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Minutes of actions taken by the Board of Governors of the Federal Reserve System on Thursday, November 18, 1954. The Board met in the Board Room at 9:30 a.m. PRESENT: Mr. Martin, Chairman Mr. Szymczak Mr. Mills Mr. Robertson Mr. Balderston Carpenter, Secretary Sherman, Assistant Secretary Kenyon, Assistant Secretary Riefler, Assistant to the Chairman Leonard, Director, Division of Bank Operations Mr. Sloan, Director, Division of Examinations Mr. Marget, Director, Division of International Finance Mr. Solomon, Assistant General Counsel Mr. Noyes, Assistant Director, Division of Research and Statistics Mr. Goodman, Assistant Director, Division of Examinations Mr. Dembitz, Assistant Director, Division of International Finance Mr. Hackley, Assistant General Counsel Mr. Temagna, Chief, Financial Operations and Policy Section, Division of International Finance Mr. Mr. Mr. Mr. Mr. The following matters, which had been circulated among the members of the Board, were presented for consideration and action taken as indi— cated: Memorandum from Governor Szymczak dated November 16, 195h, recom— mending that Athens J. Messick, Clerk—Stenographer in the Division of Re— search and Statistics, be transferred to his office as Stenographer, with an increase in her basic annual salary from $3,655 to $3,7850 effective as of the date of assuming her new duties. Approved unanimously. 1684 11/18/54 0 Letter to Mr. Millard, Vice President, Federal Reserve Bank of San Francisco, reading as follows: The Board of Governors of the Federal Reserve System has considered the recommendation of your Bank, contained in your letter of November 5, 154, and, pursuant to the provisions of Section 19 of the Federal Reserve Act, grants permission to Bank of Los Angeles, at Westwood, Los Angeles (Westwood Village), California, to maintain the same reserves against deposits as are required to be maintained by banks located outside of central reserve and reserve cities, effec— tive as of the date of commencement of business by the sub— ject bank. Please advise the bank of the Boardls action in this matter, calling attention to the fact that such permission is subject to revocation by the Board of Governors of the Federal Reserve System. Approved unanimously. Governor Szymczak commented on a visit to his office yesterday afternoon by representatives of the Carrier Corporation, who protested the handling by the Federal Reserve Bank of Atlanta of bids submitted by that corporation and another concern for air conditioning the new Birming— ham Branch building and left with Governor Szymczak a letter of representa— tion addressed to the Federal Reserve System under date of November 15, 1954. Copies of this letter had been sent by Governor Szymczak to all of the members of the Board prior to this meeting. Discussion of the matter included supplemental comments by Messrs. Carpenter and Leonard, both of whom attended the meeting in Governor Szymczak's office, and reference to correspondence explaining the situation which had been sent to Mr. Leonard by the Federal Reserve Bank of Atlanta following the visit to his office by a Carrier Corporation representative 1_685 11/18/54 1..0,0.0 concerning which Mr. Leonard commented at the meeting of the Board on November 10, 1954. Chairman Martin then suggested that a reply to the letter from the Carrier Corporation be drafted and circulated to the mem— bers of the Board, along with pertinent papers, prior to consideration of the matter at another meeting of the Board. This suggestion was ap— proved unanimously. At the meeting on October 260 1954, the Board considered a request by The Chase Bank, New York, New York, an Edge corporation, for permission to invest in the stock of a company proposed to be organized under the Companies Act of the Dominion of Canada. Acting pursuant to instructions at that meeting, the Board's staff submitted to Counsel for The Chase Bank a memorandum of items which the Board wished to have explored further. These points were discussed in a letter dated November 4, 13542 from Mr. John J. McCloy, Chairman of the Board of The Chase Bank, copies of which had been sent to the members of the Board prior to this meeting along with copies of a transmittal letter from Mr. Sproul, President of the Federal Reserve Bank of New York, which noted that the Reserve Bank saw no reason to change its recommendation that the Board of Governors give its consent to the proposed investment. There had also been sent to the members of the Board copies of a memorandum from Mr. Solomon dated November 17, 1954, giving the views of the Board's staff regarding the points covered in Mr. McCloyis letter. At the request of the Board, Yr. Solomon reviewed the background of the matter, commented in some detail on various legal aspects involved, 6 G 11/18/54 -4- and discussed the reasons underlying the staff recommendations contained in his memorandum of November 17. In a response to a request by Chairman Martin for comment on the Proposal in terms of its economic aspects, Mr. Marget stated that the Proposal was one which appeared to be entirely consistent with the Governmental policy of fostering private foreign capital investment and that he would favor the undertaking provided such safeguards as the Board con— sidered