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STOCK EXCHANGE PRACTICES
HEARINGS
BEFORE THE
COMMITTEE ON BANKING AND CURRENCY
UNITED STATES SENATE
SEVENTY-THIRD CONGRESS
FIRST SESSION
ON
S. Res. 84
(72d CONGRESS)
A RESOLUTION TO INVESTIGATE PRACTICES OF STOCK
EXCHANGES WITH RESPECT TO THE BUYING AND
SELLING AND THE BORROWING AND LENDING
OF LISTED SECURITIES
AND
S. Res. 56 and S. Res. 97
(73d CONGRESS)
RESOLUTIONS TO INVESTIGATE THE MATTER OP BANKING
OPERATIONS AND PRACTICES, TRANSACTIONS RELATING TO
ANY SALE, EXCHANGE, PURCHASE, ACQUISITION, BORROWING, LENDING, FINANCING, ISSUING, DISTRIBUTING, OR
OTHER DISPOSITION OF, OR DEALING IN, SECURITIES OR
CREDIT BY ANY PERSON OR FIRM, PARTNERSHIP, COMPANY,
ASSOCIATION, CORPORATION, OR OTHER ENTITY, WITH A
VIEW TO RECOMMENDING NECESSARY LEGISLATION, UNDER
THE TAXING POWER OR OTHER FEDERAL POWERS
PART 9
Guardian Detroit Union Group
DECEMBER 19, 1933 to
JANUARY 4, 1934
Printed for the.use of the Committee on Banking and Currency
175541
U N I T E D STATES
GOVERNMENT P R I N T I N G O F F I C E
WASHINGTON : 1934
COMMITTEE ON BANKING A N D CURRENCY
DUNCAN TJ. FLETCHER, Florida, Chairman
CARTER GLASS, Virginia
ROBERT F. WAGNER, New York
ALBEN W. BARKLEY, Kentucky
ROBERT J. BULKLEY, Ohio
THOMAS P. GORE, Ollahoma
EDWARD P. COSTIGAN, Colorado
ROBERT R. REYNOLDS, North Carolina
JAMES F. BYRNES, South Carolina
JOHN H. BANKHEAD, Alabama
WILLIAM GIBBS McADOO, California
ALVA B. ADAMS, Colorado
PETER NORBECK. South Dakota
PHILLIPS LEE GOLDSBOROUGH, Maryland
JOHN G. TOWNSEND. JR.. Delaware
FREDERIC C. WALCOTT, Connecticut
ROBERT D. CAREY, Wyoming
JAMES COUZENS, Michigan
FREDERICK STEIWER, Oregon
HAMILTON F. KEAN, New Jersey
WILLIAM L. HILL, Clerk
R. H. SPAEKMAN, Acting Clerk
SUBCOMMITTEE ON STOCK EXCHANGE PRACTICES
DUNCAN U. FLETCHER, Florida, Chairman
PETER NORBECK, South Dakota *
JOHN G. TOWNSEND, JR., Delaware
JAMES COUZENS, Michigan
CARTER GLASS, Virginia
ALBEN W. BARKLEY, Kentucky *
EDWARD P. COSTIGAN, Colorado
ALVA B. ADAMS, Colorado
1
Alternate, Thomas P. Gore, Oklahoma.
* Alternate, Phillips Lee Goldsborough, Maryland.
(H)
CONTENTS
PART 9
Page
Bubanks, W. A., Detroit, Mich
_
4434,4445
Kanzler, Ernest, 2501 Iroquois Avenue, Detroit, Mich
4543Lord, Robert C, Detroit, Mich
4203
4240,4271,4305,4339,4375,4429,4435,4440,4448,4519
Stalker, John W., Grosse Pointe Shores, Mich
4405
EXHIBITS—GUARDIAN" DETROIT UNION GROUP
[Italics indicate page on which exhibit was admitted into the record; roman type,
exhibit printed]
1. Copy of the articles of association of the Guardian, Detroit Group,
Inc., 4205
4268
la. Chart "Organization of Guardian Detroit Union Group, Inc."
4207
2. Chart showing bank failures in the State of Michigan
4210
3. Pages 2, 3, and 4 of Annual Report of Guardian Detroit Union Group
for 1929
4220
4. Photostatic copy of letter dated July 24, 1931, addressed to L. H. D.
Baker, National Bank of Commerce, Union Guardian Building,
Detroit, Mich
4227
5. Typewritten sheet purporting to be a copy of page 39 of minute book
of Guardian Detroit Group, Inc
4251
6. Photostat of letter from Robert O. Lord to John N. Stalker, dated
June 4, 1930
4252
7. Letter dated June 5,1930, from John N. Stalker to Robert O. Lord
4253
8. Photostatic copy of memorandum addressed to Mr. Lord by Mr.
Stalker under date of June 26, 1930
4257
9. Photostatic copy of letter dated Mar. 4, 1930, to Mr. Frank Brandon
from Robert O. Lord
4259
30. Letter, Mar. 4, 1930, Lord to Stalker
4260
11. Letter, Mar. 4, 1930, Lord to Sanger
4263
12. Letter, Mar. 11, 1930, Sanger to Lord
4264
13. Letter, Mar. 13, 1930, Lord to Sanger
4265
14. Letter, Mar. 18, 1930, Sanger to Lord
4266
15. Letter, dated Aug. 24, 1929, addressed to Joseph H. Brewer by Robert
O.Lord
427a
16. Letter, June 11, 1931, Maxwell to Reynolds
4286
17. Letter, Dec. 12,1931, Reynolds to Patterson
4289
18. Letter, Sept. 18,1929, Lord to Brewer
4290
19. Letter, Nov. 18, 1929, Lord to Brewer
4291,4295
20. Letter, Nov. 21, 1929, Brewer to Lord
-_
4292
21. Letter, Jan. 22, 1930, Lord to Brewer
4294
22. Memorandum dated Apr. 13, 1931, from Joseph H. Brewer to B. K.
Patterson, together with attached letter dated Apr. 10, 1931, from
Henry F. Quinn, national bank examiner, to Joseph H. Brewer, and1
also attached tabulation of loans and discounts and bonds and
securities
=. 4296
23. Photostatic copy of memorandum to A. A. F. Maxwell from F. M^
Brandon dated Sept. 17, 1931
^ 4306
24. Photostatic copy of letter addressed to B. F. Patterson from Henry F:
Quinn dated Sept. 1, 1931
.
^ _
^- 4307
175541—pt. 9
Hi;
IV
CONTENTS
25. Photostatic copy of intra-Group memorandum to F. M. Brandon, president City National Bank & Trust Co., Niles, from A. A. F. Maxwell, secretary Guardian Detroit Union Group, Inc., dated Sept.
24, 1931
4308
26. Intra-Group memorandum dated Sept. 28, 1931, from F. M. Brandon,
president City National Bank & Trust Co., Niles, Mich., to A. A. F.
Maxwell, secretary Guardian Detroit Union Group Inc
4309
27. Photostatic copy of intra-Group memorandum dated Sept. 29, 1931,
to Frank M. Brandon, president City National Bank & Trust Co.,
Niles, from A. A. F. Maxwell, secretary Guardian Detroit Union
Group, Inc
4309
28. A letter dated Oct. 8, 1931, from F. M. Brandon, president City National Bank & Trust Co. of Niles, Mich., to B. K. Patterson, executive vice president of the Detroit Union Group
4310
29. Memorandum addressed to Mr. Brandon by B. K. Patterson, under
date of Oct. 12, 1931
4311
30. A letter dated Mar. 4, 1930, to Warren J. Rachow, president Union
State Bank, Dearborn, Mich., by R. O. Lord
4315
31. A letter dated Mar. 7, 1930, to R. O. Lord, written by Warren J.
Rachow, president Union State Bank, Dearborn, Mich
4316
32. Typewritten statement showing amounts of dividends declared by
various bank units of the Group during the years 1929, 1930, 1931,
and 1932, respectively, 4318
4331
33. Typewritten statement referred to entitled " Guardian Detroit Union
Group, Inc., Summary of Cash Dividends " 4318
4331
34. Copy of proposed Annual Report of Guardian Detroit Union Group
Inc., 4319
,
4332
35. Photostatie copy of intra-group memorandum addressed by R. O. Lord
to the directors of the Guardian Detroit Bank under date of Jan.
21, 1931, 4321
.
4333
36. Annual report Guardian Detroit Union Group, Inc., Dec. 31, 1930
4324
37. Letter, Sept. 17, 1931, Walsh to Robertson
4347
38. Letter, Sept. 17, 1931, Walsh to Brandon
4349
39. Letter, Sept. 16, 1931, Brandon to Walsh
4352
40. Letter, Sept. 19, 1931, Robertson to Walsh
4356
41. Letter dated Sept. 18, 1931, from H. S. Reynolds to James L. Walsh_ 4358
42. Letter dated Dec. 31, 1930, from James L. Walsh to Herbert S.
Reynolds
4361
43. Letter dated Jan. 5, 1931, from F. M. Brandon to James L. Walsh
4362
44. Letter dated Jan. 6,1931, from James L. Walsh to Frank M. Brandon_ 4364
45. Photostat of telegram dated Dec. 30, 1930, from James L. Walsh to
Herbert R. Wilkin
4366
46. Intra-Group memorandum dated Dec. 31, 1930, from James L. Walsh
to H. R. Wilkin
4366
47. Photostatic copy of intra-Group memorandum dated Jan. 8, 1931, from
F. M. Brandon to James L. Walsh
4373
48. Copy of certificate of deposit, Dec. 31, 1931
4376
49. Photostatic copies of ledger sheets of the account of the Union Industrial Trust & Savings Bank, Flint, Mich., on the books of the
Guardian Detroit Bank
4377
50. Report of condition, Union Industrial Trust & Savings Bank, Flint,
Mich., Dec. 31, 1931
4378
51. Annual Report, 1929, Guardian Detroit Union Group, Inc
4380
52. Letter, May 5, 1931, Morton to Lord
4381
53. Letter from James L. Walsh to Scott D. Carpenter, dated Aug. 4,
1931
,
4383
54. Photostatic reproduction of Annual Report of Guardian Detroit Union
Group, Inc., for the year 1930, filed with the Michigan Securities
Commission 4480
4461
55. Photostatic reproduction of Annual Report of Guardian Detroit Union
Group, Inc., for the year 1931, filed with the Michigan Securities
Commission 4430
4463
56. Photostatic copy of Annual Report for the year 1932 filed by the
Guardian Detroit Union Group, Inc., with the Michigan Securities Commission 4430
4468
CONTENTS
57. Photostatic copy of memorandum dated Dec. 18, 1931, addressed by
Mr. Patterson to Messrs. Lord, Kanzler, Covington, and Walsh
58. Letter dated Jan. 10, 1929, from Mr. Proctor to National Bank
Examiner Boon
59. A photostatic copy of a report made for the year 1929 by the Guardian Detroit Union Group, Inc., to the Michigan Securities Commission
.
