESQ. (wife, Dorothy K . Brown)
P a u l Brollier
A l a n W. Burke
Archie C. Burnett
John B. Buttrick, Stedman Buttrick, and Russell Robb, Trs. u / w / o
Stedman Buttrick
Stedman Buttrick
Mrs. Margaret E. Bullard
Granville W. Bull
Mabel C. Button
M a x L . Button
Alessandro Gagiati
John and Thyra L . Cannell
P a u l C. Cabot
Gates M. Carney
Walter D. Carr (single)
Gerald H. Carson
H a r o l d P. Carver
John S. Carver
Margaret R. Carver
:
Arnold B. Chace I I I
Malcolm G. Chace, J r
Raymond E. Chamberlain
Mabel C. Chamberlain
Alfred E. Chase
Est. of Frederic H. Chase
Miss Anna G. Chase
Mrs. Barbara S. Chase
Miss Barbara S. Chase
George W. Chase
John P. Chase
John P. Chase, Inc
John P. Chase, J r
Miss L a u r a D. Chase
Miss Sarah B. Chase
W i l l i a m C. Chick
Frederic C. Church
Miss Anne Claflin
Mrs. Helen A . Claflin
W i l l i a m H . Claflin, J r
Evans Clark
Roe S. Clark
$30,000.00
2, 000.00
1,000.00
4, 546. 87
100,000.00
11,000.00
11,000.00
11, 000.00
5,000.00
5, COO. 00
118, 750.00
18,476.56
2,781.25
2,734.38
2,781.25
14,476. 56
10,000.00
87,500.00
45, 800. 79
5,000.00
2,000.00
50,000. 00
100,000.00
132,555.54
8,000. 00
1,000.00
7,000.00
5,000.00
10,000. 00
50,000.00
1,000.00
25,937.50
19,500.00
20,000.00
5, 000. 00
5,000.00
10,000.00
15,000. 00
3,367.19
20,000. 00
50,000.00
7, 500. 00
200,000.00
7,500.00
7,500.00
70,000.00
5, 000. 00
7,500. 00
7,500.00
7,500. 00
118, 777. 79
50,000. 00
5,000.00
15,000. 00
20,000.00
34,828.13
5,000.00
22
T E X M A S S P E T R O L E U M CO. L O A N
Texmass Petroleum Company—Members of investor groups to whom an aggregate
of $500,000 will be paid from proceeds of RFC loan, March 15,1950—Con.
Participation
in
original
$8,000,000
investment
M i s s Louise Condit
Sears B. Condit
Charles E . Cotting
R a l p h B. Craig
Frances M . Creelman
M a r y V. Cummings (single)
George C. Cutler
J o h n J . Conroy
Robert DeBuisseret
Mme. E l s a Tudor Depierrefeu
Gertrude C. K . Dickins
Linsley V. Dodge
D a v i d Doran
Est. Guy W . and Mrs. R u t h A. Downer (widow)
Mrs. Elizabeth P. D u n n
M i s s Hattie M . D u n n (single)
Edward H. Earle
Gilbert M . Elliott, J r
Robert V. B. Emmons (Anita)
Bayard Ewing
M i s s Helen F a h y
Herbert Farnsworth
Est. Ernest L . F a r r i n
Mrs. Adelaide A. F i e l d and Donald T. Field
Adelaide A. F i e l d (Donald T . Field)
Caroline C. F i e l d (Richard H . Field)
Donald T. F i e l d (Adelaide A.)
