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Federal Reserve Bank of St. Louis
UNITED STATES OF AMERICA
BEFORE THE:
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
IN THE MATTER OF
TRANSAMERICA CORPORATION
REPLY BRIEF OF COUNSEL FOR THE BOARD
J. LEONARD TOWNSEND,
SOLICITOR
G. ROWLAND CHASE,
ASSISTANT SOLICITOR.
GREGORY O'KEEFE, JR.,
OF COUNSEL.
November 9* 195>1*
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Federal Reserve Bank of St. Louis
TABLE OP CONTENTS
Page
REPLY TO RESPONDENT'S BRIEF ON THE MERITS
1
PART I
2
PART II
U6
PART III
8U
REPLY TO RESPONDENT'S MOTION TO DISMISS FOR
LACK OF JURISDICTION
91
CONCLUSION
97
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Federal Reserve Bank of St. Louis
TABLE OP AUTHORITIES
Cases:
Page
Aluminum Co. of America v. Federal Trade Commission, 281).
Fed. 401 (3rd Cir. 1922), cert, den., 261 U. S. 6l6
(1923)
15, 23
Arrow-Hart & Hegeman Electric Co. v. Federal Trade
Commission, 291 U. S. 58? (1934)
4, 92
Bank of America v. Douglas, 105 F. 2d 100 (B.C. Cir. 1939).53, 55
Beegle v. Thompson, 138 F. 2d 875 (7th Cir. 1943)
11
Board of Governors v. Transamerica Corp., 184 F. 2d 311 (9th
Cir, 1950), cert, den., 340 U. S. 883 (1950)
9k
Federal Trade Commission v. Thatcher Mfg. Co., 5 F* 2d 615
(3rd Cir. 1925)
11
In re Pressed Steel Car Co.. 16 F. Supp. 329 (W.D.Pa* 1936) .. 11
In re Transamerica Corp., 184 F. 2d 319 (9th Cir. 1950), cert.
den., 340 U. S. 883 (1950)
96
International Salt Co. v. United States, 332 U. S. 392 (1947). 10
International Shoe Co. v. Federal Trade Commission, 280 U. S.
291 (1930)
12
Parkersburg Rig & Reel Company, 3k F.T.C. 152? (194D
14
Pennsylvania R. R. v. Interstate Commerce Commission, 66 F.
2d 37 (3rd Cir. 1933), aff«d mem., 291 U. S. 65l (1934) .... 11
Standard Oil Co. of California v. United States,
337 U. S. 293 (1949)
4, 19, 20, 21,
25, 1+2, 43, kk, 84
Temple Anthracite Coal Co. v. Federal Trade Commission,
51 F. 2d 656 (3rd Clr. 193D
13, 14* 23
United States v. Associated Press, 52 F. Supp. 362
(S.D.N.Y. 1943)
11
United States v. Northern Securities Co., 120 Fed. 721
(C.C.D. Minn. 1903), aff'd, 193 U. S. 197 (1904)
29, 32
United States v. Reading Co., 253 U. S. 26 (1920)
30
United States v. Republic Steel Corporation, 11 F. Supp.
117 (N.D. Ohio 1935)
12
V. Vivaudou, Inc. v. Federal Trade Commission, 54 F. 2d
273 (2nd Cir. 193D
13, 23
Miscellaneous:
Clayton Act, 38 Stat. 730 (1914), as amended,
15 U.S.C. § 12 (1946)
Clayton Act» § 2
Clayton Act, § 3
Clayton Act, § 7
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Federal Reserve Bank of St. Louis
•
2, 10, 17, 19
25, 29, 40, 42, 43
79, 83, 85, 86, 94
18
18, 44
2, 3, 4* 5, 6
8, 9, 10, 11, 12,
14, 15, 17, 18, 19,
24, 32, k6, 79, 80
83, §6, 88, 92, 93
TABLE OP AUTHORITIES CONTINUED
Page
Clayton Act, § 11 ......................................... 55,
Clayton Act, § 15 ............................................
51 Cong. Rec. 16002 (19lU) ...................................
H. R. Rep. No. 11+80, 79th Cong., 2d Sess. (19l*6) .............
H. R. Rep. No. 1191, 8lst Cong., 1st Sess. (19U9) ............
H. R. Rep. No. 1191, 8lst Cong., 2d Sess. (1950) .............
Sen. Rep. No. 1775, 8lst Cone., 2d Sess. (1950) ........... 10,
Sherman Act, 26 Stat. 209 (Io90), as amended,
15 U.S.C. § 1 (19U6) ........................ 2U, 25, 29, 83,
92
55
18
93
19
26
25
86
U8 Stat. 193 (1933), 12 U.S.C. § 77 (19UO) ................... 5U
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Federal Reserve Bank of St. Louis
UNITED STATES OF AMERICA
BEFORE THE
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
IN THE MATTER OF
TRANSAMERICA CORPORATION
REPLY BRIEF OF COUNSEL FOR THE BOARD
Respondent has filed two briefs in this proceeding.
The first
was submitted in support of its exceptions to Governor Evans1 recommended decision and is therefore addressed to the merits of the
case.
The second was submitted in support of its renewal of an ear-
lier motion, fully considered and denied by the Board, to dismiss
the proceeding for lack of jurisdiction.
We shall reply to these
two briefs in the order named.
REPLY TO RESPONDENT'S BRIEF ON THE MERITS
To anyone who has read the opening briefs filed herein by counsel for the respective parties it must be obvious that there is a
wide chasm separating the basic contentions of the parties as to
what it takes to make out a case of Section 7 violation.
Further-
more, that chasm has existed throughout the entire hearings, as Governor Evans is well aware.
It inevitably led, especially in so pro-
tracted a trial as this one, to an extraordinary number of objections
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and arguments, and these are now all being rolled up at the door of
the Board for final agency decision*
We shall now attempt to bring
these conflicting contentions into proper perspective and to show
that, judged in the light of objective appraisal and tested by the
application of proper legal principles, the recommended decision of
Governor Evans should be sustained by the Board.
Respondent's brief is divided into three main parts.
Part I
discusses the legal tests which respondent contends are applicable
to a Section 7 case a*id argues that the application of these tests
requires a dismissal of the Board1s complaint.
Part II attacks Gov-
ernor Evans1 handling of the trial £S "arbitrary and discriminatory".
Part III discusses alleged erroneous factual findings relating to
Transamerica and its relations with its controlled banks, including
Bank of America.
_
H||nr——•^^•^••—iE«^^B*M«»
We shall reply to each of these parts in order.
,
PART I
Naturally it is on the crucial question of the legal tests for
determining whether Section 7 has been violated that the most emphatic disagreements exist between the parties.
The position of
counsel for the Board on this question has been set out in our opening brief.
In essence it is very simple and is this:
The Clayton
Act is a prophylactic statute, designed to arrest monopoly "in its
incipiency and before consummation", as Congress itself said when
it passed the law.
Section 7 was specifically aimed at holding com-
panies which buy up the stocks of companies in actual or potential
competition and bring those companies under common ownership and
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control.
The holding company which follows this practice was de-
nounced by Congress as wan abomination".
Here we have a case where
just such a situation as Congress specifically visualized has come
to pass.
Transamerica and its predecessors have for over forty
years been acquiring the stocks of small, medium and large sized
commercial banks in an ever expanding area on the West Coast.
To
date they have acquired almost 700 separate banking offices in five
states.
As fast as these banks were acquired, they were merged into
or became branches of one or another of the rapidly growing branch
banks in the controlled group.
The cumulative effect of these ac-
quisitions has been to bring the Transamerica controlled group of
banks to a point where they now comprise lj.0 per cent of all commercial banking offices in the five-state area, having 39 per cent of
all commercial bank deposits and 50 per cent of all commercial bank
loans in those states.
Furthermore, the evidence clearly indicates
that, unless restrained, Transamerica intends to acquire more banks
and thus to increase further its growing monopoly power in that
area.
The net "effect" of these acquisitions, we contend, "may be
substantially to lessen competition, or to tend to create a monopoly" of commercial banking offices, deposits and loans in the fivestate area, contrary to the provisions of Section ?•
The nub of our
contention springs from the conviction that the only proper legal
test for determining the "effect" of such a continuous series of acquisitions is to consider their cumulative effect upon both existing
and potential competition in commercial banking in the area; and the
further conviction that, so considered, the cumulative effect of
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such acquisitions on its face is quantitatively so great as, without more, to fall squarely within the ruling recently made by the
Supreme Court in Standard Oil Co. of California v. United States3
337 U. S. 293 (19^9).
Respondent, on the other hand, challenges this simple test.
In
fact, its brief brands this approach as an "oversimplification" of
the legal issues before the Board,
Standard Oil case.
It also virtually ignores the
It places main reliance upon a group of cases
decided in the early thirties, just before or around the time of the
Supreme Court*s decision in Arrow-Hart & Hegeman Electric Co. v. Federal Trade Commission^ 291 U. S. 58? (193^)» which, as we have seen,
made virtually a dead letter of Section 7 until only last year when
Congress acted to remedy the effects of that decision.
None of
those cases, as we shall see, even remotely involved the kind of
case with which we are dealing here and, hence, with certain exceptions hereinafter noted, none of them is helpful in deciding the
present question*
Concededly the position of counsel for the Board
has not been predicated upon any of those decisions.
Quite obvi-
ously, as well, none of them can be used as authority for the proposition that the tests recently laid down in Standard Oil, which Congress itself only last year declared should always have been applied
by the courts to Section 19 are not applicable here.
Aside from the argument that the "rule of reason" is applicable
to Section 7 cases, which we shall discuss separately later on in
this brief, respondents main contentions as to the proper legal
tests to be applied here are threefold^
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Federal Reserve Bank of St. Louis
They are:
!• There must be a showing, as to each bank acquired,
that at the time of its acquisition it was in actual existing
competition with one or more of the banks already controlled
by Transamerica;
2. There must be a showing that, at the time of acquisition, the amount of such existing competition was quantitatively substantial; and
3. There must be a showing that the probable effect of
the acquisition is likely to have an adverse effect upon such
existing competition.
These three arguments are used like bulldozers throughout respondents brief.
They are used to push forward virtually every
contention which that brief thereafter makes on the fundamental issue of what it takes to prove a case against Transamerica.
It fol-
lows, therefore, that if these arguments are not controlling here,
the many others, which are predicated upon them throughout the remainder of respondent's brief, must fall with them.
Let us make it clear at the outset of our discussion that we do
not contend that the tests suggested by respondent may not be one
way of proving a Section 7 case.
They undoubtedly are, and the
cases cited in its brief to this extent support counsel's position.
But the fault lies in the reasoning that these tests are the only
ones for making a Section 7 case. The Board must remember that this
is the first case of its kind ever tried under that section.
All of
the other cases which have been tried thereunder, and therefore all
of the ones cited by respondent, Involved at most only a very few
acquisitions, and none of them involved the basic question of "tendency to monopoly".
In fact, in several of those cases the court was
careful to point out that no tendency to monopoly could possibly be
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Federal Reserve Bank of St. Louis
involved, due to the fact that the sum total of a particular type of
business brought under defendant's control was insignificant when
compared to the total amount of such business in the entire field*
This is the first Section 7 case which involves a great number of acquisitions stretching back over a long period of time, and where the
principal issue is whether the cumulative effect of all such acquisitions results in a tendency to monopoly.
Let us examine for a moment what would be the situation if the
tests suggested by respondent were the only proper ones for determining whether or not it has violated Section ?•
In the first place,
instead of being one hearing to ascertain the cumulative effect of
almost 700 acquisitions, this proceeding would thereby be converted
into almost 700 separate cases, each one to be decided upon the basis
of the individual facts respecting each banking office acquired, the
bank or banks already acquired, and the effect upon commercial banking competition only as between those banks and at the time of each
such acquisition.
many words.
Indeed, respondent urges this contention in so
"Where, as here," respondent's brief argues, "the com-
plaint challenges a number of stock acquisitions, a separate inquiry
must, of course, be made with respect to each.
The thrust of the
statute, which is directed at acquisition of competing companies,
cannot be avoided by lumping a series of acquisitions, no one of
which falls within the statutory prohibition." (Resp. Br., p. 6)
Under respondent's contention, what we would have to do here is
to start in 1909, when Bank of Italy (a Transamerica predecessor in
acquiring banks) acquired its first bank, Commercial and Savings
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Bank of San Jose, California, with deposits of $3U5>000 and loans
of $229,000 (BX 8, p. 163; BX 10, p. 70).
According to respondent
the Board's duty is now to examine that transaction separately from
every other acquisition that has occurred since that time and to
determine whether the Commercial and Savings Bank of San Jose was
at that time in actual existing competition with the Bank of Italy,
whether the amount of that competition was quantitatively substantial, and whether there was a likelihood at the time of acquisition
that such competition might thereafter be substantially less.
If
the answer to those literal questions all turned out to be in the
negative, then the Board, according to respondent, must forever
close its eyes to that acquisition and nevermore consider its effect in connection with any other acquisition or acquisitions which
thereafter took place*
And this despite the fact that, upon acqui-
sition, the Commercial and Savings Bank of San Jose was promptly
converted into a branch of the Bank of Italy, which from that day
forward has continued as a banking office in the system and, with
the impetus of the deposits and loans taken over, has contributed
its share of growth to the ever expanding size and power of the
Transamerica group of commercial banks.
Furthermore, under respondent's tests the Board would have to
repeat this same process as to each one of the remaining nearly 700
acquisitions, always being careful not to take into account any
I/ Board1s exhibits sometimes will be referred to as BX; respondent!s exhibits as RX; citations to pages of the record will be
preceded by the designation R.
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banking office which had been previously acquired if at the time of
its acquisition it was not in direct and quantitatively substantial
competition with one or another of the Transamerica controlled
banks*
Merely to state respondents contentions in this light is to
demonstrate their utter inapplicability to such a case as we are
dealing with here.
Under its theory all acquisitions at the early
stages of the development of the Transamerica banking group must be
ignored because they were generally of banks in separate communities and, hence, at the time of their acquisition obviously were
not in active day-to-day competition with each other for the patronage of the same persons or companies.
Similarly, as is argued
at pages 30 to ij.0 of respondents brief, practically all of Transamerica1 s most recent bank acquisitions must likewise be ignored
because they, too, were banks located at places not immediately adjacent to any of those in which a Transamerica controlled bank is
located.
It must be obvious that under such a test as this it
would be virtually impossible ever to make out a tendency to monopoly case under Section 7 in the commercial banking business.
For
so long as the holding company was careful in its earlier acquisitions to buy banks not directly competing with each other, it could
build up its size to a point where, when finally it did start to
buy banks in direct and existing competition with those previously
acquired, the later acquisitions could be Justified on the ground
that the amount of competition which was lessened as a result of
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the latest acquisitions was at most insignificant and insubstantial.
As a matter of fact this very argument is made on page 27 of respondent' s brief wherein it is pointed out: "The extent of growth
through acquisition, especially in recent years, is so startlingly
small as to drain the percentage of occupancy figures of all significance.*1
To this statement is appended a footnote in which re-
spondent points out that:
"Between the middle of 1938 and the end
of 19f>0 the total deposits of the so-called 'Transamerica group*
increased from about $1,577,000,000 to about |7»W$9»000,000. During that period the total deposits added to the 'group1 through acquisitions were about $201,000,000 or only 3.4% of -the total deposit growth experienced during the period." (Italics ours) Accordingly, reasons respondent, $201,000,000, being the combined deposits
of almost 60 banks, all newly acquired during this period^ is "insubstantial" and should not be considered even cumulatively as contributing to a substantial lessening of competition in the five2/
state areai
What authority is there for such a purpose-defeating interpretation?
Certainly it is not to be found in the words of the statute,
Nowhere in the language of Section 7 —
whether as originally drawn
or as more recently amended -- is there anything which refers to
existing competition; or which requires that the wthrust of the
2/ Furthermore, respondent's comparison also ignores the fact that,
included in the banking offices at the commencement of the period was a preponderant number which represented acquisitions and
all of which contributed to the total "growth" during the period.
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statute" be applied only at the time of a particular acquisition;
or denies the right to enforcing bodies to consider the cumulative
"effect" of a long series of acquisitions in appraising the probable effect upon competition between all of the companies thus acquired by a holding company.
On the contrary, the very use of the
words "may bew in the statute suggests that Congress intended a
prospective, as distinguished from a present or past, test of violation.
Indeed, both the courts and Congress have interpreted the
words "may be" as meaning "reasonable probability"-*/
And it must
not be overlooked that the phrase "tend to create a monopoly" indubitably looks forward and not backward as a phrase designed for
public protection.
As the Supreme Court has said, "Under the law,
agreements are forbidden which ftend to create a monopoly,1 and it
is immaterial that the tendency is a creeping one rather than one
that proceeds at full gallop; nor does the law await arrival at the
y
goal before condemning the direction of the movement.11
Finally,
the words of Congress itself remove any doubt as to the intention
of the lawmakers on this point.
"The intent here, as in other
parts of the Clayton Act," states a recent Senate report in speaking of Section 7> "is to cope with monopolistic tendencies in their
incipiency and well before they have attained such effects as would
5/
justify a Sherman Act proceeding."
2/ See citations at page 20 of our opening brief. *~~™~
—
International Salt Co. v. United States, 332 U. S. 392, 396 (19i|-7)
Sen. Rep. 1775, 8lst Cong., 2nd Sess. i|, 5 (1950).
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The cases cited by respondent do not support its contention
that the tests urged by them are the only tests for determining
violations of Section 7.
As previously stated, not one of those
cases was premised upon the basic charge of tendency to monopoly.
In each of them only one or two acquisitions were involved and the
question presented was whether the effect of such acquisitions
might be to substantially lessen competition between the acquired
companies.
This was true of Beegle v. Thompson, 138 P. 2d 875
6/
(7th Cir. 19U3)» United States v. Associated Press, 52 P. Supp.
7/
362 (S.D.N.Y. 19i|3),
In re Pressed Steel Car Co., 16 P. Supp. 329
87
(W.D.Pa. 1936), Federal Trade Commission v. Thatcher Mfg. Co., $
9/
P. 2d 615 (3rd Cir. 1925), and Pennsylvania R. R. v. Interstate
6/ In this case it was held that acquisition by defendant, which
produced no anti-splitting irons, of a company which did produce
them and which was also in a failing condition, did not substantially lessen competition between the two companies.
2/ Here it was held that the acquisition by Associated Press, which
sold its picture service only to its members, of the stock of
World-Wide Photos, Inc., which sold its picture service to outsiders, did not substantially lessen competition between those
organizations because only seven AP members who subscribed for
pictures of World-Wide did not also take AP pictures.
Q/ In this case it was held that the acquisition by the General Araer~" lean Transportation Company of the stock of the Pressed Steel Car
Company did not substantially lessen competition between the two
companies because each was engaged almost exclusively in differing activities; and that as to the one phase of their operations
where they did compete, the amount of such competition was entirely negligible.
Here it was held that the acquisition by the Thatcher Company of
the stock of three other companies which manufactured and sold
milk bottles in competition with the Thatcher Company did violate
Section J9 but that the acquisition by the Thatcher Company of
the stock of a fourth company which manufactured mostly whiskey
and condiment bottles, and which manufactured only an Insignificant number of milk bottles, did not violate the section.
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Commerce Commission, 66 P. 2d 37 (3rd Cir. 1933), aff'd mem., 291
10/
U. S. 651 (193lj)~
Hence, In these cases there was nothing whatever to indicate whether the Court felt that a "tendency to monopoly" case might be determined by different tests, and the facts
in those cases did not raise the question of whether the companies
involved might be potential competitors.
But four of the remaining five cases cited by respondent did
indicate that; if a "tendency to monopoly" case were presented, evidence of the hind introduced here would be decisive of that issue.
And the fifth case specifically points out that Section 7 was designed to protect the public in the preservation of potential as
well as existing competition*
Two of the four cases mentioned were International Shoe Co.
v. Federal Trade Commission, 280 U. S. 291 (1930), and United States
v. Republic Steel Corporation, 11 P. Supp. 117 (».D. Ohio 1935).
Examination of the opinions in those cases will disclose that, at
the very outset of each, the Supreme Court and the District Court,
respectively, took great pains to emphasize the fact that they
were not called upon to pass on the issue of whether a "tendency
to monopoly" case had been made out under Section 7c
Surely such
TO/ Here it was held that the fact of the acquisition by the
Pennsylvania Company, an investment company owned by the
Pennsylvania Railroad Company, of less than a majority of
the outstanding voting shares of the Lehigh Valley and Wabash
Railroads would not, without more, result in a showing of
probably substantially lessened competition between the three
railroads, especially as there was evidence that the stock
had been purchased solely for investment, and in accordance
with a long standing investment practice of railroad companies
generally.
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a specific disclaimer of the need to pass on this separate issue
plainly indicated that both courts felt that some other test would
have to be applied if that issue had been presented.
And the
other two cases show why this inference is a proper one, because
in each the court pointed out the kind of statistical information
which would be necessary to shed light on a charge of "tendency
to monopoly".
Thus, in Temple Anthracite Coal Co. v. Federal Trade
Commission, 51 F* 2d 656 (3rd Cir. 193D* it appeared that the respondent, a holding company, had acquired the stocks of the Temple
Coal Company and the East Bear Ridge Colliery Company, both producers of anthracite coal sold in interstate commerce.
While the
court's opinion was principally concerned with whether the effect
of these acquisitions was to substantially lessen competition between the acquired companies, nevertheless the following language
in the opinion shows on what basis it disposed of the question of
"tendency to monopoly" in the case.
The court said (p. 660):
"There are no facts found, and we find no evidence produced before the Commission, to show the relation between
the percentage of coal mined and sold by the Temple Coal Company and its subsidiaries and that sold by the East Bear
Ridge Colliery Company to the total output of anthracite coal
of the same kind and quality in the whole anthracite region.
Prom the facts found as to the value of the annual output of
the respective mines, it is quite apparent that the percentage of these mines to the total output cannot be consequential. Therefore, if competition were lessened, its effect
upon the whole interstate trade in anthracite coal would not
tend to create a monopoly through substantially lessening
competition."
The same situation is disclosed in 7. Vivaudou, Inc. v. federal Trade Commission, $k P. 2d 273 (2nd Cir. 193D. There it appeared that the Vivaudou Company, which was itself engaged in
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manufacturing and selling cosmetics throughout the United States,
acquired the stocks of two other companies similarly engaged.
There again the principal question presented to the court was limited to "whether the competition between these companies had been
substantially lessened by reason of the stock acquisition . . ."
As in the Temple Anthracite case, however, the court indicated
that, if a "tendency to monopoly" question had been presented, statistical evidence of the kind adduced in the instant case might
well have been determinative by saying (p. 2?5):
"There can be no monopolistic tendency in acquiring control
of properties which added four million
dollars to the petitioner's already three millions1 volume of business, when the
total of the country1s similar business, amounting to at
least one hundred and twenty-five million, is considered."
The fifth case referred to above is Parkersburg Rig & Reel
Company, 3k F.T.C. 1527 (19i|l)» a case decided by the Federal Trade
Commission.
There the Commission held that the acquisition by
Parkersburg of the stock of the Oil Company Specialties Manufacturing Company did not violate Section 7 because only a small portion
of the business of the two companies was competitive. But in thus
disposing of the matter the Commission noted that the effect of
the acquisition "was not actually or potentially to substantially
lessen competition" between the two companies. (Italics ours)
It is significant that the only case decided by the courts
under Section 7 whera evidence of "tendency to monopoly" was found
(and which is referred to at some length in one of the cases cited
by respondent) is not cited in respondent's brief.
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Yet it, too,
holds specifically that the statute is aimed at protecting potential as well as existing competition and that measuring potential
competition is a proper element in testing whether an acquisition
or acquisitions may result in a wtendency to monopoly"•
This was
the case of Aluminum Co. of America v. Federal Trade Commission,
2814. Fed. 1+01 (3rd Cir. 1922), cert, den., 261 U. S. 6l6 (1923).
In this case the Commission had found a violation of Section 7 by
the Aluminum Company in its acquisition of the stock of the Aluminum Rolling Mills Company.
as follows:
The background of this acquisition was
Until the First World War the Aluminum Company pro-
duced all aluminum ingots as well as all sheet aluminum in the
United States.
During the war two new companies were formed to
roll aluminum and they competed with the Aluminum Company in the
sheet aluminum field.
Products Company.
One of the newcomers was the Cleveland Metal
After the war, faced with declining profits,
the Cleveland Company and the Aluminum Company entered into an
agreement whereby a new company, called the Aluminum Rolling Mills
Company was formed —
one-third of its stock being acquired by the
Cleveland Company and the remaining two-thirds by the Aluminum
Company.