GO. A photostatic copy of a report made for the year 1930 by the Guardian Detroit Group, Inc., to the Michigan Securities Commission 4521
61. A photostatic copy of a report made for the year 1931 by the Guardian Detroit Union Group, Inc., to the Michigan Securities Commission
,__
62. A photostatic copy of a report made for the year 1932 by the Guardian Detroit Union Group, Inc., to the Michigan Securities Commission
63. Kanzler notes, annual meeting of Stockholders, Guardian Detroit
Union Group, Inc., Jan. 24, 1933
64. Mimeographed copy of document addressed to the stockholders.
Guardian Detroit Union Group, produced by the. witness, 451%
1
Not printed because of length or for reasons given in text.
4514
£518
4521
(x )
4522:
4522!
4545,
4582
STOCK EXCHANGE PEACTICES
TUESDAY, DECEMBER 19, 1933
UNITED STATES SENATE,
SUBCOMMITTEE OF THE
COMMITTEE ON BANKING AND CURRENCY,
Washington, D.C.
The subcommittee met at 10:30 a.m., pursuant to adjournment on
Thursday, December 7, 1933, in Eoom No. 301 of the Senate Office
Building, Senator Duncan U. Fletcher presiding.
Present: Senators Fletcher (chairman), Gore (substitute for
Barkley), Adams (proxy for Costigan), Couzens, Townsend, and
Goldsborough (substitute for Norbeck).
Present also: Ferdinand Pecora, counsel to the committee; Julius
Silver and David Saperstein, associate counsel to the committee; and
Frank J. Meehan, statistician to the committee.
The CHAIRMAN. The subcommittee will come to order, please.
You may proceed, Mr. Pecora.
Mr. PECORA. Mr. Lord, will you take the stand?
The CHAIRMAN. Please stand, hold up your right hand and be
sworn: You solemnly swear that you will tell the truth, the whole
truth, and nothing but the truth, regarding the matters now under
investigation by the committee. So help you God.
Mr. LORD. I do.
TESTIMONY OF ROBERT 0. LORD, DETROIT, MICH.
Mr. PECORA. Mr. Lord, will you give your full name and residence
and business addresses to the committee reporter?
Mr. LORD. Eobert O. Lord, 17 McKinley Place, Grosse Poihte
Farms; business address, Penobscot Building, Detroit, Mich.
Mr. PECORA. What is your business, occupation, or profession?
Mr. LORD. Nothing at the present time.
Mr. PECORA. What was it?
Mr. LORD. Banker.
Mr. PECORA. With what banking institution or organization were
you last affiliated or connected?
Mr. LORD. My last connection was as president of the Guardian
National Bank of Commerce.
Mr. PECORA. Where was that bank situated?
Mr. LORD. Detroit, Mich.
Mr. PECORA. When did you become president of it ?
Mr. LORD. I became president of the predecessor bank, the Guardian Detroit Bank, in June of 1927, when that bank was opened.
4203
4204
STOCK EXCHANGE PRACTICES
Mr. PECORA. Had you for a number of years prior to that time
been identified actively with banking?
Mr. LORD. From August of 1906 until May of 1927 I was connected with the Harris Trust & Savings Bank of Chicago, leaving
it as vice president +o go to that bank.
Mr. PECORA. When did you sever your connection with the Harris
Trust & Savings Bank o* Chicago ?
Mr. LORD. The last of May 1927.
Mr. PECORA. Where did you go from the Harris Trust & Savings
Bank?
Mr. LORD. Direct to Detroit.
Mr. PECORA. With this Bank of Commerce?
Mr. LORD. With the Guardian Detroit Bank, at the time when it
was organized.
Senator COTJZENS. It was a State at that time, was it not ?
Mr. LORD. I t was a State bank then, Senator Couzens.
Mr. PECORA. DO you know of an organization or corporation called
the Detroit—no; I mean the Guardian Detroit Union Group, Inc. ?
Mr. LORD. Yes, sir.
Mr. PECORA. Were you identified with that organization?
Mr. LORD. I was president and a director.
Mr. PECORA. When did you become president of the Guardian
Detroit Uni,on Group, Inc. ?
Mr. LORD. I became president of the Guardian Detroit Group r
Inc., which was the same corporation as the one of which the name
was finally changed to Guardian Detroit Union Group, Inc., in
the early summer of 1929, when the group company was organized.
Mr. PECORA. What was the nature or form ot that corporation^
Mr. Lord ?
Mr. LORD. I am not a lawyer, Mr. Pecora, but as I understand, the
corporation was organized under the general corporation laws of the
State of Michigan. In other words, it was a Michigan corporation.
Mr. PECORA. AS a holding company?
Mr. LORD. AS a holding company.
Mr. PECORA. What kind of securities did it acquire and hold in its
portfolio ?
Mr. LORD. Very largely the stock of banking and trust company
institutions.
Mr. PECORA. Were those banking and trust company institutions
located exclusively in the State of Michigan ?
Mr. LORD. Yes, sir.
Mr. PECORA. Where
was the principal office or place of business of
the Guardian Detroit Group, Inc. ?
Mr. LORD. In the Penobscot Building in Detroit.
Mr. PECORA. Did you become the president of that organization at
its inception?
Mr. LORD. Yes,
sir.
Mr. PECORA. And also a director?
Mr. LORD. Yes, sir.
Mr. PECORA. What was
the date of the incorporation of that company?
Mr. LORD. I only have the month here, May of 1929. I cannot tell
you the exact day of the month.
STOCK EXCHANGE PEACTICES
4205
Mr. PECORA. That was May 9,1929, was it not?
Mr. LORD. I think that is correct.
Mr. PECORA. I show you what purports to be a copy of the articles
of association of the Guardian Detroit Group, Inc. Will you kindly
look at it and tell me if you recognize it to be a true and correct copy
of such articles ?
Mr. LORD (after looking over the paper cursorily). I would think
so, Mr. Pecora.
Mr. PECORA. Mr. Chairman, I offer it in evidence, and
Mr. LORD (interposing). Mr. Pecora, I should say that I have not
compared it with the papers, but I think so.
Mr. PECORA. Mr. Chairman, I offer it in evidence, and ask that it
may be made a part of the record.
The CHAIRMAN. Let it be admitted, and the committee reporter
will make it a part of the record.
(The articles of incorporation of the Guardian Detroit Group,
Inc., of May 9, 1929, were marked " Committee Exhibit No. 1, Dec.
19,1933 ", and will be found at the end of the day's proceedings.)
Mr. PECORA. I won't read the exhibit in its entirety, but I should
like to read for the information of the subcommittee the following
provision thereof, known as article 3 :
The purpose or purposes of this corporation are as follows: To acquire, own,
hold, dispose of, and deal in stocks, bonds, and other evidences of indebtedness,
and securities, including those issued by any corporation, domestic or foreign,
and to possess and exercise in respect thereof all the rights, powers, and
privileges of individual owner thereof, including the right to vote the same and
to execute proxies therefor.
Now, subsequent to the incorporation of the Guardian Detroit
Group, Inc., was its corporate title or name changed to the Guardian
Detroit Union Group, Inc. ?
Mr. LORD. It was, sir.
Mr. PECORA. DO you recall when
Mr. LORD. My recollection is that
that occurred?
it was in December, or the latter
part of November, of 1929.
Mr. PECORA. Thereafter was there a merger with another holding
•company known as the Union Commerce Corporation ?
Mr. LORD. Yes, sir.
Mr. PECORA, When did that merger take place?
Mr. LORD. In the early winter of 1929.
Mr. PECORA. That took place on December 16, 1929, did it not?
Mr. LORD. I believe the merger was declared operative about that
date.
Mr. PECORA. What kind of corporation was the Union Commerce
Corporation at the time when it was merged with the Guardian
Detroit Union Group, Inc. ?
Mr. LORD. I have not a copy of their articles, but I would say
it was the same kind of corporation.
Mr. PECORA. That is, it was a holding company organized especially for the purpose of acquiring, owning, and holding securities
of banking institutions, was it not?
Mr. LORD. I believe so; yes, sir.
Mr. PECORA. And their affiliates?
Mr. LORD. Yes,
sir.
4206
STOCK EXCHANGE PRACTICES
Mr. PECORA. NOW, upon the merger of those two holding companies, under what name did they continue to operate as one
company?
Mr. LORD. The Guardian Detroit Union Group, Inc.
Mr. PECORA. NOW, Mr. Lord, would you be good enough to look
at this chart that is before you, entitled " Organization of Guardian
Detroit Union Group, Inc.", and tell the subcommittee if in your
opinion that chart correctly represents the structure known now as
the Guardian Detroit Union Group, Inc., with the various units that
enter into that holding company or are represented in its stock
acquisitions ?
