Full text of Minutes of the Board of Governors of the Federal Reserve System : Meeting Minutes, July 27, 1937, Volume 24, Part 3

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1036
A meeting of
the Board of Governors of the Federal Reserve System
1418 held in
Washington on Tuesday, July 27, 1937, at 2:30 p.m.
'PRESENT:

Mr.
Mr.
Mr.
Mr.
Mr.
Mr.

Eccles, Chairman
Ransom, Vice Chairman
Broderick
Szymczak
McKee
Davis

Mr. Morrill, Secretary
Mr. Bethea, Assistant Secretary
Mr. Carpenter, Assistant Secretary
Mr. Clayton, Assistant to the Chairman
Mr. Thurston, Special Assistant to the
Chairman
Mr. Wyatt, General Counsel
Mr. Panlger, Chief of the Division of
Examinations
Mr. Parry, Chief of the Division of
Security Loans
Mr. Dreibelbis, Assistant General Counsel
Mr. Wingfield, Assistant General Counsel
Mr. Leonard, Assistant Chief of the Division
of Examinations
Mr. Thomas, Assistant Director of the Division
of Research and Statistics
Mr. Solomon, Assistant Counsel
Mr. Dembitz, Research Assistant in the Division
of Security Loans
ALS°

PRESENT:

Mr. Hugh Leach, President of the Federal Reserve
Bank of Richmond
Mr. J. G. Fry, Vice President of the Federal Reserve Bank of Richmond
Mr. M. G. Wallace, Counsel for the Federal Reserve Bank of Richmond
Mr. W. R. Milford, Managing Director of the
Baltimore Branch of the Federal Reserve Bank
of Richmond
"

Ther
.
'
was presented a letter addressed to the Board today by PresiLe
"h of the Federal
te.oti
Reserve Bank of Richmond with respect to the
d

th

of the

e

Union Trust Company of Maryland, Baltimore, Maryland, that

tNt c

give its consent, under a condition of membership to which the
ompan
7 is subject, to the transfer of the stock of the trust company




1037
7/27/37
-2held blr
the City
Certificates Corporation as contemplated by a revised
P1411
submitted by
the t st company to the Federal Reserve Bank of Richraond f
°r the retirement of the certificates of beneficial interest issued
by the clu.,
Y CertificatPs Corporation to the waiving depositors of the
t1711.st company
The letter read as follows:
"On June 7, 1937, we forwarded to you a proposed amended
eement between the Union Trust Company of Maryland,
Ba14.
Bal
:more, Maryland, and the City Certificates Corporation,
the fli()Ise/ Maryland, which amended agreement was proposed for
.t'Irpose of liquidating the City Certificates Corporation.
he t9n July 25, 1937, Mr. Thomas B. McAdams, President of
Le;
Trust Company, submitted orally to Messrs. Hugh
er,?h, J. G. Fry, M. G. Wallace, and W. R. Milford of the Fed0,:.Reserve Bank of Richmond, a revised proposal which is
"J-1!led in the
attached memorandum.
"With respect to the revised proposal, I submit the
J-Lowing
comments:
Necessity for action
(1) Both
large and small certificate holders are
Urging a satisfactory settlement for the non;.bearing certificates of no definite
=

(2) The
continuelexistence of the City CertiCicates

Corporation
handicaps the growth and earnings of
the Trust Company.

(3)

(4)

(1)

The present market value of certificates of $40 to
45 has been created largely through purchases by
insolvent borrowers in order to effect settlement
of their indebtedness to the Trust Company. Inasmuch as the volume of such purchases is diminishing,
it is reasonable to assume that the market value of
the certificates will decline and the disappointment
of certificate holders will be aggravated.
In order to fix a basis for calculation, it was
necessary to close the transfer books for certificates, as a result of which the certificate holders
know that
a plan is being prepared. If the books
re reopened
it will be difficult for the management
"0 give a satisfactory explanation.
Benefit to certificate holders
Over one
half in number (19,6777f certificate
holders would be paid in fuli in cash. The renaining




1038
7/27/37
-3"18,701 certificate holders would receive some
cash and marketable stock.

