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1639 Minutes of actions taken by the Board of Governors of the Federal Reserve System on Thursday, September 18, 1952. The Board met in executive session in the Board Room at 3:00 p.m. PRESENT: Mr. Mr. Mr. Mr. Martin, Chairman Evans Vardaman Robertson The Choirman later informed the Assistant Secretary that during the executive session unanimous approval was given to the request contained in a memorandum from Mr. Sloan, Director of the Division of Examinations, dated September 17, 1952, that he be authorized to attend the annual convention of the National Association of SIT)ervisors of State Ranks, to he held in Baltimore, Maryland, Septenl-er 24-26, 1952. At 3:05 p.m. the following members of the staff were called into tile room: Shelman, Assistant Secretary Kenyon, Assistant becretary Vest, General Counsel Noyes, Director, Division of Selective Credit Regulation Mr. Boothe, Assistant Director, Division of Selective Credit Regulation Mr. Hackley, Assistant General Counsel Mr. Connell, Technical Assistant, Division of Selective Credit Regulation Mr. Mr. Mr. Mr. Pursuant to the understanding at the meeting of the Board yesterday, 1 4 With representatives of the guaranteeing agencies under the V-loan Aroer waz held in the Board Room this morning to discuss the terms and tion5 of a proposed loan to Reynolds Reduction Company, Richmond, Virginia, 9/18/52 to be -2- guaranteed by General Services Administration, and to consider the rules which might be prescribed by the Board with respect to commitment including any which might be charged prior to the execution of the 1°411 agreement or other similar financing arrangement to make the loan, _4. premiums in connection with long-term loans for the purPrepaymeILL. :POse ol financing facilities expansion. The meetinv this morning, nielli°randum of which has been placed in the Board's files, was attended by °°7erliors Evens, Vardaman, and Robertson, members of the Board's staff, alicire presentatives of all of the guaranteeing agencies except the DePartment of Agriculture. At this time there was a review of the statements made and views Npre }led at the meeting this morning. Following this review, Mr. Noyes stated that the staff had obtained 4 °Ite information with regard to current practices in the matter of prepay- flerit -remiums which indicated that in the case of private placements it VEt riot 13°11(led common for insurance companies to rule out the repayment of indebtedness for a five-year period from the date of loan, after vhich rePaYment would be permitted with a premium beFinning at approximately c the °112on rate of the bonds and graduating downward. At the request of Governor Vardaman, Mr. Noyes then read a draft Cf letter to the Federal Reserve Banks which he had prepared in the light or 1e at previous Board meetings and at the meeting with the kar a.ntep4 ---1,ng agencies this morning setting forth rules which ni ht be 1641 9/18/52 -3- Ilaqted with respect to commitment fees and termination fees in IL-loan Vilth regard to commitment fees, the draft took the josLtion the"t anY fee or charge in the nature of '1 commit:lent fee which would "ertle prior to the execution of the loan agreement or other similar arrangement would operate to defeat the purl)ose of the prescri:tped- maximum limitation on commitment fees of 1/C7 of one per cent, and therefore, would not be permissible under the Lc i- leCJJe (TT rates an(i fec Prescribed. Of the Board. As to prepayment reEiLJ.1E 1i be ease terra made for the purpose of idcilL'6ie5 stated that such premiums would be permissnle under c,L..dTt-Tons 4'lwithin certain limitations. Governor Vardaman stated that,he had come to the ccnclsiort that "C institutions, particularly insurance companies, could not be ex1)eeted to make long-term loans without snide reasonable Prevision for a PE P17'e '"ent 1,enalty and that, in all the circuristnces, he felt the posi- taken in the draft of letter read by Ir. ;Tops represented a reasonable B°3-11t•lon to t'le problems under consideration. He also commented that at the ecnclusion of the meeting with representatL%es of the guaranteeing elleies this -tt felt stronLly morning he imiuirod whether any person 1.re that no Dre_ ayr : P tient premium should be permitted in the case of lon;-term Qalls for facilities expansion, and that there was no indication of such 0Pirlions the ci There followed a discussion of the draft ilestior was raised whether the Board sh0.1(., ta :lf:ttcr during which •_ ,osition specifically 9/W52 -4- with respect to the proposed loan to Reynolds Reduction Company or whether it should prescribe rules for general application to all long-term financing under the V-loan program. Mr. Vest stated, in response to an inquiry by a member of the 1c)arcl) that by executive order the Board was