The Cleveland Company then sold to the Rolling Mills
Company its rolling mill, and that company was thereupon operated
by the Aluminum Company.
The Commission ordered the Aluminum Com-
pany to divest itself of the stock of the Rolling Mills Company.
On appeal it was argued, inter alia, that the statute did not
apply because the newly organised rolling mill had not begun business at the time its stock was acquired and had not been in
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competition with anyone.
Hence there was no "competition" between
the two companies which could have been lessened by the acquisition of the stock of the new company.
In disposing of this conten-
tion, the court said (pp. i|0?-l|08):
"But the lessening of competition is not the only effect
of the acquisition by one corporation of stock of another
which the Congress sought to avoid. It intended as well to
prevent a transaction 'where the effect1 may 'tend to create
a monopoly,1 which is the effect which the Commission found
in the acquisition of the stock of the Rolling Mills Company.
A monopoly can be created by a transaction of stock acquisition when the effect is not to lessen competition with the
corporation whose stock is acquired if the effect is to end
competition existing elsewhere, United States v. New England
Fish Exchange (B.C.) 258 Fed. 732, 7U&; as for instance the
ending of competition with the Cleveland Company. This is
for the reason that the lessening of competition and a tendency to monopoly are not always synonymous. There may be a
lessening of competition between two corporations in a stock
transaction that does not tend to monopoly. But, curtailing
this discussion, we are not prepared to admit the premise
from which the Aluminum Company deduces its conclusion. In
other words, we do not find that at the time the Aluminum
Company acquired the stock of the Rolling Mills Company the
latter was not engaged in commerce and was not, potentially^
engaged in competition with the Aluminum Company, for these
reasons:
"Prior to February 17, 1918, the Cleveland Company had
been engaged in competition with the Aluminum Company. On
that day it agreed with the Aluminum Company to organize, and
later there was organized, a third corporation, which was to
purchase, and later did purchase, the aluminum rolling mill
and also the 'aluminum rolling mill business1 of the Cleveland
Company. « . . Having purchased trade upon which to start,
and having started upon the trade it had purchased, the new
corporation was, we think, truly engaged in commerce at the
time of the stock acquisition.
*
*
*
"As we are not called upon to determine whether the Aluminum
Company is a monopoly within the definition of the [Sherman
Act], we limit our decision to the question whether, within
the policy of the Clayton Act, the transaction comes within
the definition of the section. In this we are of opinion
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that it does, and that its effect upon actual competition as
well as in destroying potential competition in a way later
to make actual competition impossible was substantially to
lessen competition between the corporation whose stock was
acquired and the corporation making the acquisition; and
second, that without regard to whether its effect was substantially to lessen competition between these two corporations, the stock acquisition did, in effect, 'tend to create a monopoly.1" (Italics ours)
Nor do the various references in respondent's brief to the
statements by "a number of Congressmen when the Act was passed"
support respondent's contentions.
Not one of them makes any ref-
erence whatever to the kind of tests to be applied in determining
Section 7 violations or suggests that the words "tend to create a
monopoly" mean the same thing as "substantially to lessen competition".
Nor do any of them rebut the finding by the court in
the case last hereinabove mentioned that the Act was designed to
protect the public against the substantial lessening of potential,
as well as existing competition.
However, the best way to dis-
pose of all of these references at one time is simply to call attention to the fact that every one of them was made before the
expression "tend to create a monopoly" ever appeared in a draft of
the Clayton Act. Those words were not added to the bill until
after the House and Senate versions (neither of which contained
the phrase) had gone to conference.
All of the remarks of Congress-
men and the House Report referred to in respondent's brief were
"i-> %3»fore that time.
IK,t now let us 3s@fr/iiatK^ said by Congrsse about those words
Jr they were added to the bill. As stated, they were added in
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conference, and were inserted simultaneously in Sections 2, 3 and
7 of the Act.
So far as our inquiry has disclosed, there was only
one explanation given to either House as to the reason for their
insertion.
That was given by Senator Chilton, a member of the Con-
ference Committee, when the Conference Report was being debated in
the Senate.
It is significant that in his explanation he plainly
stated that the conferees recognized that there might be a situation where stock acquisitions might not eliminate competition but
would tend to create a monopoly.
!/
He said:!
"The Senate, however, Mr. President, adopted as its criterion the following, 'where the effect may be to lessen competition.1 In other words, the Senate struck out Eliminate1
and 'substantially.' . . . But when House section 6, which is
Senate section 6, came to conference the House conferees Insisted that the words 'eliminate1 or 'substantially lessen
competition' should be the standard. The Senate conferees
insisted that the language of the Senate should be adopted,
to wit, 'where the effect may be to lessen competition.' As
always happens with men of ordinary sense, with men who want
to carry out as best they can the instructions of their superiors, the conferees had to find some common ground upon
which their minds could meet, and the result was a compromise,
which is section 7 in the bill reported by the conferees.
That compromise was the adoption of the words 'may be' instead of the word 'is,1 so that instead of reading 'where the
effect is* the bill now reads, 'where the effect may be';
that is, where it is possible for the effect to be, which was
a decided victory for the Senate. We struck out 'eliminate,'
which was another victory for the Senate. We left in the
word 'substantially,' which was a victory for the House; but
the House conferees insisted that that would change the section and would not accomplish the purpose intended by it; that
a corporation might acquire the stock of another corporation,
and there would be no lessening of competition^ but the tendency might be to create monopoly or to restrain trade or commerce, and therefore there was added to the definition the
following: 'Or to restrain such commerce in any section or
community or tend to create a monopoly of any line of commerce.|W (Italics ours)
51 Cong. Rec. 16002 (1914)
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And recent expressions of Congress are to the same effect.
Thus, H.R. Rep. No. 1191, 8lst Cong., 1st Sess. 8 (19l*9), has this
to say about Section 7:
"Acquisitions of stock or assets have a cumulative effect,
and control of the market sufficient to constitute a violation
of the Sherman Act may be achieved not in a single acquisition
but as the result of a series of acquisitions. The bill is
intended to permit intervention in such a cumulative process
when the effect of an acquisition may be a significant reduction in the vigor of competition, even though this effect may
not be so far-reaching as to amount to a combination in restraint of trade, create a monopoly, or constitute an attempt
to monopolize. Such an effect may arise in various ways:
such as elimination in whole or in material part of the competitive activity of an enterprise which has been a substantial factor in competition, increase in the relative size of
the enterprise making the acquisition to such a point that its
advantage over its competitors threatens to be decisive, undue
reduction in the number of competing enterprises, or establishment of relationships between buyers and sellers which deprive their rivals of a fair opportunity to compete.
"Under H.R. 273k a merger or acquisition will be unlawful
if it may have the effect of either (a) substantially lessening competition or (b) tending to create a monopoly. These
two tests of illegality are intended to be similar to those
which the courts have applied in interpreting the same language
as used in other sections of the Clayton Act." ("italics ours)
As pointed out in our earlier brief, the tests of illegality
which the courts have applied in interpreting the same language as
used in other sections of the Clayton Act are plainly set forth in
the Standard Oil case.
There the Supreme Court held that proof of
substantially lessened competition and tendency to create a monopoly is made out whenever the record shows that a respondent made
use of the practices prohibited by the Act and has attained a
"dominant" position in the particular field in which it is engaged.
A "dominant" position was held to be one showing that a respondent
controlled two-fifths of available outlets in that field.
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It was
also held that the same percentages held controlling for determining violations in a case involving a national market are applicable
for determining violations involving a smaller geographical area*
A second test was also enunciated in Standard Oil.
requires even less proof than the first.
This test
It was held that, absent
a showing that respondent has achieved a "dominant" position in a
particular field, violation of the Act is shown by proof of the
prohibited practice coupled with a showing that the amount of competition foreclosed thereby is quantitatively "substantial". Control of only 16 per cent of all outlets in a seven-state area and
annual sales of $57*000,000 was held to meet this test.
It now remains for us briefly to bring all of the above discussion into focus upon the facts of the present case.
In the first
place, we reiterate the position taken in our opening brief, namely,
that the tests referred to above in Standard Oil are completely dispositive of the issues herein presented.
That respondent has ac-
quired the stocks of commercial banks is, of course, admitted.
Largely as a result of its acquisitions, it now controls the same
percentage of banking offices in the five-state area which the
Supreme Court held in Standard Oil to constitute a "dominant" position.
And even if respondent*s position could not be called "dom-
inant", certainly the acquisition by itself and its predecessors
of almost 700 banking offices over a lj.0-year period is quantitatively so substantial as to meet the alternative test set out in
Standard Oil. Judged from either viewpoint, therefore, the "effect"
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of respondent's acquisitions roust be held, under the tests laid
down in Standard Oil, to have resulted in both a substantial lessening of competition and a tendency to create a monopoly.
But let us look at this case as though Standard Oil had never
been decided, and apply those considerations which emerge from the
other discussion hereinabove appearing.
Considering first the
question whether the effect of respondents acquisitions may be
"substantially to lessen competition11, the evidence is clear that
both existing and potential competition has in fact already been
eliminated to a very substantial degree.
First, as to the proof of elimination of existing competition.
Board Exhibit 257 shows the acquisitionsby respondent and its predecessors in individual communities.
Even respondent admits that
local banks compete with other local banks for local business.
In
Board Exhibit 257 there appears community after community in which
respondent has acquired more than one bank.
In fact, it shows a
great many instances where numerous acquisitions were made in the
same community.
Take the City of Oakland, for example.
The record
shows (BX 257* P« 200) that respondent now controls 25 out of the
37 banking offices in that city, 23 acquisitions having been made
over the years.
In Los Angeles (BX 257* pp. 155-158) it controls
91 out of 225 offices, 70 acquisitions having been made.
In San
Francisco (BX 10, pp. 61-65; BX 16, p. 37) it controls U8 out of
102 offices, 18 acquisitions having been made.
In San Diego
(BX 257, p. 257) it controls 11 out of 23 offices, 9 acquisitions
having been made.
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Nor have its acquisitions of more than one
-21-
office been limited only to the large cities.
In 192lj. there were
four independent banks in Healdsburg, California, comprising two
pairs of affiliated institutions, each of which jointly occupied
a banking office.
By 1929 all four of these banks had been ac-
quired by respondent and its predecessors (EX 257* P* 118).
In
I92ij. there were three independent banks in Winters, California,
including two affiliated institutions which jointly occupied one
office.
By 1928 all of them had been acquired.
Shortly thereafter,
another bank was organized in Winters, and in 19Ul this bank was
also acquired by the Transamerica group (BX 257* P* 327).
In 192U
there were three independent banks in Gardena, California, including two affiliated institutions which jointly occupied one office.
By 19^2 all of them had been acquired (BX 257, p. 101;).
These
illustrations could be multiplied over and over again in communities of all sizes.
Can anyone seriously argue that the cumulative
effect of all of these acquisitions was not to substantially lessen
existing competition?
Next, as to potential competition.
In the first place, the
very existence of the Transamerica banking empire is a deterrent
to those who otherwise would be willing to enter the field, as was
testified by Dr. Goldenweiser (R. 2758-2759, 11,962). There is, of
course, no way to measure the extent of this influence, but it certainly cannot be ignored.
In the second place, and more important-
ly, the acquisition of almost 700 separate banking offices over the
years has not only eliminated existing competition, as stated above,
but the dissolution of those banks by the branching of their assets
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into and the assumption of their liabilities by one or another of
the Transamerica controlled banks forever put an end to all potential competition between those institutions.
As stated in Aluminum
Co. of America v. Federal Trade Commission, supra, the effect of
these mergers was to destroy "potential competition in a way later
to make actual competition impossible11.
Again, is there anyone who
would seriously urge that if all of those separate institutions had
remained in the field and the number of Transamerica controlled institutions diminished by a like amount, present competition would
not be "substantially11 increased?
Finally, as to the issue of tendency to monopoly.
The record
is replete with evidence of the kind referred to in Temple Anthracite Coal Co. v. Federal Trade Commission and V. Vivaudou, Inc. v,
Federal Trade Commission, supra.
That evidence shows respondents
steady and inexorable march toward monopoly.
Prom 1920 to 1950 the
percentage of controlled offices rose from 2 per cent to i|0 per
cent; deposits from 6 per cent to 39 per cent; and loans from 5 per
cent to 50 per cent.
In 1921}. the Giannini group had offices in but
little over half of the counties in California and none in any other
12/
state. Today it not only controls offices in all but 2
of the 58
counties in California, but it also controls offices in 2? counties
in Oregon, in 10 counties in Nevada, in 2 counties in Arizona, and
5 counties in Washington,
It has 100 per cent of all banking of-
fices in 28 of these counties.
It has more than 60 per cent of all
b«M:lng offices In 5* of these counties.
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Federal Reserve Bank of St. Louis
In fact, in only 9 of
*.:.~ no tanking" off ices at all in these 2 counties,
-23-
them does it control less than 30 per cent of all banking offices.
Surely, the cumulative effect of all of these acquisitions, to use
the words of Congress itself, has been to "increase , . . the
relative size of the enterprise making the acquisition to such a
point that its advantage over its competitors threatens to be decisive . , ." Who besides respondent would seriously urge that
such a relentless process of acquisition, which has brought it control of UO per cent of all commercial banking offices, 39 per cent
of all commercial bank deposits, and 50 per cent of all commercial
bank loans over a five-state area, is not a discernible movement
in the direction of monopoly?
The final point made by respondent's brief as to the proper
legal tests applicable in a Section 7 case is that the Mrule of
reason", a Sherman Act test, is also applicable here.
Respondent11
brief now speaks of this as the "public interest" test, but the nature of the inquiry which they suggest is required by this test is
the same as that previously made by them when they openly called
it the "rule of reason" test.
Thus, they say the Board must In-
quire into the "motive" which led the Gianninis to buy all those
banks; whether "increased efficiency" resulted; whether the previous owners of the banks were "willing sellers"; whether the
strength of remaining competitors is sufficient to give adequate
protection to the public; whether the industry itself shows "price
rigidity, artificial scarcities"; and the like.
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Federal Reserve Bank of St. Louis
.137
We disposed of this contention in our opening brief^ by
pointing out that, in Standard Oil, the Supreme Court flatly rejected the need, in a Clayton Act case, for making the kind of inquiry which the nrule of reason" test requires in Sherman Act cases.
Admittedly, earlier cases under the Clayton Act, including those
cited by respondent, had seemed to embrace the Sherman Act test*
But in Standard Oil the Supreme Court traced in detail its own departure from this approach and emphasized the fact that the Clayton
Act was designed to prevent, not remedy, monopolistic growth.
It
said (pp. 312-313):
"It seems hardly likely that, having with one hand set up an
express prohibition against a practice thought to be beyond the
reach of the Sherman Act, Congress meant, with the other hand,
to reestablish the necessity of meeting the same tests of detriment to the public interest as that Act had been interpreted
as requiring. Yet the economic investigation which appellant
would have us require is of the same broad scope as was adumbrated with reference to unreasonable restraints of trade in
Chicago Board of Trade v. United States, 2l|.6 U 0 S. 231. To
insist upon such an investigation would be to stultify the
force of Congress1 declaration that requirements
contracts are
to be prohibited wherever their effect fmay be1 to substantially lessen competition.11 (Italics ours)
Congress, too, has emphatically stated that Sherman Act tests
are not to be applied in Section 1 cases.
Sen. Rep. No. 1775> 8lst
Cong., 2nd Sess. 1^-5 (1950), states:
w
The committee believe that the excessive sweep that has
been given to section 7 of the present Clayton Act by these
two features of that section has been largely responsible for
the tendency of the courts in cases under that section to revert to the Sherman Act test. By eliminating the provisions
of the existing section that appear to reach situations of
little economic significance, it is the purpose of this
137 Commencing at p. 21
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legislation to assure a broader construction of the more
fundamental provisions that are retained than has been given
in the past. The committee wish to make it clear that the
bill is not intended to revert to the Sherman Act test. The
intent here, as in other parts of the Clayton Act* is to cope
with monopolistic tendencies in their incipieney and well before they have attained such effects as would justify a
Sherman Act proceeding," (Italics ours)
H.R. Rep. No. 1191, 8lst Cong., 2nd Sess. 8 (1950), reporting
on the same bill, had this to say:
"Under H. R. 2?3l| a merger or acquisition will be unlawful if it may have the effect of either (a) substantially
lessening competition or (b) tending to create a monopoly.
These two tests of Illegality are intended to be similar to
those which the courts have applied in interpreting the same
language as used in other sections of the Clayton Act. Thus,
it would be unnecessary for the Government to speculate as to
what is in the 'back of the minds ' of those who promote a
merger; or to prove that the acquiring firm had engaged in actions which are considered to be unethical or predatory; or
to show that as a result of a merger the acquiring firm had
already obtained such a degree of control that it possessed
the power to destroy or exclude competitors or fix prices."
(Italics ours)
These authorities make it clear that the "rule of reason"
test is not applicable in this proceeding.
Next, respondent argues that, even if our contentions be right
as to the proper legal tests to be applied in this case, our case
is factually defective in numerous respects.
Its first attack is
upon the expression "Transamerica group" as used by counsel for the
Board in presenting evidence and as used by Governor Evans in his
recommended decision.
This expression, it is alleged, was merely
a "device", given articulation by "cleverly contrived statistics",
designed to suggest that "one single concern operates i|l per cent
of the banking offices and holds 39 per cent of the deposits and f?0
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per cent of the bank loans in the five-state area described in the
complaint11.
Such a suggestion is wrong, says respondent, because
it ignores the fact that Transamerica itself is not a bank and
that there are almost £0 separate banking institutions within the
"group"; that these institutions all operate independently of each
other; and that all are available to supply banking services to the
public,
Our answer to these contentions will show (1) why the term
"Transamerica group" was used and (2) why the banks whose offices,
deposits and loans have been included in various tabulations reflecting the growth and present position of the "group11 were properly so included.
First, as to why the term "Transamerica group" was used and
what it means. We have repeatedly stressed herein that this case
involves an appraisal of the cumulative effect of a great many acquisitions stretching back almost a half century.
Those acquisi-
tions were all made under a policy, originated and given continuing
effect over the years by A. P. and L. M. Giannini, to build larger
and larger branch banking organizations in each of the five states,
principally by acquiring existing banks and then causing them to
be branched or merged into one or another of the branch systems.
The ultimate objective, as we have seen, is to establish one interstate branch banking organization when and if the law permits,
Prior to 1928 these banking acquisitions were mad© by ¥arious officials of the Bank of Italy and by a
A,, P. Giannini for that
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of companies formed by
purpose,* aiaong others.
_27-
In 1928
Transamerica was formed by A. P. Giannini to take over "control"
of the banks then under Giannini management, and thereafter approximately 237 additional banks and branches were acquired.
It
now holds the stocks of 1±8 banks, including Bank of America, all
of the others having been swallowed up by one or another of those
which it now controls.
Throughout the case, therefore, the expression "Transamerica
group11 has been used to identify the banks which at any particular
time prior to 1928 were controlled by one or another of the
Giannini managed companies or banks and, after 1928, the banks
which have been controlled directly by respondent.
Whether "clev-
erly contrived11 or not, those are the simple facts and respondent's
counsel was put on notice that such was the use being made of the
expression when, on the first day of the trial, the first statistical exhibit was introduced to show how many banks have been acquired over all of these years.
The "Transamerica group" now con-
sists of every bank which Transamerica controls, and the only
question remaining is to show why it was proper to "lump" them together in such fashion.
The measure of "market occupancy" which a holding company enjoys in a particular field depends, of course, upon the number of
outlets which it controls in that field and the amount of business
which those outlets command therein.
Here the question is whether
the banking offices identified in the Board's statistics and in
Governor Evans1 opinion as the "Transamerica group" are outlets
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"controlled" by respondent and, hence, in sum total accurately reflect the competitive position of respondent in the commercial
banking field in the five-state area.
On this question we think
V
the record clearly supports the conclusion reached by Governor
Evans•
Insofar as the Transamerica majority owned banks are concerned
(they comprise all but one of the banks identified in the present
"Transamerica group11), it is obvious that respondent has the legal
power to control such institutions.
This in itself is sufficient
to justify their inclusion in the figures showing respondent's
position, because the Clayton Act is aimed at preventing the rise
of monopoly power, not at remedying the use of that power. Even
Sherman Act cases (where the evidentiary tests are much more
stringent than here) hold that majority stock control, without
more, is sufficient to prove existence of such power. Thus, in
the celebrated Northern Securities caseik/the court, in answering
the question "whether the ownership of all of the stock of two competing and parallel railroads vests the owner thereof with the
power to suppress competition between such roads", stated that it
had "no doubt that it does".
Furthermore, said the court, "we re-
gard the suppression of competition, and to that extent a restraint
of commerce^ as the natural and inevitable result of such ownership."
(Italics ours)
But the evidence here shows far more than mere ownership of
bank stocks by respondent; it shows a consistent course of
120 Fed. 721, ?2o (C.C.D. Minn. 1903), aff«d, 193 U.S. 197 (l90l|)
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IS/
"deliberate, calculated purchase for control".
Thus, as we have
seen, respondent was organized specifically for the purpose of
taking over "control11 of existing Giannini managed institutions,
including banks.
It paid unusually high prices for bank stocks to
enable it to obtain control; it paid bonuses and granted special
inducements to officers of banks in order to assist it in obtaining
control; its common practice was to select the directors of its
banks, sell them qualifying shares, and take options to repurchase
such shares, thus insuring continuing control of its banks; it
formed an advisory committee headed by L. M. Giannini to "assist
A. P. Giannini in directing the activities of all banks controlled"
by It; this committee at the suggestion of L. M. Giannini gave consideration to questions of loan policies, investment policies,
branch organization, personnel, operating policies, inter-bank relations, public relations, business development, pending legislation, and representation in bankers and clearing house associations
for respondent's banks; it requires each majority owned bank to
submit detailed reports of condition and earnings each month; It
also requires quarterly reports showing all loans in excess of a
stated amount, together with information about overdue loans, etc.;
it receives copies of reports of examinations from the various
supervisory authorities which examine Its majority owned banks; it
receives reports of examinations of these banks made by the inspection department of the Bank of America; it causes these reports to
United States v. Reading Co., 253 U. S. 26, £? (1920)
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be analyzed and any matters of importance are taken up with the
banks by respondent's officials; since 19U6 one of respondent's
vice presidents, who has aljso been its principal bank buyer, has
been used as wbank liaison man"; his duties are to visit respondent's banks, talk with the officers and directors on their operations and conditions and to advise and help them.
These and many
other instances which are multiplied in the record leave no doubt
but that respondent effectively "controls" its majority owned banks.
As stated above, the only other bank which has beeu included
in the "Transamerica group*1 is the Bank of America.
This Bank, it
will be recalled, was the first bank organized by A. P. Glannini
and into it have been funneled virtually all of the banks that have
been acquired in California.
The principal purpose behind the for-
mation of respondent in 1928 was to take over "control" of this
institution, and respondent held all of its stock from that time
until 1937»
In that year it distributed to its stockholders about
58 per cent of the Bank stock and from time to time since 1937 it
has further decreased its holdings.
that stock.
It now owns 7.6 per cent of
Prom the beginning of the case counsel for the Board
have conceded that, because respondent now owns less than a majority
of Bank of America shares, it would be proper to include the figures respecting Bank of America as part of the "Transamerica group"
only if respondent today still enjoys the power to control that
institution.
Accordingly, much evidence was introduced at the
trial to establish this proposition and on the basis of such evidence Governor Evans has found that respondent does possess such
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power.
This evidence has been fully discussed and the question
has been fully argued in our opening brief.
We therefore respect-
fully refer the Board to pages l|.7-68 thereof for that discussion.
But, argues respondent, even if we consider them as a "Transamerica group" of banks, there is no evidence that such banks all
operate as a single unit.
On the contrary, they contend, these
banks all function through separately existing boards of directors
and formulate their own policies.
Hence, the public has a wide
choice of banking institutions even within the MTransamerica group"
at which to obtain competitive banking services.
But this argument misconceives the nature of the Board1a case
and, in any event, is no defense to the Board's charges.
At no
time have we contended that respondent dictates the day-to-day operating decisions at its various controlled banks.
Obviously re-
spondent's officials do not sit at one end of a telephone line and
instruct controlled bank officials as to what loan to make and
what loan to turn down.
They have -the power to do thatf however^
and power alone is the evil against which the statute is aimed.