necessary could be worked out satisfactorily. He also stated that he concurred in the recommendations contained in Mr. Solomon's memorandum. Governor Mills then made a statement in which he said that if it appeared that the working out of the matter with The Chase Bank was now Proceeding on a negotiated basis and if it seemed that the points referred to in Mr. McCloy's letter and Mr. Solomon's memorandum could be covered in a way which was mutually satisfactory, he would favor going forward on that basis. However, if the matter were being considered as a new item of business, it would be his feeling that in most of the areas in question the Board should remain silent. It was his view that the most logical way Of preventing such transactions, or types of operations, on the part of an Edge corporation as the Board deemed undesirable in fulfilling its legal responsibilities would be to place restrictions in the charter of the corporation. If the applicants for such a charter were financially weak or if the Board had any question about their business standards, the charter should be denied, but where a group was financially responsible and their business standards acceptable, it seemed to him that the Edge .f.: 1 11/18/54 corporation and any subsidiaries thereof should be given the greatest freedom of action possible within statutory limitations. In cases where an Edge corporation was chartered and undesirable activities were noted in the course of its operations, Governor Mills pointed out that the Board could request correction or, in an extreme case, could repeal the charter. Governor Mills questioned the wisdom of imposing numerous re— strictions in connection with the Board's consent for an Edge corporation to make an investment such as proposed by The Chase Bank because he felt that to do so might in a sense presume an intent by the Chase to engage in inappropriate activities, whereas it actually appeared to be the Chase's intent to engage in activities of a type which it mould be desirable to foster as a matter of policy. Governor Szymczak said it was his impression that both Governor Mills and the staff were striving toward the same objective and that the principal question was how far the Board could go under its regulatory Powers and the pertinent statutory limitations. He pointed out that once the Board granted The Chase Bank consent to purchase stock in the proposed Canadian subsidiary, it would not thereafter have more than an indirect control over the activities of the subsidiary and that, accordingly, the questions which had been raised with The Chase Bank were ones which it would seem proper for the Board to raise for exploration with any Edge corporation that might make a similar request. He doubted the advisa— bility of going so far as to impose conditions which would make it necessary for The Chase Bank to come to the Board for authority in 11/18/54 -6- connection with specific transactions of the subsidiary, but otherwise he considered the recommendations in Mr. Solomon s memorandum appropriate and he favored carrying forward the discussions with The Chase Bank on that basis. Governor Balderston said it was his feeling that at the outset the Board should assume that The Chase Bank was embarking on this venture in accordance with objectives of which the Board would approve. Like Governor Szymczak, he thought that the Board, in granting its consent, should not set up conditions which would require detailed supervision of the subsidiary's various activities, since the Board was not equipped to consider individual transactions and, even if it were, it seemed doubtful whether that would be a proper function for the Board. To put it another way, Governor Balderston thought the Board could hope to do no more than inquire from time to time regarding the Canadian subsidiary's operations and take the matter up with The Chase Bank if it had reason to believe that activities were being undertaken which were not appropriate. In general, his feelings on the matter were along the lines of the views ex— pressed by Governor Mills. Chairman Martin said it appeared to him that the Board in approach— ing the matter might be thinking too much in terms of "fringe problems". He expressed agreement with the emphasis which Governor Mills had placed Upon the financial competence and responsibility of the parties initiating such a proposal and said that, assuming it was a good thing in principle 1689 11/18/54 -7- to have an undertaking of the kind in question and assuming there were no other avenues available through which the interested parties could Proceed, it seemed to him that the Board must be prepared to run some risks and go as far as possible to be helpful. Should an arrangement of this sort not prove feasible, or if unsound practices developed, he thought that the Board might then be in a position where it would want to propose remedial legislation to the Congress. In the meantime, he felt that the Board should not exaggerate whatever difficulties might be involved. Governor Robertson then made a statement in which he said that although a very plausible case had been made that the general objectives of the proposal were good, he had doubts about it for several reasons. First, he pointed out that the Special Committee on Foreign Operations of American Banks (the