Mr. LORD. Mr. Pecora, without checking every corporation shown
on that chart I could not say that it was absolutely correct. I have
seen the chart, and in general I should say it is correct. There are,
however, I think some letterings in the chart that show discrepancies
as of the present time and that should be checked. For instance, the
FlintBank Has been reopened on a partial basis.
Mr. PECORA. Can you point out whatever inaccuracies appear on
this chart?
Mr. LORD. The only one that I notice at the moment is that there
is no securities company listed up there in connection with the First
National Bank of Kalamazoo. That securities company mam
months ago was liquidated, and that is possibly the reason why yo*
left it off. You will see in the second line to the left the First
National Bank & Trust Company of Kalamazoo, and
Mr. PECORA (interposing). Yes; I see it. You mean by that, that
at the time of the acquisition of the First National Bank & Trust
Co. of Kalamazoo by the Guardian Detroit Group, Inc., a securities
affiliate connected with the First National Bank & Trust Co. of
Kalamazoo was also acquired ?
Mr. LORD. That is my recollection.
Mr. PECORA. And that affiliate does not appear on this chart.
Mr. LORD. It does not appear on the chart.
Mr. PECORA. When did that affiliate cease to operate?
Mr. LORD. I cannot answer that question, but a good many months
ago.
Mr. PECORA. And the fact that it had so ceased to operate is the
reason why it does not appear on this chart, I take it.
Mr. LORD. I should think so.
Mr. PECORA. Are there any other items that you would like to
refer to by way of correction on that chart?
Mr. LORD. Not offhand; I do not see anything offhand, Mr.
Pecora.
Mr. PECORA. NOW, according to this chart the Guardian Detroit
Union Grdup, Inc., which is the top organization, is made up of a
merger of the Guardian Detroit Group, Inc., and the Union Commerce Corporation, two predecessor holding companies, isn't that a
fact?
Mr. LORD. That is correct.
Mr. PECORA. And the various banking institutions
Mr. LORD (interposing). Mr. Pecora, I would not say that the
Guardian Detroit was a predecessor company, because it was the
same corporation as I understand it as the Guardian Detroit Union
Group, Inc., after the name was changed.
COMMITTEE EXHIBIT NO. 1-A, DECEMBER 19, 1933
ORGANIZATION
OF
GUARDIAN DETROIT UNION GBOUPJNC
UNION COMMEBCEC08PN.
W////A
CITVNATIONAt.*
ZC12AND ftAPJOS.^
'. ilMlON "• TRUST CO«'
OTY NATIONAL CO.
fY7777f77/f777i
/Vv-i-niifct-V/* ' A
?1ST.
:
.UNION;CO.* .'*•
" OF • OETftOlt'.'.
..•UNION: TITLE';',
' & GUARANTY CO.*
<MmM
/'//'//
^ ^
ESTATE BANIC^
OFfeC*HIt : \^J,
•.BUILDING'. CO!
PRESENT STATU5
A-RECEIVED
B-CONSERVATOa
C-CLOSED
O-REOPENED
F - OPERATING
175541—34. (Faces p. 4207.)
-AND'
CO.
STOCK EXCHANGE PEACTICES
4207
Mr. PECORA. Yes. Now, those two holding companies had been'
merged into the Guardian Detroit Union Group, Inc., on December 16, 1929, and owned, controlled, or acquired at various times
the various banking institutions that are designated and shown on
this chart, isn't that a fact ?
Mr, LOED. They owned the shares of those banking institutions,
with the exception of the qualifying shares of directors, and in
some cases a small percentage or minority stockholding.
Mr. PECORA. NOW, on this chart also appear various affiliates that f
in turn, had been organized or created and were wholly owned subsidiaries of the various banking units to which they are annexed on
this chart.
Mr. LORD. I believe so. Mr. Pecora; I have prepared, and if I
may have the forbearance of this committee, it seems to me that if I
were to read a statement, which is not very long, it would clarify
the minds of the members of this committee in giving sometMngr
about the history of the matter.
Mr. PECORA. About the organization of the constituent units of
this situation?
Mr. LORD. Yes, sir.
Mr. PECORA. Have you a copy that I may have ?
Mr. LORD. Yes, sir.
Mr. PECORA. I should like to look at it as you go along*
Mr. LORD. With your permission may I read it ?
Mr. PECORA. Will you just let me have a copy so I may
follow
your reading of it ?
Mr. LORD. Certainly.
Mr. PECORA. And I should like to state that we are having ar
photographic reproduction made of this chart, I mean the chart to
which the witness' attention has been called, and it will be on a*
smaller scale, and I propose then to make it a part of the forma]
record here.
The CHAIRMAN. In regard to that matter, Mr. Pecora, as youprobably know, we have to have regard to the rules of the Government Printing Office. I suppose you will get it up so that we canhave it reproduced there.
Mr. PECORA. We will have inquiries made to enable us to ascer>
tain just what sort of reproduction we will have to make.
The CHAIRMAN. They are not equipped generally to insert illustrations. We will have to go into that with them in order to find
out what their requirements are. And, of course, the Government
Printing Office cannot show these colors that appear on the chart.
Mr. PECORA. I am sure that it is so prepared that what appears
on the chart will be clear in the reproduction by the Government
Printing Office.
The CHAIRMAN. All right.
(The chart referred to is reproduced herewith as Commii>fe&x Exhibit No. 1-A, December 19,1933.)
Mr. LORD. Shall I now proceed?
Mr. PECORA. DO you now want to read your statement
the organization of this holding company?
Mr. LORD. Yes, and
Mr. PECORA (interposing). You may go ahead.
4208
STOCK EXCHANGE PRACTICES
Mr. LORD. This statement will contain some history of the acquisition of the stock of these banks and trust companies, and I think
will enable the committee to follow the matter more clearly.
The CHAIRMAN. May I ask, first, what proportion of the banks in
Detroit were involved in this set-up ?
Mr. LORD. Senator Fletcher, at the time of the bank holiday there
were only 4 banks remaining in Detroit, 1 of them being the Ghiardian National Bank of Commerce, which was our institution, and the
other 3 were the First National Bank, the Detroit Savings Bank,
and the Commonwealth Commercial, a State bank.
Senator COTJZENS. Then there was a little savings bank.
Mr. LORD. And there was the Morris Plan Bank. And there was
the United Savings Bank, which was not a member of the clearing
house.
The CHAIRMAN. DO you mean those were the only banks that
opened after the bank holiday ?
Mr. LORD. NO ; those were the only banks in existence before the
bank holiday.
The CHAIRMAN. Oh! Before the bank holiday ?
Mr. LORD. There were only 4 banks in Detroit then, including, of
course, the 2 I have just mentioned, the Morris Plan Bank and the
United Savings Bank, which makes 6.
The CHAIRMAN. Are they all included here ?
Mr. LORD. NO, sir. And we have only one bank in Detroit now.
Mr. PECORA. In order to get that clear let me ask you: The most
of the banks shown on this chart as combined in the organization of
the Guardian Detroit Union Group, Inc., were located outside of the
city of Detroit, but all within the State of Michigan; is that so ?
Mr. LORD. Yes, sir. Now, this statement is addressed to the
chairman of the committee.
The CHAIRMAN. YOU may proceed with your statement.
Mr. LORD. AS I understand it, and as emphasized to me by representatives of this committee in Detroit, the principal purpose of the
investigation into the Detroit banking situation is to obtain information which will serve to suggest banking legislation either in
addition to or revising existing laws to strengthen the banking
structure of this country, to aid a recovery in business, and at the
same time to prevent a repetition of the mistakes and excesses which
occurred during the so-called " speculative era " that ended in the
late fall of 1929. I am, of course, glad to be helpful in any possible
way.
To go into every minute detail of the history, organization, and
growth of the Guardian Detroit Union Group, Inc., would require
an unnecessary amount of the time of this committee. I t would
seem to me, however, that to give the committee the proper understanding of the background of this situation it would be helpful
to bring out something of the growth of the city of Detroit and to
tell briefly of the history of the Guardian Detroit Union Group, Inc»
The CHAIRMAN. Mr. Lord, will you sit a little closer to the microphone so your voice may be heard ?
Mr. LORD. Certainly.
Mr. PECORA. And will you read a little more slowly so that the
voice reproducer may carry satisfactorily?
STOCK EXCHANGE PEACTICES
4209
Mr. LORD. A S is well known, the effect of the growth of the automotive industry was a tremendous and rapid increase in the population of Detroit and the so-called "Detroit metropolitan area."
In 1900 Detroit, according to the United States census, had a population of 285,704. I n 1930 this had increased to 1,568,602. Similar
substantial increases were also shown by other communities in the
State of Michigan, notably Grand Rapids, which increased from
87,565 to 186,592 in the 30-year period; Lansing from 16,485 to
78,397; Flint from 13,103 to 156,492; Dearborn from 844 to 50,358;
Highland Park from 427 to 52,959; Royal Oak from 468 to 22,904.
Economically, Detroit occupies a position different than any city
of comparable size in the United States in that on a dollar and!
cents basis it probably consumes less of its own products than any
other city. Detroit's prosperity is closely linked, not only with
the general prosperity of the United Stages but also of the entire
world. Bank closings in any city or section of the country, floods,
famine, crop failures, or other local disasters are in turn reflected
directly in the output of motor cars and in the employment of
factory workers in Detroit.
Generally speaking, it may be stated that the rapid growth of
these communities was largely, if not entirely, due to the development of the automotive industry and the growth of the companies
supplying materials to this industry. During this period manufacturing—and particularly that of the motor industry—so absorbed
the attention and energy of Detroiters that banking facilities did not
keep pace with the needs of the growing city. Detroit found itself
dependent financially to a great extent on outside cities, and even
up to a few years ago, while it ranked fourth in population and
manufactured products, it ranked eighth or ninth in banking
resources.
