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376 A meeting of the Board of Governors of the Federal Reserve 878tem was held in Washington on Friday, March 17, 1939, at 11:15 a. MI PRESET: Mr. Mr. Mr. Mr. Ransom, Vice Chairman Szymczak McKee Draper 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. Dreibelbis, Assistant General Counsel There were presented telegrams to Mr. Paddock, First Vice Pre sident of the Federal Reserve Bank of Boston, Messrs. Kimball, }lays and Stewart, Secretaries of the Federal Reserve Banks of New -2-(:)rkt Philadelphia, Cleveland and St. Louis, respectively, Mr. eelciweill Chairman of the Federal Reserve Bank of Kansas City, and 141'sal e,Secretary of the Federal Reserve Bank of San Francisco, attititig that the Board approves the establishment without change by the recierai Reserve Banks of St. Louis and San Francisco on March 14, bY the Federal Reserve Banks of New York, Cleveland, Kansas City and 411 l'rElneisco on March 16, 1939, and by the Federal Reserve Banks of lklaton and Philadelphia today, of the rates of discount and purchase tlItheir existing schedules. Approved unanimously. Mr. Clayton referred to a draft of reply which had been preby Counsel to a letter received under date of March 11, 1939, 377 3/17/39 tItqa D. W. Bell, Acting Director of the Bureau of the Budget, request14 the views of the Board of Governors on a draft of bill, which it '412113 understood the Chairman of the Federal Home Loan Bank Board in- tended to submit to the Senate and House Banking and Currency Cammittees, to amend the Federal Home Loan Bank Act, the Home Owners Loan 4 "of 1933, Title IV of the National Housing Act, and for other Poses. Mr. Dreibelbis stated that similar proposals were made 148t Year in Senate Bill 3874 on which the Board submitted a report to tlae Chairman of the Banking and Currency Committee of the Senate tinder date of May 27, 1938. The draft of letter was read and cer- ri s tatements contained therein were considered in the light of INeEtions presented by Mr. McKee. At the conclusion of the discussion it was understood that Mr. Dreibelbis would redraft the letter in the light of suggestions made during the discussion. At this point Mr. Dreibelbis left the meeting. 14r. Wyatt stated that recently J. C. Persons, President, and NIley J ohnston, attorney, of the First National Bank, Birmingham, 4E441.11, called on Mr. Ransom and made the request that the Board of °111'9'ernors file a brief as friend of the court in a test suit which 44(1 been brought against the bank to determine the bank's liability to beneficiaries of trusts administered by the bank on mortgages Ilkeri in the name of the bank and sold to the various trusts. The 378 3/17/39 representatives of the blank stated, Mr. Wyatt said, that a similar request was being made of the Comptroller of the Currency and the Reconstruction Finance Corporation but not of the Federal Deposit Inellrance Corporation, that the bank had lost the case in the lower ecnats and was making an appeal to the State Supreme Court, and that the loss to the First National Bank in suits of similar nature that Light be brought by other beneficiaries amounted to approximately Ils°00,000 and a loss of t800,000 would be suffered by the Birmingham NSt and Savings Company. The representatives of the national bank 4180 stated, according to Mr. Wyatt, that neither of the banks had ellgaged in the business of making mortgage loans for its own account, bUt --at in order to have available investments for trust funds they he'd Inede each loans when applied for with a requirement that all zicirtgages meet the requirements for trust investments and had placed the 111°rtgages in trust accounts when trust funds became available for —cvnent, an entire mortgage being placed in a single trust account elliDarticipated among several trust accounts depending upon the ciretketances. lAr. Wyatt stated further that under a technical construction t}j, law such a practice is regarded as "self-dealing" and that it is ti Well settled principle of law in such circumstances, that if lose results, the beneficiaries have the right to require that the 379 3/17/39 -4-- 'hal* repurchase the mortgage and restore the funds to the trust with itterest at the legal rate. He added that the representatives of the Ilret National Bank of Birmingham represented that banks in Alabama 14ight be called upon to make good losses amounting to a total of apPr°Ximately $15,000,000, and that the representatives had in mind tbst, if the Federal banking supervisory authorities would file briefs as 1'r/end of the court Pointing out the difficulties which banks are 444r in investing trust funds, they could impress the court that the under consideration was not an isolated case but should be considered from a national standpoint. tar. 