authorized to prescribe l'eEtaations roverning the V-loan program and also to fix rates and fees, arly regulations issued by the Board would have to be rules for general W-ication, and that, while it appeared that the Board might make an exeelpti°11 in an unusual case, he thought that ordinarily rates and fees presel'thed by the Board should apply generally. At the conclusion of the discussion, it was the consensus of the that it would be preferable to lay dcwn rules for general application and that no exception should be granted in the case of the proposed 1°all to Reynolds Reduction Company. Thereupon, it was agreed unanimously that the draft of letter presented by Yr. Noyes should be revised to take into account minor changes suggested at this meeting and submitted to the members of the 'Board for approval, and that following such approval, the letter should be sent to the Presidents of all Federal Reserve Banks, with copies to all of the guaranteeing agencies under the V-loan program. Secretary's Note: The letter, having been revised as requested and having been approved thereafter by all of the members of the Board present at this meeting, was sent under date of September 22, 1952, in the following form: - 643 1 9/18/52 -5- "In connection with the V-loan Program, certain questions as to commitment fees and termination or prepayment fees have recently been raised with the Board. "The first question presented is whether or not the 1/2 of 1 per cent maximum commitment fee prescribed by the Board for V-loans operates to limit or prohibit the charring of a fee in connection with a guaranteed loan prior to the time the loan agreement and guarantee agreement are formally entered into. With respect to this question, it iS intended that the commitment fee be charr7eab]e only after the lender is committed on a firm basis through the execution of a loan agreement or other similar financing arrangement to make the loan. Accordingly, the Board has determined that any fee or charge in the nature of a commitment fee which would accrue prior to the execution of the loan agreement or other similar financing arrangement would oPerate to defeat the purpose of the prescribed maximum limit °I1 commitment fees and is, therefore, not -permissible under the schedule of rates and fees prescribed by the Board. In Other words, in any case in which a financing, institution ;r3Poses a commitment fee in connection with a guaranteed such fee may not exceed 1/2 of 1 per cent per annum, based on the average daily unused balance of the maximum Principal amount of the loan, and may not begin to accrue Prior to the date on which the loan agreement or other edrailar financing arrangement is entered into. "Another question presented relates to the policy with respect to prepayment premiums in connection with long tern 'loans made for the purpose of financing, facilities expensi°fl. In its letter of February 8, 19)1, the Board prescribed a general rule that no premium or fee on account of prepayment be charted the borrower by a financing, Institution in c°10nection with V -loans made primarily for wcrking capital 1;liarposes. With respect to V-loans made for the purT3ose of -nancing facilities expansion, the Board now prescribes a eeneral rule that in such cases provision for a prepayment Premium may be made, provided: (1) the loan has a maturity br five years or more; (2) such prepayment premium shall not e in excess of the rate of interest to be raid by the borrower 1)11rsuant to the terms of the loan; (3) provision is made for a ,adnated decrease in such prepayment premium as the loan .12'8'11;°aOhes maturity; and ()4) it is affirmatively provided that eh Prepayment premium shall not be applicable in the event 1.644 9/18/52 -0- "the loan is refinanced by or consolidated with another loan Which is made or guaranteed by the Government or any of its agencies. "These actions have been taken by the Board after consultation with the guaranteeing agencies." Before this meeting there had been placed in circulation among the er Of the Board a draft of letter to the Honorable Preston Delano, ColiTtroller of the Currency, reading as follows: "In accordance with the infolual arrangement existing between your organization and ours with respect to the Interchange of information relative to applications to establish branches, representatives of your office have notified us of the pendency of applications by the First National Bank, Portland, Oregon, to establish branches at Southeast 49th Avenue and Gladstone :treet, and at Northeast Broadway between Ninth and Twelfth Avenues, Portland, Oregon. "Neither this Board nor the Federal Reserve Dank of '8n Francisco is in possession of any facts, other than facts presumably in your possession, which would seem to have a bearing on the need for such additional banking f_acilities, the