Richard H. Field
Thomas P. Flaherty
C. Stewart Forbes
Ethel A. Forbes
Donald A . Fowler
Marjorie S. Fowler
M. Foss & Co
Leopold Friedman
M a r y A. Frothingham (single)
R u t h V. Gait (Robert M. Gait)
George Peabody Gardner (Rose Gardner)
Margaret T . Gardiner (Tudor Gardiner)
Wm. Tudor Gardiner
Stanley R. Garrard
W . W . Garth, J r
James E . Gibbons
Horace D. Gilbert (Katharine deP. Gilbert)
John S. Gilbert
Katharine deP. Gilbert
Francis G. Goodale (Margaret P. Goodale)
Dr. P h i l i p Gregory
M e r r i l l Griswold
R i c h a r d P. Hallowell 2d
W. A. Hartwig
R . W i l t o n and Mildred S. Harvey
Bartlett Harwood
A l l e n C. Hawkridge
E d w i n Harkridge
Leslie D. Hawkridge
Mrs. L i n d a M . Hawkridge
Robert M . Hawkridge
M i s s L a u r a Haywood
M i s s Hattie Helborn
i
$6,000.00
6,000.00
25,000.00
2,000.00
4,000.00
4,000. 00
5,000.00
6,250.00
5,000.00
25,000.00
10,000.00
10,000.00
1,957.04
3,000.00
5,000.00
5,000.00
51,250.00
20,000.00
146,718.75
10,000.00
1,000.00
30,000.00
781. 25
7,656.26
2,000.00
16,000.00
26, 000.00
19,000.00
4,000.00
10,000. 00
5,000.00
15,000.00
15,000.00
50, 000. 00
6, 000.00
100.000.00
20,000.00
50,000.00
60,000.00
60,000.00
2,000.00
4,562.50
5,000. 00
6,953.13
60,000.00
10,000.00
5,000. 00
5,000.00
25,000.00
50,000.00
5, 000. 00
5,000.00
5,000.00
25,000.00
27,000.00
18,000.00
21,000.00
25,000.00
1,000.00
5,000. 00
23 T E X M A S S P E T R O L E U M CO. L O A N
ITexmass Petroleum Company--Members of investor groups to whom an aggregate
of $500,000 will be paid from proceeds of RFC loan, March
15,1950—Con.
Participation
in
original
$8,000,000
investment
M r s . Margaret Helburn
M r s . Margaret Neilson Helburn
M r s . Tess Helburn
Miss Theresa Helburn
W i l l a r d Helburn (Margaret Helburn)
W i l l a r d Helburn, Inc
Robert G. Henderson (Lucy G. Henderson)
Francis L . Higginson
Charles L . Hildreth
Mrs. Katherine W. Hildreth
E t h e l L . Hiller (single)
Augusta W. Hinds
Aurelius S. Hinds 2d
Charles B. Hinds
Charles B. Hinds, J r
Wadsworth L . Hinds
Reginald T. Hixon
M r s . R u t h Williams H i x o n
J o h n C. Hodges (Anna B. Hodges)
A n n a B. Hodgson
Howard B. Hodgson (Muriel H.)
John S. Hodgson
W i l l i a m S. Hodgson
Richard Holland
H i l d a S. Hollis
M . J. G. Hogan
Mrs. Catharine R. Holmes
Herbert S. Holmes
E d w i n P. Holmes
Amelia M. Holtby ( E a r l D.)
E a r l D. Holtby
E d i t h B. Holmes Trust, Mrs. Edith B. Holmes
Lindsey Hooper
Gladys E. H . Hosmer
Herbert B. Hosmer, Jr. (Jane D. Hosmer)
Herbert B. Hosmer (Gladys E. H . Hosmer)
Humphrey B. Hosmer (Janet)
Patience Hosmer
Samuel M. Hosmer
Miss Hope Hubbard
Richard S. Humphrey
M r s . Martha Lee Huot
Oliver P. Hussey (Louise M.)
Sumner F . Hyland
H a r o l d F . Jones
Lawrence L . Jones (Mary I.)
Mrs. R i t a C. Jones
Walter B. K . Kenneil
Nelson E. Kidder (Gertrude L.)
Mrs. Anne Hosford Kimball
Mrs. Gertrud S. Kirschner
Charles E. Kinkade
Mrs. Sarah K . Kinkade
Prunella B. Kirchwey
Alan L. Kling
Mrs. Margaret H . Kocher
George E . Kunhardt, J r
Vincenze L a l l i
Southworth Lancaster (Margaret T.)