(2)

Voting control of the Trust Company would pass
from the old stockholders to certificate holders.
Benefit to Trust Company
The Trust Company would be able to compete
for business on an equal basis with other Baltimore
1?anks; an opportunity which it has not enjoyed since
its reorganization.
Rights of Stockholders

(1)

Regardless of whether or not the reorganization
plan of the Union Trust Company was equitable to
all parties concerned,
the stockholders of that
Company acquired certain enforceable rights under
the plan, which rights must be given due consideration at this time. The original stock was not
donated
to the depositors. The ownership of the
Unlon Trust Company vests in the stockholders of
he City Certificates Corporation and the nonassenting stockholders of the Union Trust Company
subject to a lien on recoveries and earnings
?qua' to
the face amount of the outstanding noninterest bearing certificates. In the opinion of
°ur counsel and of outstanding Baltimore attorneys,
he City Certificates Corporation cannot be
llquidated without a vote of two-thirds of its
stockholders
nor can substantially all of its
assets be transferred to certificate holders without the
consent of two-thirds of the stockholders.
Mr. Webster Smith, a Baltimore attorney, told us
in view of the advice given by several leading
ms of attorneys of Baltimore, the directors of
. _he City
Certificates Corporation would be unwilling
Put any plan involving the distribution of substantially all of its assets into effect without the
approval of stockholders and he did not think the
stockholders could be induced to vote in favor of
anY proposal unless it appeared that they would
1.?elve benefits substantially equal to those provlued in the plan under consideration.
Recommendation
.From my knowledge of the banking situation in
BaitImere, I
am convinced that the Trust Company will
be seriously handicapped if an equitable plan is not
effected at this time.




1039
7/27/z7
-4"In my opinion it is impossible for anyone
to determine the relative monetary value of the
rights of the certificate holders and the stockholders. As to whether or not the rights of the
stockholders are properly valued in the proposed
plan is a matter of opinion but I do not think
the amount proposed is sufficiently large to
justify the responsibility that would be assumed
by refusing the request which is conditioned upon
the consent of two-thirds of the certificate
holders and two-thirds of the stockholders as
well as the approval of the Bank Commissioner of
the State of Maryland. 1, therefore, recommend
that the requested Permission be granted."
There was also
presented a memorandum dated July 27, 1937, preilired by Mr.

Leonard, Assistant Chief of the Division of Examinations,

tIblilititing the
following recommendations of the Division of Examinations:
a,
"There is a serious legal question as to whether the
:
:
4:
1 rectors of
the City Certificates Corporation would be
J
(14ified
in
distributing the assets of the corporation
es
etoek of
the Union Trust Company) to the holders of the
ofrt
;
ificates of beneficial interest without authorization
bi 'he st
ockholders, and the recommendation of this
vil°11 depends upon the determination of that question.
If it be determined that the directors would be
A
ti
-ein making such distribution without stockholders'
et
tL'°n, it is
recommended that the Board reaffirm its posicomtl
, that a distribution to the stockholders of the
ilri;P°ration at the expense
of the certificate holders is
tr :
i t
4,ified and that the Board refuse its assent to the
Ceri er of the stock to the stockholders of the City
3-flicates Corporation.
hold If, on the other hand, it be determined that stockbealkebrst action is required, it is recommended that the
to :
tl je advised that the Board will not withhold its assent
aric:e transfer of
the stock of the trust company in accord1101111
'
1th a plan adopted by 2/3 in number of the certificate
sent:ft° who will not receive cash payment-in full and reprebaidl!;Ig in
amount 2/3 of the certificates which will not be
c
full provided
that the plan as submitted to the
ertif
detailleate
holders clearly and simply sets forth the
peeif Qf the plan and advises the certificate holders
Posed IcallY not only what they will receive under the profurth Plan) but what they are giving up; and provided
er, that the
management of the trust company and the




1040
7/27A7
-5"corporation agree that, in explaining the plan or
s°11,citing assents, no representations, either direct
°r indirect,
will be made to the effect that the
doard has
approved or will approve the plan.
. "The basis for the second reconinendatlon is that if stockholders'
action is
required, representatives of the trust
?emPany and the Reserve Bank maintain that
it.cannot
be obtained without some consideration. In such event, it would appear that
the queption resolves itself into a question
of price and it is submitted that the question
of the
fairness of price is not a matter for
determination by the Board, but a matter for
neg°tIation between the interested parties."
The

memorandum also suggested
if the directors of the City
that
Certificates Corporation
are in a position to distribute the assets of
t'4
corporation to the certificate holders without submitting the matter
tothe
stockholders, the fairest and most simple plan, which would
eliiriate the
preferred status of the non-assenting stockholders of the
Trust C
ompanY, would be the organization of a new bank to succeed

the

present

institution, the transfer by the present bank to the City

Certificates

Corporation of the stock of the new bank, and the distribuq°11 Of all
of the
stock of the new bank to the certificate holders after
b.z large
a cash distribution
as possible has been made.

In connection with the legal question mentioned above, reference
174 44de to
a memorandum prepared by Mr. Wingfield under date of July
147,
which statd that, while it might be argued that the board of
tipDr°

ot th

could dispose of
the assets of the corporation without the
cr the

shareholders, since, in any action thich the directors

the eCitY Certificates Corporation might take they would be guided by
%lion of
their otn attorneys, it did not seem to be desirable for




1041
7/27/Z7
-6the
Of

Board to assume the responsibility of suggesting that the directors
the co
rporation be guided by an opinion of counsel for the Board.