ability of the applicants to provide such facilities on a sound basis, or the extent to which other banks Would be adversely affected by the additional competition involved, or which for any other reason we believe sh°111d be brought to your attention for consideration in formulating your decision on these applications. "As you know, matters of this kind are ordinarily handled by telephone, but in this case we are also ren°ndinc by letter because the bank involved is related (*) Transamerica Corporation, which, as ycu know, has been rlacle the subject of the Board's Order in proceedings instituted under the Clayton Act. We appreciate that the authority and responsibility for making a decision on l'anch applications of national banks rests with your c)iffice; and this letter should not be regarded as indicat11F- in any way the views or opinion of the Board of Go:ernors as to the action which should be taken by you with resPect to these applications." 1645 9/18/52 _7 Governor Vardaman had requested that the draft of letter be discussed at a meeting. In the draft the word "facts", where it appeared for the first title in the second paragraph, was underscored, and Governor Vardaman stated that he would prefer that the underscoring be omitted since unintended ill1P1ication5 might be drawn from its use. Thereupon, the letter, with the underscoring deleted,was approved, Governor Evans not voting because he felt that some reference should be made in the letter to previous discussions between the Comptroller of the Currency and the Board on the matter of expansion of banks owned or controlled by Transamerica Corporation. At this point all of the members of the staff except Eessrs. Eherman r -elVon withdrew from the meeting and the following additional actions ere ts.ken by the Board: Minutes of actions taken by the Board of Governors of the Federal Rer— "' SYstem on September 17, 1952, were approved unanimously. Memoranda recommending that the basic annual salaries of the 1°11°141 ng employees be increased in the amounts indicated, effective 52: SeDtember 28, 19 Nte Memorandum 8/19/52 Name and Title Memoranda from Mr. Young, Director, Division of Research and Statistics Irving Schweiger, Economist Stanley J. Sigel, Economist Salary Increase From To $7,040 $7,240 7,040 7,240 9/18/52 Date of L:emorandum 8/19/.. 2 -8Salary Increase Lane and Title From To Memoranda from T, r. Younf, Diector, Division of Rescarch frid ;A:tiatics Peter M. Economist A. Jane Ll'ocrci, Economist Jennie L. M.o. Clerk Evelyn N. Hurley, Statistical Assistant Reba C. Driver, Clerk 4;5,435 4.,705 4,330 3,350 3,1130 3,255 3,14.10 3,190 Memoranda from Mr. Sloan, Director, . Division of .ifiajhatunL; 9/15/52 D. Dou:J,1, Federal i.eserve Examiner Evelyn C. Golibart, StenoLrapher 7,640 7,o 3,350 3,43o Memorandum from Mr. Leonard) Director, Division of Pank (Verations 9/17/52 Mary M. DurY:Ti.n, Analyst 5,o6o Memorandum from Er. Pethea, Director, Division of Administrative Services 8/20/52 John Kakalec, Accountant 4,1ry,) Memorandum from Mr. Boothe, ,:iListant Director, Division of Selective Credit i'eculatLon 8/20/52 J. J. Connell, . Technical i‘ss.stInt Approved unanimous] y. 8,760 9/18/52 -9Memorandum dated September 2, 1952, from Mr. Sloan, Director, Division of Examinations, recommending that Helen B. Wolcott be transferred temporarily from the Board Members' Offices to the Division of xaxinations, with no change in her basic salary of $),500 per annum, effective September 2, 1952. The memorandum stated that it was antici- Da'ted that Miss Wolcott's assignment in the Division of Examinations °111d be of about five weeks' duration. Approved unanimously. Memorandum dated September 10, 192, from Mr. Fethea Director, lilrision of Administrative Services, recommending the appointment of 11°rence A. Norman as Cafeteria Helper in that Division, on a temporary 1)aeis for a period of three months, with basic salary at the rate of $2,420 per annum, effective as of the date upon which she enters upon the Performance of her duties after having passed the usual physical e411nation and subject to the completion of a satisfactory employment IINstigation. Approved unanimously. Memorandum dated September 15, 1952, from Mr. Bethea, Director, bivis. lon of Administrative Services, recommending the appointment of 41tr. ' -11 C. Langley as Messenger in that Division, on a temporary basis for E Period of two months, with basic salary at the rate of $2,2 per t111.41111, effective as of the date upon which he enters upon the performance f;e18 9/18/52 -10- °f his duties after having passed the usual physical examination and subject to the completion of a satisfactory employment investigation. Approved unanimously. Letter to Mr. Latham, Vice President, Federal Reserve Bank of 13°ston, reading as follows: "In accordance with the request contained