In view of this situation, in June 1927 there was organized under
the banking laws of the State of Michigan the Guardian Detroit
Bank. That was originally the State bank that Senator Couzens
spoke about. Under the plan and subscription agreement there
was sold unified stock. Each subscriber to stock in Guardian Detroit Bank at the same time subscribed for an equal number of
shares of Guardian Detroit Co., an investment affiliate, and for one
fifth of the number of shares in Guardian Trust 0o., a fiduciary
institution which had been organized under the banking laws of
the State about 2 years previously. The unified stock plan was not
new as the purported advantages of having a group of institutions
with identical ownership and rendering complete financial service
had been recognized elsewhere. Regardless of the lesson since
learned that banks and trust companies should not be identified directly or indirectly with the general securities business, the contention was held at that time by many of our leading bankers that
this was a proper form of service to be rendered by banking institutions. That this principle was then considered a proper one
is further shown by the provisions of the McFadden Act which
specifically authorized banks themselves—that is, national banks—
to enter into the business of buying and selling investment securities.
There were thus created three independent corporations owned by
the same, stockholders in no way subsidiary to each other.
4210
STOCK EXCHANGE PRACTICES
I t was provided that none of the stock of the bank, the trust
-company, or the securities company should be acquired or transferred except in connection with the acquisition or transfer of a
proportionate amount of stock of each of the other two companies,
so that each stockholder would at all times own the same percentage
of the stock of any one of the same companies as he owned of the
stock of each of the other two companies.
The city of Detroit, as stated, was primarily dependent upon
the automotive industry and various estimates placed the preponderance of this industry at from 50 percent to 75 percent of the total
industry of the city. Citizens of Detroit, drawn not only from
the motor industry but from other manufacturing industries, merchandising, construction, transportation, publishing^ real estate, and
the professions, were identified with the formation of Detroit's
first group of related institutions equipped to transact every kind
of banking, trust, and investment business for individuals and corporations. Included among these men were the following individuals, not only well known locally but in most cases of national
.reputation:
Balph H. Booth, president Booth Publishing Co.
Hoy D. Chapin, chairman of the board, Hudson Motor Car Co.
Howard E. Coffin, president National Aviation Corporation.
George K. Fink, president Michigan Steel Corporation.
Fred J. Fisher, vice president, General Motors Corporation.
Edsel B. Ford, president, Ford Motor Co.
Albert Kahn, architect.
Ernest Kanzler, now president Universal Credit Corporation.
Alvan Macauley, president Packard Motor Car Co.
W. Ledyard Mitchell, vice president Chrysler Corporation.
Charles S. Mott, vice president General Motors Corporation.
Fred T. Murphy, trustee Murphy family trusts, also a trustee of
Yale University.
Alger Sheldon, president Shelden Land Co.
From the above list it will be seen that there, were upon the boards
of one or more of the Guardian institutions individuals who were
identified with an aggregation of motor companies representing
probably well over 75 percent of the volume of the industry upon
which it is estimated 10 percent of the population of this country
depends and which is the largest single purchaser in the world of
cotton, hardwood lumber, nickel, upholstery leather, polished plate
lass, crude rubber, gasoline and oil, and an industry which for years
as, generally speaking, paid the highest wages. I t was, therefore,
natural that the Guardian should become known throughout the
country as an " automobile " bank.
Under this coordinated management these three institutions, which
came to be known popularly as " the Guardian Group ", grew and
prospered so that within 2 years their aggregate resources amounted
to approximately $78,000,000, exclusive of the figures of the Guardian
Detroit Co.., the securities company.
In the early summer of 1929, in order to provide, among other
things, an increase in capital of the securities company without at
the same time increasing the capital of the bank or the trust company, neither of which institutions fr&s in need of additional capital,
f
STOCK EXCHANGE PEACTICES
4211
there was organized the Guardian Detroit Group, Inc.; that is the
one shown in yellow at the top. The additional capital amounted to
$3,694,500 and was raised $747,000 through the acquisition of the
entire capital stock of the K. O. L. Co. and $2,947,500 by the stockholders of the Guardian Detroit Group subscribing to 32,750 shares
at $90 per share. Of this additional capital $3,250,000 went to increase the capital of the securities company to $5,000,000 and the
balance of $444,500 remained with the Group Co. as working capital.
At or shortly after its organization the Group Corporation acquired all except directors' qualifying shares of the Highland Park
State Bank and the Highland Park Trust Co. The city of Highland
Park, although entirely surrounded by the limits of the city of
Detroit, and although in effect an integral part of the economic and
business district of Detroit, has continued to maintain its separate
corporate identity. The same is true also of the city of Hamtramck.
The officers and directors of the Highland Park institutions felt
that it would be distinctly advantageous to effect a closer working arrangement with a large downtown bank. At that time the Highland Park State Bank, in addition to its main office, had seven
branches within the corporate limits of Highland Park. As you may
know, branch banking within the corporate limits of the municipalities in which a bank was located had been permitted in Michigan
for many years, one of the larger Detroit banks having upward of
150 branches in Detroit.
The Guardian Detroit Group, Inc., was organized in May 1929,
under the provisions of the general corporation laws Act 84, Public
Acts of 1921, as amended, for the following purposes:
To acquire, own, hold, dispose of, and deal in stocks, bonds, and other evidences of indebtedness and securities, including those issued by any corporation, domestic or foreign, and to possess and exercise in respect thereto aU
rights, powers, and privileges of individual owners thereof, including the right
to vote the same and to execute proxies therefor.
It might be here stated that the general idea of acquiring the
shares of banking institutions located throughout the State was to
have an association with a number of strong banks in different sections of the State, banks a part of whose business had flowed to New
York and Chicago and which could be handled just as well or better
through strong Michigan banking institutions, thus retaining that
business within the State. Through this association these banks
could more capably handle the business of their own local and out-ofState clients, could supply more complete credit information, and
through contacts of other unit banks in the Group could aid their
clients in the development of the clients' own business. I t was
thought that such an association would naturally attract to the various local units a substantial amount of desirable business.
The Group Corporation had but one class of capital stock of $20
par value; 2,500,000 shares were finally authorized, of which there
were finally issued and outstanding 1,544,844 shares. The issuance
of these shares was in all cases validated by the Michigan Securities
Commission.
Under the original articles of association or charter of Guardian
Detroit Group, Inc., the company could, upon the affirmative vote of
three fourths of its board of directors, issue and dispose of unissued
4212
STOCK EXCHANGE PRACTICES
or increased stock of the corporation for the purpose of acquiring
stock of banks or trust companies without offering to the stockholders
of the corporation for subscription the stock to be so disposed of.
In accordance with these provisions of the charter, the Guardian
Detroit Group, Inc., acquired all or substantially all of the capital
stock, except directors' qualifying shares, of the following institutions : Guardian Detroit Bank, Detroit, Mich.; Guardian Trust Co.
of Detroit, Mich.; Guardian Detroit Co., Detroit, Mich.; Highland
Park State Bank, Higland Park, Mich.; Highland Park Trust Co.,
Highland Park, Mich.; Bank of Dearborn, Dearborn, Mich.; National Union Bank & Trust Co., Jackson, Mich.; Federal Commercial
& Savings Bank, Port Huron, Mich.; First National Bank & Trust
Co., Port Huron, Mich.; Bant of Detroit, Detroit, Mich.
While Guardian Detroit Group, Inc., was negotiating with and
acquiring stock of the above-listed institutions, another company
called the Union Commerce Corporation of Detroit, Mich., had acquired or were acquiring all or substantially all of the capital stock,
except directors' qualifying shares, of the following institutions:
National Bank of Commerce, Detroit, Mich.
Union Trust Co., Detroit, Mich.
Union Co., Detroit, Mich.
Michigan Industrial Bank, Detroit, Mich.
Union State Bank of Dearborn, Mich.
Bank of Commerce of Dearborn, Mich.
Jefferson Savings Bank, Grosse Pointe, Mich.
Union Joint Stock Land Bank, Detroit, Mich.
Ohio-Pennsylvania Joint Stock Land Bank, Cleveland, Ohio.
Mr. Pecora, that is the only corporation domiciled outside of the
State. It was later sold, as you know.
City National Bank & Trust Co., Battle Creek, Mich.
Keene, Higbie & Co., Detroit, Mich.
Union Industrial Bank and Union Industrial Trust Co., Flint,
Mich.
Union Commerce Corporation had also acquired through exchange
of its stock an approximate 40 percent interest in seven small banks
located entirely in agricultural communities. In two other cases a
58-percent and a 78-percent interest was acquired.
Mr. PECORA. May I interrupt your reading of your statement to
ask you if you can give at this place in the record the names of those
seven small banks ?
Mr. LORD. State Savings Bank, Vestaburg, Mich.; State Savings
Bank, Stanton, Mich.; State Bank of Six Lakes; State Savings
Bank, Remus; State Savings Bank, Clinton; and Lansing State
Bank. That is six, and I believe the other was the Thompson Savings Bank, of Hudson, that was afterward sold back to the original
owners, Mr. Pecora.
The CHAIRMAN. Were these institutions all acquired by stock
arrangements ?
Mr. LORD. Exchange of stock.
The CHAIRMAN. And no cash ?
Mr. LORD. Yes. That is, so far as the Guardian was concerned.
I think in one or two cases there was some stock purchased back
from the owners in the case of the Union Commerce Corporation,.
I haven't the record on that.
STOCK EXCHANGE PRACTICES
4213
Early in September of 1929 representatives of Guardian Detroit
Group, Inc., and Union Commerce Corporation discussed the possible advantages which might arise from a merger of the two com*
panies. The discussion pointed out manifest benefits, and, accordingly, a proposed plan and agreement was drawn up providing for
the acquisition of the stock of Union Commerce Corporation by
Guardian Detroit Group, Inc., through exchange of shares on a
share-for-share basis after declaration of a 20 percent stock dividend
by Guardian Detroit Group, Inc.
On December 16—or 17—Mr. Pecora and I differ in the date. We
will say on December 17, 1929, the plan was declared operative, the
title of Guardian Detroit Group, Inc., thereupon being changed to
Guardian Detroit Union Group, Inc., which is its title today.