Neal Committee) would shortly submit its report, Which might be expected to furnish better guideposts regarding the proper scope of operations of Edge corporations than those now available to the Board. Secondly, he referred to the fact that once the Board had given its consent and the Canadian subsidiary became active, the Board would not have the power to examine the subsidiary so that effective supervision would be difficult and the Board would be forced to rely upon such infor— mation as might be furnished it on a voluntary basis. As a third point, he raised the question whether the proposal was quite in line with what the Congress intended in authorizing the Board to allow a commercial bank to set up an Edge corporation. In this connection, he expressed the view 690 11/18/54 —8— that it would be preferable to amend the Board's regulations rather than to permit them to be circumvented. In the course of further discussion, Chairman Martin said that he considered the points Governor Robertson had made to be ones which it mould be valuable for the Board to bear in mind. He questioned, how— ever, whether the report of the Neal Committee would be especially help— ful to the Board in reaching a decision on the case before it, and com— ments by members of the staff familiar with the work of the Committee indicated that the report probably would not be particularly valuable for that purpose. Governor Robertson then stated that he would not vote against giving the requested consent to The Chase Bank, but that he would like to be recorded as not voting and have his reasons stated in the minutes. He also suggested that in any further discussions with Chase Bank repre— sentatives every effort be made to work out an arrangement pursuant to Which adequate information concerning the subsidiary's activities Timid be made available to the Board. Following further discussion as to the course of action which might be followed, it was suggested that Mr. Solomon draft a letter to The Chase Bank to the effect that the Board had considered Mr. McCloy's letter of November 4, that the Board would like to have additional in— formation on certain points as a matter of clarification, and that the Board wished to suggest that The Chase Bank draw up and submit for the 1_691 —9_ 11/18/54 Board's consideration a draft of stockholders' agreement incorporating various points, including those discussed with representatives of the bank. The suggested procedure was approved, Governor Robertson not voting for the reasons he had indicated. Secretary's Note: In accordance with the foregoing action, the following letter was sent to the Federal Reserve Bank of New York on November 24, 1954, for trans— mittal to Mr. McCloy: This refers to your letter of November 4, 1954 regarding the possible investment by your Bank in a proposed Canadian corporation. The Board has carefully considered your letter and has noted your suggestion that certain matters might be covered by an agreement which would be executed by all the stockholders of the proposed corporation, and remain in force while The Chase Bank owns any stock in the corporation. It is believed that it would aid in consideration of this problem at this stage if you would have yourcounsel prepare for the considera— tion of the Board a draft of a suitable stockholders' agree— ment which would incorporate the points stated in the attached memorandum. For convenience, the memorandum follows the points listed as 1(a) through l(f) in your letter of November 4, 1954 and in the memorandum of points for exploration men— tioned in your letter. The Board's staff will, of course, be glad to be of such assistance as it can to your counsel in his preparation of a draft. Governor Mills then withdrew from the meeting to keep an outside appointment. Messrs. Marget, Goodman, Dembitz, and Tamagna also withdrew at this point. Chairman Martin had recently had a visit from Messrs. Knute C. Borregard, Secretary and Treasurer of the Federal National Mortgage Association, and David M. Kennedy, Assistant to the Secretary of the 1692 11/18/54 —10— Treasury, who outlined a proposal whereby the Federal Reserve Banks would act as fiscal agents in connection with short—term debentures to be issued by the Association against mortgages acquired or committed for by the old Federal National Mortgage Assocation, for the purpose of reimbursing the Treasury for amounts advanced to the Association for the acquisition of mortgages. Copies of a memorandum prepared by Messrs. Riefler and Noyes under date of November 17, 1954, spelling out the pro— posal in more detail, had been sent to the members of the Board in advance of this meeting. The matter was discussed in the light of information contained in the memorandum and on the basis of a question raised by Chairman Martin as to whether the proposal would involve activities on the part of the Federal Reserve Banks going beyond those normally performed by the Banks as fiscal agents. Along these lines, it was mentioned that in the absence of a syndicate manager for the debentures, the circularization of commercial banks by the Federal Reserve Banks at the time of the offering might be taken to imply an endorsement of the securities and some obligation on the part of the Reserve Banks to promote the sale of the debentures. For all of these