in your telegram of September 10, 1952, the Board approves the designation of T. Henry O'Keefe as a special assistant examiner for the Federal Reserve Bank of Boston, for the Specific purpose of rendering assistance in the examinations of Depositors Trust Company, Augusta, Maine, The Merrill Trust Company, Bangor, Maine, The HertfordConnecticut Trust Company, Hartford, Connecticut, Industrial Trust Company, Providence, Rhode Island, and Rhode Island Hospital Trust Company, Providence, Rhode Island." Approved unanimously. Reserve Bank Letter to Mr. Lunding, Federal Reserve I gent, Federal Of Chicago, reading as follows: "In accordance with the request contained in Mr. Meyer's letter of September 4, 19-)2, and as amended in his letter of September 15, the Board of GO7Cri T l',012;, oves the payment of salary to nr. Clarence rate Alternate Assistant Federal Reserve igent, et the °f 6,3O0 per annum, effective September 7, 1952." Approved unanimously. Reserve Bank of Letter to Mr. Diercks, Vice President, Federal 44cago, reading as follows: "In accordance with the request contained in your letter of September 2, 1952, the Board approves the 16'1) 9/18/52 -11- "designation of the following individuals as special assistant examiners for the Federal Reserve Bank of Chicago for -che specific Purpose of rendering assistance in examinations of The Detroit Bank, Detroit, Michigan: Peters, Glove Masonis, William J. Banner, Loren W. Rentenl)och, G. Mills, Walter Jones, Everett D. Neff, G. Lazevnick, Joseph "The Board also approves the designation of the following individuals as special assistant examiners for the Federal Reserve Bank of Chicago for the specific ,mrpcse of rendering assistance in examinations of the Commonwealth Bank, Detroit, Michigan: Rentenb-ch G. Lazevnick, Joseph Heika, K. 0. Masonis, lli.am J. Peters, Glave Jones, Everett D. of records our "Appropriate notations have been made on the names to be deleted from the list of special assistant examiners." Approved unanimously. Letter to Mr. Dearfflont, Federal Reserve Agent, Federal Reserve )38,* of St. Louis, reading as follows: "In accordance with the request contained in your letter of September 11, 1952, the Board of Governors approves the payment of salary to Mr. Richard O. Fraley, Alternate Assistant Federal Reserve Agent, at the rate $5,100 per annum, effective October 1, 1952." Approved unanimously. Letter to Mr. Slade, Vice President, Federal Reserve 'Dank of an t'sncisco, reading as follows: "In accordance with the request contained in your letter of September 2, 1952, the Board approves the designation of Eliot J. Swan, Assistant Vice President, a special assistant examiner for the Federal Reserve Tnk of San Francisco, for the specific purpose of rendering assistance in the examination of State member banks Only, exclusive of the American Trust Company, San Francisco. 9/18/52 -12- "Appropriate notations have been made in our records Of the names to be deleted from your regular examining force, and from the list of special assistant examiners." Approved unanimously. Telegram to Mr. Slade, Vice President, Federal Reserve Bank of 0 1, Prancisco, reading as follows: "Reurtel September 10. Board approves designation or the following as special assistant examiners for the Federal Reserve Rank of Can Francisco: J. V. Dennis R. A. Haskell P. T. Schwedler G. H. Force W. G. Johnston" E. W. Anderson Approved unanimously. Letter to the Board of Directors, The Marine Trust Company of 14estern New York, Buffalo, New York, reading as follows: "The Board of Governors of the Federal Reserve System, Pursuant to authority contained in section le(c) of the Federal Deposit Insurance Act, consents to the absorption by The Marine Trust Company of Western New York, Buffalo, New York, of the Bank of Hamburgh, Hamburg, New York, and approves the establishment and operation of a branch by The Marine Trust (1) Company of Western New York in Hamburg, New York, .provided such absorption is effected in accordance with the plan subMatted, (2) the banking premises acquired by the trust company are not carried on its books at a value in excess of d5fl,000, an(I (3) formal approval is obtained from the appropriate bt.Ae authorities. "In its consideration of this matter, the Board has not Illstcle and should not be deemed to have made any decision as to the application of the Clayton Antitrust Act or any related statutes to Marine Midland Corporation or the banks in the Marine Midland group. The Board understands th?t additional transactions are in contemplation which may make It necessary for banks in the Marine Midland group to apply to the Board for 9/18/72 -13- permission to establish branches or to merge with or assume the liabilities of other institutions or for the rz,rine lend Corporation to apply to the Board for voting permits. Accordingly, in