Through this merger the Group Co. acquired ownership of stock in
the financial institutions and other corporations referred to in the
preceding paragraphs.
Subsequently, Guardian Detroit Union Group, Inc., acquired by
exchange of stock all or substantially all of the stock, except
directors' qualifying shares, of the following institutions:
Peoples National Bank of Jackson, Mich.
City National Bank & Trust Co., Mies, Mich.
Capital National Bank of Lansing, Mich.
Grand Rapids National Bank, Grand Rapids, Mich.
First National Bank & Trust Co., Kalamazoo, Mich.
Grand Rapids Trust Co., Grand Rapids, Mich.
Second National Bank & Trust Co., Saginaw, Mich.
National Bank of Ionia, Ionia, Mich.
In figuring the basis of exchange of stock of the Group Co.
for that of the banks or trust companies acquired, it may be stated
that in general the method was to reduce to a parity of actual value
both the stock of the Group Co. and the stock of the bank to be
acquired; and earnings of both institutions were also reduced to
a parity—both factors being given due consideration in arriving at
a basis satisfactory to both parties at interest.
Actual values were determined by ai| examination of the assets of
the bank with which negotiations were under way; and/or the
examination reports of these banks by the National or State banking
authorities; and the bank, through its representatives, in turn, was
afforded an opportunity to satisfy itself as to the value of the
shares of the Group Co.
From its inception Guardian Detroit Group and, inturn, Guardian
Detroit Union Group, endeavored to preserve the local management
and to follow the policy of developing the standing and prestige of
that management, of the local institutions and placed the responsibility of such management upon the local boards of directors and
local officers.
Without taking the time of this committee to read the minutes of
the Group Corporation, I would call your particular attention to
the proceedings of a meeting of the board held December 23, 1929,
at which the basic policies of the corporation were clearly and definitely set forth. Article VI of the bylaws of the Group Co.
provided:
Whenever at any meeting of the stockholders of a bank or trust company
of which corporation shall at the time own 75 percent or more of the outstanding
175541—34—PT 9
2
4214
STOCK EXCHANGE PRACTICES
stock, an election of such board of directors is held, the shares of such bank
or trust company owned by this company shall be voted in favor of the election
of a board of directors of which at least 75 percent shall consist of directors
residing in the municipality where said bank or trust company is located or
within a radius of 50 miles thereof.
This policy was adhered to. The selection of directors in the unit
institutions was left to the unit directors who had previously been
m charge of these institutions, and such changes as occurred after the
acquisition of the stock of the unit institution by the Group Co. were
very largely on account of death or an account of resignation for some
other reason.
To further carry out these policies, the board of directors
of Guardian Detroit Union Group, Inc., adopted the following
resolution:
Resolved, That credit based upon the deposits in a local bank, which is a unit
member of Guardian Detroit Union Group, Inc., shall be controlled wholly by
the board of directors and the officers of the local unit bank.
The. officers of each unit institution in the Group were responsible
directly to the board of directors of their own institution.
The Group Co. performed the following useful functions for
the local institutions without in any way violating the basic policy of
encouraging local management to run their own banks, namely:
(a) Acting as a clearing house for information bearing upon policies, practices, and results obtained by the various member unit institutions.
(&) Systematically making available to all units the practice of the best
with a view of enabling aU to reach the highest standards of operations and
resultant profit.
(c) Providing capable supervision in connection with building construction
and management.
(d) Coordinating business development activities.
(e) Purchasing standard equipment and supplies in quantity.
(f) Providing an independent examining force, in no way responsible for
the condition which its examination discloses, to supplement the work of the
board of directors of a local unit in connection with the examining responsibilities imposed by statute.
(g) Provding investment counsel and advice, together with statistical data
and information on investments which the local institution, on account of its
size, could not afford to provide for itself.
(h) Where local industries required credit beyond the loaning capacity of
the local unit, the excess amount was offered to and frequently taken by other
banking units in the group, thus obviating the necessity of these industries
going outside the State for their credit accommodation.
In brief, it was the principal function of th$ Group Co. to act
purely in an advisory capacity and as any stockholder would act in
an institution where his funds were invested.
Admittedly, the institutions in the Guardian Detroit Union
Group made many mistakes; but, to the best of my personal knowledge, mistakes of judgment. Loans that were well secured at the
time made, suffered losses due in large measure to the velocity of the
deflation. This situation occurred in most banks throughout the
country necessitating banks in the United States charging down
hundreds of millions of dollars of assets which under any reasonably
normal conditions could and would have liquidated in lull.
I t might be of interest to this committee to know somes of the
many helpful and constructive things which the Group Co. accomplished. During the period from 1930 to 1933 the Group Co. purchased from unit banks and trust companies nearly $8,400,000 of
STOCK EXCHANGE PRACTICES
4215
slow or undesirable assets, in some cases in an amount almost equal
to the capital structure 01 the unit institution. The amounts were
:as follows, as reported to me:
Union Guardian Trust Co
-City National Bank & Trust Co., Battle Creek
.National Bank of Iona
City National Bank & Trust Co., Niles
•Guardian Bank of Dearborn
Guardian Bank of Grosse Pointe
Grand Rapids National Bank
Guardian Bank of Trenton
$7,500,000.00
198,068.9a
149,408.90
148,401.00
130,646.79
99,590.18
92,353.04
78,090.90
Thus, in the case of the Union Trust Co., the Group Co. replaced
the entire capital and surplus of that institution.
Senator COUZENS. May I interrupt you at that point: Where did
you get the money to purchase those securities, from the dividends
that you got from the paying institutions ?
Mr. LORD. Senator, I think it is very difficult to earmark money.
I would say it was from the borrowings of the Group Co., not from
the dividends.
Senator COUZENS. I do not ask you to earmark the money, but did
you relieve these units of these slow and doubtful assets by dividends
received from the units?
Mr. LORD. Received from the units ? No, sir; by borrowing money
*by the Group Co.
Senator COUZENS. Was that the only source that you had?
Mr. LORD. That was the source that was used. The situation in
Michigan during the years 1931 and 1932 was probably more acute as
regards bank failures than in any other State in the Union. In cities
where our own units were located many failures occurred in spite of
every aid to these competing banks that we could and did render. I
have here a map of the State, prepared early in 1933, showing the.
bank failures throughout the State, and I would like to show it to
this committee.
I t is rather an interesting picture. [Exhibiting map.] There are
195 banks pictured there. The towns that are starred were left with
no banking facilities whatever. In cases where they are marked
with a number 2 or 3 it means 2 or 3 banks in the community have
failed. That is in the period from January 1, 1931, to February 25,
I think it was, 1933.
Mr. PECORA. Have you any reproductions of those?
Mr. LORD. I have some small ones, Mr. Pecora. They are not very
clear.
Mr. PECORA. Would you let the committee have as many copies as
you can gather ?
Mr. LORD. They may have them all [handing copies].
Mr. PECORA. I think we might offer this chart produced by the
witness in evidence.
Senator COUZENS. Following up my earlier inquiry, Mr. Lord,
where did you borrow this money from that you used to relieve these
banks of their slow assets ?
Mr. LORD. Senator, most of that money was borrowed from New
York and Chicago banks, practically all of it, and I cover it a little
later. May I read it, and if I have not answered the question I
will be glad to?
4216
STOCK EXCHANGE PRACTICES
Senator COTTZENS. All right.
The CHAIRMAN. Let the chart be admitted and entered on the
record.
(Chart presented by Mr. Lord showing bank failures in the State
of Michigan from Jan. 1,1931, to Feb. 25,1933, was thereupon designated " Committee Exhibit No. 2, Dec. 19, 1933 ", and is reproduced
herewith.)
Mr. LORD. The effect upon the deposits of open banks where a closing occurs in the same or a nearby community is always serious and
was particularly so during those years when lack of confidence and
fear were so prevalent in the public mind.
Another interesting situation that I might comment upon that
took place in Michigan during that period was the fact that many
banks who called themselves open—and there were literally county
after county where this occurred—presented a situation where a man
who tried to cash a check for a hundred dollars must be given $5 or
$10. In other words, those banks held their doors open by brute
strength, and there was no one in the community who wanted to see
them close it, and they did the best they could, but it made a very
difficult banking situation.
I t may also be of interest to this committee to know what the situation is of the largest unit of the group, the Guardian National
Bank of Commerce. That bank was a consolidation of the Guardian
Detroit Bank, Bank of Detroit, and National Bank of Commerce,*
which latter bank had some previously absorbed the Griswold National Bank. I might say that, as shown on this chart, the Griswold
National Bank had previously absorbed the First State Bank.
When these three banks were separate institutions they reported
on December 31, 1929, total deposits of. $190,609,633.78. When the
final consolidation was completed December 31, 1931, the deposits
were $169,058,328.36. On December 31, 1932, deposits were $138,385,923.37. After the bank had been refused a license to reopen after
the holiday and was in the hands of a receiver 40 percent was paid
to the depositors by the middle of the summer of 1933. Since then
an additional 20 percent has been paid and plans are being completed
for an additional 5 percent. Taking into consideration the current
withdrawals made in normal course of business since December 31,
1931, that is, the date of the consolidation, and figuring as nearly
accurately as I can without access to the bank's records, the deposit
liability of approximately $33,000,000 remaining after this last 5percent payment—I say deposit liability as contrasted with contingent liabilities that come to a bank at its closing, such as rentals.
Senator COUZENS. Have you any estimate of that, Mr. Lord ?
Mr. LORD. Very rough estimate. I should say they have set up
four or five millions. That is the figure that I have heard, Senator,,
but I do not think it will take any such figure.
Senator COUZENS. That is for the leases and other claims?