Laurence Langner
Mrs. Anna Rose Leffler
-
$41,253. 91
6,503.91
2,503.90
25,000.00
27,570.31
74,875.00
6,000.00
50,000.00
5,000.00
100,000.00
5,000.00
20,000.00
5,000.00
30,000.00
5,000. 00
5,000.00
5,000.00
8,000.00
1,000. 00
25,000.00
16, 000.00
69,375.00
6,000. 00
5,000. 00
6, 000. 00
2,000.00
15, 000. 00
10,000.00
12,000.00
50,000.00
20, 000. 00
48,000.00
100,000.00
10,000.00
1, 000.00
6,914.06
1,000.00
1, 000.00
1,000.00
5,000.00
30,000.00
4,503. 91
4, 000. 00
5,000.00
10,000.00
18,476.56
10,000. 00
10, 000.00
2,000.00
10,000. 00
7,000.00
30,000. 00
90,000. 00
15,000.00
1,000.00
5,914.07
10,742.19
1,000.00
30,000.00
40,000. 00
5,468. 75
24
Texmass Petroleum
of $500,000 will
T E X M A S S P E T R O L E U M CO. L O A N
Company—Members
of investor groups to whom an aggregate
be paid from proceeds of RFC loan, March
15,1950—Con.
Participation
in
original
$8,000,000
investment
John E . Leffler
E d w a r d G. Leffler
Leonard N. Leum
A l l a n Prescott Locke
Joseph A. Locke
Joseph A . Locke, J r
Mabel D. Lockwood (widow)
Mildred H . Mahoney
E a r l M. Major
Prof. Lionel S. Marks
M i r i a m A. Mason
Warren MacPherson
Bernice B. M c G o r r i l l (Virgil C.)
V i r g i l C. McGorrill
Miss Catherine Mclnnis
Mrs. Cecil M. Mclntyre
Miss Helen McLaughlin
Harry F. Merrill
Lawrence F . M e r r i l l
M a r j o r y M. Meyer (Edward C.)
George Pierce Metcalf
E d w i n W. McGowan
Mrs. Gretchen T. Marto (Joseph P.)
M i l t o n M. & Helene F . M c G o r r i l l
Mrs. Helen A. Miller
Adelaide C. Morse (widow)
Donald G. Morse (Elizabeth K . Morse)
Donald G. Morse
Mrs. Elizabeth K. Morse
Gladys Carr Morse
Herbert R. Morse
Jas. F . Morse & Co. (partnership D G M R E M Sale Partners)
Roger E. Morse
Roger E. Morse
Roger E. Morse
Winslow C. Morse
Charles C. Moskowitz
Curtis H . Mosher
Mrs. Martha E. Myrick
Dr. W i l l a r d D. Nalchajian
U r i a h N. Nash
Mrs. Elizabeth Neilson
Mrs. Alice B. Newell
Miss Alice Blake Newell, J r
James M. Newell, J r
E l l e n B. Nichols
Hollis P. Nichols
M a r i o n P. Nichols
M i r i a m Nichols
Rudge Nichols
Dr. P a u l Norton (Margaret H.)
Joseph E. O'Connell
LeRoy P. and H i l d a C. Ogden
LeRoy P. Ogden
Theresa H . Opdycke
Ellen E. Paine
Stephen Paine
W i l l a m A. Paine
Joseph Paone
R a l p h J. Paone (Louise V.)
Amory Parker
$1,000.00
13,000.00
2,000.00
1,000.00
20,000.00
1,000.00
15,000.00
15,000.00
10,000.00
5,000. 00
— 20,000.00
1,888. 88
' — 10,000. 00
40,000.00
1,000.00
5,000.00
1,000.00
5,000.00
5,000.00
26,000.00
15,000.00
50,000.00
1
5,000.00
6,(250. 00
5,000.00
100,000.00
23,375.00
2,000.00
9,000.00
100,000. 00
10,000.00
250,000. 00
100,000. 00
4,375. 00
33,000.00
2,000. 00
6,000.00
2,000. 00
2,000. 00
5,000.00
5,000.00
2,000.00
5,100.00
5,100. 00
6, 800. 00
10,000.00
10,000. 00
20,000.00
10,000.00
20,000.00
1,000.00
50, 000.00
7,000.00
2,000.00
62,187.50
50,000.00
55,000.00
5,000.00
2,000.00
2,000.00
25,000. 00
25
T E X M A S S P E T R O L E U M CO. L O A N
Texmass Petroleum Company—Members
of investor groups to whom an aggregate
of $500,000 win be paid from proceeds of RFC loan, March
15,1950—Con.