reasons, there was some feeling on the part of the Board that it would be preferable if the Federal National Mortgage Association could work out an arrangement under which an agent would be appointed to handle the issue, or a group of dealers designated. At the same time it was recognized that the Association had explored and apparently 1693 11/18/54 —11— had rejected these alternatives, and that the Federal Reserve Banks were authorized and directed by the Housing Act of 1954 to act as fiscal agents for the Association (on a reimbursable basis). The discussion also brought out that a request from the Association to the Federal Reserve System mould have the endorsement of the Treasury, although it was under— stood that the Treasury would not insist if the System interposed strong objections. Consideration was given to what course of action should be fol— lowed in connection with the proposal, and some feeling was expressed that the matter might be turned over to the Federal Reserve Bank Presidents in order that they might explore the feasibility of Such a fiscal agency arrangement from the operating standpoint, the thought being that the conclusions reached by the Presidents might be of assistance to the Board in reaching a decision on policy grounds. However, it was noted that representatives of the Association already had discussed the matter with officers of the Federal Reserve Banks of Chicago and NewrYork, that those Officers considered the proposal workable, and that Messrs. Borregard and Kennedy had requested the views of the Board from the standpoint of the Policy aspects involved. In all the circumstances, it was suggested that Chairman Martin confer again with Messrs. Borregard and Kennedy, expressing to them the points which were of concern to the Board but not going so far as to close the door to a request by the Federal National Mortgage As— sociation, after full consideration of the factors involved, that the 1_694 —12— 11/18/54 Federal Reserve Banks act as fiscal agents in connection with the pro— posed debentures. This suggestion was ap— proved unanimously. Messrs. Riefler, Leonard, Sloan, Noyes, and Hackley then withdrew from the meeting. Mr. Carpenter reported that Mr. Brett, General Counsel for the American Bankers Association, had advised him that a meeting of the secretaries of the State bankers associations for the eastern region would be held in Washington on January 13 and 14 or January 27 and 28, 1955, and that Mr. Brott was interested in knowing whether the Board would be willing to meet with the State secretaries and have them for luncheon at the Boardts offices. It was agreed that Mr. Carpenter should state to Mr. Brett that the Board would be glad to receive the group and would suggest that the meet— ing be held on the later of the two dates in January -which had been men— tioned. There was presented a draft of letter to Mr. Denmark, Vice Presi— dent of the Federal Reserve Bank of Atlanta, reading as follows: This refers to your letter of November 12, 1954, in which you transmitted the request of the Progressive Bank and Trust Company, New Orleans, Louisiana, for permission under the pro— visions of condition of membership numbered 1 to act as trustee and paying agent for the 20 year h% debentures in the total amount of $400,000 and 4,000 shares of no par value common stock of the New Orleans Pelicans, Inc. It is noted that it is not the desire of the member bank to exercise general trust powers and that the authority requested is only to permit the bank to act as trustee and paying agent for the securities mentioned above. 11/18/54 —13— In view of the Reserve Bank's recommendation and the information submitted, the Board of Governors of the Fed— eral Reserve System grants the applicant permissions under the provisions of its condition of membership numbered 1$ to act as trustee and paying agent for the debentures and stock of the New Orleans Pelicans, Inc. You have previously been advised by telegram of the approval of this requests and we assume that you have advised the member bank accord— ingly. Following a discussion, the matter was referred to Governor Robertson with power to act. Secretary's Note: Governor Rob— ertson having indicated his ap— proval, a letter was sent to Vice President Denmark today in the form set forth above, along with a telegram advising of the action taken by the Board. Governor Robertson stated that it appeared desirable, in connection with the Board's program for relocation of activities in an emergency, that the positions occupied by the secretaries to Mr. Vest, General Counsel, and Mr. Leonard, Director of the Division of Bank Operations, and the positions occupied by Mr. Hackley, Assistant General Counsel, and Mr. Myrick, Assis— tant Director, Division of Bank Operations, be declared "sensitive" posi— tions. He therefore recommended that these positions be added to the list of those previously designated as "sensitive", with the understanding that full field investigations of the occupants would be conducted. Governor Robertson's rec— ommendation was approved unan— imously. Minutes of actions taken by the Board of Governors of the Federal 1696 11/18/94 lit Reserve System on November 17, 19541 were approved imanimous1 The meeting then adjou.rned.
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