Mr. LORD. For leases and other claims besides the depositors. The
deposit liability of approximately $33,000,000 remaining after this
last 5 percent payment means that during the period of less than 2
years, nearly 1 year of which the bank was closed, the bank has
paid out to its depositors about $136,000,000, or nearly 80 percent of
its deposits of December 1931. I t is true that this was made possible
COMMITTEE EXHIBIT NO. 2, DECEMBER 19. 1933
-PLACES WHERE BANKS HAVE CLOSEDPROM JANUARY 1,1931 TO JANUARY 25.1933
175541—34. (Paces p. 4216.)
^ I&ONWOOO
(GLU£
6LOOf*FtELD HILLS •
COOOELJW*
STOCK EXCHANGE PRACTICES
4217
by the aid of the Eeconstruction Finance Corporation, but there
were no loans remaining from the Reconstruction Finance Corporation until the first 20 percent payment was made.
I might state there that in paying and completing the 40 percent
the Eeconstruction Finance Corporation loaned the receiver of the
Guardian National Bank of Commerce four million three hundred
ninety-one thousand and odd dollars; I think that is the correct figure. The National Bank of Detroit had when it opened brought
about 13 million dollarsr of the loans which enable the 40 percent
payment, and by the end of the summer the Reconstruction Finance
loan had been back in full and most of the loans taken by the
National Bank of Detroit had been liquidated.
Mr. PECORA. Pardon me, Mr. Lord; that National Bank of Detroit
to which you have just referred was a new bank that was organized
in the spring of the current year?
Mr. LORD. It was a new bank that was organized this year. I
think it opened on March 24. In my opinion, with proper handling
of the remaining assets and any reasonable recovery of business, the
depositors will receive 100 cents on the dollar. Personally, I do not
know of any closed institution with conditions in any way comparable where the showing is as good.
In 1929 Guardian had a definite plan to acquire bank shares in
institutions in certain of the principal cities of Michigan, cities where
industry was closely allied with the industries of Detroit. In no
communty did we desire or attempt to have a banking monopoly.
There were many cases where bank shares were offered to and declined by our group, not only in cities where ^ e already had a unit
but in other communities. Our original program adopted in 1929
was completed early in the year 1930 and except for the Guardian
Bank of Royal Oak which we organized in that city of upwards of
20,000 people at the request of its citizens because the three banks
formerly serving that city had long since been closed, there were, I
believe, no further additions of banking units to the group.
I have already stated that there were undoubtedly many errors
in judgment. Broadly speaking, the greatest mistake of the Group
was that it was organized at the peak of the Nation's prosperity—
that we along with others were unable to foresee the conditions
which were to follow that long period of prosperity and expansion
of business. During almost the entire history of the group it was
engaged in a battle against a depression probably never before
equalled in its severity in the history of the world and the consequences of which were felt more acutely in Michigan and in Detroit
than in any other section of this country. In this battle against the
depression, most of the larger stockholders contributed enormously
to support and stabilize the situation. Here are some of the
instances:
First. In the late fall of 1929, when negotiations were in progress
for the merger of the Guardian Detroit Group and the Union Commerce Corporation, a series of defalcations were discovered in the
Union Industrial Bank of Flint, the stock of which bank has been
or was being acquired by the Union Commerce Corporation. Mr.
C. S. Mott, from his own resources, made good these defalcations,
4218
STOCK EXCHANGE PRACTICES
which amounted in the aggregate to $3,595,000. He was later reimbursed in part by the other stockholders of the Flint Bank.
Second. When the Group Co., in December 1931, found it necessary to borrow, Mr. C. Mott loaned his credit on a note of the Group
Co. with the Bankers Trust Co. of New York to the extent of
$2,500,000.
Third: Late in 1930 Mr. Edsel B. Ford loaned to the Guardian,
Detroit Co. $1,000,000 in cash and also loaned to that same corporation—that was the securities company—approximately $5,000,000*
of his personal securities.
Fourth: In December 1931 Mr. Edsel B. Ford loaned his credit
to the Group Co. on a loan of $2,500,000 with the Continental Bank
in Chicago.
Fifth: The Ford Motor Co. in December 1932 loaned the Group*
Co. $3,500,000 with which funds the Group Co. lifted out of the
Union Guardian Trust Co. $3,500,000 of criticized assets.
Sixth. In December 1929 certain of the directors of the Guardian
Detroit Group loaned their credit to the extent of $1,600,000 maximum, of which about $1,100,000 is now used, on a loan with the
Bankers Trust Co. of New York3 made for the purpose of carryingdistress loans of certain officers and employees of the units of the
Guardian Detroit Group.
Seventh: In November 1929, in order to relieve the Guardian Detroit Co. of part of its heavy inventory, a certain small group of
stockholders purchased from that company, at $180 per share, 18,800^
Group shares at a total cost of $3,384,000.
Eighth: In the early winter of 1930-31 certain individual stockholders agreed to subscribe for a total of approximately 93,000
shares of Group stock, to be bought from time to time in the open,
market at not to exceed $60 per share, the purpose of these purchases
to stop or retard the decline in the quoted price of Group shares
which was adversely affecting the institution's standing with an
already hysterical public. That cost ov^r $4,000,000.
Ninth: In the fall of 1930 certain individual stockholders put.
up $400,000 in cash through a company known as the Natum Corporation to purchase certain of the inventory of the Guardian
Detroit Co., to provide funds for reduction in the loans of that
company. These various items added together show that the larger
stockholders contributed, in order to strengthen and stabilize the
entire situation in the protection of the depositors, an aggregate of
nearly $27,000,000.
Senator Couzens, that is where your money came from that lifted
out the eight million four. Does that answer your question, sir?
Senator COUZENS. Yes; except that you said that you got it from
New York and Chicago banks, I understood.
Mr. LORD. Yes,
sir.
Senator COUZENS. And these loans from New York and Chicagobanks were guaranteed by these stockholders?
Mr. LORD. Yes, sir.
Senator COUZENS. That answers it.
Mr. LORD. Mr. Chairman, I do not
know exactly what this committee wants, but I am here to cooperate in any way that I can.
The CHAIRMAN. Did any of these banks subsequently reopen as.
shown on this chart?
STOCK EXCHANGE PEACTICES
4219
Mr. LORD. On that State chart?
The CHAIRMAN. Yes.
Mr. PECORA. That is the
chart which has been presented by Mr,
Lord and marked " Committee Exhibit No. 2".
Mr. LORD. I cannot tell you, Senator. I t has been a changing
situation. There has been a very substantial number of State
banks reopened on a reorganization or on a partial withdrawal
basis.
Senator COUZENS. There is one statement I would like to have you
clarify, and that is you say that this sum of $27,000,000 was advanced
for the purpose of protecting the depositors. Is that quite an accurate statement?
Mr. LORD. For either protecting the depositors directly or stabilizing the situation which was so disturbing to the depositors, Senator.
Senator COUZENS. Have you any figures to segregate that money
that was put up for the protection of the stock in the group or the
banks, as distinguished from that money that was put up for the
protection of the depositors?
Mr. LORD. Yes. May I take a minute to give you the approximate
figure?
Senator COUZENS. Yes.
Mr. LORD. I would say that Mr. Mott's contribution in Flint was
for the protection of the depositors; wouldn't you? He made good a
defalcation in a bank of which he was president.
Senator COUZENS. I should say so; yes.
Mr. LORD. That is $3,595,000. Do you want me to eliminate the
loan of Mr. Edsel Ford to the securities company? Would you not
consider that for the protection of the whole situation?
Senator COUZENS. I understood that was used for the purpose of
taking up doubtful securities in these institutions.
Mr. LORD. NO ; I mean where he loaned some of his personal collateral to the security company.
Senator COUZENS. I do not know whether you can trace back to the
purpose of that, the purpose for which it was used, or not, but I do
not think it is in accord with your statement a while ago as to what
it was used for.
Mr. LORD. I t was loaned by the Guardian Detroit Co. to the
securities company to enable them to carry their inventory.
Senator COUZENS. That would hardly be for the protection of
depositors.
Mr. LORD. Not directly for depositors, but for the protection of
the whole situation.
Senator, I would say that for the direct protection of the stockholders over 12 million went in, and the balance to stabilize the
general situation.
Senator COUZENS. SO that out of about 27 million about 12 million
went for the protection of depositors and the balance for the protection of the stockholders?
Mr. LORD. First for the depositors, Senator. You know when the
stock of the banks dropped how disturbed the depositor was?
Senator COUZENS. Oh, yes. You can only get the best estimate of
how the money reacted, but I was trying to arrive at the purpose
that first suggested the putting up of the money.
4220
STOCK EXCHANGE PRACTICES
Mr. LORD. Senator, these purchases of stock to stabilize the general situation were not made by any stockholder with an idea of
wanting the stock or for gain. It was for the one purpose.
Senator COTJZENS. I understand that. I was not going back into
the motive. I was just trying to get the purpose for which the money
was used.
Mr. PECORA. Mr. Lord, I show you what purports to be a printed
<5opy of the Annual Report for the year 1929 of the Guardian
Detroit Union Group, which appears to have been issued to the
stockholders over your signature as president. Will you look at it,
particularly the portion of it which purports to give the names of
the officers and directors for the first year of the Guardian Detroit
Union Group, appearing at pages 2 and 3 and 4?
Mr. LORD. May I look at your copy?
Mr. PECORA. Certainly (handing document to Mr. Lord). And
tell me if those pages correctly set fr>rth the names of the officers
and directors of the Guardian Detroit Union Group, Inc., for the
first year.
Mr. LORD. I would assume so.
Mr. PECORA. Yes. Well, I want the record to show those things.
Mr. LORD. I haven't any reason to believe it is not correct.
Mr. PECORA. I offer in evidence that report, particularly those
three pages enumerated pages 2, 3, and 4.
The CHAIRMAN. Let it be admitted. You do not want the whole
report, but just those pages showing the officers and directors ?
Mr. PECORA. I merely want to show the names of the officers and
directors of the first holding company during the first year of its
operations.