view of the number and size of the bankinu Offices in the Marine Midland Croup in relation to the other banking institutions in the areas served by that group, the Board, through the Federal Reserve Bank of New York, is making a careful survey of all facts and circumstances that may have a bearinf: on any actions which the Board should take in such cases. Pending the completion cf such a survey, which, of course, will require some time, and consideration by the Board of its results, the Board will not look with favor on any such cases that may be submitted to it involving the Marine Midland group." Approved, for transmittal through the Federal Reserve Dan17: of New York, Governor Evans not voting. Letter to Mr. Latham, Vice President, Ivederal Reserve Bank of lost n; reading as follows: "Reference is made to your letter of March 12, 1952, and the enclosed review of the 1951 annual report to the Board of New Hampshire Bankshares, Inc., Nashua, New Hampshire, wherein attention was drawn to the fact that the hcldinr company affiliate's net earnings for the year 195' exceeded six per cent of the book value of its own shares outstanding at December 31, 1951, by $139.14, and that the only readily marketable asset held was *51.08 of cash, thereby leaving a deficiency of fl readily marketable assets required by E'ection 5144 R.S. at December 31, 1951. "Comments in the review were also noted to the effect that although the deficiency in readily marketable assets was insignificant, the matter was drawn to the attention or the Executive loe President of the holding company affiliate for consideraten In view of the possibility that earnings may continue to increase; and that the holding company affiliate is a personal holding company and subject to such high taxes on undisLrjbLted earrcnt: that it will not be able to acquire the reserve of readily marketable assets through the retention of earnings. Y 9/18/52 "Because of the tax burden, the holding company affili!Ite pays dividends in the approximate amount of its net earnings. Consequen-tly, the book value of its own shares outstanding does not increase through the retention of eurninL:s. Therefore, it is possible that in 1952 and, subsequent years net earnings will continue to exceed six per cent of the book value of the holding company affiliate's own shares outstpndlug "A reserve of readily marketable assets could be established by the sale of additional stock of the corporation or by contributions to the corporation's surplus by shareholders. However, it is possible that the readily marketable assets can be acquired through the retention of earnings, because it al)Pears that the Internal Revenue Code and the regulations thereunder provide for an allowance of a tax credit for that portion Of earnings or profits which the Board certifies to the Commissioner of Internal Revenue as having, been devoted by such holding company affiliate during the taxable year to the acquisition of readily marketable assets in compliance with Section 5144 R.S. The holding company affiliate nag wish to consider this possible tax relief in connection with the acquisition of readily marketable assets. "Because of the violation of Section 5144 R.S. in 1951, and the aforementioned considerations, please advise the hole,111E company affiliate that the Board will expect it to comply with the statute and acquire the proper amount of readily Marketable assets in this and future years, and to correct the deficiency for the year 1951 by December 31, 1952." Approved unanimously. Letter to Mr. Peterson, Vice President, l'eder,,1 Reserve Ban': of uls, reading as follows: "The annual report to the Board for 1951 filed by the Tr1141tees, First National Bank of Louisville, Louisville, Xentucky, shows that the holding company affiliate had net earnings for the year of *415,503.00. The book value of the rustees Participation Certificates outstanding at December , 1951, was *6,688,236.15. Since the net earnings for .)1 exceeded six per cent of the book value of the Trustees ertificates outstanding by *14,208.83, the holding company iliate was required by subsection (c) of Section 5744 ' 0 establish and maintain a reserve of readily narketble e.ssets in the amount of *14,20P.83. T p r 9/18/32 -15- "At December 31, 1931, the only asset held by the holding company affiliate, other than its investments in subsidiary banks and companies, was ;;2,380.72 of cash. "An investment in a wholly-owned subsidiary or a subsidiary wholly owned except for directors' shares, has not been regarded by the Board in other cases as meeting the requirement of a readily marketable asset. The fact that the assets of such a subsidiary or subsidiaries are predominately of a readily marketable character would not appear to justify a different conclusion. Moreover, ownership of readily marketable assets by