Therefore, the fact that we introduced no evidence of abuse of that
power is no ground for deducing that abuse of power may not have
taken place at respondent's direction.
It means simply that we
were of the opinion, as is Congress, that proof "that the acquiring
firm had engaged in actions which are considered to be unethical
or predatory1* was unnecessary to prove a Section 7 case.
Moreover,
we can point out here what the court pointed out in the Northern
Securities case, supra, as follows (p. 725):
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"It will not do to say that, so long as each railroad
company has its own board of directors, they operate independently, and are not controlled by the owner of the majority
of their stock. It is the common experience of mankind that
the acts of corporations are dictated and that their policy
is controlled by those who own the majority of their stock."
Furthermore, it is clear that respondent maintains a firm grip
on all policy questions in its controlled banks.
This is to be
found, inter alia, in the elaborate machinery which it has set up
for policing them, as set out above.
To this must be added the
degree of uniformity which necessarily characterizes the actions
of all of its banks resulting from the use of the "manual of operations" now employed in its banks; the use of trained Bank of
America personnel, who Invariably turn up as key officials and/or
directors of a bank as soon as respondent acquires it; the "meetings" of the staffs of the various banks with officers from the
larger Transamerica controlled banks within the area; and the like.
Even if there were no evidence of the kind referred to above,
however, there is one fact which stands out in bold relief in this
case which is sufficient in itself to sustain the case against respondent.
It is this:
Since its organization respondent has ac-
quired approximately 237 independently operating banks and branches.
All of them but U7 banks and approximately 11 branches which those
banks had at the time of their acquisition, with respondent's consent, have been dissolved and converted into branches of or merged
with one or another of its controlled banks, including Bank of
America.
And there are now pending before the Comptroller of the
Currency applications to branch 37 of its remaining controlled
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banks into Bank of America and the First National Bank of Portland,
respectively.
To accomplish this objective respondent will have to
do what it has always had to do in similar situations, namely, vote
its stock in its controlled banks to sell all its assets and to
dissolve the banks.
Prom these facts, plus the fact that it is the
long-range intention, when possible to do so, to combine all of
respondent's banks into one interstate branch bank, it is more than
obvious that the "use" by respondent of its stock in these banks
"by the voting or granting of proxies or otherwise" has always been
and now continues to be to substantially lessen competition and
tend to create a monopoly.
Respondent next contends that the statistics used by Governor
Evans to show the extent of "market occupancy" by the Transamerica
group banks are inaccurate and misleading.
The basic contention
is that commercial banks perform a variety of services and functions
and that most of these same services and functions are also performed by organizations other than commercial banks.
Thus, it is
argued, insurance companies and savings banks make real estate
loans, post offices accept deposits for safekeeping, auto finance
and personal loan companies make consumer loans, and so on.
A wide
variety of other organizations are also named as competitors of
commercial banks, including federal farm credit agencies, savings
and loan associations, production credit associations, banks for
cooperatives, and various others of either a private or governmental nature.
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Hence, the argument runs, only by adding statistics
-3U-
respecting all of these organizations to those showing total offices, deposits and loans of commercial banks would a proper base
be obtained against which to measure the "market occupancy11 enJoyed by respondent's controlled banks0
The answer to this contention is very simple.
If a monopoly
of commercial banks, as such, would not be potentially hurtful to
the economy of an area, then we are wasting our time in this case,
for concededly the entire theory of the Board"s case is squarely
bottomed upon the contention that it would.
In fact we have con-
tended, and the evidence fully supports the contention, that a
monopoly of commercial banks over any substantial geographical
area would constitute the worst kind of a monopoly because it could
adversely affect more people, businesses and communities than any
other kind of monopoly yet attempted. So the answer to respondent's contention lies in showing that commercial banks, as such,
perform Important services and functions which are not performed
by any of these outside organizations and that monopolistic control
of those services and functions over any substantial area could do
great harm to the economy of such an area. This is easily done.
Throughout the case evidence has been piling up which emphasizes the importance of three functions which are absolutely unique
to commercial banks. These are the money payment function, the
money creation function, and the function of supplying short-term
4
business credit to the small, medium, and even the large sized
businesses of the nation.
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These are the functions which set the
-35-
commercial bank apart from all other business organizations of a
private nature and which have established for commercial banks the
unique and traditional place in the financial affairs of our economy which they enjoy.
We do not believe it to be an overstatement
to say that commercial banks, because of these primary functions,
provide the greatest single protection to the continued maintenance
of our private enterprise system, because without them resort by
business to some form of governmental substitute would seem inevitable •
It will probably be "carrying coals to Newcastle" to explain
the mechanics and argue the importance of these three important
functions to an agency such as the Board, which is itself an authority in the commercial banking field.
Nevertheless, we are re-
quired to dispose of respondents contentions on the basis of what
appears in this record and not on the basis of what we realize the
Board already knows from its general experience in this field.
That commercial oanks perform the money payment function is,
of course, but another way of saying that commercial banks accept
deposits subject to check.
in our country can do so.
No other type of business organization
Before that function can be performed,
those who would perform it must obtain a charter as a commercial
bank.
Out of this function has been fashioned a nationwide system
of money payments which today accounts for virtually all money payments made throughout the entire country without the need for the
physical transfer of currency or coin.
That system has become so
deeply entrenched in the economic and business life of the nation
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that all businesses and most individuals would be seriously handicapped if they were suddenly denied access to it. Even the economists called to the stand by respondent admitted that no substitute
for this function is to be found anywhere.
By virtue of their privilege of accepting deposits subject to
check commercial banks are thus enabled to obtain a large part pf
the money with which to make their loans and investments. This
money is obtained without any cost to the bank beyond that of maintaining and staffing its banking offices.
The net effect of this,
as the record amply attests, is that commercial banks are enabled
to reach the broadest base of the borrowing public at the least
cost. Whatever the kind of loan, the borrower who can qualify as
a good commercial bank risk can obtain his loan cheaper at a commercial bank than anywhere else.
Overshadowing even this consideration, however, is the power
that goes with the control of so vital a service as the checking
account service. All of the economists called by the Board, Messrs.
Goldenweiser, Bopp and Wheeler, were unanimously agreed that control
of this function would place it in the power of the commercial bank
monopolist to discriminate between individuals and business concerns and, by denying the service to some, to place those discriminated against at such a disadvantage vis-a-vis their competitors as
in some Instances to spell the difference between success and failure.
Moreover, as they also testified, control over the money pay-
ment function could be used by a monopolist as an effective lever
for compelling all who need the checking account service to obtain
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all of their credit needs at the commercial banks controlled by
.16/
the monopollstT"^
The second unique function of commercial banks is the money
creation function. We will not restate the mechanics of the operation by which the commercial banking system is enabled, under our
present system of fractional reserves, to create new deposit money
by the simple process of bookkeeping entries.
Governor Evans1
findings set out this process in detail, and the Board is fully
16/ The following colloquy occurred during the examination of Dr.
Goldenweiser (R. 273U-2735):
W
Q Let me ask you this, Doctor: Having in mind that the
commercial banking system has the exclusive control over the
check payment function, which you have heretofore described,
and with particular reference to the control of that function
in the commercial banking system, I will ask you whether you
have an opinion as to whether or not the control of that function by a banking monopoly in any substantial geographical area
would tend or not tend, as the case may be, to bring to the
commercial banking monopoly a monopoly of all credit in the area,
n
THE WITNESS: ... I think that it would be a very big
leverage in that direction that the monopoly could have, because
it could deny the business community and those lenders other
than banks access to the all-essential, important part of our
mechanism, namely, the check clearing and check payment system.
W
I believe that in determining matters of this sort, one
can t be absolute. Business is frequently an extremely sensitive thing and the difference in cost and in convenience that
might result in a fraction of one per cent of the gross turnover of the business may make the difference between success
and failure and while it is unquestionably true that an Institution and an organization can use the facilities somewhere else
outside of the district, while they can use money orders or they
can ship cash or they can use telegraphic transfers, they would
not be barred from all means of making payments, but they would
be barred or they could be barred-by the hypothesis of your
question, they could be barred from making the most convenient,
the most efficient and the most economical kinds of payments
and by being barred from that, they could very easily find themselves at a sufficiently serious disadvantage so as not to be
able to do profitable business,1*
f
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-38-
conversant with it. What is important is the harm which a malevolent control of this function over a substantial area could perpetrate in such an area.
We concede that in a relatively small
area control of all commercial banks would not carry with it much
of a threat from abuse of the money creation function.
But as the
monopoly expands in geographical proportion the more likely it is
that the banks controlled by the monopolist will function as the
banking system functions in creating money.
This is because of
the greater probability that a check drawn against a newly created
loan deposit will be paid by the borrower to depositors of banks
which are also members of the controlled group; hence the larger
the area covered by such a group, the smaller would probably be
the adverse clearing balances experienced by the group after initially creating deposit balances.
Obviously, as the amount of
such adverse clearing balances grows smaller, the opportunity of
the group to relend the same deposit balances which it had originally created would increase proportionately.
Respondent is now moving in the direction of commercial banking monopoly in five large and important states.
More than 10 per
cent of the nations population is located there (RX 293), and the
extensive nature of its economy has been emphasized in numerous of
respondent's exhibits.
Thus, with full monopoly power in those
states would come a realistic opportunity for the Transamerica
group to operate as the banking system does throughout the balance
of the nation, so far as the money creation function is concerned.
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Thus, there would be emphasized the power or the Transameriea group
banks, in the language of Governor Evans,
tf
to expand credit by lend-
ing too freely and too much, and, on the other hand, . . . to so restrict credit as to hamper growth and development",
The third function unique to cosimereial banks Is
of sup-
plying virtually all short-term business eredit to the smll, medium
and some large sized business concerns*
The principal reason why
commercial banks have been the only organizations t© supply this
type of credit is because through numerous or even daily contacts
they obtain an intimate knowledge of the business affairs of their
customers that no other company could possibly duplicate.
This
knowledge, and the special "know-how" of commercial banks of which
it is a part, bring to commercial banks a strategic advantage in
serving the credit needs of the business community not shared by
any other type of organization.
All of this enables the commercial
bank, with a minimum outlay of energy and expense, successfully to
appraise the needs of its customers and, after the loan is made, to
service the loan through all of its phases until collection has
been made.
The testimony is clear that if for some reason a busi-
ness concern was not able to get eredit from its local commercial
bank, it would suffer serious damage to its business.
Prom this brief discussion it is evident that commercial banks,
as such, fulfill a role in our economy which is at once traditional
and unique.
It is a pure libel to minimize their importance to the
point which respondent would do in order to escape liability under
the Clayton Act.
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If competition in commercial banking should
disappear in any substantial area, the result in our judgment
would be inevitable.
Sooner or later the Government would be
forced to take over the commercial banks and this would be followed by the gradual, if not precipitate, disappearance of the
private enterprise system.
The "market occupancy" figures used by Governor Evans are
also challenged on a number of other grounds in respondent's brief.
The next argument is that the base figures used by him are improperly limited to showing commercial banking offices, deposits and
loans only for the five States of California, Oregon, Washington,
Nevada and Arizona, because "the boundaries of the five-state area
have no economic or competitive significance".
The brief seems to
proceed on the theory that only if the five-state area represents
an economic unit or a "trade area" of the kind that prompted the
division of the Federal Reserve System into twelve separate districts can figures limited to such an area have any significance
here.
Here again the answer is simple.
We have never made any con-
tention that the five-state area represents any unit of "economic
significance".
It may represent such an area or it may not, but
whether it does or not is unimportant here.
The reason why the
figures in the statistics are limited to those states is simply because only in those states has respondent acquired and does respondent now control commercial banks.
Each of those states per-
mits state-wide branch banking; in each of them respondent has
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Federal Reserve Bank of St. Louis
already established or is in the process of building state-wide
branch institutions out of the independent banks it has acquired.
Thus far, at least, respondent has limited its commercial banking
activities to those five states.
states — yet.
It has not moved into other
Consequently the "market occupancy*1 figures re-
specting the Transainerica group are limited to those states in
which its acquisitions, in the aggregate, have brought it into
violation of the Clayton Act.
Under these circumstances the only question is whether within
the five-state area the "effect" of respondents bank stock acquisitions "may be" to substantially lessen competition or tend to
create a monopoly*
As we have seen, the answer to this question
is to be found by applying the standards laid down by the Supreme
Court in the Standard Oil case.
Banks, like gas stations, must do
business at specific locations.
The only difference between the
two in this respect is that, to operate at its location, a bank
must meet tests of the public Interest which are a good deal more
stringent than those applied to gas stations.
Every deposit and
every loan of a commercial bank must be received or made at its
banking office, just like a sale of gasoline by a gas station must
be made from pumps at its physical premises.
Both the bank and the
gas station serve people who are preponderantly located in the area
of the physical location of their places of business, respectively.
In the Standard Oil case the Supreme Court found that Standard Oil
sold gasoline in the seven States of Arizona, California, Idaho,
Nevada, Oregon, Utah and Washington; that it had entered into
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Federal Reserve Bank of St. Louis
.Itialve supply contracts with operators of 5*937* or approximately 16 per cent, of the gas stations in those seven states; and that
It sold gas at a yearly rate of about $57*000,000 to the stations
it had under such exclusive supply contracts*
This evidence, with-
out more, was held to justify the conclusion that the "effect1* of
Standard*s exclusive supply contracts was to substantially lessen
competition and to tend to create a monopoly.
No inquiry was made
to ascertain whether the seven states constituted a "trade area"
or had any special "economic or competitive significance".
No at-
tempt was made to determine the precise boundaries of competition
as between each gas station in the area, or even as between those
under exclusive supply contracts.
It was obvious on the face of
the facts there, as it is here, that the companies taken over
(there by exclusive supply contracts, here by buying their stocks)
were retail outlets largely servicing particular local areas.
It
was no more a matter of judicial inquiry there than it should be
here, as to whether a particular outlet obtained in San Diego, California, was in actual or potential competition with another obtained
in Reno, Nevada, or Portland, Oregon.
The crux of the matter, as
the Court found, was that the use of the practice prohibited by the
Clayton Act was directed toward obtaining "the maximum number of
strategically located outlets".
That this same objective has con-
tinually characterized respondents stock acquisitions is patent
from the record.
In that respect this case and the Standard Oil
case are exaet parallels, only here the percentage of controlled
outlets is much greater.
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It would be a strange anomaly indeed if
-1*3-
it were to be concluded that a prohibited "effect" contained in
identical language in two sections of a law having the same central
purpose required one kind of a test when one section was being applied and an entirely different test when the other was being applied.
Common sense as well as legal precedents require that iden-
tical language in the two sections be given identical interpretations .
Next, respondent attacks as "without probative value11 Governor
Evans1 finding that it now controls lj.1 per cent of all commercial
banking offices in the five-state area.
This finding, it is argued,
treats all commercial banking offices alike and fails to distinguish between small offices and large offices and overlooks the advantage which the public obtains by having convenient places at
which to secure banking services.
ale of Standard Oil is decisive.
Here again, however, the rationNo doubt the gas stations In-
volved in that case were of all sizes, so far as the number of pumps
and personnel is concerned, and no doubt, too, some were more strategically or conveniently located than others for serving the public.
But the Supreme Court did not stop to inquire into these re-
finements of outlet control; it found simply that there were only
a certain number of outlets in the seven states and that the Standard Oil Company had brought 16 per cent of them under its effective
control by doing what Section 3 of the Clayton Act forbids.
So
here. A banking office is a banking office; nothing in the license
to conduct that office requires that it be a big office or a little
office, that it employ at least but not more than a certain number
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Federal Reserve Bank of St. Louis
of employees, that it receive only so many deposits or make only
so many loans.
Of all the available commercial banking outlets in
the five states (and the statistical base is sufficiently broad to
average out all kinds and sizes of offices, in and out of the
Transamerica group) respondent has, largely by acquisition, brought
if.1 per cent of them under its effective control.
And these same considerations dispose of the remaining attacks
upon Governor Evans1 statistical findings, such as the claim that
deposits and loans of all kinds are improperly "lumped" together
in the figures showing the Transamerica percentage of commercial
bank deposits and loans to all such deposits and loans in the fivestate area.
Each of these totals is premised upon the broadest
kind of statistical base, which more than averages out the extremes
of high and low breakdowns.
Furthermore, they represent the his-
torical method used in all statistics showing size of commercial
banks in official as well as unofficial publications.
Taken in
conjunction with all of the other statistics which confirm the relative importance of the Transameriea group in the five-state area,
such as the comparison of the number of personnel employed by the
Transamerica group to total personnel of all commercial banks in
the area, the comparison of the number of deposit accounts by size
of account to all deposit accounts of such classification in the
area, the comparison of dollar value of deposit accounts by various
classifications to the dollar value of all accounts of such classifications in the area, etc., they expose the gigantic size of the
Transamerica group in a perfectly accurate and proper manner*
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PARTJEI
Part II of respondent's brief is devoted to the charge that
the hearings were conducted by Governor Evans in an arbitrary and
discriminatory manner.
The first part of this discussion consists
of general, though personal, comments as to his conduct of the proceeding*
The remainder consists of a discussion of alleged errors
made by him in various rulings on evidentiary questions.
The lat-
ter are supposed to demonstrate his unfairness and to show that, as
a result, respondent was denied a fair hearing.
First^ as to the general comments.
These include such obser-
vations as "Lacking completely in judicial experience, [Governor
Evans] was forced to conduct an extended and hotly contested hearing.
In those circumstances it was all too easy to abdicate in
favor of the theories expounded by the Solicitor in support of the
complaint"; and, nTo find the Hearing Officer's ruling on any evidentiary issue one needs only to look at the position urged by the
Solicitor"; and, "Invariably, instinctively, and towards the conclusion of the hearing, mechanically, the Hearing Officer turned to
the Solicitor for 'guidance1 on every issue".
These remarks are but a continuation of the public and personal attacks made upon Governor Evans at various times while the
hearings were in progress.
The trial had hardly commenced before
he was put on notice of the conflicting theories which counsel for
the parties entertained as to the proper measure of proof in a
Section 7 case.
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As we have seen, under our theory the issues are
-1*6-
very narrow and a minimum amount of proof is necessary to support
the Board1s case.
Under respondent's theory the issues are numer-
ous and complex, and require a veritable mountain of proof to sustain.
It was inevitable that, at an early point in the trial,
Governor Evans had to come to grips with these conflicting contentions*
His job was to decide which one was right and which one
was wrong and then to admit or reject evidence accordingly.
He did
what any other judge or hearing officer does in a similar situation —
he satisfied himself as to the right theory and thereafter
conducted the trial in accordance with that fundamental decision.
Unwilling to credit Governor Evans with an honest decision —
even
if believed to be erroneous -- officials of Transamerica and Bank
of America promptly reviled him publicly in a most shameful way —
a way, in fact, which would have brought prompt punishment from a
court, but which, unfortunately, administrative officers are powerless to do anything about.
Thus, on April 28, 19U9* A, P. Giannini
released to the press a statement made by Mm
at the Transamerica
annual stockholders meeting which commented upon the Board's Clayton
Act proceeding.
Among other statements therein contained was the
following:
M
The charges were rigged up, the Boards attorney is allowed the widest license of conduct, the rulings of the hearing officer (who is a member of the Board and shows a prejudice in favor of the Board) are virtually all in favor* of the
Board* s attorney^ The counsel for Transaiaerica is overruled,
his rights denied and his every attempt to bring clarity to
the issues is stopped.
"During the earlier sessions in Washington the hearing
officer stated that he would permit wide latitude to both sides
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in the admission of testimony* The pious aim was to admit
material for what it might be worth so that later it could
be sifted for factual value. In practice, however, this
privilege has been reserved almost exclusively to the Board's
own side of the case."
This same statement was also sent by A. P. Giannini to the
stockholders of the Citizens National Trust and Savings Bank of
Los Angeles.
The 19U9 Annual Stockholders Report of Transamerica (BX 3-v,
Po 13) states, inter alia, as follows:
"The Board^ solicitor and presiding member have exhibited a determination to ignore all facts except statistics
prepared under their supervision and in accordance with their
preconceived ideas." (Italics ours)
Similarly, the 19i|9 Stockholders Report of Bank of America
contains the following statement respecting the hearings:
"As to disregard for fair play, consistency and judicial
procedure: The Board's solicitor took a year and a half for
advance preparation of his case, but once the hearing started
both he and the presiding officer became curiously interested
in haste, haste which could serve no other evident purpose
than that of hampering the defense in its research, preparation and presentation of its case. More to be condemned, the
Board1s hearing officer has repeatedly ruled in favor of its
solicitor, under the influence of his inconsistent and fallacious arguments, and has as repeatedly and without compunction sided with the Board's solicitor when he has reversed
his own position and used equally false reasoning to gain exactly opposite rulings."
Of course these personal attacks on Governor Evans were not
new Transamerica techniques in this proceeding.
Some of the pres-
ent Board members will recall that when the complaint was first
issued respondent promptly moved to disqualify Governors Eccles
and Clayton on the ground of personal bias and prejudice.
It is
clear from the evidence that the real purpose of the motion was to
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-U8-
give widespread publicity to certain affidavits filed in the case
in support of the motion.
According to one of these affidavits,
signed by L« M. Giannini, Governor Clayton allegedly was biased
against Transamerica because he had failed to land a job with the
Bank of America*
At the time this affidavit was filed a Trans-
america press release was sent to all branch managers of Bank of
America for delivery "to the newspapers and radio stations for
which you are responsible".
Among other things, this press re-
lease contains the following
statement:
"L9 M. Giannini, President of Bank of America, in his affidavit presented correspondence and information to support the
contention that Clayton's animosity towards Transamerica developed as a result of the refusal of the Bank of America
president to provide a job and compensation which met with
Clayton"s evaluation of his Washington Texperience and contacts that I could turn to good advantage.1
"Giannini stated that one year after the Bank's refusal to
employ Clayton *A significant change took place in the attitude of the Board of Governors of the Federal Reserve System.1
This attitude resulted in unprecedented and discriminatory
acts leveled at Transamerica Corporation by the Board of Governors. The bank president's affidavit stated that f it is
significant that the change of attitude of the reserve board
from one of fair administration under the law to one of violent opposition beyond its legal authority occurred very
shortly after the conversations with Mr. Clayton in which I
made it clear to him that it was not possible for Bank of
America to give him the kind of employment to which he aspired. ' Giannini presented correspondence which he claimed
indicated * Clayton's bitterness has remained in the forefront of his mind' following the job turndown." (BX 3kS)
Of course the Board refused to disqualify Governor Clayton on any
such obviously contrived charges.
January 17, 19*49.)
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(See Board opinion filed herein
The press release referred to above also had this to say about
Governor Eccles:
"Conclusions by Sam H. Husbands from facts In his affidavit
are that "'while appearing to act in the public interest, Mr.
Eccles for six years has misused his power as a member
and former Chairman of the Board of Governors of the Federal Reserve System, to foster regulations and promote
legislation favorable to his family holding company and
discriminating against Transamerica, — legislation which
the Executive Council of the American Bankers Association
at its meeting in April 19l*8 characterized as "Punitive
Legislation"; that while carrying on such discriminatory
activities, he and his family, through the Eccles Investment Company, have had substantial stock interests in the
First Security Corporation of Utah; that this is a bank
holding company controlling banks with 38 banking offices
situated in Utah, Idaho and Wyoming, and as such is a
competitor of Transamerica Corporation in the ownership
of banks in the Twelfth Federal Reserve District.1"
And the same diatribe against Governor Eccles was later continued In a full page advertisement which Transamerica published in
various New York, Washington and California newspapers at or about
2the time the trial herein was scheduled to commence. (See RX 52-c.
177 Governor Eccles was not always regarded by the Gianninis as
their "persecutor". In 1938 the Gianninis sought his assistance
in connection with a controversy then raging between the Bank of
America and the Treasury Department. L. M. Giannini had several
talks with Governor Eccles in which he sought to have the Board
Intervene in the controversy. The Board did so and Governor
Eccles participated in subsequent negotiations which led to an
amicable settlement of the natter. Thereafter, he received a
letter (BX 3^) from L. M. Giannini, dated April 1, 191*0, which
stated in part as follows:
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Federal Reserve Bank of St. Louis
"Despite the unpleasant circumstances under which the
conferences in Washington were held, I enjoyed them because
they renewed again my confidence in some of the persons responsible for administering our important governmental activities. As a result of the conferences I feel that I
cane to know you and John McKee better and to appreciate
the breadth and soundness of your views and the fact that
no personalities entered into the formation of your opinions and the rendering of your judgments."
-SO-
This type of personal attack is not something which was Invented by the Gianninis just for use in this case.
use by them for a great many years.