Ther'efore, it
was suggested that, if any action taken by the Board of
Cc7erncr8 be based on
the question whether the directors of the City
Certificates Corporation may act independently of the shareholders of
the acn'oration, such action be based on a written opinion of reputable
ttO
vs for the
City Certificates Corporation.
Attention
was called to the fact that the revised plan submitted
bY the Ti
--aion Trust Company does not differ greatly from the plan
Pl'eviollay

submitted but does provide for approval by two-thirds of the

shareholders of the City
Certificates Corporation as well as two thirds
Of
holders of the certificates of beneficial interest. Mr. Ransom
l'aiEed a question
whether the condition of membership under which the
1:'el14141"' of the Board is required was prescribed as a means of prothat
the stock of the trust company would be retained by the City
4rtifi0ate8 C
orporation until the certificates of beneficial interest
Ilere P4id in
full or to give the Board an opportunity to review any plan

co ch might be advanced at an earlier date for the dissolution of the
11/°tation and
the disposition of its assets. The opinion expressed
by rawb
era of the staff who had participated in the discussions at the
the a
doption of the condition was that it had been imposed for
the
latter
Pose.

'Like

b4ring a discussion of the actions which might be taken by the
thp
- Premises, the opinion was concurred in by the members of
%etc)
41'1 that,

in order to afford an opportunity to study the matter




1.042
7/27/z7
-7further,
action

should be deferred.

Thereupon Messrs. Windfield, Leach, Fry, Wallace and Milford
left the
meeting.
A further discussion of the plan proposed by
the Union Trust Company ensued and it vas agreed
that the matter should be placed on the docket for
cionsideration at
the meeting of the Board on ThursuaY, July 29, l9Z7; it being understood that Lir.
Paulger ill be prepared at that time to discuss
the recommendation of the Federal Feserve Bank of
Richmond as contained in Mr. Leach's letter and to
Present any recommendation that he may have to
make in connection therewith.
At this
point Messrs. Paulger, Leonard and Thomas left the room.
Reference was made to the draft of a proposed revision of
RegIllati
"Ty Extension and Maintenance of Credit by Brokers, Dealers
MeMbers of
National Securities Exchanges,which was presented at the
111-11C of
the Board on June EO, l97.
M,
Parry described briefly the important changes proposed to
Diade in
the
regulation and stated the principal arguments which
:
1:t be
ad
anced for and ogainst the changes. In connection particularly
the Pr°Posal.to
prescribe the same margin requirements for short
a2 are required in
connection with purchases of securities on
'44'giri, M.
Parry stated that he had discussed the provision with Chairra4u
LaNic
and Mr.
David Saperstein, Director of the Trading and Exchange
ti\'41c)rly of th
e
the
Securities Exchange Commission, and that they favored
of '
.uch a provision in the regulation.
At the conclusion
of a discussion of questions
!
3,r"ented by the proposed changes, Mr. Szymczak
(
!ved
the F chat a letter, reading as follows, be sent to
ederal reserve banks:




4

1043
7/27/37

-8"Inclosed are six copies of a tentative draft of a pro.1.°8ed general revision of Regulation T, Extension and MainIrrince of Credit by Brokers, Dealers, and Members of
lrlonal Securities Exchanges, which has been prepared at the
b ection of the Board but which has not yet been acted upon
Y the Board. Additional copies are being sent under
separate cover.
•'° rill
note that this is a preliminary Craft and
that
au it is not
for publication.
eh "Please submit copies to any national securities exsian
ri Ces locate& in your district, and request them to conu!r the draft in
confidence, rith every precaution against
cc
,
tice bY the press, and to submit to you in writing their
tfrullents, criticisms and suggestions. Please forward these
!, the Board as soon
as they are received, and furnish to
B0
ore
within a reasonable time any comments, criticisms
suggestions of
your own.
Feis anticipated that some of the exchanges and some
Of "It
deral Reserve banks will submit their comments
Within,
two or three weeks, but that otherE will desire
time. All comments, however, should reach the
Board
"ru not
later than September 15, 1937."

p

ti

Carried unanimously.
During the course of the discussion of Regulaon T, Mr. Proderick suggeFted that action should
u-be taken
Regulation U,
L
'by the Board to eliminate in Relation
by
Banks for the Purpose of Purchasing or
ELrr ing Stocks Registered on a National Securities
)(change, the distinction between old and new loans
end it was agreed that Mr. Parry should prepare for
CO
at the meeting of the Board on Thai'sJuly 29, a draft of an amendment to Regulation
u which would
effect such an elimination.

toarci

Mr.. Ransom

referred to the action taken at the meeting of the

Onjun'
19=;7, requesting counsel to prepare tentative amend41 11t.3
ti le t° certain sections of 8.2700, a bill to provide for reorganizing

ttabl
le
.8 Of the

Government, extending the classified Civil Service,

ror ( 11ing a general auditing office and department of welfare, and
:
Nlberher PurP°ses, and stated that, following conferences of senior
r4q4lor

8 Of the

11.cl

aff, Mr. Wyatt had submitted to him (Mr. Ransom) a
st,

dated




July 12, 1937, to which was attached a draft of the

1044
7/27/37
-9Mendinents requested by
the Board.