Participation
in
original
$8,000,000
investment
Mrs. Elise A. Parker
William A. Parker
The Parker Corp
1
Mrs. Louise H . Partridge
Mrs. Naomi Perlman
Catherine C. Piper
Ralph C. Piper
Harold J. Powderly
Mrs. Evelyn F. Potter
W i l l i a m H . Potter, J r
President and Fellows of Harvard College
Mrs. Anna A. Prince
Gordon C. Prince
George N. Proctor
Grace Hopkins Proctor
Henry Harrison Proctor
Romaine L . Pushee (G. Horton)
Grace Yeomans Quigley
Mrs. Mary F . Quigley
Est. of Norma B. Reams
W i l l i a m A. Reed
Theo. A. Rehm
Neil W. Rice
Helen W. Robbins
Dr. Harold C. Robinson
Est. of Anton R. Rose
Miss L a u r a T. Rose
Mrs. Arthur G. Rotch
Mrs. Helen G. Rotch
Mrs. Josephine D. Anderson
Benjamin A . Rowland
Mr. C. E a r l Russell
Charles F . Rowley
Edgar C. Rust
Mrs. Elizabeth A. Rust
Richard Saltonstall
_
Charles N. Satterfield
Joseph M. Schenck
Marvin H. Schenck
Nicholas M. Schenck
Alfred D. Scott Estate
Walter K . Shaw, Jr. (Helen B.)
S. L. Sholley
Adelbert W. Smith (Roberta)
Oliver Smith
Miss R u t h Patterson Smith
The State Investment Co
Mrs. Helen C. Spring
John Stewart (Gracia P.)
Harold L. Stillman
Carl M. Stolle
Carl M. Stolle, J r
V. Craig Stolle
Henry A. Stone
Robert Gregg Stone
Mrs. Bertha Lea Stone
Joseph S. Sylvester, J r
Mildred B. Sylvester (unmarried)
John O. Stubbs
David B. Stone
Miss Elizabeth L. Stone
_
$100,000.00
215,000. 00
50,000. 00
5,000.00
3,000. 00
5,000.00
8,000.00
6,250.00
5,000.00
40,000.00
100, 000.00
25,000.00
25,000.00
5,000.00
50,000. 00
50,000.00
5,000.00
5,000. 00
1,000.00
1,000.00
1, COO. 00
18,000.00
50, 000. 00
10,000.00
1,000. 00
10,000. 00
1,000. 00
5,000.00
_ 10, 000. 00
5, 000. 00
25,000.00
7, 500. 00
25,000.00
25,000.00
10, 000. 00
50, 000. 00
1,000.00
25,000.00
6,000. (X)
38,000.00
2,000. 00
150, 000. 00
36,000.00
48,000.00
3,000. 00
5,000.00
10, 000. 00
5,000.00
5,000.00
5,000.00
10,000.00
2,000.00
2,000.00
15, 000.00
330,000. 00
25,000.00
50,000.00
9,000.00
10,000.00
16, 687. 50
16, 687. 50
26
Texmass Petroleum
of $500,000 will
T E X M A S S P E T R O L E U M CO. L O A N
Company—Members
of investor groups to whom an aggregate
be paid from proceeds of RFC loan, March
15,1950—Con.
Participation
in
original
$8,000,000
investment
Galen L . Stone
Robert G. Stone, J r
C y r i l E. Shelvey
Mrs. M i r a W . Shelvey
J o h n M. Templeton
E . C a r l Thiessen
Barbara Proctor Thompson
Est. of Mrs. E m i l y B. Thompson
Miss Lena A. Thompson
Ralph E . Thompson (widower)
Ralph E. Thompson, J r
M r . H a r r i s B. Thompson
R a y Vance
Mrs. E d i t h A. V a n W i n k l e
Mrs. Lena L l o y d Vogel
M a r y B. W a l s h (single)
Henry T. W a y
Mrs. Katherine C. Weeks
Est. of E. Sohier Welch
Wellesley College
Vernon P . West
Mrs. Margaret A. Williams
Robert N. W i l l i a m s
Jason Westerfield
M r . David V. W h i t i n g
M a x O. W h i t i n g
Betsey W h i t i n W h i t t a l l
Matthew P. W h i t t a l l
Matthew John W h i t t a l l
Walter F . Whittier
Mrs. Nancy G. Whittier
Frances Proctor Wilkinson
James G. and Elsie S. Willett
Andrew N. Winslow, J r
Boston Safe Deposit and Trust Co., Andrew N. Winslow, Jr. and Mrs.