It has been in
The record is clear that at
various times throughout their banking careers, whenever any of
their institutions became involved in a controversy with public officials, the cry of "persecution" was the first one raised by them,
apparently on the theory that by publicly attacking the official
they could divert attention from the real issues.
Any official who
disagreed with them has always been, as here, charged with acting
in bad faith.
Thus, as late as October 1950 while L. M. Giannini
was on the stand in this case, he calmly charged two banking commissioners of California who served in the early 1920*s with having
resisted the expansion of the Giannini banking group at that time
purely out of personal motives or as a result of "pressure" brought
by other banks in the area.
When, in 1938 > the Treasury Department
had its historic differences with the Gianninis over management and
expansion policies of the Bank of America, Secretary Morgenthau was
publicly branded as a "persecutor" of the Gianninis.
In a public
statement made at that time by L. M. Giannini he stated, among
other things, that:
"Being without power under the circumstances
to impose on the Bank his personal opinions and wishes, because of
their illegal character, Mr. Morgenthau fostered the proceedings of
the Securities and Exchange Commission against Transamerica Corporation." (RX 255, p. 3i|)
Even in this case the old charge against
Secretary Morgenthau was renewed.
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Thus, when Governor Eccles was
being cross examined in this case, respondents counsel asked the
following question (R. 77k):
"Prom your knowledge of events from 1938 to 19^1> or
19i4.0, anyway, would you say it was fair to say that Secretary
Morgenthau was engaged in a continuous campaign of persecution against Transamerica Corporation, the Bank of America,
and A. P. Giannini?
To which Governor Eccles replied:
"I don1t think he was engaged in a campaign of persecution. . .
W
I think the Federal Deposit Insurance Corporation and
the Treasury and the Comptrollers Office were very much concerned about the expansion of Transamerica and prior to the
getting of the new capital in the bank, I think they were
very much concerned about the condition of the bank, . • "
We make reference to all of these episodes in order that the
Board may clearly see that the present attack against Governor
Evans was as deliberately planned as all of the other legal moves
made on respondents behalf throughout this case.
What else could
explain the production of witness after witness, usually persons
whose appearance was likely to be the subject of press comment (such
as the Mayor of San Francisco or the former Treasurer of the Democratic Party), when respondent1s counsel knew, on the basis of repeated rulings already made in the case, that they would not be permitted to give the kind of testimony they were produced to supply?
Governor Evans1 conduct of the trial needs no defense.
And we
would be presuming if we tried to defend his integrity before this
Board.
Anyone who knows Governor Evans would know instinctively
that he is incapable of discharging any responsibility except in a
way he believes to be right.
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We will, therefore, confine our
remarks merely to saying that, whether his decisions were right or
wrong, they were all honestly made and none of them reflects any
"abdication" of responsibility on his part, or that he and counsel
for the Board had joined in working out any "preconceived ideas"
about evidence in the case.
A.
We turn now to a consideration of those arguments in
Part II of respondents brief which challenge various rulings made
by Governor Evans on evidentiary questions.
The first of these
contentions relates to evidence introduced in support of the Board's
case.
While not clearly delineated in the brief, this attack seems
to be divided into two main allegations:
(1) that the testimony of
certain employees of the Board and of the Federal Reserve Bank of
San Francisco relates to matters which are "confidential" and should
not have been disclosed in this hearing; and (2) that the substance
of their testimony is "untrustworthy".
First, as to the alleged "confidentiality" of their testimony.
This argument is launched in respondents brief by an extended discussion of alleged precedents, including the case of Bank of America
v. Douglas, 105 F. 2d 100 (D.C. Cir. 1939)> showing that examination
reports of banks traditionally have been regarded as of a confidential nature and their use frowned upon as evidence in a public proceeding.
By this maneuver respondent apparently attempts to suggest
that examination reports of banks were introduced in evidence here.
The short answer to such a contention is that it is not true; no
bank examination reports were offered in evidence at any time in
this case.
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Whether, if offered, they would be admissible in this
or any other proceeding before the Board — such as a Section 30
18/
case — is, therefore, not even remotely involved here.
Three of the witnesses whose testimony is under attack did
testify concerning facts they learned while engaged in various examinations of Transamerica Corporation.
We assume that it is this
testimony which respondent claims is "confidential" and should not
have been revealed.
If so, there are a number of answers to the
contention.
In the first place, banks traditionally have been placed in a
special class because of the nature of their activities.
Their
very existence depends upon the maintenance of public confidence.
The spreading of rumors by the premature publication of criticisms
of bank examiners contained in bank examination reports might very
easily cause a run on the bank.
Then, too, their relationships
with their customers are of a highly confidential character.
Reve-
lation of comments about those relationships contained in bank examination reports would strike at the heart of the bankfs ability
to perform its functions.
Consequently, bank examination reports,
as such, have been treated as confidential so far as the public
generally is concerned.
However, and without arguing whether the
doctrine of "confidentiality" would apply to such reports in a case
brought by the government charging the bank itself with violating
the law, it is obvious that Transamerica is not entitled to the
benefit of any such privilege.
It is not a bank and can lay no
18/ k& Stat. 193 (1933), 12 U.S.C. § 77 (19UO)
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legitimate claim for being treated as one.
It is just like any
other private business organization.
As stated, three Board witnesses testified as to facts learned
by them while participating in examinations of Transamerica.
Their
testimony largely consisted in reading into the record transcripts
of correspondence, documents and accounts contained in the official
files and records of Transamerica and its non-banking subsidiaries.
All of their work papers were made available to respondents counsel,
so that the specific dates and other identification respecting this
material could all be checked at the offices of Transamerica.
jot of that evidence was relevant to this proceeding.
Every
If the case
had been brought by the United States Attorney in the District Court
as provided in Section 15 of the Clayton Act, instead of before the
Board in this administrative proceeding pursuant to Section 11 of
the Act, all of this evidence could have been obtained by the simple
process of subpoena.
Even bank records would not be privileged
against disclosure under those circumstances.
v. Douglas, supra.
Cf, Bank of America
The Board lacks the subpoena power, presumably
because Congress was satisfied that the Board possesses ample power
to discharge its full responsibilities under the law through the
examination function.
Under such circumstances it is unrealistic
to suggest that the Board can obtain the information necessary to
enable it to decide whether the law is being violated, but cannot
put that information into a formal record before Itself simply because "examination" and not subpoena brought it to light.
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We submit
that the claim of alleged "confidentiality" is completely without
merit.
Even if the evidence gathered by Board examiners in the course
of authorized examinations of a holding company were to be treated
as having some "confidential" aspects, however, it must be obvious
that it is not "confidential" as between the company and the Board.
The very purpose of an examination is to ascertain facts for use by
the Board in performing its statutory obligations.
Therefore, so
long as examiners report only to the Board facts found by them when
making an examination, no one could seriously charge that the "confidentiality" of such an examination was being violated.
is all this hearing set out to do.
And that
If the hearing had been con-
ducted in private, as provided by the Board1s Rules of Procedure
and as was originally ordered, no one but the Board would have been
told anything that the examiners learned.
But respondents counsel
(who is also vice president and general counsel of Bank of America)
insisted that the hearings be opened to the public.
If any element
of "confidentiality" of the kind now insisted upon ever did exist,
any right to assert the claim was surely waived by respondent's motion.
Certainly under these changed conditions, brought about at
respondents own request, the Board is not denied the right to hear
the same evidence from its examiners that it could have received
without question if the hearings had been conducted privately.
But even this is not the sum total of our answer to the "confidentiality" argument.
At various times throughout the trial,
when respondent's counsel objected on this ground to the testimony
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of Board examiners, counsel for the Board offered to close the
trial to the public and put on such evidence as if in a private
hearing.
Of course this was never agreed to, because such a pro-
cedure would have denied counsel their present argument.
Now let us examine the claim that the evidence given by the
employees of the Board and of the Federal Reserve Bank is "untrustworthy".
This requires a brief analysis of the testimony of each,
as well as of the facts which give probative force to their evidence.
The first two to testify were Messrs. Horbett and Thompson
of the Board's staff.
Through them was introduced the basic sta-
tistics relative to bank acquisitions and showing the mounting percentage of respondent's domination of commercial banking in the
five-state area.
Thompson testified first.
While he produced sev-
eral exhibits which were admitted into evidence, Exhibits 8 and 9
are the only ones we need to consider now because all of the remainder were made by him from facts presented in Exhibits 8 and 9«
Exhibit 8 is a volume of 680 pages.
Each page is headed at the top
by the name of a particular banking office acquired by Transamerica
or its predecessors since the formation of Bank of Italy by A. P.
Giannini in 190i|.
Only those companies and banks were regarded as
"predecessors11 of Transamerica which were identified as such by
James A. Bacigalupi, a former president of Transamerica, in his
testimony before the Banking and Currency Committee of the House
of Representatives in 1930.
Also included on each page of Exhib-
it 8 is a short statement showing every change which thereafter
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took place in connection with that office, such as its conversion
into a branch of a Transamerica group bank, merger, closing, etc.
Exhibit 9 is a volume consisting of 230 pages.
Each page
identifies a branch established de novo by any of the Transamerica
group banks since the formation of Bank of Italy in 190lu
It also
contains a short statement showing any subsequent changes of the
kind mentioned above in connection with Exhibit 8.
The "trustworthiness" of these exhibits depends, of course,
upon whether they were carefully prepared and whether the material
used in their preparation was taken from reliable sources.
To sat-
isfy itself on these points the Board is respectfully referred to
Board Exhibits 269, 270 and 2?2, which show exactly where verification of every fact contained in those exhibits can be found.
Ex-
amination of those exhibits will show that almost without exception
the data was obtained from official publications of bank supervisory authorities, such as the Comptroller of the Currency or Superintendents of Banking in the five-state area, or from official statistics maintained by the Federal Reserve Bank of San Francisco in
the regular course of its duties, or from official publications or
communications from the Transamerica companies and banks themselves.
It would serve no useful purpose to analyze each of these sources
again in this brief.
They are all set out in the explanatory exhib-
its listed above and the Board can quickly determine the authoritative nature of these sources by reference to those exhibits.
Not only were Exhibits 8 and 9 carefully prepared from authoritative sources, but they were also subjected to as complete a
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checking as any evidence ever received in a trial.
Thompson was
cross examined on two occasions, once in Washington when he Introduced the exhibits and again several months later in San Francisco
after respondent's counsel had ample opportunity to check them
against the records of Transamerica.
On each occasion Thompson had
at his side all of the source material referred to in his explanatory exhibits and was prepared, if necessary, to substantiate every
line of the exhibits theretofore introduced by him.
Not only did
respondent's counsel fail to contradict any of the facts contained
in Exhibits 8 and 9 but they have actually used material contained
in them to prepare some exhibits of their own.
(See, for example*
Respondent's Exhibits 73, 7U, 83, 99 and 301.) In the light of these
and the other facts more fully contained in the record on this point
we submit that the charge of wuntrustworthlnessw against the Thompson
exhibits is clearly without substance.
Now let us examine the Horbett exhibits.
He also introduced a
number of statistical exhibits which are basic to the Board's case.
The principal ones are Board Exhibits 13 through 20, and Exhibit
257*
As was this case when we considered the Thompson exhibits, we
need now refer to only three of these exhibits, namely, Exhibits 13,
16 and 257, because these exhibits contain the basic figures which
were used in the preparation of the remainder of this group of exhibits.
Exhibit 13 shows by selected years the total office?, loans
and deposits .of all banks by states in the five-state area; the
total offices, loans and deposits of the Transamerica banking group
In each of these states; and the percentage ratio of the Transamerica
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group bank offices, deposits and loans to all offices, deposits and
loans In those states.
Exhibit 16 shows similar figures by coun-
ties Instead of by states, and. Exhibit 25? shows similar information by individual communities, except that Exhibits 16 and 25? do
not include loan data.
As to the "trustworthiness" of the Horbett exhibits*
In the
first place, for over twenty-five years Hcrbett has been in direct
charge of that portion of the Board1s work which consists in keeping accurate statistics of the banking structure of the entire
United States*
He took the names supplied by Thompson in Exhibits
8 and 9 as correctly representing the members of the Transainerica
banking group and then compiled figures showing comparative percentages of the kind mentioned above.
He, too, introduced in evidence
the precise source of all of the material used by him in their preparation*
For that information we respectfully refer the Board to
Board Exhibits l\%, i|6, 25U* 255 and 256.
Examination of that mate-
rial will disclose that every figure used by him in the preparation
of these exhibits was taken from published official sources or other
official statistical data kept in the regular course of the Board's
duties.
And all of this material is regularly used by Horbett and
his subordinates in preparing the banking statistics which are published monthly in the- Federal Reserve Bulletin or in other official
Federal Reserve publications.
Furthermore, Horbett, like Thompson, was twice subjected to
extensive cross examination.
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He, too, was prepared on each occasion
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to vindicate every figure contained in the exhibits prepared by him*
In addition, an offer was made by counsel for the Board to permit
respondents representatives to check the information in the Horbett
exhibits while the case was in recess.
This offer was accepted and
respondent's representatives did examine the source material in
Horbett1s office.
As occurred in connection with the Thompson exhibits, material
contained in the Horbett exhibits was used by respondents counsel
in preparing some of their exhibits. (See Respondents Exhibits 85,
99, 123, 12ij, 21*7, 2U8.) In addition, as the Board will recall, respondent requested and the Board authorized Horbett to prepare comparable exhibits in connection with a number of other banks located
in the five-state area.
And these, too, were later used by respond-
ent's counsel as source material for the preparation of some of
their exhibits.
In the light of all of these facts it seems a lit-
tle late in the day for respondent to challenge the validity of
these exhibits.
Horbett also introduced Board Exhibits 275, 328, 329, 33C, 331,
332-a, 332-b, 333 and 3^0.
The sources of each of these exhibits
are contained on the face of the exhibits except Exhibits 332-a,
332-b and 333, in which cases Horbett identified the sources in his
testimony.
Reference to these explanations will show that they are
the same general sources used by him in the preparation of the exhibits referred to above.
Their probative value is, therefore, be-
yond dispute.
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The next employee witness to testify was James C, Smith of the
Board's staff. Examination of his testimony will disclose that he
testified principally on the following subjects:
Particular bank
acquisitions; the use of agents, inside and outside the Transamerica
organization, to acquire banks; the methods of financing these
agents in such acquisitions; the use in particular cases of Bank of
America official personnel in perfecting arrangements to buy banks;
the fact of payments by way of bonuses or other special inducements
to secure controlling stock interests in particular cases; and the
making of advances in particular cases to enable directors to purchase qualifying shares and the taking of options on directors1
shares by Transamerica.
In giving testimony on these subjects Smith used working papers
made by him during the 19^3 examination of Transamerica, in which he
participated.
He read into the record the whole or part of various
letters, ledger accounts, stock purchase agreements, option agreements, and other memoranda relevant to the subjects outlined above,
which he had transcribed from the official records and accounts in
respondent's offices at the time of the 19U3 examination. Each one
of these letters, accounts, agreements, etc., was specifically identified by him by name, date and place, and all his work papers were
turned over to respondent's counsel for checking against the originals.
No contradiction of any of this evidence was ever offered on
respondent's behalf.
The next employee witness was Carl Reinholdt who is employed
by the San Francisco Reserve Bank in its examination department.
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Reinholdt was in direct charge of the 19U3 and 19^6 examinations
of Transemerica.
His testimony closely paralleled that of Smith.
He gave evidence upon most of the same subjects as Smith, except
that such evidence touched upon other bank acquisitions and other
transactions relevant to this proceeding.
In addition, he testi-
fied on other subjects, such as a conversation with one of respondent's officers in which the latter named A. P. Giannini as the one
who made the determination respecting bank acquisitions by Transamerica; the consideration given and specific action taken by the
Transamerica board of directors on matters directly relevant to
this case; the intimate relationships existing between various nonbanking subsidiaries of Transamerica and Bank of America; and
others.
As can be readily verified, Reinholdt, like Smith, read
into the record all or portions of specific agreements, correspondence, ledger accounts, minutes and other memoranda which were transcribed by him, or other examiners acting under his direction, from
the official books and records of Transamerica and its subsidiaries.
Counsel for the Board offered to produce all of the examiners whose
transcriptions were thus identified by Reinholdt as having been
made under his direction.
No request was ever made for permission
to cross examine these men and no one testified on respondents behalf that the records and other data identified by Reinholdt were
not a part of the official files of Transamerica, or its non-banking
subsidiaries.
The next employee witness named in respondent's brief was E. H.
Galvin, now chief examiner of the San Francisco Reserve Bank.
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Galvln1s testimony was limited solely to showing an arrangement in
effect between Bank of America and three Transamerica non-banking
subsidiaries, Inter-America Corporation, Pacific National Fire Insurance Company, and Premier Insurance Company.
This arrangement
related to the insurance of automobiles, the purchases of which
were financed by Bank of America, and under its terms Bank of America virtually guaranteed the insurance companies against loss on
such coverage.
In his testimony Galvin related a conversation had
between himself and an official of Inter-America Corporation (which
acted as insurance broker in the deals) who stated the terms of the
payment formula in effect between the parties.
He also read into
the record certain payments made pursuant to the formula, the latter having been transcribed by him from the journal entries which
he observed in the official records of Inter-America Corporation
during the 19i|3 examination.
He gave similar data for the period
19U3 to 19U& but, inasmuch as he did not take part in the 19U6 examination, these figures were taken from the work papers of another
examiner who participated in that examination.
However, counsel
for the Board offered to produce the other examiner if respondent's
counsel wished to cross examine him.
No such request was made and
neither the officer of Inter-America Corporation from whom Galvin
obtained part of his information nor any other official of these
companies appeared to refute any evidence given by him.
The final witness in this group was W. F. Volberg, at the time
vice president in charge of examinations at the San Francisco Reserve Bank.
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Volberg was called principally for the purpose of
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identifying three letters written to him by officials of Transamerica, showing the acquisition by that corporation of three banks
after these proceedings had been started, and to state for the record the approximate loans and deposits of those banks at the time
of such acquisitions.
Upon this evidence counsel for the Board se-
cured an amendment to the complaint herein to include these additional banks.
Volberg also produced and identified a report of ex-
amination of Bancitaly Corporation, a Transamerica predecessor,
conducted in 1923 by a man long since retired from the Reserve Bank.
Excerpts from this report were read into the record, but the material so used was designed only to be integrated with other matter
theretofore introduced from the Board's official files showing the
Board1s concern even in those early years over the Giannini bank
expansion program.
Aside from our inability to produce the man who
observed those records in the offices of Bancitaly Corporation in
1923, the guarantees of trustworthiness are the same as those referred to in the case of Messrs. Smith, Reinholdt and Galvin.
As
the legal successor to Bancitaly Corporation respondent presumably
obtained all of its records.
No one testified as to whether it did
or did not, and no one controverted the facts recited in the report.
However, if this part of Volberg1s testimony is considered lacking
in probative value, we have no objection to its being disregarded
by the Board.
It has no particular significance one way or the
other so far as the basic issues here involved are concerned.
Finally, respondent1s counsel attack as untrustworthy the socalled "reputation" testimony, that is, the testimony given by all
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of th?
'-^pendent bankers called in support of the .boards case,
that T
..-america and Bank cf America have the reputation among
banker
of wanting to acquire e^ery independent bank they can get.
This testimony, while not vital to the Board5 s case, is nevertheless quite revealing and can be accorded its proper weight by an
expert body such as the Board,
Taken in conjunction with other evi-
dence showing the methods pursued by respondent in acquiring banks,
the very fact of this "reputation11 among bankers shows, as no statistics can show, the fear which permeates the entire independent
banking structure of the area that the day may not be far distant
when all remaining independent banks there will have become but additional units in the Transamerica network of centrally controlled
institutions.
Furthermore, such a reputation is also a deterrent
to the organization of new independent banks.
We submit that the
testimony on this point is helpful, but not necessary, in determining the issues on this record.
B.
The next section of respondent's brief attacks rulings
made by Governor Evans on the scope of cross examination of certain
Board witnesses.
The first witness mentioned in this connection is
Reinholdt, the nature of whose direct testimony is referred to
above.
Like practically all of the balance of respondents brief
the arguments respecting alleged errors during the Reinholdt cross
examination are in the most general terms.
These seem to be that,
during such cross examination, Governor Evans applied a test of
"confidentiality" against respondent's counsel which he did not
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apply on direct examination against counsel for the Board.
course such a charge is absolutely without foundation.
Of
The only
completely satisfactory way for the Board to satisfy itself that
such is the fact is to examine the Reinholdt testimony from beginning to end and to have before it all of the material which was before Governor Evans when the contested rulings were made by him.
We assume that the Board will want to do just that.
This will en-
tail the necessity of the Board opening the record to have brought
before it all of the papers hereinafter mentioned which were marked
for identification by respondent, but which never became exhibits
in the case.
This material is all available and it is the under-
standing of counsel for the Board that respondent's counsel have
photostatic copies thereof.
Upon such an examination of the entire
record the Board will find the truth to come out something like
this:
On direct examination Reinholdt, with only a few unimportant
exceptions, read into the record excerpts or transcripts of letters,
minutes, agreements, etc., identified by him in the manner hereinbefore stated, all of which were directly relevant to one or another
of the issues in the case.
All of this material was transcribed
from the originals; therefore none of it was copied from bank examination reports.
When cross examination commenced, respondent's counsel obtained from Reinholdt numerous papers which had been accumulated by
him during the course of his various activities as examiner in
charge of the Transamerica examination but which had not been used
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by him in giving direct testimony.
After obtaining these papers
from Esinholdt, respondent's counsel had them marked for identification, RX 17 to 33, inclusive*
As is obvious from an examination
of this material^ some of it consists of excerpts made by Reinholdt
from bank examination reports, ostensibly for use by him in preparing his own report of examination of Transamerica to the Board.
As
stated, however, none of this material had been put in evidence by
him in any way on his direct testimony.
Indeed, a good portion of
these papers related to institutions about which Reinholdt had not
even given any testimony on direct examination.
After keeping these papers in their possession for some time
respondent's counsel renewed their cross examination of Reinholdt,
In doing so they attempted to have him testify as to certain of the
information contained in these papers which had been abstracted by
him from confidential sections of bank examination reports.
This
was objected to on the ground that the questions had no relation
whatever to any matters brought out on direct examination and that,
in addition, the information being sought would require disclosure
of information contained in confidential sections of bank examination reports.
(Reinholdt had testified that he had no independent
knowledge as to this information.)
At this point we would respect-
fully request the Board to consider the arguments that took place
between counsel at pages 3596 to 3609 of tne record and the considered opinion of Governor Evans commencing on page 3610 thereof.
This will fully inform the Board of the fundamental position of both
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counsel on this entire subject, and Governor Evans1 ruling will
demonstrate how completely without substance is respondents contention that there was any "dual standard" of confidentiality applied by him in this case.
Another charge made in this section of respondent's brief is
that Governor Evans unfairly limited respondent's counsel from developing the alleged bias and prejudice of certain Board witnesses.
Of cours© the extent to which cross examination on such a matter
aay be appropriately carried is lodged in the sound discretion of
the trial offisarc
Wfesc It
to examine the entire record made
i;*; .::;o^.jo,scti^n tfith trs? :'-;ft>ss examination of the witnesses mentioned,
the Board will find that Governor Evans leaned over backwards to
allow the widest latitude in such cross examination.
And it must
be remembered, as stated earlier herein, that those in charge of
Transameriss. always .<•.-
:
to disagree with tb^-;-,,
O^;,^?- ^,-':.?^.lnation is this
> l&s s.7i;.rs9 of attacking anyone who dares
was no ex-
septioa to this habit *
The purely legal answ&r to respondent's contentions may be
shortly stated*
As to Governor Eccles.
Respondent's counsel sought
to establish his alleged bias and prejudice by cross examining him
concerning the introduction la Congress of bank holding company legislation sponsored by the Board.
r^santing
The Board's official action, rep-
combined offlolsl views of all the members thereof,
:;:: v).erdly be used as a basis for charging individual bias and prejudice.
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As to Partridge.
Counsel were permitted to develop that
Partridge had been discharged by Bank of America.
They were not
permitted to develop the alleged reason for that discharge.
As is
apparent from the record, it was obvious that the only purpose of
attempting to develop the latter information was to humiliate and
embarrass the witness.
As to the banker witnesses.
On cross examination respondents
couns01 was permitted to develop that they were members of one or
another of the independent bankers associations on the West Coast.
Counsel was not permitted to ask questions as to the prerequisites
of membership or purposes of those organizations.