Mr. LORD. Mr. Pecora, might I say this, that this may not be the
names of the officers and directors during the first year of operation.
The report is dated as of January 28, after the annual meeting of
1930 which was held. See the point ?
Mr. PECORA. Those names are the names of the original officers
and directors of this holding company?
Mr. LORD. I do not know whether they are the original ones, because I haven't that list with me. But the point is this
Senator ADAMS (interposing). They are the names at the beginning of the second year, as I get it ?
Mr. LORD. They are the names of the officers and directors after
the annual meeting of the corporation which was held in the latter
part of January.
Mr. PECORA. Of 1930?
Mr. LORD. Of 1930. In other words, these men may not have
served as officers and directors during the period covered by this
report, but as of the date of the report. That is my understanding.
Mr. PECORA. With that explanation I will offer that list in evidence.
The CHAIRMAN. Let it be admitted and entered on the record.
(P. 2,3, and 4 of Annual Report of Guardian Detroit Union Group
for 1929 were thereupon designated "Committee Exhibit No. 3,
Dec. 19,1933.")
Mr. JPECORA. I will first read the names of the directors shown
on pages 2 and 3 of this report (reading):
STOCK EXCHANGE PEACTICES
4221
Frank W. Blair, chairman Union Trust Co., Detroit.
Arthur O. Bloomfield, president National Union Bank & Trust Co., Jackson.
Henry E. Bodman, chairman Guardian Trust Co., Detroit.
Clarence H. Booth, chairman Motor Bankers Corporation, Detroit.
Ralph H. Booth, president Booth Newspapers, Inc., Detroit.
Joseph H. Brewer, president Grand Rapids Trust Co., Grand Rapids.
Walter O. Briggs, chairman and president Briggs Manufacturing Co., Detroit.
Daniel D. Brown, president First National Bank & Trust Co., Port Huron.
Harry C. Bulkley, Campbell, Bulkley & Ledyard, Detroit.
Charles S. Campbell, president First National Bank & Trust Co., Kalamazoo,
Roy D. Chapin, chairman Hudson Motor Car Co., Detroit.
George R. Fink, president Michigan Steel Corporation, Detroit.
William A. Fisher, president Fisher Body Corporation, Detroit.
Edsel B. Ford, president Ford Motor Co., Detroit.
Frank E. Gorman, vice president Capital National Bank, Lansing.
Stephen A. Graham, president Federal Commercial & Savings Bank, Port
Huron.
John C. Grier, Jr., president Guardian Detroit Co., Detroit.
C. H. Haberkorn, Jr., chairman Bank of Detroit, Detroit.
Carlton M. Higbie, chairman Keane, Highbie & Co., Detroit.
Sherwin A. Hill, Warren, Hill & Hamblen, Detroit.
Charles H. Hodges, vice president American Radiator & Standard Sanitary
Corporation. Detroit.
James Inglis, president American Blower Corporation, Detroit.
Richard P. Joy, director National Bank of Commerce, Detroit.
George B. Judson, president Bank of Detroit, Detroit.
Ernest Kenzler, president Universal Credit Corporation, Detroit.
Jerome J. Keene, director Guardia Detroit Bank, Detroit.
Dwight B. Lee, president and treasurer Motor Products Corporation, Detroit.
Robert O. Lord, president Guardian Detroit Bank, Detroit.
Alvan Macauley, president and general manager Packard Motor Car Company, Detroit.
Francis C. McMath, director Canadian Bridge Co., Ltd., Detroit.
George B. Morley, chairman Second National Bank & Trust Co., Saginaw.
Charles S. Mott, vice president, General Motors Corporation, Detroit.
Fred T. Murphy, chairman Guardian Detroit Bank, Detroit.
Edwin H. Nelson, president Nelson, Baker & Co., Detroit
Phelps Newberry, vice president Guardian Detroit Bank, Detroit.
Ransom E. Olds, chairman Reo Motor Car Co., Lansing.
Jerome H. Remick, president Detroit Creamery Co., Detroit.
Herbert S. Reynolds, president Peop'es National Bank, Jackson.
John R. Russel, director Russel Steel Construction Co.
Murray W. Sales, president Murray W. Sales & Co., Detroit.
Henry H. Sanger, president National Bank of Commerce, Detroit.
R. Perry Shorts, president Second National Bank & Trust Co., Saginaw.
Hal H. Smith, Beaumont, Smith & Harris, Detroit.
Oscar W. Smith, president Parke, Davis & Co., Detroit.
John N. Stalker, president Union Trust Co., Detroit.
James L. Walsh, vice president Guardian Detroit Bank, Detroit.
Charles Beecher Warren, Warren, Hill & Hamblen, Detroit.
Dudley E. Waters, chairman Grand Rapids National Bank, Grand Rapids.
OFFICERS
Frank W. Blair, chairman of the board.
Henry E. Bodman, chairman executive committee.
Robert O. Lord, president.
John C. Grier, Jr., vice president.
James L. Walsh, vice president.
Henry H. Sanger, vice president.
Bert K. Patterson, vice president and treasurer.
C. H. Haberkorn, Jr., vice president.
Lewis K. Walker, vice president.
Joel H. Prescott, vice ^president.
Andrew L. Malott, vice president.
A. A. F. Maxwell, secretary.
4222
STOCK EXCHANGE PRACTICES
H. A. Conner, assistant secretary.
Earnest Kanzler, vice president.
Phelps Newberry, vice president.
John N. Stalker, vice president.
Arthur H. Vogt, vice president and comptroller.
Samuel R. Kingston, vice president.
Charles A. Kanter, vice president.
Harry S. Covington, vice president.
R. Perry Shorts, vice president.
W. J. Penningroth, assistant treasurer.
O. A. Waldow, assistant comptroller.
Advisory committee: Fred T. Murphy (chairman), James Ingl's (vice
chairman), Henry E. Bodman, Roy D. Chapin, Edsel B. Ford, Charles H.
Hodges, Ernest Kanzler, Alvan Macauley, George B. Morley, Charles S.
Mott, Jerome H. Remick, John R. Russel, Murray W. Sales, Charles B,
Warren.
Executive committee: Henry E. Bodman (chairman), Frank W. Blair,
Harry C. Bulkley, John C. Grier, Jr., C. H. Haberkorn, Jr., Carlton M. Higbie,
Sherwin A. Hill, Richard P. Joy, Ernest Kanzler, Robert O. Lord, Charles S.
Mott, Fred T. Murphy, Edwin N. Nelson, Phelps Newberry, Murray W. Sales,
Henry H. Sanger, John N. Stalker, James L. Walsh.
Operating committee: James L. Walsh (chairman), Frank W. Blair, Frank
M. Brandon, Joseph H. Brewer, Harry S. Covington, Frank E. Gorman, Stephen
A. Graham, John C. Grier, Jr., Carlton M. Higbie, George B. Judson, Charles
A. Kanter, Samuel R. Kingston, Robert O. Lord, Duncan J. McNabb, Frank J.
Maurice, E. R. Morton, Phelps Newberry, Bert K. Patterson, George R. Paul,
Frank E. Quisenberry, Herbert S. Reynolds, Henry H. Sanger, Earl H. Shepherd, R. Perry Shorts, John N. Stalker, Arthur H. Vogt, Herbert R. Wilkin.
Mr. PECORA. NOW, Mr. Lord, will you tell the committee what
the functions were generally of the advisory committee of the board
of directors?
Mr. LORD. I would say that the advisory committee was a policy
committee.
Mr. PECORA. Meaning exactly what?
Mr. LORD. TO discuss and formulate policies to recommend to the
unit banks for their consideration, or to the board of directors of
the Group Corporation itself.
Mr. PECORA. And this advisory committee not only formulated
policies or proposed policies for the holding company itself, but also
for the unit banks?
Mr. LORD. Only as suggestions to the unit banks. You see, on
that advisory committee, as I recall it, there were some of the
unit heads. I do not remember the list; I have not got it.
Mr. PECORA. What were the functions of the executive committee ?
Mr. LORD. May I read here about the executive committee ? Perhaps that will clarify it.
Mr. PECORA. What is it that you propose to read?
Mr. LORD. This is from what is known as Bulletin No. 1, issued
by the Guardian Detroit Union Group.
Mr. PECORA. All right.
Mr. LORD (reading) :
The advisory committee is largely a policy-making committee. Its membership is comparatively small and includes no active operating officers of
any unit. This committee has and should have entire freedom in criticising
either the policies or handling of any unit or any department of the associated
institutions. Its meetings are not held on stated days, but at regular intervals at the call of the chairman. Operating heads* of units will from time
to time be called to confer with this committee as to any question under
consideration.
STOCK EXCHANGE PBACTICES
4223
Senator COXTZENS. Did they keep any minutes ?
Mr. LOKD. I think they did, Senator. Dr. Murphy, I believe, was
chairman of the committee.
Senator COUZENS. Have you the minutes here ?
Mr. LORD. I have not, sir.
Mr. PECORA. Was it the general purpose of this advisory committee to secure unanimity of action with regard to the general policies
of the holding company and its various constituent units ?
Mr. LORD. I would not say so, Mr. Pecora, because each unit might
have its own problem. I t was? so far as I could describe it, just
what its name implies—an advisory committee, a committee which
would advise with Grand Rapids or Saginaw or Flint over their
problems, or would advise with the officers of the group over a
group problem.
Senator COUZENS. Have you any evidence of any advice which
they sent out?
Mr. LORD. I do not know that they sent it out. There were meetings.
Senator COUZENS. IS that where the advice was given—in meetings ? Or was it given out in documentary form ?
Mr. LORD. I do not know whether Dr. Murphy ever wrote any letters or not as chairman of that committee. I have no records here.
I would say that mostly it was conversation at meetings.
Mr. PECORA. The advisory committee would from time to time confer with the executive heads of unit banks with regard to problems
peculiar and exclusive to such unit banks ?
Mr. LORD. I would think so.