Elinor C. Winslow, Trs., u/ind. of Elinor Condit Winslow T-2619—
Frederic Winthrop
:
Mrs. A n n a W. Wolbach
Est. of Estey J. W o l f e
Ralph Wolf
Stuart E. W o l f and A l i d a R. W o l f
Stuart E. W o l f and A l i d a R. W o l f
G. Forrest Woods
Est. of Delano Wight
Percie C. Worrick
Charles M. Young
$16,687.5a
16,687.50
23,750.00
15,000.00
2,000.00
1,000.00
50,000.00*
25,000.00
100,000. 00
153,777. 795,000.00
5,000.00
28,000.00
5,000.00
6,000.00
10,000.00
10,000.00
5,000.00*
50,000.00
50,000.00
150,000.00
2,000.00
8,000.00
10, 000.00
2,000.00
10,000.00
4,000. 00
13,000.00
9,000.00
7,000. 00
3,000.00
50,000.00
5,000. 00
6,000.00
6,000.00
110,000. 00
50,000.00
1,000.00
15,476.56
19,781.25
1,093.75
2,000.00
25,000. 00
2,000.00
20,000.00
APPENDIX C
T E X M A S S P E T R O L E U M C O . — A P P L I C A T I O N OF T H E PROCEEDS OF L O A N S OF $8,000,0 0 0 M A D E TO T E X M A S S I N 1 9 4 7 B Y M A S S A C H U S E T T S M U T U A L L I F E I N S U R A N C E
Co., J O H N H A N C O C K M U T U A L L I F E I N S U R A N C E CO., AND M E R C A N T I L E N A T I O N A L
B A N K AT D A L L A S
Among the conclusions of the subcommittee presented in this report is the view
that the R F C loan to Texmass "* * * is primarily a 'bail-out' of existing creditors of the borrower.'' It appears from the prospectus which Texmass Petroleum
Co. filed w i t h the Securities and Exchange Commission, that the loans made to
Texmass i n 1947 by two insurance companies and a bank i n Dallas, which w i l l
27 TEXMASS P E T R O L E U M CO. L O A N
be repaid in part from the proceeds of the R F C loan, were also a "bail-out"
of then existing creditors and investors. The prospectus contains the following
comments on this subject:
"On or about November 15, 1946, Mr. Snowden gave to Mr. T. B. Knox, an
independent oil operator i n Weatherford, Tex., an option to purchase at $50
per share 1,254 shares of the 1,880 shares of Texmass stock to which he would
become entitled upon dissolution of Snowden, Ltd. On December 18, 1946, the
special partners in Snowden, Ltd., and Mr. Gordon D. Harriman and Mrs.
Eunice Harriman Millikin granted Mr. Knox an option (hereinafter called the
'Harriman option') to purchase all of their interests in Snowden, Ltd., their
claims against Snowden, Ltd., for loans made to it, several oil leases (owned by
Henry I. Harriman), and all of their interests in the capital stock of Mass-Tex
and Texmass for the sum of $2,227,522 plus interest at 6 percent from January 1,
1947. The option was apportioned among the respective claims and interests as
follows:
"J. Dudley Clark:
Capital account ($300,000) and interest ($31,700)
Loans ($365,000) and interest ($10,911)
$331,700
375,911
Dudley L. Millikin:
Capital account ($300,000) and interest ($31,700)
Loans ($116,250) and interest ($3,453)
331,700
119,703
Henry I. Harriman:
Capital account ($300,000) and interest
Loans ($271,250) and interest ($6,358)
Warren lease override
Warren lease working interest
F r i o County lease
Marion County lease
331,700
277,608
94,085
120, 000
50, 000
5,000
($31,700)—
,
Gordon D. Harriman: Loans ($34,700) and interest ($3,140)
Eunice Harriman Millikin: Loans ($150,000) and interest ($2,275)—
Total
$707,611
451,403
878,393
37,840
152,275
2, 227,522
"After obtaining the Snowden option, Mr. Knox was instrumental i n effecting
various financings for Texmass, the short-term financings all being i n the form
of a purchase by the lender of a note of Texmass payable to Mr. Knox and assigned by him to the lender.
"On or about February 10, 1947, Massachusetts Mutual L i f e Insurance Co.
(herein called Mass-Mutual) lent $1,000,000 secured by a mortgage covering
properties in Eddy County, N. Mex.