a subsidiary of a holding company affiliate would not amount to the ownership of such assets by the holding company affiliate as contemplated by the statute. "It, therefore, is suggested that you advise the holding company affiliate of these views in order that it may take the necessary steps to establish and maintain the reserve of readily marketable assets required by section .5144 R. Approved unanimously. Letter to Ni-. Gilbert, President, Federal Reserve Dank of Dallas, as follows: "This refers to your letter of August 19, 1952, by which You have requested the reconsideration of the application for full fiduciary powers originally submitted on behalf of The Waggoner National Bank of Vernon, Vernon, Texas, on June 12, 1952, and disapproved by action ol the Board on August 8, 1952. "In your letter of August 19, you stress the favorable experience of the national bank, the high quality of its Inanagement and the conservatism of its operating policies, and express the feeling of your Executive Committee that these factors and related favorable circumstances more than compensate for the somewhat unfavorable capital position of the bank in considerations relating to a grant of the fiduciary authority which has been requested. "These favorable factors and circumstances, originally cited in the application and re-emphasized in your recent letter, were carefully weighed in relation to the capital Position of the applicant during consideration of its request for authority to exercise trust powers. Notwithstanding the -16- 9/18/52 "demonstrated capability of the management of tfrle bank and the conservatism of its operating policies, it was the considered view of the Board at that time that an extension of its corporate authority should not be authorized while the capital position in relation to existing corporate liabilities and responsibilities was such as to prompt supervisory action directed toward improvement in such capital position. Particularly did such an authorization seem inappropriate in recognition of the unusual nature of responsibilities and incalculable risks accompanying fiduciary undertakings heightened in the subject instance by the inexperience of the directors and officers of the bank in that specialized field. "The subject application, at your request, has been carefully reconsidered in the light of all the facts and circumstances presented, but the Board can come to no conclusion other than to reaffirm the position taken in its letter to you dated August 8." Approved unanimously. Letter to Mr. McCormick, Chairman, Federal Reserve Bank of Richmond, ing as follows: "At the completion of the examination of the Federal Reserve IL.nk of Richmond, made as of June 13, 1952, by the Board's examiners, a copy of the report of examination was left for your information and that of the directors. A copy Was also left for President Leach. "The Board will appreciate advice that the report has been considered by the Board of Directors. Any comments you r'IsY care to offer regarding discussions with respect to the sXamination, or as to action taken or to be taken as a result of the examination, will also be appreciated." Approved unanimously. Letter to Mr. Shepard, Chairman, Federal Reserve Bank of Minneapolis, as follows: "It has been noted from the reort of examination of the AI 1952, that Federal Reserve Bank of Minneapolis as of April 16S5 9/18/52 -17- "the management reported one case of a possible violation of the criminal Provisions of the banking laws of the United States involving an employee of the Federal Reserve Bank. "In this case it appears that the employee implicated, Who had responsibility for reviewing on behalf of the Reserve Dank the monthly statements of accounts payable for food used it the cafeteria, had contrived to have included in the payments made by the cafeteria concessionaire the cost of weekly Purchases of food for his own use, commencing in March 1949 and continuing through October 1951 and involving the aggregate amount of *9117.59. Further, it appears that the payments thus improperly made were absorbed by the Reserve Bank inasmuch as It underwrites cafeteria operating losses. "From the information presently available to the Board it is not clear whether, in the opinion of the Reserve Bank's management, this case involved a violation of the banking laws and/ if so, whether there is a probability that the violation constituted a felony. The Board would like to be fully informed regarding the matter. "In this connection, attention is directed to the procedure set forth in the Board's letter of AuFust 19, 194e (P.R.L.S. fl6503) to be followed in cases wherein it appears Probable that a violation of the banking laws constituting a felony may have occurred." Approved unanimously. Assistc it mstary.
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