'Wyatt said that the repre- ealitetives of the First National Bank had in mind that the Board's brief would admit that the practice was bad and was now so recognized 14 the Board's Regulation F, but would express the opinion that it 414 been engaged in in good faith, that it was merely a technical breach of trust, and that, therefore, the bank should not be held t°/' the loss suffered by the beneficiaries. At this point Mr. Leonard, Assistant Chief of the Division Ot xe llinations, and Mr. Wingfield, Assistant General Counsel, joined the Meeting. Mr. Wyatt said that after the matter had been discussed with the representatives of the First National Bank of Birmingham, "Mfr. RE1/718°I/1 requested that they submit a draft of the kind of brief they 11°1114 expect the Federal supervisory agencies to file, that this was (104. by ' Mr. Johnston, but that the draft received went considerably 380 3/:17/39 -5- Allthar than MBS indicated during the discussion since it would de- the practice and put the Board in the position of assuming that th " a was no wrong doing on the part of the bank. Mr. Wyatt added that Mr. Ransom had inquired of the bank's representatives whether, it a Federal agency were to intervene, it would not be more appropriate r(* the Federal Reserve Bank of Atlanta to file a brief, that the repIlecentatives did not discuss this question, and that in order to get at)le of the facts surrounding the situation he (Mr. Wyatt) had talked to 1111'• Parker, President of the Federal Reserve Bank of Atlanta, over the telephone and found that the representatives of the First National taw, had already requested the Federal Reserve Bank of Atlanta to interv. erle in the suit and that under date of February 8, 1939, Mr. Parker 114d addressed a letter to Mr. Johnston setting forth the reasons why clid not think it would be appropriate for the Reserve bank to intel"Ire a. the or Mr. Wyatt stated finally that his office had conferred with of the Comptroller of the Currency and the Reconstruction -Lice Corporation regarding the matter and, while a decision had 11°t been reached, it appeared that they would not be willing to file a brier. Mr. Ransom stated that if losses in the amounts estimated %Id develop they might seriously impair the solvency of both the eti°4a1 bank and the trust company, but that, regardless of this 381 3/17/39 -6- sitUation, he did not see that there was any action the Board appro11/lete1Y could take in the matter. Mr. Wyatt said that it appeared *0111 his conversation with Mr. Parker that it would be possible for the banks to settle any suits brought against them for less than the total amounts stated. It was agreed unanimously that the Board should not intervene in the suit. In reaching this decision it was understood that the letter advising of the Board's decision, after approval by Mr. Ransom, would be sent concurrently with the advices to the bank by the Comptroller of the Currency and the Reconstruction Finance Corporation of their decision in the matter. Mr. Ransom referred to a memorandum dated March 6, 1939, from 141's Wingfield relating to a conference which he had had with attorneys t" the Securities and Exchange Commission with respect to legislat104 which they are drafting designed to regulate investment trusts. m -eflorandum had been circulated among the members of the Board and th, 4-8 meeting Mr. Wingfield amplified the statements contained thereu Ransom stated that he had brought the matter before the Board r(51!the - Purpose of acquainting the members of the Board with the postY of such legislation in order that if they had any suggestions to fl ' 441$ with respect to the form or objectives of the legislation these suggestions could be made before the legislation took definite tOtta. 382 3/17/39 -7It was understood that Mr. Wingfield would prepare a memorandum for circulation among the members of the Board stating the problems involved and raising the question whether or not the Board wishes to take a position with respect to them. Mr. Ransom stated that he had received yesterday from Mr. ems, Assistant Counsel, a copy of H.Res. 118, a resolution in- t:"Axeed in the House of Representatives on March 10, 1939, by Repre44etiVa Oliver requesting that the Temporary National Economic e°110ittee make an investigation of certain questions which would bring the seqle of the investigation of the committee into the banking field. R anscm stated that he was presenting the matter for the purpose "determining whether the Board wished to take any action with reelet to the resolution and that it did not appear that the resolution 411 "for any action by the Board at this time. It was agreed unanimously that no action should be taken in connection with the resolution. Mr. Ransom then stated that Mr. Wilcox, of the Washington 4 'Bb. Aoureau which publishes a weekly news letter entitled "Washington h1 4,4 -' 411g Trends and Backgrounds", called on the telephone today and l'telted that he would appreciate it if the Board would make available t() 414 for inclusion in the weekly letter the contents of the report 1444 bY the Board on the Barkley Trust Indenture Bill. Mr. Ransom 4 ' 41 he had advised Mr. Wilcox that the Board had not published the 383 3/17/39 144*/t, that the question whether it should be released was one for deterzination by the Chairnan of the Banking and Currency Committee cltile Senate, and that, therefore, be Board was not at liberty to /3161ce it available to him. Thereupon the meeting adjourned. Assistant Secretary.
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