Such a line of
inquiry is obviously irrelevant to the case and could not possibly
establish any bias or prejudice on the part of the individual witnesses.
Moreover, it was obviously aimed at focusing further pub-
lic attention upon the charges made in the Transamerica paid advertisements to which reference has heretofore been made.
C.
The next section of respondent's brief charges that Gover-
nor Evans discriminated against respondent by rulings which are alleged to have "prevented Transaraerica1 s presentation of its defense11.
A number of rulings made while respondent was putting in its case
are compared to earlier ones made while the Board1s case was being
presented and these are arranged in such a fashion in respondents
brlaf as to suggest "inconsistency".
By this method counsel at-
tempt to give substance to their charge that Governor Evans was applying one rule in favor of Board counsel and another when dealing
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with counsel for respondent.
As we shall see, however, none of the
rulings referred to in respondent's brief involved any legal inconsistencies whatsoever*
The first comparison is between a ruling made by Governor
Evans while L. M. Giannini was on the stand and one made by him
more than a year earlier when Roy Edwards, a banker witness for the
Board, was testifying.
proper perspective.
First let us put these rulings in their
On direct examination L, M. Giannini had stated
that he and his father had over the years been offered some 1? banks
having approximately 60 to 70 banking offices and aggregate deposits
at the time of the alleged offers of seven or eight hundred million
dollars, but that they had declined to acquire these banks because,
as he said, "they did not fit into our picture" (R. 10,536-10,538).
He supplied a list naming these banks.
When cross examination was
undertaken, counsel for the Board called to Mr. Giannini1s attention the fact that a number of the principal officers of these banks
had wired counsel for the Board that such banks had never been offered to the Gianninis, and we served notice that it was our intention to produce those officers at the appropriate time to so testify.
On redirect examination counsel attempted to give some sub-
stance to the Giannini testimony by producing an affidavit of a
former official of the Bank of America in San Diego stating that a
Kr. Russell Jones had celled upon him in 1933 and 19314 to offer for
sale the shares of the Security Trust and Savings Bank of San Diego.
Mr. Jones was not identified and nothing appears in the affidavit
which would enable counsel for the Board to even find Mr, Jones to
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ascertain what connection, if any, he had with the subject institution and what right he had to offer the bank for sale, if he ever
did do so.
This affidavit and a letter from A. P. Giannini to the
same Bank of America official referring to some unnamed institution
were therefore excluded by Governor Evans as without probative value.
Whether the Gianninis thought they had an opportunity to buy
i
this bank is not, as contended by respondent's counsel, important
to a decision in this case.
The reason why counsel for the Board
later produced evidence from the man qualified to give evidence as
to the Security Trust and Savings Bank, as well as representatives
from the other banks listed by Giannini, was to show that the
Giannini testimony generally was lacking in credibility. By the
time Governor Evans made the ruling complained of, L. M. Giannini,
by his attitude and conduct on the witness stand, particularly during cross examination, had already cast serious doubts upon the reliability of much of his testimony given on direct examination.
Under these circumstances Governor Evans1 refusal to receive such
self-serving and hearsay statements and as to which no possible
safeguards of cross examination were present was entirely justified.
Now let us analyze the Edwards ruling.
Edwards is the cashier
and a stockholder of the First National Bank of Orange, California.
His father is the president and principal stockholder of that bank.
At the start of his direct examination Edwards was permitted to
testify that his father had told him that the Gianninis had approached his father a number of times about buying the bank.
This
answer was permitted over objection by respondents counsel on the
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express understanding that it would be connected up with testimony
which would adequately safeguard the rights of cross examination,
Edwards then testified that L. M. Giannini, accompanied by two officers of the Bank of America, had called upon his father and himself in 19i|3 and then and there confirmed the fact that the
Gianninis wanted to buy the bank.
In that meeting L. M* Giannini
even offered Edwards a position with the Bank of America when and
if the institution was taken over*
place or it did not.
How that occurrence either took
Respondents counsel had a completely ade-
quate basis for cross examination because all they had to do was
ask L, M, Giannini whether it happened.
The best proof of the cred-
ibility of Edwards1 statement is that when L. M. Giannini took the
stand and had the opportunity to deny it under oath he failed to do
so.
The second comparison is between another ruling made while L,
M. Giannini was on the stand and an earlier one when Herbert Ivey,
president of the Citizens National Trust and Savings Bank of
Los Angeles, was testifying.
spective.
Again let us put the rulings in per-
L. M. Giannini had made quite a point on direct examina-
tion that his father1s and his own policy had always been to prevent "insiders", as he called them, from deriving any personal profits from the operations of the various companies or banks with which
they were identified.
proved the contrary.
On cross examination we developed facts that
We showed that, following the proxy battle in
1932 when the Gianninis were returned to control of Transamerica
and its subsidiaries, a company was organized by Transamerica called
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Associated American Distributors, the sole activity of which after
1933 was to pay commissions to brokers and salesmen all over the
country to get people to buy Transamerica stock on the stock exchanges —
not new stock or stock which Associated had in its port-
folio, but stock that was already owned by existing Transamerica
shareholders.
The likelihood that such operations, if extensively
carried on, would tend to bring about an increase in the market
price of Transamerica stock is, of course, obvious.
Contemporane-
ously with these activities of Associated, all of the expenses of
which were being paid by Transamerica, A. P. Giannini organized a
pool to trade in Transamerica stock*
The pool was composed of in-
dividual contributions from himself and others, including L. M.
Giannini.
It was during a portion of the cross examination of L.
M. Giannini about the activities of Associated that the ruling complained about was made.
He had previously, in general terms, stated
that the reason Associated had been formed was that lists of stockholders of Transamerica had been obtained by unscrupulous persons
during the proxy battle of 1932 and that these lists were being used
by them in attempts to induce Transamerica stockholders to dispose
of their shares and to invest in others.
We asked him to be spe-
cific and to give evidence about which he had personal knowledge on
this subject.
He replied by starting to relate conversations with
other persons which took place, as he said, "in later years".
We
interrupted to request the Hearing Officer to require Giannini to
limit his answers to our question to matters within his personal
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knowledge.
As the answer was thus clearly unresponsive to our
I2/
question, it was ordered stricken.
However, as appears from his
later testimony, all of this subject was gone into at length
(R. 11,182-11,198).
Now compare this ruling with that made in connection with the
Ivey testimony.
Ivey was called to give evidence concerning the
attempts made by Transamerica over the years to acquire his institution.
This is the bank which Transamerica attempted to acquire
over the objection of the management by publishing newspaper advertisements throughout the Los Angeles District requesting them to
trade their Citizens stock for stock of the National City Bank of
New York owned by Transamerica.
He testified that the first "au-
thentic11 attempt to buy his bank came in the fall of 19U2 when
Francis Baer, an official of Bank of America, came to him to talk
about acquiring the Citizens Bank.
Purely as a preliminary ques-
tion he was asked whether prior to that visit there had been any
instances which had led him to believe that Transamerica was seeking to obtain the stock of the bank.
In reply to this he stated,
over objection, that (R. l88l):
"In 1936, rumors were pretty rife that Transamerica was going
to endeavor to take us over, and it was brought to the attention of the Board. The Board made an authorization for its
officers to refute it and George W. Walker, the then Chairman
of the Board, and myself addressed a letter to this man Byrne
telling him that our bank was not for sale, had never been
for sale, and requesting that he desist from calling on our
stockholders and directors, trying to work up deals."
197 Incidentally, this testimony had nothing whatever to do with
the subject of "raids on Bank of Italy stock" or the "formation of Transamerica Corporation" as stated in respondents
brief.
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Quite apart from the relative unimportance of this background information, it is obvious from all of the testimony subsequently
given in connection with Transamerica1a efforts to purchase the
stock of the Citizens Bank that the rumors testified to by Ivey
had a foundation in fact.
This is also corroborated by the fact
that L. M. Giannini identified a Mr. Byrnes as having been the
"broker" in the acquisition of the Seaboard National Bank, Los
Angeles, in 1936 (R. 11,396)0
Hence, like the situation in con-
nection with the Edwards testimony above referred to, the hearsay
statements were corroborated by subsequent events unchallenged in
the record.
Next, respondents brief compares a ruling made during the
testimony of Carl Wente, an official of the Bank of America, to the
testimony given by Ivey relating to the Transamerica attempts to
acquire the Citizens Bank.
On direct examination Wente started to
tell about conversations and correspondence between himself and
certain directors of the Citizens Bank to establish that they had
offered him a job at Citizens before Transamerica obtained any
stock of that institution.
the ground of hearsay.
This evidence was properly excluded on
But even if it had not been hearsay, it
still would not have been admissible because it was not relevant
to any issue in the case.
Transamerica insists that one of the
reasons it tried to acquire Citizens is because certain directors
of that institution, who are alleged to have been dissatisfied with
its management, Importuned it to do so.
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The Wente testimony was
offered as indicative of the fact that the Citizens directors were
dissatisfied with the Citizens management.
The answer to this, of
course, is that, even if there were dissatisfied directors and
even if they did ask respondent to buy the bank, that fact would
not excuse respondent for doing so in violation of the Clayton Act.
No specific ruling is referred to in citing the Ivey testimony
Counsel simply refer to the fact that wlvey testified extensively
as to conversations with total outsiders which purportedly bore
upon Transamerica1 s purpose in acquiring stock in Citizens*1, citing
the record reference as wTr. 1882 et seq.n
In the first place,
Ivey's testimony had nothing to do with the purpose of the Transamerica attempts to buy the Citizens Bank.
His testimony related
only to the fact of the Transamerica attempts to purchase the bank.
Moreover, the conversations to which he testified were not with
"total outsiders", but only with official representatives of Transamerica, which, of course, were not objectionable on any grounds.
The next comparison is between rulings made by Governor Evans
in allowing counsel for the Board to introduce certain newspaper
I
clippings into the record and his refusal to allow respondents
counsel to put in others.
To begin with we must, of course, con-
cede that all newspaper clippings offered by either side were subject to the technical objection of hearsay.
We stated at the time
that we did not expect to rely upon them as proof of any of the
basic issues in the case.
Nor have we done so.
subject is of little significance now.
However, there is ample
justification for Governor Evans1 rulings.
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Hence, the entire
As the Board will find
when it comes to examine the record, there is other competent corroborative evidence concerning the matters referred to in each of
the six clippings put in bj counsel for the Board and mentioned in
respondent's exceptions.
The very fact that it was common practice
for Transamerica and Bank of America to issue press releases would
support the conclusion, if necessary, that most of these newspaper
articles were put out as official utterances of those institutions.
This is in sharp contrast to the attempt by Mr. Stewart to introduce a collection of wapproximately 100 editorials, and other stories, which were published at or about the time of Mr. A» P.
Giannini's death" (R. 63014.}.
Surely such an omnibus and random se-
lection of newspaper clippings, written about A. P. Giannini at the
time of his death, on the face of it could have no relevance to any
of the issues in this case.
We objected on the ground of their ir-
relevance and they were properly excluded on that ground.
Hext, comparison is drawn between certain rulings made during
the testimony of the economist witnesses for the Board and for respondent, respectively.
Respondent^ brief calls attention to the
fact that when Dr, Goldenweiser was on the stand, Governor Evans
permitted him to state that monopoly control of the check payment
function in any substantial area would give to the monopolist a
"very big leverage11 in the control of all credit in the area, whereas when respondent's economists testified, they were not permitted
to state that if a monopolist raised its charges for the checking
account service, the public would resort to substitutes.
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Both
rulings are easily justified.
Dr. Goldenweiser was testifying as
to the power which would come to a monopolist on the basis of conditions now known to exist.
In other words, the checking account
service is an Indispensable element today in the business life of
the nation and its availability from competitive sources is, therefore, essential.
a monopolist.
Control of it obviously would give great power to
On the other hand, the opinions of respondent's econ-
omists, if expressed, would have been predicated upon conditions
which do not exist today, namely, the possibility that some substitute could be found to take the place of the checking account service.
The Clayton Act is designed to protect against the destruc-
tion of competition in commerce in its present form; it is not designed to force people to use substitutes.
Furthermore, as all of
respondent's economists testified, there is no satisfactory substitute for the checking account service rendered by the local commercial bank.
Next, respondent compares rulings by Governor Evans permitting
Board economists to testify concerning the harm to the public which
could result from monopolistic control of commercial banks in any
substantial geographical area with those prohibiting customers of
Bank of America and other Transamerica controlled institutions from
testifying that they had not been victimized in any way by these
institutions.
..
Time and again in this brief we have called atten-
tion to the fact that proof of predatory action is not a necessary
element of proof in a Section 7 case.
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As we have seen, only
recently Congress itself has stated that it is not necessary nto
prove that the acquiring firm had engaged in actions which are considered to be unethical or predatory1*.
The theory of a Section 7
case is not that an acquiring firm has already attained monopoly
power, but rather that it is tending in that direction.
It is un-
realistic to suppose that a company which has not yet attained monopoly power would attempt to use that power.
It is important,
however, to know that, as testified by Board economists, if such
power is attained, it has the potentiality of great and destructive
harm*
Next, respondent compares certain rulings respecting the proxy
machinery of Bank of America,
Counsel for the Board was allowed to
show, as one of the elements of proof on the issue of control of
Bank of America by Transamerica, various facts about the proxy machinery of Bank of America, such as how many shares were voted by
proxy each year, who the members of the proxy committee were, and
the like.
While putting in their case respondents counsel were
not permitted to put in evidence the opinion of a partner of a New
York company, which has conducted proxy campaigns in a great number
of contests over control of the managements of corporations, to the
effect that Transamerica1s present stock ownership in the Bank
would not necessarily be decisive if a proxy contest were to take
place.
The justification for both of these rulings should be ap-
parent without argument.
The question whether or not Transamerica
now has the power to control Bank of America is a totally different
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one from whether, at some future time, it may lose such power.
Our
evidence demonstrated, and Governor Evans found, that Transamerlca
does possess the power to control Bank of America at the present
time.
The proxy machinery of the Bank has been, and is now being,
effectively used in preserving that power, a conclusion amply supported by the cases.
In addition, a whole host of other factors of
present or past significance, all of which were also introduced in
evidence and most of which are contained in Governor Evans1 recommended decision, contribute to that conclusion.
An opinion as to
what might happen at some indeterminate time in the future, under
circumstances which no one can now reasonably foresee, could contribute nothing to a determination of the question whether Transamerica now possesses the power to control Bank of America.
Next, it is contended that Governor Evans unfairly discriminated against respondent by allowing Dr. Goldenweiser to testify to
a "legal conclusion11 in answer to a hypothetical question put to
him by counsel for the Board, while respondents witnesses had been
prevented from doing the same thing.
It is true that Governor
Evans did sustain a number of objections to the testimony of the
economists called by respondent on the ground that they called for
legal conclusions.
But it is also true that he overruled the same
objection on other occasions and permitted them to testify to such
conclusions.
Furthermore, virtually all of the evidence given by
the economists called by respondent, such as the proper tests for
determining whether a tendency to monopoly has been shown, the
elements that make up "market occupancy", and the like, was designec
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to show that respondent is not tending to a monopoly which is, as
counsel say of Dr. Goldenweiser*s opinion, "the answer to the entire proceeding11.
And, as the record also shows, a great number of
hypothetical questions, all calling for answers not describable
otherwise than as legal conclusions, were put to and answered by
respondents witnesses.
When the propriety of the single hypothet-
ical question put to Dr. Goldenweiser was being argued, counsel for
the Board pointed out that it was asked only to contradict all of
the conclusions of the economists who testified for respondent.
we are willing now that it be so construed by the Board.
And
Under the
circumstances it is clear that the examples cited in respondent's
brief do not support a contention of unfair treatment.
Next, respondent's brief compares the admission of testimony
by banker witnesses called by the Board as to the reputation of
Transamerica and Bank of America for acquiring all of the banks they
can get, with the exclusion of evidence as to the reputation of Bank
of America for competing with other banks.
It is obvious that the
justification for both rulings is simply that as to the former the
evidence is relevant, but not necessary, while as to the latter, it
is not even relevant.
Next, respondent contends that Governor Evans refused to consider rebuttal findings submitted by its counsel.
This is not true.
The following statement contained in Governor Evans1 rulings upon
the proposed findings submitted by both sides contains the following statement:
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Permission was granted counsel for each side to file a
reply memorandum to the findings proposed by opposing counsel*
It was not intended to grant leave, nor was leave granted, to
file further proposed findings in addition to those originally
filed on behalf of each party, Jn ruling upon -the findings
proposed and arriving at -the findings made, consideration has
been given to the reply memorandum filed by counsel for the
Boardj and to the so-called 'Proposed Rebuttal Findings and
Conclusions ' submitted by counsel for respondent, the latter
document having been considered as being the reply memorandum
for which leave to file was granted." (Italics ours)
D.
This brings us to the final section of Part II of respond-
ent's brief.
In this section counsel refer to the rulings of Gov-
ernor Evans which excluded testimony from a great number of persons,
including officials and customers of the Transamerica controlled
banks, other bankers, the Mayor of San Francisco, and others, to
the effect that there is still active competition in the five-state
area among commercial banks.
the fact.
We have always conceded such to be
The reason we objected to its introduction, and the rea-
son for its exclusion by Governor Evans, is that such evidence is
simply not relevant to this case.
Respondent argues that it is
relevant, even decisive, citing Sherman Act cases to support its
contention.
But we have already shown that, under the Clayton Act,
the language "substantially to lessen competition" does not require
an analysis of the competition which remains after the challenged
acquisitions have occurred, but rather refers to the competition
which was eliminated as a result of the acquisitions.
If the cumu-
lative effect of all of the Transamerica acquisitions has been to
eliminate actual or potential competition to a substantial degree,
then Section 7 of the Clayton Act is violated no matter how much
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competition remains*
So with the words "tend to create a monopoly"0
If the cumulative effect of all of the Transamerica acquisitions
has been to bring Transamerica to a "dominant* place in the banking
field in the five-state area, then that effect, under the decision
in Standard Oil
is to tend to create a monopoly.
The testimony of
the witnesses referred to is, therefore, clearly irrelevant.
PART III
Part III of respondent's brief purports to disclose alleged
erroneous factual findings made by Governor Evans relating to respondent and its relations with its controlled banks, including
Bank of America.
When the Board comes to examine this section, it
will find that a great deal of what is argued therein is merely repetitive of what was already argued in one or more other places in
respondent^ brief*
Consequently, we shall not again recite our
replies to those arguments but instead respectfully refer the Board
to our earlier discussions which answer each and every one of them.
We will, however, deal with such new points as are made in this
part of respondent's brief.
A.
There is very little in the first section which is new.
The first part of this section again argues that there is no justification for referring to a "Transamerica group" of banks because,
as it is alleged, respondent is merely an "investor" in banks and
has no interest in them except as an "investor".
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This argument has
20/
been fully answered commencing at page 27* suprccr^
The only ob-
servation we shall now add is that, if respondent is only an "investor" in banks and, as it says, "relies upon dividends" for its
earnings, then why does it always purchase all or nearly all of
the stocks of the independent banks which it acquires?
Why does
it always make them branches of its larger controlled institutions
and put them forever out of the competitive arena?
Why, as to its
majority owned banks in California, which pay to it all of their
earnings declared as dividends, does respondent want to make them
branches of Bank of America, which pays only ?•& per cent of its
dividends to respondent?
These and the many other factors already
fully discussed show without question that respondent is the instrument through which the Giannini bank expansion program, started almost fifty years ago, is still being carried out according to a
formula which has not been changed in any particular in all of that
time.
This section also contains a discussion about "intent".
It
proceeds on the theory that, in determining whether there is a violation of the Clayton Act, the Board must consider the intent of
each acquisition, that is, whether respondent or its predecessors
acquired a particular bank to eliminate it as a competitor, or for
some ^good" motive, such as to bring more banking service to the
public than it was already receiving from the bank which it acquired.
20/ This argument is also dealt with extensively at pages 2 to 6 of
our REPLY TO PROPOSED FINDINGS SUBMITTED ON BEHALF OF RESPONDENT,
filed April 30, 1951.
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It is obvious that, carried to its logical conclusion, that contention would enable respondent to acquire all commercial banks in the
five states, so long as it could show a "good intent" in doing so.
The short answer to this contention is that the element of intent
is not an essential element of proof in a Section 7 case*
We agree
that it may be in a Sherman Act case, but the Clayton Act, as we
have seen, was designed to arrest the growth of monopoly power before it can do any damage, regardless of how or why it got started.
As already pointed out, Congress itself has declared that, in proving a Section 7 case, it is "unnecessary for the Government to speculate as to what is in the 'back of the minds1 of those who promote
a merger1*.
It is true, as pointed out in respondents brief, that Board's
counsel did put banker witnesses on the stand to show that respondent's attempts to acquire banks remain unabated.
All of them testi-
fied that respondent's representatives were continuously
upon their banks in an effort to acquire them.
calling
This testimony was
offered to prove that the danger of more acquisitions was not over.
As stated, however, the case against respondent would be fully made
out even if there was no such testimony.
B.
This section is devoted to the contention that Governor
Evans should have made separate findings respecting Bank of America*
The only reason suggested why this should have been done is that 85
per cent of the statistics showing offices, deposits and loans in
the Transamerica group are made up of offices, deposits and loans
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of Bank of America.
It is difficult to see why this fact requires
separate treatment for Bank of America*
That bank is not a re-
spondent in the case, although we are willing to concede that it
probably is entitled to that recognition in a different kind of
antitrust case in some other forum.
The important question is, was
it proper for Governor Evans to regard Bank of America as within
the Transamerica group?
We have already shown why it was properly
so included.
Furthermore, as we have seen, the original pattern of acquisition and absorption has been followed without deviation ever since
the first acquisition in 1909.
The only reason why the figures re-
specting Bank of America are so much larger than those of the branch
banks controlled by respondent in other states is that more banking
offices have been acquired in California than in such other states,
hence Bank of America has swallowed up more acquisitions than have
respondent's other large branch banks.
But then it must be remem-
bered that the Gianninis were acquiring banks in California over
twenty years before they started to acquire them in other states.
Considering this late start it cannot be said that respondent has
been lacking in diligence in making acquisitions in these other
states since it acquired its first bank in Oregon in 1930. As the
record shows, it now controls 3& P«r cent of all banking offices in
Oregon, 6l per cent in Nevada, Hi per cent in Arizona, and l| per
cent in Washington.
C.
This section refers to an alleged "misuse" of statistics
in the Board's exhibits and in Governor Evans1 findings.
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Claim is
made that some of these statistics have been "slanted11 against respondent in such a way as to be "seriously prejudicial".
First, respondent objects to the inclusion in the "market occupancy" statistics of figures showing offices, deposits and loans
of group bank offices which were originally established as "de novo"
branches by respondents controlled banks. In support of this contention respondent refers to the statement made in our opening
brief that, if respondent's present dominant position in the banking field was attributable solely to the establishment of "de novo"
branches, there could be no Section 7 case. We did make such a
statement and we are glad to repeat it here.
For in that event re-
spondent1 s banks would have grown under a perfectly legal method of
expansion rather than by the illegal one of buying out competitors.
But that has nothing to do with the propriety of including figures
of all Transamerica group banking offices, whether acquired or established "de novo", in measuring "market occupancy" of the group.
Those totals are solely for the purpose of showing the extent of respondents growing monopoly power and the fact that it has been
steadily and relentlessly increasing over the years. To properly
measure this power it was, of course, necessary to include all elements making up the sum total of such power, including that derived
from the establishment and operation of "de novo" branches.
Next, respondent challenges the table contained on page 33 of
Governor Evans1 findings. This table consists of four columns.
The first column purports to show that respondent acquired, a*nd is
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now operating, the only banking office In each of 173 communities.
Respondent points out that in 52 of those communities it established
w
de novon branches and did not acquire banking offices already in
existence.
Column 2 of this tabulation shows that in each of 18
communities in California respondent acquired the only two banking
offices and merged them into one office! column 3 shows that in ©mch
of 9 communities respondent acquired the only thre© banking offices
merged them into one officej and column 1| shows that in each of
•g^immunities respondent acquired the only four banking offices and
merged -them into one office*' Respondent
that* of the 71
acquisitions represented by th©s© figures, 15 Involved cases of
"dual occupancy11, that is, where two banks oeempied joint offices* .
¥e have no objection to the Board aeenpting the modifications
suggested by respondent.