"Late in March 1947 Texmass received assurances from Mass-Mutual and
John Hancock Mutual Life Insurance Co. (hereinafter called "John Hancock") that on certain conditions they would make long-term loans of $4,000,000
and $3,500,000, respectively, out of total loan of $8,000,000, for the purpose of
paying off indebtedness of Texmass, exercising the Harriman option, and providing working capital. Pending completion of this long-term financing, MassMutual and Mercantile National Bank at Dallas (hereinafter called the "Mercantile Bank"), lent to Texmass $3,600,000 and $500,000, respectively, evidenced
by notes of Texmass payable to Mr. Knox and assigned to the lenders, and
secured by a deed of trust covering properties i n Texas and Oklahoma. Of the
proceeds, $1,873,000 was applied to payment of short-term loans and other indebtedness (not including the $1,000,000 loan then held by Mass-Mutual) and the
balance of $2,227,000 was placed in escrow for the purpose of exercising the
Harriman option to Mr. Knox, which the latter had apparently agreed to hold
for the benefit of Texmass. On May 29, 1947, Mercantile Bank lent $750,000
to Texmass secured by deed of trust and mortgages on various properties in
Louisiana, Kansas, and Texas.
"On June 5, 1947 (as of May 29, 1947), the Harriman option was exercised
by Mr. Knox on behalf of Texmass and Texmass thereby acquired 6,120 shares
{76y2 percent) of its own outstanding stock, the loan claims against Snowden,
Ltd. (which had been assumed by Texmass), and the leases owned by Mr. Harriman. Texmass paid total cash of $2,230,735.81 (the escrowed funds plus an
additional $3,735.81) including $65,795.83 for interest accrued after January 1,
1947, allocated as follows: $1,018,533.75 to the stock, $947,372.40 to loan claims,
28
T E X M A S S P E T R O L E U M CO. LOAN
and $264,829.66 to oil properties; and set up an account payable of $62,060.02
(since discharged) allocated to oil properties.
"Between the date the option was exercised and August 1, 1947, Texmass borrowed an additional $1,000,000 on secured loans.
"On August 15,1947, Texmass consummated the $8,000,000 long-term financing
with Mass-Mutual, John Hancock, and Mercantile Bank, evidenced by notes of
$4,000,000, $3,500,000, and $500,000, respectively, secured by deed of trust and
mortgage on all its properties, and assignment of 100 percent of oil and gas runs
to Mercantile Bank, as trustee. Sixty percent of the runs is to be applied to
payment of principal and interest on the indebtedness and 40 percent paid to Texmass except that to the extent that the 60 percent is insufficient to pay the aggregate minimum monthly payments of $75,000 required by the notes, the deficiency
is to be paid out of the 40 percent. A l l instruments were dated August 1, 1947.
The proceeds of the loan were applied to payment of the above-mentioned notes,
other liabilities of Texmass, and $1,000,000 on the open-account indebtedness of
Texmass to Republic Supply Co. then due in the amount of $2,737,796.11. In
settlement of the balance due Republic Supply Co., Texmass delivered its note
for $1,737,796.11, due February 15, 1948, bearing interest at 6 percent and
secured by a second mortgage on its properties and an assignment (subject and
subordinate to the above assignment to Mercantile Bank, trustee) of 100 percent
of its oil and gas runs of which, so long as said assignment to Mercantile Bank,
trustee, remains in effect, 15 percent is to be applied to payment of principal and
interest on the indebtedness and the balance paid to the company.
"In summary, the records of Texmass indicate that of the proceeds of the
indebtedness refinanced with the $8,000,000 borrowed as described above,
$2,230,736 had been applied to the exercise of the Harriman option, $2,595,970
had been applied to retirement of debts incurred by the predecessors of Texmass,
and $281,326 had been used for working capital. The balance of $2,891,968 had
been applied to working capital, to retirement of debts incurred by predecessors
of Texmass, and to acquisition of property, the exact amount of each not being
readily ascertainable due to the condition of the records of that period.
"This financing still left the company with insufficient working capital. In
addition at least 75 percent of its gross cash income was required to be applied
to debt service, a condition which has been somewhat alleviated since December
28, 1948, by successive short-term agreements by the above secured creditors,
whereby 62y2 percent is applied to debt service and the balance is available to
Texmass for working funds."
o
@FedFRASER