At thm suggestion of Mr. Ransom, Mr.

reviewed the present status of the reorganization bills in the
Senate Etnd
House of Representatives, stating that the features of the
Senate bill
which were objectionable to the Board were not in the House
bills and
that he was watching the progress of the latter closely with
111.0W tO
bringing

ti011

to the attention of the Board promptly the incorpora-

in such
bills of any provisions to which the Board had indicated
44
objection. Mr. Wyatt
also suggested that any action by the Board
Itith
respect to S.2700
might be deferred until a chairman of the Special
4114te
Reorganization Committee is named when, if it appeared that the
411 is to
receive consideration by the Senate at this session of
Collgress, a
request might be made by the Board that it be given an
tIPP(IrtilllitY to
express an opinion with respect to the objectionable
hatizres of
the Senate bill.
It was agreed by the members present that
the matter required no action by the Board at
this time.
The
re was then
presented a letter received under date of July 19,
Nrct p
i‘eEltitti
resident Peyton of the Federal Reserve Bank of Minneapolis,

1Z7,

e 48 follows.
EIrt,.,:Leaving here Tuesday morning, last, I spent Wednesday
the°n, Thursday, and Friday in Helena. Before leaving
the-:' and after conferences
with its officials, I thought
,
404-7
441
,4
:
,
8 a very good chance of buying the building of the
the4Jire Insurance Company for the Branch for $115,000.
cost to us of remodelling for our use.
aYI
Treazt
:
d
received a telephone call from Mr. Cunningham,
tiett Tile!: of the company, advising that the company had
r
Pilrelia;"elY
decided not to sell to us. He assured me the
coth„:se Price was
perfectly satisfactory, but that the
'
-""Y did
not feel it could make any plans at this time




1_045
7/27/37

-10-

ehc°mPassing the sale of the building. Doubtless local
civic sentiment, which seems 100% determined that ye build
in
snlbsuilding at Helena, has had some effect on this deToday I wired Mr. Cunningham as follows:
'Will not exercise option until twenty-eighth.
Should you have change of heart before that
time advice me.'
"We must, therefore, assume that we will proceed with
.ection of a .100,000 building in Helena, vith the
additional
cost of ‘,15,000 for the lot, if I hear nothing
lilrthr from the Montana Life Insurance Company by July 28.
I have instructed Mr. Towle to exercise the option
on
JulY 28 unless I advise him to the contrary."

Z

Chairman Eccles stated that he had requested that the letter
bediscussed at the meeting of the Board today for the reason that if
the action
proposed by Mr. Peyton is not entirely satisfactory the
toard
should advice him before tomorrow, July 28, that being the date
Pot"thich it is proposed to exercise the option for the purchase of
the
'
l te for the Helena branch building.
No objection was raised to the program
outlined in Mr. Peyton's letter and it was
agreed that no further action need be taken by
the Board in the
matter at this time.
Solomo

At thiz point Messrs. Thurston, Wyatt, Parry, Dreibelbis,

n
Dembitz left the meeting and consideration was then given
t° th-e f
0110wing mattersand the action stated with respect thereto was
ri by
the Board:
The minutes of the meeting of the Board of Governors of the

Pede

1'61
'
1 Reserve
Re,
ee

System held on July 26, 1937, were approved unanimously.

Letter to
Mr. Worthington, First Vice President of the Federal
Bank

of Kansas City, reading as follows:

"In
ju
view of the statements contained in your letter
a41-1. 29, 1937, the Board approves the payment of
--s in excess of the maximums provided in the

Or




1.046
7/2747

-11-

'Per onnel classification

plan for the positions occupied
the following employees in the amounts shown:

Annual
salary

Nam
Position
hede

ck Eckstrom

1Yde C.
Addison




Asst. Supervisor,
R.F.C. and P.W.A.
Custody Dept.,
Omaha Branch

$2,580

Junior Clerk-A,
Head Office
Approved =anima

1,896

Maximum for
position in
personnel
classifiestion plan

$2,400

1, 00"

Y.

Thereupon the meeting adjourned.

Secreta r.
f
. "Cgt"1"4411.

Chairman.