The result would not alter the signifi-
cance of the table in Governor Evans1 findings because it would
still show respondent's propensity for acquiring the only bank In
a very large number of single bank towns. And the conclusion would
still emerge that it has also been respondents practice to acquire
all competing banks in a number of smaller communities and to merge
them into one office*
Another objection in this section relates to a finding made by
Governor Evans that "despite the tremendous growth of population
and wealth in this area, the expansion of Transamerica has been accompanied by a decrease in the number of banking offices independent of Transamerica . . ." The objection mad® to this statement Is
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that it infers that the decrease in banking offices was due "entirely" to respondents acquisitions and overlooks the fact that
numerous banking offices closed during the depression*
The answer
to this contention is that we do not read into Governor Evans1
statement any such inference as charged by respondent. We are willing to concede that part of the decrease in the number of banking
offices "independent of Transamerica" in the area was due to bank
closings brought about by economic conditions prevailing during the
depression.
But also there can be no doubt that a substantial part
of the decrease is attributable to respondent's acquisitions. It
is unimportant here to ascertain how many resulted from one cause
or the other; the important fact is that respondent has been doing
what the Clayton Act forbids and, largely as a result of doing so,
now enjoys the exact percentages of "market occupancy" stated in
Governor Evans1 findings,
D, This section attacks Governor Evans1 findings on th© issue
of control of Bank of America. It would serve no useful purpose to
repeat here all of the facts found by him which demonstrate the
correctness of his conclusion that "Transameriea has had and now
has the power to control1* that institution. They are set out in
detail commencing at page 11 of his findings. And many more can b©
found in the forty pages of factual data on this issue in our requested findings (commencing at page 59)• Nor will we repeat again
the legal arguments which support Governor Evans1 conclusion on
this issue. They appear commencing at page U? of our opening brief.
We will simply say here that, when the Board comes to examine all
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of this material and compares it with the comments appearing in
respondent's brief on the subject, it will confirm without difficulty the correctness of Governor Evans1 ultimate finding on the
subject.
In doing so the Board will also learn why it is that prac-
tical people throughout the five-state area, such as competing bankers and newspaper men, have always taken it for granted that the
Gianninis, father and son, have been the dominating influences in
all of the closely integrated organizations composing the Transamerica controlled group* When it reads such Items as the press
release issued by Transamerica on November 30, 19^8 (BX 3^5)» saying that A* P. and L. M« Glannini had "regained • • • operating
control of their bank [Bank of America] and investment company
[Transamerica}*1 as a result of the proxy battle sixteen years earlier, the Board will readily understand why the names nGianninl%
"Transamerica11 and "Bank of America*1 are regarded as synonymous in
the West*
(Italics ours)
REPLY TO RESPONDENT'S MOTION TO DISMISS
FOR LACK OF JURISDICTION
As stated at the outset of this brief, respondent also has
filed a brief in support of a motion to dismiss the proceedings for
lack of jurisdiction*
This motion is but a renewal of the motion
filed by it on December 7* 19^8, and denied by the Board on January 17» 19^9*
Since the present motion merely exhumes an issue
that has already been fully considered by the Board on the earlier
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21 we do not deem It necessary to reargue the matter at this
motion-r^
time. All of the points now made by respondent were urged, with
slightly different emphasis, in support of their previous motion.
Our position on these points is fully set out in our brief in opposition to the earlier motion, and we respectfully refer the Board
thereto. ¥@ shall limit this part of our brief to calling the
Board1s attention to two recent authoritative pronouncements, one
by Congress and one by the Ninth Circuit, which sustain the Board1 s
previous ruling on the jurisdietional issue*
First, as to the Congressional pronouncement. For a number of
years prior to the amendment of Section 7 approved December 29*
1950, the Federal Trade Commission had been asking Congress to plug
the loophole in Section 7 created by the decision of the Supreme
Court in Arrow-Hart & Hegeman Electric Co. v. Federal Trade Gommis-
22/
siQHj 291 H» S. 58? (193^).
numerous bills were offered and these
were considered by various Congresses. In 191*6 one of these earlier
bills, which would have amended Section 7 along the lines of the recent amendmeatf was considered by the Committee on the Judiciary of
the House of Representatives and favorably reported by it to the
House. That the Committee entertained no doubt but that Section ?
applied to banks and that the Board was authorised under Section 11
21/ In overruling the
previous motion the Board pointed out that "~
while respondent1 s argument ''has been pressed earnestly and at
length, ... it finds a complete answer In the language of the
statute and cannot be sustained.*
See our discussion of this decision eoimeneing at page ij.0 of
our opening brief.
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Federal Reserve Bank of St. Louis
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to enforce Section 7 as it relates to banks is clear from the fol£2/
lowing quotation from its report!^
"Section 11 of the Clayton Act, as it now stands, vests
jurisdiction to enforce the provisions of Section 7 in the
Interstate Commerce Commission where applicable to common carriers; in the Federal Communications Commission where applicable to common carriers engaged in wire and radio communication; in the Civil Aeronautics Authority where applicable to
domestic and foreign air carriers; in the Federal Reserve Board
where applicable to banks and trust companies; and in the Federal Trade Commission where applicable to all other character
of commerce, and outlines the procedure to be followed.
M
The proposed amendments affect only corporations subject
to the jurisdiction of the Federal Trade Commission. The jurisdictions and regulatory powers of the Interstate Commerce
Commission, the Federal Communications Commission, the Civil
Aeronautics Authority, and the Federal Reserve Board in their
respective fields remain unchanged.1* (Italics ours)
And this same concept will be found, upon examination of the
terms of the recent amendment, to have been entertained by the dlst
Congress which enacted the amendatory law.
Examination of Section
7, as now revised, shows that existing limitations upon stock acquisitions were retained as to all categories of companies, but that
the new prohibition against acquisition of assets was carefully limited only to those corporations "subject to the jurisdiction of the
Federal Trade Commission1*.
This plainly indicates that Congress
was of the opinion that the prohibition against stocfr acquisitions
was applicable to other types of companies subject to the jurisdiction of other agencies of the Government, including the Board.
H.R. Rep. No. 1U»0, 79th Cong., 2nd Sess. 2, 3
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As to the pronouncement by the Ninth Circuit.
The Board will
recall that last year it brought a suit in the Ninth Circuit to
enjoin the proposed take-over by Bank of America of 22 California
banks now majority owned by respondent.
Such take-overs, if con-
summated, would have defeated the jurisdiction of the Board, upon
appropriate findings in its Clayton Act proceeding, to enter an
order effectively restoring these 22 banks to competitive status
in California*
In its action the Board called attention to the
fact that it was powerless to protect either its own jurisdiction
or that of the Ninth Circuit to review and enforce such an order
if and when issued by the Board,
Consequently the Board asked the
Ninth Circuit to protect the jurisdiction of both the Board and the
court by enjoining Transamerica and Bank of America from consummating the take-overs.
The court issued the injunction and sus-
tained the Board's right to a judgment, stating, inter alia, as
follows:
H
It is therefore said that what the Respondents are about
to accomplish here will serve to circumvent the possibility of
the Board, in case it finds the same warranted, making an
order of the kind upheld in the Western Meat Co. case, supra,
and thus defeat the jurisdiction of the Board, and of this
Court.
2k/
M
We think the position thus stated is well taken,"'
(Italics ours)
Subsequent to the issuance of the injunction in that case the
respondents and their respective presidents were convicted of civil
contempt for having violated the court's order.
At the trial in
Board of Governors v. Transamerica Corp., loq. P. 2d 311, 316
(9th Cir. 1950), cert, den., 31*0 U. S. 883 (1950)
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Federal Reserve Bank of St. Louis
-9U-
the contempt proceedings the alleged lack of Jurisdiction in the
Board was again argued by counsel for the respondents.
All of the
points now being urged upon the Board in support of respondent's
present motion were urged upon the court at that time.
Thus, the
"MEMORANDUM OF POINTS AND AUTHORITIES ON BEHALF OF ALL RESPONDENTS",
filed In the contempt proceedings, states, inter alia., as follows?
w
(b) The Board has no jurisdiction to enforce section 7 of
The Clayton Act and, therefore, this court has,._nopreviewing jurisdiction.
"^ ~
"
""
"J
"Section 11 of the Clayton Act (15 U.S.C., § 21)
does not specifically authorize the Board of Governors of the
Federal Reserve System to enforce Section 7 of the Act.
"The Congressional history of the Clayton Act demonstrates beyond doubt that Congress never intended that the
Board should have power to enforce section 7«
11
At the time of the enactment of the Clayton Act,
the investigation of the §money trust1 by the Pujo Committee
had just been completed. As a result, what is now § 8 of the
Clayton Act was put into the original bill (H. R. 15657, 63d
Congress). Upon being reported out, | 8, relating to Interlocking directors, was stricken out and the enforcement provision, which is now section 11, contained no reference to the
Federal Reserve Board. (S. S. Report 698, 63d Congress, pages
12, lj.8). In conference, the sections relating to interlocking
directorates were restored and the Federal Reserve Board was
added to the enforcement section, section 11 (15 U.S.C. § 21).
It is clear, therefore, that the Congress never intended the
Federal Reserve Board to have any powers under the Clayton Act
except with respect to interlocking directors.
"This conclusion is further justified by the history
of the administration of the Act. In the first place, the
Board has never sought to enforce § 7 of the Clayton Act (12
U.S.C., § 18) prior to the present proceeding against Transamerica. It has issued regulations only with respect to interlocking directors. The Board does not and never has had any
subpoena power. Finally § 7 of the Clayton [Act] could not in
any way be applied to a bank because banks are not permitted
to acquire stock in other banks (Banking Act of 1933, Section
5, Remingtons Revised Statutes of Washington. Supplement 19l*0,
f 321^2; Oregon Compiled Laws Annotated §§ 1*0-810, lj.0-2510;
Nevada Compiled Laws, §| 662; Arlsona Code Annotated 1939,
§ 51-207; California Banking Code, § 76l).
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Federal Reserve Bank of St. Louis
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"Transamerica, the respondent in the alleged Clayton
Act proceeding, is not a bank and does not conduct a banking
business. If it were a bank or did operate as a bank, it woulc
have to do so in accordance with the banking laws. Finally,
§ 7 of the Clayton Act relates only to corporations engaged in
commerce. Banking has never been held to be commerce and is
not commerce.
"Despite all of these considerations, this court has
assumed that the Board has been granted jurisdiction to enforce § 7 of the Clayton Act."
In its opinion finding the respondents guilty of civil contempt the court again reviewed the jurisdictional question and
stated as followsr^
"We are also pressed by argument and brief for reconsideration
of the question of our jurisdiction to issue the orders. It
is our opinion that nothing contained in the showing now made
requires or suggests a withdrawal or a modification of the injunction, ... As for the jurisdictional argument, attention
has been drawn to West India Fruit & Steamship Co. v. Seatrain
Lines, (2 Cir.) 170 F. 2d 775, 779. That case affords strong
support to the reasoning by which we have arrived at our jurisdictional conclusion.11
To this statement the court appended the following footnote:
"Overruling an earlier case the court said: «In any
event, the rationale of the Long Island case lacks pertinence
here; for there the majority rested its conclusion on a holding that the S.E.C. unmistakably lacked any possible jurisdiction; on the facts now before us, we are unable so to hold as
to the Commission here.1 The complaint of the Board of Governors in the Clayton Act proceeding pending before it, a copy
of which is a part of the record here, indicates the existence
of probable cause for that proceeding and discloses a case
within -the jurisdiction of the Board." (Italics ours)
We submit that, even if the Board had not already itself considered respondents arguments and ruled against them, the decision
of the Ninth Circuit just cited would be decisive of the present
motion*
In re Transamerica Corp., 18U F. 2d 319, 32> (9th Cir. 1950),
cert. den. 3^0 U. S. 883 (1950)
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Federal Reserve Bank of St. Louis
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CONCLUSIOH
On the basis of all of the discussion hereinabove set forth
counsel for the Board respectfully submit that respondent's motion
to dismiss should be denied and that the findings of fact contained
in Gover&or Evans1 recoannended decision should be adopted by the
Board.
Respectfully submitted,
J. LEONARD TOWNSEND,
Solicitor,
Board of Governors of the
Federal ReserY© System,
Washington, D. C«
G. HOWLAUD CHASE,
Assistant Solicitor*
GREGORY O'KEEFE, JR.,
Of Counsel*
November 9, 195l«
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Federal Reserve Bank of St. Louis
-97-
MARTIN, PEPER AND
MARTIN
A T T O R N E Y S AT LAW
4O7 NORTH EIGHTH STREET
ST. LOUIS, 'D MO.
WILLIAM MSCHESNEY MARTIN
December ll; y 195>1
T E L E P H O N E C H E S T N U T 9972
J O H N C. BOYD
Mr. William McC. Martin, Jr.
286l Woodland Drive, N.W.
"Washington 8, B.C.
Dear Bill:
As I told you on the way to the station there were a couple of matters
Viiich I forgot and could not think of until the train, pulled out. lou
probably noticed the memorandum on your desk at home about the provisions
of the Administrative Procedure Act. As I read this, Mr. Townsend and
his prosecuting staff must not consult -with the Board in any respect about
the decision, but Governor Evans is definitely entitled to participate in
all deliberations as you will note the clause that states that the hearing
is to be treated the same as if the Board itsslf had been hearing the
proceedings from the beginning. In other words itw as not an appeal but
ivir. Evans holding the final Hearing assisted by his colleagues on the Board.
Another minor point in connection with subpoenas. It was argued in the
District Court in the original case to enjoin the Board from bringing the
action that one reason the Board s hould not be allowed to proceed was its
lack of subpoena power. Judge Morris, in his opinion, stated that if
Respondent, Transamerica, were prejudiced in any manner by this lack of
subpoena power, he was confident the Circuit Court of Appeals could
rectify the situation by itself granting subpoenas for any witnesses it
deemed essential for a proper consideration of the case. In a sense this
was an invitation for Respondents to allow the Appellate Court to complete
the record if it felt the Board hearing was inadequate. There is, therefore, a legal precedent for the opinion I expressed based on common sense,
namely, that if the Board Hearing Officer erred in excluding evidence as
to lessening competition, the proper place for this to be corrected would
be the Appellate Court.
I may change my mind upon reading the two volume transcript of the oral
argument, but at the moment, I am still of the opinion that the outline
I gave you, were the decision left to me, should be followed. In other
words I would over-rule Respondent's objections as to procedure, including
Governor Evans' lack of subpoena power, and lack of jurisdiction. The
commerce question is apparently admitted and there is ample evidence to
support the point that even assuming the statistics are somewhat garbled
there was a tendency toward monopoly. Mr. Townsend is supported by the
Standard Gil case in his conclusion that this alone is sufficient to show
a violation of the Clayton Act. As to the second point, Respondents have
some basis for their argument that evidence should have been admitted as
to the lessening of competition but it is based primarily on the dissents
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Federal Reserve Bank of St. Louis
Mr, "William McC. Martin, Jr.
-2-
December lU, 19^1
in the Standard Oil case and not on the majority opinion. Another argument
for upholding Governor Evans' ruling and suggesting that Respondents take
an appeal if they feel prejudiced by the exclusion of this evidence is their
own argument as to subpoena po?;er. In other words, if the Board remands
the case for further hearings before the Hearing Officer, the problem of
subpoenas is still there, whereas hearings before the Court of Appeals would
cure this defect. In' final analysis, it seems to me the case boils down to
whether to meet the terms of the statute it is necessary to say that each
individual acquisition results in specific lessening of competition or
whether as Mr, Townsend argued the historical record of acquisition in a
relatively limited area does not indicate a tendency towards monopoly which
the Clayton Act was designed to stop in its incipiency.
I doubt if these remarks will prove of any value, but I will send them to
you from time to time as they crystal!2©•
I was greatly pleased to find I won the Star-Times v. Buder case I told you
about in the Missouri Supreme Court, so my worry about a motion for rehearing was unnecessary. The Court adopted our arguments completely and the
decision was unanimous.
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Federal Reserve Bank of St. Louis
Before the
BOARD OF GOVERNORS
of the
FEDERAL RESERVE SYSTEM
In the Matter of:
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Federal Reserve Bank of St. Louis
TRANSAMERICA CORPORATION
CONFERENCE BETWEEN GOVERNORS OF THE FEDERAL
RESERVE SYSTEM AND REPRESENTATIVES OF TRANSAMERICA CORPORATION, AND THE SOLICITOR'S
STAFF, FEDERAL RESERVE SYSTEM.
Place of Conference: Washington, D.C.
Date of Conference:
December 11, 1951.
UNITED STATES OF AMERICA
BEFORE
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
_____--.-_-.
x
*
•
In the Matter of:
:
•
TRANSAMERICA CORPORATION
:
x
Board Room,
Federal Reserve Board Building,
Washington, D. C.,
Tuesday, December 11, 195>1«
U:ii5 o'clock p.m.
Conference between Governors of the Federal Reserve System,
and representatives of Transamerica Corporation, and the Solicitor's Staff,
Federal Reserve System.
PRESENT:
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Federal Reserve Bank of St. Louis
WM. McC. MARTIN, JR., Chairman, Presiding.
M.S. SZYMCZAK
R. M. EVANS
JAMES K. VARDAMAN, JR.
EDWARD L. NORTON
OLIVER S. POWELL
J. LEONARD TOWSEND
G. HOLLAND CHASE
GREGORY O'KEEFE, JR.
PAUL HODGE
GEORGE B. VEST
JOSEPH SMITH
SAMUEL B. STEWART, JR.
GERHARD A. GESELL
HUGO A. STEINMEYER
-2-
THE CHAIRMAN: Gentlemen, we thought that we would accept the
designation that you have given us of judges, both sides in this case, and
use the prerogative of judges and perhaps have a little session in chambers
here to give some of the members of the Board and counsel an opportunity to
ask some strictly legal questions, or other points that they would like to
have cleared up.
So I will throw the meeting open now.
MR. SMITH: Do you want me to break the ice, Mr. Chairman?
THE CHAIRMAN: You can break the ice, Joe.
MR. SMITH: If I may, I would like to ask Mr. Gesell a question.
As I understand your distinction as to the meaning of Section 7>
Mr. Gesell, it is that the Clayton Act has no application to stock acquisitions of non-competing corporations.
I believe that is the position you
take in your brief, unless there is pre-existing competition?
MR. GESELL: Pre-existing competition or an immediate probable
affect upon competition demonstrably shown.
MR. SMITH: You make an alternative in your oral argument. Your
brief takes the position that there must be pre-existing competition.
MR, GESELL: That is right.
MR. SMITH: If that is correct, what is the nBaning of the
language in Section 7 to the effect that the acquisition is unlawful where
the effect may be, one, to lessen competition between the acquired and acquiring organizations, or, to restrain competition, or to tend to monopoly?
Aren't those three different alternatives, the showing of either
one of which might justify an order?
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Federal Reserve Bank of St. Louis
-3MR* GESELL: Yes.
I think any one of the three might justify
an order, but I think an essential element of proof as to any of the three
is competitive effect. It seems to me that is possibly, where the difference comes in between a substantial lessening, which is directed to
existing competition primarily, and tendency, to create a monopoly, which
may have implied in the term more questions of probability and immediate
affect, but in either event, the probability must be clear and demonstrable
and tangible and not simply a matter of speculation.
MR, SMITH: I was struck by Mr. Townsend's illustration and,
frankly, it seemed to me a valid one, that you can have a tendency to
monopoly without having a substantial lessening of competition. You don't
agree with that?
MR, GESELL: I don't agree with that, no.
MR. SMITH: Why are the words "or tend to lessen monopoly" in
the statute, why doesn't the statute just provide that the acquisition is
unlawful where the affect may be to substantially lessen competition?
MR. GESELL: There are several different ways you can look at
that. One is you can say that the tendency is directed more .to potential
competition than is substantial lessening, but in either event we are talking
about probable affect on competition.
The other thing you could say is that the words "tendency to
monopoly" may be there to deal with this sort of a situation, which is not
comparable to anything we have here, the situation of vertical integration,
where a manufacturer acquires distribution outlets on the one hand and then,
on the other, acquires, let us say, the only source for the raw material.
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Federal Reserve Bank of St. Louis
Such a series of acquisitions would not have any competitive
effect as between the acquired and acquiring company, but the affect of the
acquisition v/ould be very clearly in the direction of creating a monopoly
because the acquirer would be sewing up distribution channels on the one
hand and sources of raw material on the other.
There are many different kinds of situations where I think you
could argue that a tendency might not necessarily have to involve a substantial lessening, but in a situation of this sort, a horizontal situation,
concerned with the acquisition of banks, all concerns engaged in the same kind
of business, it is our contention that unless those banks compete, or are
clearly shown to be probable competitors, in a nonspeculative sense, the
statute doesn't become operative.
MR, SMITH: Then you don't read either or provisions of the
statutes as setting up distinctly different standards or judging or determining the affect of the aquisitions?
MR. GESELL: Not so far as applied to this case, this type of
acquisition.
MR. SMITH: May I pass on to you a question that Governor Powell
wanted to ask, Leonard: The statute as it stood at the time the complaint
was filed referred to the effect substantially to lessen competition, or
restraint of trade to create a monopoly.
Governor Powell noticed that in
the statute as it has been amended to provide that the acquisition is unlawful where the effect may be substantially to lessen competition or tend to
monopoly.
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Federal Reserve Bank of St. Louis
Governor Powell inquired whether or not that -word "substantial"
should be read to modify both restraint of competition and tendency to
monopoly.
MR. TOMSEND: No. I think that that is all clearly deliniated
in the report of the committees, and I am perfectly willing to leave the
matter, so far as that question is concerned, to what the committee said
about it, and rather than try to paraphrase it, I will simply pass the
question back by saying that the committees in Congress in adopting the
change indicated that they were trying to get away merely from small, ...
insignificant acquisitions, that the re-arrangement of the language was to
do no other thing than to obviate the necessity of the courts having to play
with completely trivial acquisitions.
I think that is made out in the committee reports.
MR. SMITH: You would reply, then, that principle of de minimis
to tendency, as well as to the lessening of competition?
MR. TOWNSEND: I think it always has applied.
MR. SMITH: If either of you want to make any observation on the
remarks made by the other, I think the Governors would like to have them.
Would you like to say anything?
MR. TOWSEND: I have nothing to say.
MR, SMITH: All right.
Mr. Gesell, or Mr. Stewart, there has been a great deal said in
the case about the necessity for a showing that Transamerica controlled
Bank of America.
The statute, as I recall, prohibits the acquisitions, having the
specified effect of all or any part of the capital stock of a corporation.
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Federal Reserve Bank of St. Louis
-6Now, in view of that Ian0uage of the statute, why is it necessary for the Board to show that Transamerica
controls Bank of America?
MR. GESELL: I think the answer to that, from our point of view,
is this, that the statute is concerned also with affects, where the affect
may be to substantially lessen, or to create a monopoly, and that is why,
when the complaint was filed, it was said that that acquisition of stock
involved control of the operations, and policies of the Bank of America.
Now, if the acquisition of stock does not involve control of the
operations and policies, then, obviously, vfo ether it is all or part of the
stock, it can not have any of the prohibited affects and, therefore, the
question of control, as I see it, and it is a shorthand expression for what
we have been talking about, gets into this case because there is no case
unless it can be shown that because of this part of the stock — to use
your expression — Transamerica is in a position to influence and control
the operations and banking policies of Bank of America.
MR. SMITH: Suppose you had a situation like this: Suppose that
Transamerica owned none of the stock or owned two shares, an infinitesimal
number for that matter of the stock of Bank of America, or none, and there was
a contract between Bank of America, on the one hand, and Transamerica on the
other, pursuant to which Transamerica undertook to shop around and buy the
stocks of banks for Bank of America to sell the banks to Bank of America,
there is no interlocking directors, no ownership of Transamerica by Bank of
America.
If you could show in a given situation that Transamericars ownership of the stock of B bank, if transferred to Bank of America, would have
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Federal Reserve Bank of St. Louis
-7a tendency to injure your competition, and you further showed a contract
between Bank of America and Transamerica by which Transamerica was to buy
that bank and merge it and sell it to Bank of America, wouldn't you make
out a case for divesting Transamerica of the stock of the bank, even though
there was no ownership of Bank of America stock at all?
Ml. GESELL: Of course, that is an entirely hypothetical question.
MR. SMITH: It is.
MR. GESELL: We don't think you would, because we think the
statute is related to the affect of the stock acquisitions, and if that
contract came about unrelated to any stock acquisition, if it had existed,
let's say, prior to the stock acquisition, to make the situation clear, there
would be no showing that the acquisition of the stock had any of the prohibited affects on competition, to which the statute is addressed.
Now, on the other hand, if I may go on, Mr. Smith, if because of
that acquisition the contracts came about and it was shown that the stock
was the resulting reason for the continuation of the contract, then you
would relate it to the stock acquisition.
That, I think, is our position on that, isn't it, Sam?
MR. STEWART:. I think that is substantially right.
MR. SMITH: Do you want to say anything about that, Leonard?
i"R. TOMSENDi Yes, I think this is a matter that deserves a
little consideration by me.
I have always felt that it would have been perfectly appropriate
for me to have argued in this case that under the ruling of the Aluminum
Company Case that control of Bank of America would not be necessary if the
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Federal Reserve Bank of St. Louis
-8affect of the Transamerica acquisitions can be shown to have had an affect
of substantially lessening competition elsewhere, arid if the result of
Transamerica1s buying stocks of banks, say, in California, and turning them
over to the Bank of America,
NT and SA, whether they had an agreement to
do it or whether they didn't if it was a course of conduct which gave
reasonable indication that it was a likely situation to continue, then it
would be perfectly proper, I think, for the Board to find that the acquisitions in California made under those conditions would result in a substantial
lessening of competition as between the companies the banks acquired and
Bank of America.
In other words, if Bank of America can be shown to have existing
or potential competition with institutions acquired by Transamerica, and
Transamerica continued as a matter of policy to buy banks, the stocks of
banks and to transfer the stock to the Bank of America so that the Bank of
America could eliminate that competition by branching them, then I think
the statute would be violated.
I have preferred, however, not to make that argument for the
reason that I rather intended that the case could always be considered as
a unit or in its entirety.
MR. SMITH: If the hypothesis implicit in my question to Mr.
Gesell is right, then assuming that the Board finds no control, where is
the Board left in view of your admission on the record that in the absence
of control there is no case?
MR. TCBNSEND: Let me put it this way:
If I were wrong in that
admission, there is certainly nothing to prevent the Board, which is the
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Federal Reserve Bank of St. Louis
-9-
deciding body, from pointing out that error.
Certainly, in the course of my presentation, I have considered
Bank of America to be an integral part of the Transamerica organization,
and always the central part of it, in fact, quite candidly, I believe that
it is going to be, if and when the situation ever permits, the name of the
bank that is going to be the interstate branch banking system, as I have
indicated right along.
I think it has always been the hub of the entire wheel.
I have said so many times.
Therefore, in rny judgment, the finding of a
control in the sense in which I used the term is probably essential to the
making out of that case.
Now, if you are talking about control in the sense of just
Transamerica1s sitting at the other end of the wire dictating policies, then,
of course, we might just as well forget it. On the other hand, if you are
talking bout control that is derived from personnel and tradition, and the
kind of organizational structure that has permeated the entire organization
from the beginning that is an entirely different matter.
If you don't find that kind of a situation, then it would seem
to me to be very difficult for the Board to find any kind of a situation
that violates the anti-trust act.
MR. SMITH: I would like to advert to the quantitative substantiality theory.
In the copy of the opinion that you gave us, copy of
the majority opinion, on page ii, the Court, the Supreme Court, quotes Judge
lankwich as having said that a "substantial number of outlets and a substantial amount of products, whether considered comparatively or not, was
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Federal Reserve Bank of St. Louis
-10sufficient to establish a violation."
Now just iwhere — do you consider the Supreme Court approved
that expression?
MR. TOYiiNSEND: Not only approved it, but specifically stated it,
and I can give you my answer to that very shortly.
Iv!iR. SMITH: Yes. "Where, then, are you going to draw the line in
a case of this sort under Section 7? as distinguished from Section 3?
I can see a situation where you and I are competitors in a
gasoline business, and Mr. Chase has a big filling station.
million dollars worth of business a year.
titatively
He does a
Now, that is, I would assume, quan-
substantial, but assume further that there is one hundred mil-
lion dollars worth of business a year being done in that town.
I tie him up with an exclusive dealing contract. Then under
Section 3, under the Standard Oil Case, Section 3* I violated Section 3,
haven't I?
MR. TCOTSEND: I don't know.
I have never seen that case decided.
MR. SMITH: Would you object to answering it on the basis of
the hypothesis, to try to apply the decision, I want to see how far you
contend this decision goes.
MR. TO'diNSEND: I think that it unquestionably deals vtith a
situation that goes into the billions of dollars, and to forty percent of
the assets. Therefore, my job is at an end. If you are asking me whether
a third of one percent, or a fifty of one percent would be enough, I don't
know. I don't know what the Supreme Court would say about that.
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Federal Reserve Bank of St. Louis
The refinements of this doctrine have only just begun to appear.
-11I would say as a safe rule that the doctrine of de minimis would be the
one that the court is actually adopting in Standard Oil.
MR. SMITH: If that applies to Section 7 then, how can you ever
have any kind of a acquisition that will be lawful if the tendency to
monopoly is to be governed by the quantitative substaniality rule and the
quantitative substantiality rule applies to anything beyond de minimis, how
can you ever have any kind of a stock or asset acquisition that would be
lawful?
MR. TOV/NSEND: I think under the doctrine of de minimis you
could
have any number of such acquisitions. It remains for the Supreme Court to
say where the line shall be drawn.
We say we don't have to worry about the
doctrine of de minimis because clearly UO percent and six billion dollars is
a far cry from that total.
MR. SMITH: Let's get to the percentages, then.
I have some
difficulty in understanding just what there is about the five-state area
vtfiich justifies you in drawing an iron curtain around that area, and refusing
to look to anything either beyond it, or anything in it, which comes from
outside of it.
Now if I correctly understand Governor Evans' findings, they are
to the effect that banking is essentially a local business.
Do you agree
that that is a correct interpretation?
MR. TOlVTiSElO: Except where institutions are developed to an
extent where they become statewide, as the Bank of America, and the other
statewide institutions that Transamerica has.
MR. SMITH: It is essentially local, and a bank with the negligible
exceptions mentioned in oral argument, a bank chartered in one state can't
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-12-
establish offices in another, so that in that sense, California baiks can't
cross the state line into Washington or Oregon, Arizona can't come into or
go into Nevada, or any other state.
Now, if that is true, if the lav/ is agreed, and if the fact is
assumed that one bank can't go into another, how can you say that the holdings of banks in California have any tendency to affect a monopoly in
Washington, where there is only one bank owned by Transamerica?
MR. TOV/NSEND: Well, you consider the locations, for example, if
this were any other kind of a circumstance than banking, say, filling
stations, it would be perfectly obvious that it is the outlet which is the
unit of articulation in the business.
Now in banking, the outlets are severely limited by law and by
supervisory permission.
Therefore, all of the banking business that can be
done in any particular outlet has got to be done in the available outlets
in the areas in question.
Consequently, a constantly increasing control
over the available outlets of filling stations is, in my judgment, the same
degree of monopoly control that you can get and which I think Transamerica
possesses in connection with the banks in this case.
MR« SMITH: I suggest to you that there is a difference
there
in that Standard Oil Company can do business in any state, and put branches,
and buy filling stations in any state.
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Federal Reserve Bank of St. Louis
MR. TOWNSEND: So can Transamerica.
MR. GESELL: May I interject here, Mr. Smith, a minute?
MR. SMITH: Go ahead.
MR. GESELL: In the Standard Stations Case, there was no question
•
-13of the competition between the filling stations, a point vhich Mr. Townsend
overlooks in his discussion. It wasn't a question of the competition between the filling stations. The question was, the competition between the
supplying oil companies, which one foreclosed from the other by the contract,
so that the analogy breaks down, and our contention is that where you are
dealing with competition between the banks, then the question of the area
of their competition becomes important, and it would have become important
in Standard Stations if you were concerned with the question of the competition between the filling stations, which you weren't.
I simply, in other words, want to emphasize that distinction.
MR. SMITH: I would like to go back to this point which gives me
a great deal of trouble.
Since Bank of America can not operate, in, say,
Washington, where Transamerica owns only one bank, I have difficulty in
seeing how you can carve out a five-state area, or even a two-state area
and say that we won't pay any attention whatever to what goes on outside of
this area, or to what comes into this area from outside of it.
V/e are going to look to what goes on in this area, and we are
going to lump together the statistics of the whole area to have a five-state
area monopoly.
It seems to me that a banking monopoly, in view of the finding
that banking is essentially a local business, that if you are going to deal
with banking monopolies, you have to deal with local monopolies, local to
the extent that they are within the geographical limits of a state.
I would concede that you could have a state monopoly, one-state
monopoly in banking, but since a bank can't cross a state line to establish
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-ma branch, I have difficulty in my own mind in justifying the lumping
of statistics for five states to come up with a five-state total.
I can
see how you can say that the statistics in California present a dangerous
situation, but v/hen you look at Washington, you have an entirely different
picture.
What I am trying to get at is the justice for combining
Washington and California, or combining Nevada and Oregon.
VJhat would
be the Board's justification for lumping all of these statistics together
to reach a conclusion that you have got a five-state area tendency to
monopoly, when the bank in no one state can open a branch in another state?
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Federal Reserve Bank of St. Louis
- 15 MR. TOWNSEND: Well, it just seems to me that you misconceive
the whole purpose of the monopoly statute, which is aimed —
MR. SMITH:
I may do that.
MR. TOWNSEND:
— at the question of monopoly power.
Banks can't
go over state lines but holding companies can, and have, and they are doing
it in this case, and by the process of buying out banks across state lines
they are building up a vast amount of economic power which in its ever
enlarging ratio, grows to the point where it can produce harm to the public.
MR. SMITH;
In what way?
How does Transamerica1s ownership of,
say, 40 per cent or even 50 per cent of the banks in California make it
dangerous for Transamerica to own one bank in Ashton?
MR. TOWNSEND:
I have never contended there is any tendency to
monopoly in a single state.
I have said and am free to admit that the
monopolistic tendency so far as state lines is concerned, are merely the
states in which they are operating. They ha\Te given every indication of
buying more banks in each of the states in which they are located. Now, as
long as they have that intention, and we may judge what they are going to do
with that intention by what they have been doing in the past, the question
is whether it should be halted.
MR. SMITH: Just because they have given an indication in the
past that they were going to buy other banks, you wouldn't.even allow them
to own one bank in the State of Washington because you are afraid that that
one bank, that the ownership of one bank has a tendency to monopoly?
FIR. TOIJHSEND: No.
a false angle.
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Federal Reserve Bank of St. Louis
I think you are looking at it completely from
- 16 MR. SMITH:
It may be that I am.
MR. TOWNSEND: The ownership of a single bank means nothing.
It
is the drive, or continued accumulation of a lot of banks that creates the
power in those who are
in a position to control, or to affect the manage-
ment of those institutions.
In addition, it gives free purchasing power.
It enables a holding company or anyone possessing that power at a.ny one
time that it wants to do it, to turn its power, malevolently if it should
desire to do that, against the elimination of a local competitor somewhere.
You can bring the resources of a whole group of banks to bear through the
holding company just as easily as you can through one bank.
MR. SMITH: Yes, but the question here — let's stick to Washington a minute — that may oversimplify the problem, but I want to keep
it as simple as I can for the time being; we have got a charge that Transamerica's ownership of the stocks of all these banks tends among other
things to effect a monopoly in commercial banking in the State of Washington.
MR. TQWNSEND: Maybe, to do that.
MR. SMITH:
All right.
The ownership of one bank may tend to ef-
fect a monopoly in the State of Washington. Now, how can the ownership of
banks in Arizona, which can't do business in Washington, or banks in Oregon,
which can't do business in Washington, and so on, with Nevada and California,
hov can the ownership of those banks in the other states make the ownership
of one br.nk in Washington tantamount to a tendency to monopoly in Washington?
•MR. TQWWSEND:
That just seems so perfectly clear to me that it
doesn't provoke any question in me. Maybe I am looking at it wrong, but as
the size of the holding companies dominion over banks grows, it has an
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Federal Reserve Bank of St. Louis
- 17 increased contact potential, all over the area, and vhen a local bank in
Washington, for example, let's take the bank they own in Washington — that
now is the result of ten or eleven acquisitions — -1 don't know hew many —
they have gone out of existence. They are in the bank now, but let's talk
about it as if it weren't in existence.
Let's sa.y every one of these were
individual banks. Does not the accumulative power of all of these ownerships
give to the man at the top or the management at the top the power to centralize how banking shall go in all of the areas covered by these institutions?
MR. SMITH:
I don't recall any evidence to that effect.
MR. TOWNSEND: You are supposed to look at it presumably from the
standpoint of the power that has been reached; that may have been reached,
that may be reached. I am not saying there is any predatory action. There
may have or may not have been, but we didn't proceed on that theory.
hR. SiyllTH: What power do they have in Washington other than over
this one bank?
MR. TOWNSEND:
1 said in my oral argument I am perfectly willing
for the Board to cut down its perimiter of operations in a finding of
tendency to monopoly to the actual counties in which they are located. I
don't have any brief for the argument that the Board has got to say these
five states.
Let them say every one of the counties in which they are
located and that achieves the result. I put in the five states for the simple
reason that 1 figured that I had to lean over backwards in order to give them
a chance to develop all the facts that related to the states.
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Federal Reserve Bank of St. Louis
MR. SMITH: Well, if that MR. TOWWSEND:
I did it on the theory, further, that I believe
- 13 that I had demonstrated an intention to go into each of these states &nd to
build up the same kind of an organization in each of these states that they
built up in California or Oregon.
MR. SMITH: Where wouldn't it be fair for the Board, then, to
include statistics in New York, where Transamerica owns about as large a
percentage of the National City Bank as it does of Bank of America?
MR. TOWNSEND:
I don't have any trouble with that. They just
don't have any control over that organization.
They are not affiliated for
the purpose of building up an interstate branch system.
They have no de-
sire to strike New York into the picture, and it hasn't been demonstrated.
We are dealing with the areas in question where they have demonstrated that
contention, and where they ha.ve a continuing intention to do so.
MR. SMITH: Do you have any observations to make?
Ml. GESELL: Yes, I have two. Much of which Mr. Townsend says
has no basis in the record as fcr as proof is concerned. There is no proof
as to what our relationship is with National City. He has percentage figures
like he has as to Bank of America, but I would like to also point out this,
that if his argument is true, the same results would apply if General Motors
Corporation bought a bank in Washington.
It would give all this accumulated
power that comes from being a big company, a big stockholder which it could
use as influence in Washington, and I think that we come back again on his
remarks to the fact that lie overlooks the absence of competition between
these separate units.
MR. SMITH:
Do you attach any significance to the fact that a bank,
a California bank, may not have offices in Washington, for example?
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Federal Reserve Bank of St. Louis
Do you
- 19 have any qyestions as to the validity of combining statistics for the five
states to come up with a five-state area total?
MR. GESELL: Yes. We have said that you can't do that; that you
will have to look at this situation either on a nation-wide basis, or on
the basis of .some economically established area. Now, Mr. Tovnsend has
conceded this is riot an economic area; that it has no validity as an economic
area, and if you take less than the United States, we say you have to find
some area that from a competitive standpoint of view is a separate and
distinct market.
MR. SMITH:
I would suggest to you that a state which permits
branch banking might be regarded as a competitive area in view of the fact
that any bank in that state could establish branches all over the state.
MR. STEVART: May I make one comment on that, Mr. Smith?
I think
there is some validity for your last suggestion, but I think in doing it
you would have to take into account all of the competition which the bank
faces in that state, which includes in many instances lending activities
and deposit activities, new business activities, from banks which are situated outside the state, and you have that situation demonstrated at least in
the offers of proof here, it didn't got into the evidence because it was
excluded, but we put in a substantial number of offers of proof of the
activities of the big New York and Chicago banks, the others who maintain
representatives and in some cases actual offices in the five-state area,
where they are soliciting the exact same customers that are solicited by
the banks in that area.
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Federal Reserve Bank of St. Louis
MR. SMITH: I understand.
MR. STEWART:
Before I leave that, I would like to add one other
- 20 thing in reference to the comment Mr. Tows end made about Transamerica
being in all these states.
It is conceded here that Transamerica isn't
in the banking business end is not operating any banks.
It is a stockhold-
er and only a stockholder, and while we didn't discuss it at any length in
the oral argument, it is quite apparent from the evidence that each of
these banks directs its own policies.
Some of the ones other than Bank of
America do send Transamerica some reports of their activities, as it is the
sole stockholder, but each of the b.;.nks own sets of directors and officers
operates that bank.
Transamerica doesn't do it.
MR. SMITH: Apart from that, going back to the sharp and narrow
question, in view of the fact that a bank may not maintain branches in a
state outside of which it is chartered, is there any objection to including
Washington statistics, for example, with California statistics, to come up
with a two-state or three-state or five-state total which justifies the
divestment of the ownership of the stock in one bank in Washington, or one
bank in Arizona, and all of the banks in all of the rest of the states?
MR. GESFLL: Ye said on oral argument we didn't think you could
do that, but that was putting together, adding up cats and dogs. There
wasn't a group of figures that had any competitive significance.
THE CHAIRMAN: Governor Vardaman has a question.
MR. VARDAMAN: I don't know that it is important.
I have been
intrigued by this five-state arbitrary grouping and wondered why, for
statistical purposes, it wasn't grouped by Federal Reserve districts.
We
have seen the arbitrary — we have disregarded state boundaries throughout
the Federal Reserve System, the districts divide states; it is done according to trade area, and I wonder if there was anywhere in this record or
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Federal Reserve Bank of St. Louis
- 21 available these statistics applied to the entire 12 Federal Reserve Districts,
instead of these arbitraries applied to these five states.
I will grant for the Gake of argument that you cannot in fairness
apply statistics compiled in Washington to a bank that can't do business in
Washington, but since that has been done here for the record, I wondered
if there was any other compilation?
Is there, Leonard?
MR. TOWNSEND: I know of none.
MR. VARDAMM: Then the only other question I have on this particular point is the degree, or the percentage of stock ownership — I am
not talking about the question of control — is there an agreed statement
of fact as to the percentage of stock owned in Bank of America by T'ransamerica?
MR. TOWNSEND: There is.
MR. YARDMAN: As of June 24, 1943, when this hearing was started?
MR. TOU11SEND: Yes.
MR. STEWART:
I think that is clear.
I don't think there is any disagreement between us
on that.
MR. VARDAi-'lAN. What percentage was owned at that time?
MR. STEWART.
It was 22 and a fraction.
The fraction is in the
record.
MR. VARDAMAN: Then later on during the process of this hearing,
Transamerica, allegedly or actually, or whatever the contention may be,
disposed of a large portion of its stock holdings in Bank of America?
MR. STEWART: Yes. There is no question about that either.
MR. VARDAHAN:
Is it agreed between counsel that the ownership
as of a certain date was reduced from 20 per cent down to seven per cent?
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Federal Reserve Bank of St. Louis
- 22 MR. STEWART: Yes.
MR. GESELL: 7.6
MR. STEWART:
MR. VARDAMAN:
That occurred in two steps.
Is it the contention of respondent's counsel that
the change in the status of the ownership, stock ownership, still disregarding this question of control, did that in any way change the question of
jurisdiction?
Did it relate directly or indirectly to jurisdiction?
MR. STEWART:
The jurisdiction of the Board, sir?
MR. VARDAHAN: Yes.
MR. STEWART:
tion of the Board.
I don't think that had any effect upon the jurisdic-
It does have an effect upon what the effects of the
ownership may be and whether there is a potential lessening of competition.
MR. VARDAMAN:
It does have an effect upon the contention of the
Board, but it didn't relate back to jurisdiction?
MR. GESELL:
MR. VARDAHAN:
It does not go back to jurisdiction.
The only other question I had was this:
A state-
ment was made, I believe it was ly respondent's counsel, that certain
board records were requested to be put in evidence. The board records were
requested. That was refused. You weren't given the records you asked for.
MR. STEWART: That is correct.
MR. VARDAMAN:
Were those same records during this hearing avail-
able to the Solicitor in the prosecution of the Board's case?
MR. STEWART:
I assume, sir, anything in the files of the Board
was available to him., but I don't know vhat you gentlemen on the Board know
better than I what has been available to him. All I know is that the orders
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- 23 in the case show what was made available to me and were not.
MR. VARDAi-lAN: Were those records available to you in the preparation of your case?
MR. TOUWSEND: I. have no idea.
i-iR. VARDAMAN:
If you will identify the record —
I don't know. I am going by the statement that
certain records were excluded.
Mil. STEWART:
I can give you two illustrations, sir. There were,
of course, bank examination records, there were the reports of the examiners,
the materials they developed in their examination, there were matters such
as the minutes of the Board in connection with the decision to initiate
this proceeding. We asked for that information for the purpose of going
into the question of what vote had been taken, what proceedings had been
taken, and to what extent my judgment might have been formed, in advance.
There were questions raised as to the records of Governor Eccles1 activities,
which we sought in connection with his cross examination which were not
given to us. There may have been others.
Those are the ones that I recall
at the moment.
MR. VARDAMAN: Leonard, do you recall whether those records were
available to you?
MR. TQWNSEND:
I have never seen the records.
hR. VARDAi'iAN:
To put it another way; Was there at any time in
any degree any restriction put upon you and your staff in the examination of
this board's records in conjunction with the preparation and prosecution of
this case?
MR. TOFNSEND: No more than would be put upon any attorney for
any governmental agency in referring to the official files of the Board
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Federal Reserve Bank of St. Louis
needed for the prosecution of a case.
iiR. GESELL:
And Mr. Townsenci, it is clear that you did have ac-
cess to bank examiner reports which were not made available to respondent?
MR. TOWNSEED:
There is no doubt in the course of the proceedings
that I have seen some bank examination reports. I did not put any bank
examination reports in evidence.
IiR. GESELL: You questioned the people who made some of those
examinations and had the reports in the hearing room and we didn't have
access to them?
MR. TOUNSEND: That is not so. I don't believe I have talked
with any Examiners of the Federal Reserve System, outside of the Federal
Reserve vSystera, about bs.nk examination reports. There is no doubt that in
the course of ny presentation of evidence, that I discussed with bank examiners of the Federal Reserve B^nk of San Francisco, but that was information which they had gotten while they were engaged in a holding company
examination at the behest of the Board.
MR. STEWART: But there, again, you brought out the information
which had been developed upon their examination, and which was not available to us, which I think is the question Governor Vardaman was asking.
hR. VARDAilAK:
That is right.
lf!R. TQUNoEND: There isn't any doubt that is done.
in any agency that conducts investigations.
That is done
I can recall in the S.E.C., for
example, the reports that the S.E.C. made of a similar situation to this,
was naturally made available to counsel who was going to put the evidence
in the record, for which the report stood.
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Federal Reserve Bank of St. Louis
You have got to remember this, and I would like the record to be
- 25 sure to show it, that any of the information which a bank examination
report, or any other kind of examination report about these institutions
could disclose would be
information within the possession of the company
that had been examined, and hence if there was any information that came to
the knowledge of the Examiner, it must of necessity be information that the
company itself had knowledge of, and therefore they can produce anybody —
MR. VARDAMAN:
I am sorry. That is not the case.
MR. TOWNSEND: I don't think for the record I want to debate with
one of the judges in the case —
MR. VARDAMAN: Let's keep the record straight because that is not
a fact. The minutes of the Board show that certain reports of examination
of the Transamerica Company were excluded, and were not given.to Transamerica.
MR. TOWNSEND: That is a different question.
I thought you were
talking about the matter of information —
MR. VARDiiMAN: That is the report of the examination of the holding
company and it was not given. So let's keep the record straight on that
MR. STEWART: My recollection is in accordance with Governor
Vardaman's on that for the record.
THE CHAIRMAN: Governor Powell has a question.
MR. VARDAMAN: My other questions are all answered by Joe's
questions.
MR. POWELL: I have two questions, one a minor one:
It seem that
in listening to the discussion that there wasn't quite a meeting of the minds
on this matter of the attempted check of 22 California banks in the summer
of 1950.
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Federal Reserve Bank of St. Louis
I wonder what the opinion of the attorneys for Transamerica are
- 26 on that, in a little more detail? That was rather brushed off today, I
thought.
There seemed to me anyway, come into the Federal Reserve Board
after that fact and just hearing about it, that there was rather facility
between Transamerica and the Bank of America for easy transfer of banks
into branches of the Bank of -America, which would seem a bit more of a
normal working arrangement, than the lack of control of complete disassociation of the two organisations would lead me to believe from your discussion today.
Am I wrong on that?
MR. STr/JiRT: May I answer that?
MR. POT-ELL: Or is it an improper question to raise at this
time?
MR. STEWART: Ho, I am. glad to discuss that,
and you are quite right.
Governor Powell,
I had expected to discuss it at greater length
in my oral argument, but the time ran out on me and that was one of the
things I had to curtail in argument.
1 will do it very briefly.
Those banks do not represent one block of acquisitions, which
had been bought by Transamerica to be handed over to Bank of America, or
anything like that.
They vere individual investments made one at a time
ovsr a number of years — about how many, Hugo, 15 years?
ME. STEim-SYER: Yes.
MR. STEWART:
Some such thing as that, and the testimony, the
only testimony on it in the record is that they were bought for investment
by Transamerica, but that in some instances — I think three or four instances
were identified — at the time that they were bought, consideration was
given to the fact that they might be logical branch locations for the Bank
of America, and that enhanced their investment potential from Transamerica's
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Federal Reserve Bank of St. Louis
- 27 -
point of view because they thought they might be able to sell them to
Bank of America at a profit.
Then there had been a running discussion with the Comptroller
of the Currency by Bank of America over a period of a number of years,
before this case ever started, over the possibility of obtaining branch
permits from the Comptroller for those locations.
Finally, two years after this case started, those conversations
reached the point at which it. was suggested ^hat the Board come into the
conversations and have a three-way discussion.
that invitation.
The Board did not accept
Those facts are in the record. There was a letter written
by xir. Giannini to Mr. McCabe, which was not answered and subsequently
i'ir. rlcCabe asked him to withdraw it and he did withdraw it.
Then sub-
sequent to that the bank, assuming that the Board didn't want to participate in it at all, continued the conversations with the Comptroller.
The Comptroller investigated the situation, decided to approve the permits, and then meanwhile there had been two committees created °} one by
Bank of America, one by Transamerica, to discuss all the terms of the deal.
They finally did work it out and the whole deal was at the point of consummation when, without having had any advance notice from the Board,
l--ir. Townsend came into the court out in San Francisco and got this
injunction proceeding, just on the eve of the passage of title.
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Federal Reserve Bank of St. Louis
-28Now you say there seemed to be a greater ease than one vould
normally expect.
It was a historical situation thc.t had been developing
ovcsr a long period of years, and so far as its significance in this case
is concerned, it does not have any because there aren't anymore like it.
There aren't any pending negotiations with respect to anymore banks, and.
as a matter of fact, there are only four other? that Transamerica owns
in California., and there has been no suggestion at any time of the
possible intention
of those with Bank of America, and so far as the
ones across state lines are concerned, they couldn't be integrated with
Bank of America if everbody wanted them to.
MR. GESELL:
MR. STEWART:
I think only four came in.
As Mr. Gesell just reminded me, of the 22
banks only four of them that have offices in the same communities with
Bank of America. The rest of them are places where Bank of America is
not represented, or for that reason logical locations for extension of
their system.
MR. POWELL:
I was not thinking of diminishing competition
but more of the apparent community of interest between the Bank of America
and Transamerica that was demonstrated by this situation.
MR. STEWART:
I think one might almost think of them as
distinctly relevant of the historical situation.
I think if they go,
that would be just about the cutting of the final tie, the final historical
tie which is all that is left, all of the actual ties having been cut
many years ago, like the telephone number that Mr. Townsend brought out
in this case.
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Federal Reserve Bank of St. Louis
It happened that back in the old days they had the same
-29telephone number, and frankly, I don't think anybody remembered it until
Mr. Townsend put it in evidence in this case and then they changed it so
they don't have the same telephone number anymore.
Soine of those
historical things that you just don't change overnight are thaee, but this
is all that is left and you are dealing with it right here.
MR. POVELL: May I ask one other question?
THE CHAIRMAN: Certainly.
MR. POIJELL: This question is one that has not even been raised
in the hearing.
I raise it because I think we are breaking new ground
in this proceeding.
It is a combination of the effect of states1 rights.
Several
states have permitted branch banking. They must have assumed there
were going to be branch banking systems ' nd branch banking systems can
bo built up either by'establishing new branches or buying out existing
banks. I don't think California lav/ specifies any particular method
of developing branch banking.
foben it comes to the question of monopoly, or reducing
competition, one element in that is the element of making it less possible
for competing institutions to live or to get started, and find the climate.
In considering this lessening of competition, would you consider — and
I am asking this of attorneys on both sides — would you consider it more
important that unit banks could not live or that other branch banking
systems could not live in the sane state?
I can conceive of a situation
where it might be very difficult for unit banks in a branch-banking state
to operate, but where other branch-banking system might operate very
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Federal Reserve Bank of St. Louis
-30successfully, as they do side by side in Canada.
Mi. STEWART: The best illustration I could give you as answer
to that, Governor Powell, is that in California, which has been set up
here as the worst example which Mr. Townsend has been able to develop,
you have probably had a more active creation of new banks and a more
rapid growth of new banks then you have anywhere else in the United States,
and we have a. number of illustrations in this record of the rapidity of
that growth in direct competition with the Bank of America and three or
four other branch banking systems, so thc.t I don't think it is a valid
premise to say that you have got to have either branch or unit banks.
There is room for both, and the California experience illustrates that
thay can grow and prosper side by side.
MR. TOWNSEWD:
I think —
MR. STEWART: Wells Fargo, for example, one of the biggest
banks in San Francisco, is a unit bank and there are others among the
largest ten.
MR. TOVJNSEND:
I think, Governor Powell, without getting into
argument ^.bout facts, I guess what you wanted was an answer to the question.
MR. POWELL:
Principle rather than facts.
1MR. TOV&1SEND:
I. think the answer is to be found in the purpose
of the Anti-trust statute. The anti-trust statute must take the situation
as it finds it. If there is state branch banking there is no reason why
there shouldn't continue to be branch banks
and the de novo process of
opening new branches, of course, is available to all, within certain
limits, but like our property, whatever it is, we hold it subject to the
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Federal Reserve Bank of St. Louis
-31overpowering control of the Government, so that the Government has picked
out a particular practice in this instance that it wants to discourage,
and that practice is the buying out of existing institutions. How to tie
extent that you buy out existing institutions and do not substantially
lessen competition or tend to create monopoly you are in the clear, but
•when you start to cross the line, then the statute applies, and no state
question could rise superior to it.
MR. POWELL:
Thank you.
MR. SMITH: May I ask you this, Leonard?
The complaint in this case specifically charges that the effect
of the acquisitions referred to has been substantially to lessen competition between the acquired banks.
The first exception set out to the Trial Examiner's rulings is
that Transamerica was prevented from showing the effect of these acquisitions upon the acquired banks.
Since the complaint specifically charges that there was such •
an effect, how can we justify the exclusion of evidence to meet that
charge, to show that there was any such effect?
MR. TOVNSEttD:
I am afraid I will have to ask you to be a little
more specific. I don't concede that any relevant evidence that was offered
in connection with this case has been refused.
MR. SMITH:
Assuming that Transamerica truthfully stated the
facts in its first exception --
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Federal Reserve Bank of St. Louis
MR. TOWNSEi-ID:
MR. SMITH:
I don't assume that.
I aia giving it to you as a. fact to assume for the
-32purpose of answering the question.
MR. TOWNSEND:
The answer to that can be short circuited. If
there is any relevant evidence that has been denied admission it ought
to be received,
MR. SMITH:
narrow than that.
That is not my question. My question is much more
The complaint charges that there has been a lessening
of competition between the acquired banks. Transamerica asserts that it
has been prevented from offering evidence to show that there has been no
such lessening of competition.
If that contention is correct, what is
the basis for justifying the exclusion of that evidence?
MR, TOWKSEND: You are right back to where we started when you
first asked the question.
If there has been any relevant evidence excluded,
it ought to bs admitted.
MR, SMITH:
Do you sdn.it that would be relevant evidence?
MR. TOFiiSEUD:
As to whether or not evidence between the
acquired institutions —
MB.. SMITH:
Competition between the acquired institutions has
boen lessened,
MR. TCM-iSEND: Veil, let me put it this way:
if there is
sufficient evidence in this case to justify a conclusion on the basis of
the premise that I have argued to the Board that there has been such a
sufficient showing of substantially lessened competition over the years,
then for the Board to stop and get individual evidence with respect to
these particular banks, or any one or more of them, would be a perfectly
obvious waste of time, because if the conclusion, if the overall conclusion
must be reached regardless of an individual scintilla of evidence respecting
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-33one or another of the institutions, then the answer, it isn1t necessary
to stop and get it,
MR. SMITH:
Does it seem to you fair to make a charge in a
complaint ~ we are dealing with a hypothesis here — to make a charge
in a complaint and then say to the other side, "We won't let you offer
any evidence to meet that charge because under our theory the evidence
would be immaterial, but the charge is still there?"
MR. TOI'.'KSEi'tD: My point is I don't know of any evidence that
has been excluded and if any evidence that is considered by this Board
to be relevant, I am assuming it is going to order its admission.
cannot answer it any more fairly or openly than that.
it happened.
I
I don't believe
I don't believe any can be introduced, but even if it were
introduced, if it were of such insignificant proportions as to not overcome the presumption that arises from all of the past history we have been
talking about, it would be a vain thing to stop and get it.
MR. SMITH:
It seems to me, to take that argument, it cones down
to this, that if we can get in enough evidence to support our theory
before the others, before we rest, then we are not going to -listen to
any evidence froia the other side which might proceed on a different theory,
MR. TOvJHSESD:
1;R. SMITH:
I cannot —
Isn't that what it comes down to?
MR. TO'lJNSErlD: iJo, it certainly does not come down to that, b\rb
if it comes down to that in your mind, there is nothing I can do about
it, is there?
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Federal Reserve Bank of St. Louis
MR. SMITH:
Let me ask you this along the same lines and along
-34the basis of your quantitative substantiality theory.
What do you do with
the provision of the statute which provides that the acquisition of stock
for investment is permitted provided that the stock is not actually used
to lessen competition?
Wow do you read that out of the statute under
the quantitative substantiality theory?
MR. TOl-.ftSEND:
Certainly not.
IxR. SMITH: You don't?
Well, then, what is the objection to
admitting evidence on the part of the Respondent to show that some of its
acquisitions were wade within that exception?
MR. ICO SEND: A perfectly simple answer to that.
The evidence
is already in the record that they have got applications to branch the
institutions and therefore, they intended all along to branch them, therefore, they intended to eliminate the competition, actual or potential,
and therefore, they are just waiting the day until they can get them out
as independent banks and into the system as branches.
MR. SMITH:
Then you assume from the mere fact that they have
a contract to sell them that they couldn't possibly have bought them as
an investment?
MR. TOVNSEflD:
Considering the last 40 years' history that Mr.
Stewart talked about e.s the background?
MR. SMITH:
That is my question.
ME. TOJJNSEMD: It just stands out to me just as clear ~
ME. SMITH:
In other words, the mere fact that they have
entered into a contract to sell, regardless of whether it might be a
profitable contract, would preclude them from offering evidence to show
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Federal Reserve Bank of St. Louis
-35that they acquired them in the first instance, because they thought they
would be a profitable investment?
MR. TOl.liSEiJD: No.
They have put in all that evidence. They
put in the president, who said all these were bought for investment and
we destroyed that evidence, I think by shov.ri.ng —
Kit. SMITH:
Did you destroy it or did you object to its
admissibility?
MR. TGVHSEND:
On the contrary, Mr. Husbands got on the stand
and talked about these acquisitions as having been bought for investment
purpose and I demonstrated the fact that if they were such good investments
as he was bragging, why was he selling them to somebody else vho was not
tho true c?wner of Transamerica Corporation?
MR. SMITH: May I ask you a question, Sam?
MR. STEWART:
Yes.
MR. SMITH: Do you have any observations to make either of you,
about those questions?
If I ask a question of either one of you and the
other side vents to Sc.y anything about it, I would like for you to go
ahead.
MR. STEWART:
I would like to add one comment on this question
of s.J.e and investment purpose:
It has always been my conception of an
investnerit purpose, as including the desire to realise capital gains as
much as to realize income. Mr. Townsend, in his reply brief, has raised
the question why should Transamerica want to sell some banks which it owns
one hundred percent to Bank of America, which it only ovns seven and sixtenth percent because it is getting a hundred percent of the dividend now,
and will only get 7.6 percent of Bank of America dividend?
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Federal Reserve Bank of St. Louis
\
-36The answer to that is perfectly obvious. When you have .
substantial capital g«. ins, and it appears in this evidence that Transamerica has substantial capital gains in every one of these banks because
they have all been profitable, there comes a tine when you want to
realize on a good investment and you feel that you have got all that it
is worth to you as an investment out of it, and, therefore, I think
this matter of a contract of sale being in existence has no bearing upon
the question of investment purpose at all unless you determine whether
they were trying to use it for sonething else or just to make money on it.
MR, SMITH: Leonard, I would like to suggest to you that
evidence of competition in the fi.ve~st.ate area, coming from banks from
outside of the five-state area, was relevant on the ground that competition
is not, a question of source or location, but is a question of activity.
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Federal Reserve Bank of St. Louis
-.37If, in fact, the Chase National Bank, for example, has a man in
California who is trying to get Hetro-Goldwyn-LIayer, we will say, to borrow
from Chase, money which -bank of America is trying to get Lletro-Goldwyn-l.layer
to borrow from Bank of America, doesn't that seem to you to be competition
in California between Chase and between Bank of America?
MR. TCTOSSND: There is sor.ie competition, if all you want is an
answer yes or no; of course it is, but that isn't the point in the case.
The 'Admission, of that testimony end all of it wouldn't change one iota the
outcome of the case if it doesn't substantially affect the basic issues
involved, and how it substantially affect the basic issues involved when
eighty to ninety percent of all of the people in the State of California
hcve got to look to their local banks for service?
The evidence is clenr it is only the big accounts in which the
branch banks or buying banks around the country compete. They are not
competing for the little fellow out on the street. He is the corner grocery
man, the fellow who is buying anc1. selling automobiles, or whatever may be
the fact, so that if you stop and took all that evidence and produced a
great amount of evidence that there is competition between New York banks
and bonks in California, for the big accounts, you wouldn't, by any means,
overcome the Question of whether the little fellow in all of these areas
should be continued to be protected.
MR. £LITE:
That is your assumption and the basis or is that
your assumption, on the basis of the exclusion of the evidence? How do
we know wbxt that evidence would have shown unless it is admitted?
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Federal Reserve Bank of St. Louis
-38M.E. TOVjNcil^D:
Because there is enough of that evidence in to al-
ready indicate it. There is enough answers in the record for you to make
tliLt determination.
I always refrained from objecting until enough had come
into the record to show what the nature of it was goinp* to be.
IviR. SluiTH:
AS competition from outside states?
MR. TQV-iNSEND:
AS to competition from outside states. You will
find, if you look into the record, that a man said that you only compete
for the big accounts and it is in the record and h&s been received.
MR. STUART:
I gave a slight indication today in oral argument
that these big accounts, so-called, involving out-of-state customers
represented fifty percent of Bank of America's total loan volume over a
hundred thousand dollars, snd of the commitments that they had made, and
represented 25 percent of the total loan volume.
MR. TOVvNSMJD:
If it represented nine percent of ail of the
loans made by the Bank of America, it would still not change the fundamental
picture that all of the people out there in California, or the majority of
them, have got to look to local banks for service so it wouldn't change
the picture at all.
kR. VAiXA!JAN:
Following up Joe's contention, as distinguished
snd contrary to yours, I don't recall anything in the record other than two
banks from out-of-stete, eastern banks, which were allowed, or whose testimony was accepted in this case, and I would appreciate it if you would m&ke
a.memorandum and give it to me to show me where I can go to the record and
find where there is in the record that will go to court review, testimony
tending to show competition from outside sources, similar to that?
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Federal Reserve Bank of St. Louis
-39IviR. TOV.KSEKD:
I won't have any difficulty doing that.
I,iR. Vjii,D>i;/.N:
I just skipped it.
I want to see how many cases
we hf-iV-3 pot of that.
11R. SMITH: Governor, I think you made a slip of the tongue,
just in case anybody might have a feeling otherwise, I don't mean to be
mekinp; any contentions when I am asking these questions.
I am trying to bring
out —
MR. VA^LAiviAN: Your theory of the case, what I should have said.
1','iK. SiilTH:
Yes.
I an trying to develop counsel's theories to
some point on which some r-embers of the Board, have indicated an interest
and. which I think they would be interested.
MR. ST~&V->xf.T:
Before you leave this cuestion of the out-of-state
banks, I would just liks to add one point, that if those were recognized
to be in substantial cor.petition with the barks that we have involved in this
proceeding, it would certainly change the figures upon percentages of market occupancy cuite strikingly, without saying the extent.
JiiR. Sl.ilTH:
Ily suggestion is that competition is activity, that
it doesn't make eny difference where it comes from, that if-two banks are
in the anteroom of an office of a president of a big company trying to get
his deposits or his loans, that those banks are competing for that business, r-r-ardless of where they are located, and that you have got a charge
in the conpleint here that there is a tendency to eliminate competition in
each of these stctes, end I suggest that that is competition in those states.
MR. TOV^SIUNiD: ft ell, apparently three years of trial end three
years of review of the record and three years of looking at the rulings of
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Federal Reserve Bank of St. Louis
Governor Evans haven't convinced you as yet of what we have been trying to
sf-y £.11 along; namely, that you don't look at competition that is remaining,
You look at what has been eliminated.
MR. SMITH:
I may be a hopeless case, Mr. 1'oMisend.
ME. GESZLL:
It is our position that the affect on competition
requires you to look at the nature and character of the existing competition, how it got there and where it is going, and i^r. Evans and ±vir.
Toms end have said it was not, and we argued vehemently today that we
thought that was clear error.
IvIK. TOVJKSEKL:
Let me make this point as strongly as I know how,
because it stands out in bold relief here in the course of these discussions, fcnen the Clayton Act raa passed to arrest monopoly in its incipiency, and prohibit its stock acquisitions having the affect of substantially lessening competition, it was not thir.king ir terms of competition
that remained after the acquisitions had been effectuated.
It was think-
ing about the business of eliminating the competition that existed before
the acquisition was made.
Hence, when you look at this picture, don't look and say "There
is G lot nore competition in the field."
Look and see if there wouldn't
be some more or a lot more if that which has been eliminated were restored.
Thet is the way to look at this case. You look back at what happened.
YOU don't look forward &s to whether or not there still nay be some.
Monopolies take Cc.re of that, in the monopoly statutes; namely,
the Sherman Act.
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Federal Reserve Bank of St. Louis
LiP. cTiiM-cJVi1:
I am a little bit at a loss as to now you can look
-41b?..ck and see whether there would be no re or not when all the evidence which
was designed to prove that has boen excluded.
MR. TOVJ'JSH-ID:
I don't agree with, that. The bringing in evidence
on that h&en't the remotest bearing on whether or not they bought what
they did buy was substantial enough to linit con/petition.
MR. V/JtDi-u.u^: Have v e any statistics of the business existing in
these areas prior to the acquisitions complained of in the Board's case?
LiR. TOV^SOT): The best -MR. V'.^'Lu-ii.ihN:
In other words, I want to find out where can we
go to find out what has b^en eliminated that you referred to.
HE. TOVliSjiND:
Just take a look at the progressive growth of the
institutions.
MR. V*J;DjhlifcN:
That has nothing to do with competition.
Mi. GSbELL: There is nothing in the record, about competition.
KK. VKr;DM.^ii\i:
I want to find out if there is anywhere in the
record we can go, because this is an inquiry as far as the Board is concerned — to hell with the record — if we can get sone information from
outside for our information, I think it should be gotten, end I want to
find out is there any statistical data anywhere -I-ilv. TOV.'NSliKD:
Yes.
L.'B. V^ll^,j-.N:
— upon which we can base even th«a roughest estimate
of the business that existed these complained-of are&s?
r/iE. TOV'TjSaiD: Y e c .
k.R. V/iKDAi.Uii^:
Vrould you be good enough to give us a memorandum
on where ?;e can go and get it?
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Federal Reserve Bank of St. Louis
-42MR. TOWN SEND:
I can tell you ri-?ht nov,T where you will find it.
There is Board's Exhibit 257, the community exhibit.
It shows, among
other things, the acquisition of stock of bank after bank in individual
communities. Lay contention made this afternoon is no different than the
one I an making now, that as everybody agrees, local banks compete.
That Exhibit 257 shews the elimination of competition, in those
communities by the buying of banks at a time when these banks were operating
as independent institutions, and that is all there is to it.
MR. SL1ITH:
Sam, may I ask you this, in connection with your end
Hr. Gesell's contention that the Board, should have admitted evidence relating to competition inside the five-state area, as between commercial banks,
on the one hend and. insurance companies, building and loan associations,
federal savings associations, etc., on the other?
Do you seriously contend that there is e- substitute for the
checking account, the payment of deposits on demand subject to check?
MR. STSW^RT:
I would like to snswer that this way, Mr. Smith:
The witnesses here, our economists, as well as the Board's, agreed that
there was no complete substitute now operating in. that limited function of
the commercial banks.
The evidence shows that that is not even one of the
major functions of the bank, i^ost of their functions and most of the
matters in which they compete are the loan side rather than that side.
They are all gl&d to take all the deposits they can get, but
there is evidence elso that there is a substantial amount of potential competition available in that field; for example, Dr. Wester-field pointed out
that the demand deposit checking account system, which is in vogue in this
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Federal Reserve Bank of St. Louis
-43country at the present time, has "been developed only in the last fifty,
seventy-five or a hundred years, anci that there are many places all over the
world which have different systems which accomplish the sane purpose.
Dr. G-oldenweiser ssid he had no doubt that if this particular
system hadn't grown up here it would have been invented and there is
evidence in the record here of the seedling of a nev, system now.
There is evidence that major corporations all over the country
are being admitted to clearing houses in order to issue and pay their
own checks through the clearing houses, without having to go through the
commercial banks, so my answer to your question in brief is that in that
particular segment of their business, commercial banks do not have a complete substitute actively functioning now, but there are other systems
available and had wide use in other places.
MR. TGMISjiNL: The other system available seems to me to constitute, we are all going to join
the clearing house and draw checks on
ourselves.
ivIE. GESELL:
I think whether there is anything available or not
overlooks the legal argument we are making.
The legal argument is that
that isn't the way commercial banks make money.
That is not where they
conpete, that this is a competitive statute concerned with the lending of
r:oney which comr.ercial banks do, arid with the lending of noney by other
institutions, and if you want to measure competitive effect you have to
look at those functions, and to think that we could have a case here, as
we seem to neve, about commercial banking that never looks at loans, I
think is all you hc-ve to say to prove what a syn then tic kind of a proposition
that is.
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Federal Reserve Bank of St. Louis
-44Now, this cellophane crse I was talking about that 1 am trying
is one in point. The government contended, "Veil, cellophane is the only
chemically made wrapping material or it is the only purely transparent
wrapping material."
Those were characteristics of cellophane but the
product competes in the market with things that may not have that characteristic and you have to measure the market by the full competitive circumstances.
ki.K. SiviITH:
That, then, would be your answer to ray next question,
1 assume, that except as a hypothesis solely for the be.sis of argument
that commercial banks occupy e. unique and distinct position in our economy,
because of the demand deposit checking service function, you would still
contend that the evidence respecting competition between banks, on the
one hand, and insurance companies and building loans, on the other with
respect to loans, savings banks, and receiving deposits, is relevant to
the issue of competition and tendency to monopoly hore?
M£. STLW/JAT: Absolutely.
MR. GESLLL: Yes, and to use ?:!r. Towns end's phrase, relevant to
the extort of whether or not there is a monopoly pop-er because if you
c^ri't make the loans you don't have any deposits.
Ml;.. LvJTH:
Your position is that even if we make the assumption
as to the unique organization, evidence which was excluded as to the competition between this ur..ioue organization and the other organizations, is
relevant to a determination of the case?
i,lR. GE3KLL:
I/iE. JSklTH:
Yes.
You would, not concede the.t if you make the assump-
tion that evidence is not relevant?
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Federal Reserve Bank of St. Louis
MR. GESELL: Wo. V e feel it is relevant.
IvIR. STEV&RT: I not only say it is relevant, it is essential if
you would ?et adequate notion for what the completion is for the credit
function, which is the business for which the banks conpete.
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Federal Reserve Bank of St. Louis
THE C&JRM1: Five minutes.
AdE. GliSiLL: We are trying to keep our answers short.
MR. SMITH:
I am through. I retire now.
TEE CHKIEUJ5: Mr. Korton?
MR. ivOf-TON: No further questions.
THE ClitJflJ-iK:
I rno^e we adjourn.
I thank you £.11 very much.
(Whereupon, at 5:55 o'clock p . m . , the Conference was closed.)
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