Mr. PECORA. And at the same time would also discuss with heads
of units banks problems that were common to all the unit banks represented by the Group ?
Mr. LORD. They might.
Mr. PECORA. What were the functions of the executive committee
of the board, generally speaking?
Mr. LORD. I would say that the executive committee's functions
of the Group Co. were what any executive committee of a corporation would be, to act on behalf of the board in the intervals between
board meetings.
Mr. PECORA. What were the functions of the operating committee of the board?
Mr. LORD. The operating committee was very largely an educational
committee, Mr. Pecora. It was made up—if you will look at the
list—to a great extent of the operating men in the units who had
meetings every month, or perhaps more frequently, to discuss such
matters as transit and various things dealing with the details of
bank operation; and there might be some man selected from that
committee who would talk on one particular subject, and then discussion would be had. Whether there are any minutes of those meetings I could not say. Colonel Walsh was chairman of the committee
and maybe he kept full minutes; I do not know.
Senator COUZENS. Did that operating committee have anything to
•do with passing upon loans?
Mr. LORD. NO, sir.
Senator COUZENS.
Did the executive committee do that?
4224
STOCK EXCHANGE PRACTICES
Mr. LORD. Not the Group Co.; each separate bank.
Senator COTJZENS. YOU made no loans at all to any of your
groups ?
Mr. LORD. The Group Co. ?
Senator COTJZENS. Yes.
Mr. LORD. The Group Co. had nothing to db with loans to
separate units.
Senator COTTZENS. YOU just borrowed?
Mr. LORD. We borrowed money.
Senator COTJZENS. But you did not lend it?
Mr. LORD. I say we did not. The Group Co. may a,t some time or
other have loaned a little money, but they were not in the business
of loaning money to the public, if that is what you mean.
Senator COTJZENS. HOW many employees were engaged in that
Group organization?
Mr. LORD. Actively, Senator?
Senator COTJZENS. Yes.
Mr. LORD. Some of these listed are more or less honorary. I was
president. Colonel Walsh gave a great deal of his time to Group
activities.
Senator COTJZENS. Did you get salaries separate from those you
got from the units?
Mr. LORD. My salary, I believe, was split between the bank and
the Group Co.
Senator COTJZENS. Was that true also of Colonel Walsh?
Mr. LORD. I could not say. The chairman of the Group board, beginning in January 1932, was very active, and had no salary whatever.
Senator COUZENS. Have you any figures to indicate how many of
the employees there were on full time in this organization ?
Mr. LORD. N O ; but perhaps I can get them. [After conferring
with associates.] Approximately 30, both in the examining department and the accounting department. The real active officers, from
the standpoint of executive capacity, were the chairman, myself as
president, Colonel Walsh, Mr. Patterson when he was with us, and
the secretary, who was, I believe, Mr. Haberkorn, at that time, of the
Group Co.
Senator COEZENS. Were any of those on the pay roll of any unit
separately from the Group ?
Mr. XiORD. The salary may have been split between them as mine
was. I only know about my salary.
The CHAIRMAN. What was your salary?
Mr. LORD. DO you want it since I was with the institution ?
The CHAIRMAN. Yes.
Mr. LORD. For a portion
of the year 1927—you see, I became head
of the bank on June 15 when it opened, and I was there the first of
June—for that portion of the year my salary was $29,176.62.
Senator COUZENS. In other words, you double that to get the annual salary?
Mr. LORD. N O ; not quite, because I was there 7 months. During 1928 I received $50,010. I don't know how that $10 came in.
This is my income-tax record. In 1929 my compensation was
$84,759.92. In 1930 my salary was divided between the Guardian
STOCK EXCHANGE PRACTICES
4225
Detroit Bank, which paid me $37,249.86, and the Guardian Detroit
Co. which paid me $11,250. The Union Guardian Trust Co. which
was a consolidation of our Guardian Trust Co. and the Union Trust
Co.—I had been president of our Guardian Trust Co. prior to that
consolidation—the Union Guardian Trust Co. paid me $7,499.88.
Senator COTJZENS. Was that in 1930?
Mr. LORD. That was the year, 1930.
Senator COTTZENS. What was the aggregate of that?
Mr. LORD. About $56,000. In 1931 the Guardian Detroit Bank
paid me $24,166.56. The Guardian Detroit Co. paid me $10,000. The
Guardian Detroit Union Group paid me $7,500. I t was apparently
the first year in which the Group paid any of my salary. The Union
Guardian paid me $6,666.66. That totals about $48,000. In 1932 my
total compensation was $45,479.14, divided $25,312.56 to the Group
and $20,156.58 to the bank. The reason that the increase came from
the Group was that I was spending more of my time all the time on
Oroup matters, and the board felt it was entirely proper that that
institution should pay me.
Senator COTTZENS. Did you get any compensation after the banks
-closed?
Mr. LORD. I think I got a couple of thousand dollars; I don't
remember. That was until after the first of April, and then it was
-cut off entirely.
The CHAIRMAN. What became of the bank finally ?
Mr. LORD. The Guardian National Bank?
The CHAIRMAN. Yes.
Mr. LORD. I t is still in the hands of receivers. It will have paid
out 65 percent through the cooperation of the senior Senator here,
and others in Washington. An arrangement has just been completed
lhat will pay in full the depositors who had on the date of the holiday $1,000 or less. That has been done by the fine cooperation not
only of the authorities here in Washington, but also some of the bank
depositors who have waived their rights to that 5 percent so that the
little fellow can get his money in full.
The CHAIRMAN. This has been paid out of loans from R. F. C ?
Mr. LORD. Yes, sir, only in part——
Senator COUZENS. He stated a while ago how it was divided up.
Mr. LORD. I think, Senator Fletcher, when they get through even
with the 5 percent, the bank will owe less than $28,000,000 to R. F . C.
and will have paid back since December 31, 1932, to the depositors
$105,000,000.
The CHAIRMAN. What became of this holding company?
Mr. LORD. I t is in receivership.
The CHAIRMAN. Did you sell any of the stock of the holding
company to the public?
Mr. LORD. Did we sell any to the public?
The CHAIRMAN. Yes.
Mr. LORD. There were dealings in it all the time. Unfortunately,
the stock was listed on the Detroit Stock Exchange; and I might say
here that it was listed over my protest. No bank stock should ever
"be listed on an exchange.
The CHAIRMAN. And the public bought from the Exchange?
4226
STOCK EXCHANGE PRACTICES
Mr. LORD. They bought it on the Exchange. The only direct offering that the Guardian Detroit Group as such, my group, as against
the Union Commerce Group, made, was in 1929. The Guardian
Detroit Group offered to its stockholders the right to subscribe to
an amount of stock equal to 10 percent of their holdings. The Union
Commerce corporation did, however, make an offering, but I have
not the record of it here.
Senator COTJZEISJS. Was that 10 percent all subscribed by your
stockholders ?
Mr. LORD. Yes,
sir.
Mr. PECORA. Mr. Lord, as the board of directors of the Guardian
Detroit Union Group. Inc., was constituted and as its various committees of the board of directors were constituted, there were represented on the board of directors the operating or executive heads of
most if not all of the banks that were units of this group; is not that
a f act ?
Mr. LORD. Certainly the senior executives in most cases, Mr. Pecora^
and in some cases the operating heads.
Mr. PECORA. DO you recall having appeared on April 23, 1930,.
before a meeting of the Committee on Banking and Currency of the
House of Representatives during the second session of the Seventyfirst Congress, where hearings were being held on House Eesolution
No. 141?
Mr. LORD. Yes; I think so. That was the MacFadden committee,*
was it not?
Mr. PECORA. Yes. And at that time, you read to that committee
a prepared statement, many extracts from which have been embodied in the statement which you read to this committee this
morning?
Mr. LORD. Some of them; yes.
Mr. PECORA. I have what purports to be a printed copy of that:
statement of yours to the house committee on April 23, 1930, and
I want to read therefrom the following extract to see if you recall
having made the statement [reading] :
Aside from the detail of illegality or any intent to usurp the functions orhamper the activities of the board of directors of a local unit bank, such a
course would run directly counter to prudence, good judgment, and common
sense. Experience indicates that the bulk of profitable business enjoyed by
a given bank is the result of the personal efforts of the directors and officers.
Hence any policy which impairs even in the slightest degree the prestige or
enthusiasm of the local board of directors is a body blow at the growth of the
local unit bank and therefore at the growth and prosperity of the group as a
whole. The deliberate adoption of policies so obviously suicidal is unthinkable.
Nevertheless extreme care must be exercised to insure that group management
does not, perhaps unconsciously, encroach upon the statutory and customary
authority and responsibility of the unit bank management. Accordingly, it is
deemed advisable to particularly emphasize "the group policy of noninterference with local management" by formal action of the group board of directors..
Do you recall generally that statement?
Mr. LORD. I t sounds familiar.
Mr. PECORA. In that statement you attempted to give the House
Committee on Banking and Currency, in April 1930, a statement of
a principle that was governing and guiding the board of directors o l
this Guardian Detroit Union Group?
Mr. LORD. In general; yes.
STOCK EXCHANGE PRACTICES
4227
Mr. PECORA. A S a matter of fact, Mr. Lord, was that principle
strictly adhered to ?
Mr. LORD. SO far as I personally know, it was. I t is not always
possible to control some other individual. But it certainly was the
policy of the Group to let the unit banks be run by their own boards
and their own officers.
Mr. PECORA. Did the board of directors of the Group—and by the
Group I mean the holding company known as the Guardian Detroit
Union Group, Incorporated—have any control over the selection of
the boards of directors of the unit bants in the Group ?
Mr. LORD. I assume they had control, because the Group owned
the stock. So far as exercising that control is concerned, I do not
know whether it ever forced a director on a local unit, except in
Flint, where that defalcation had occurred and where it was necessary to put 35 men in there to keep the bank running.
Mr. PECORA. Did the board of directors of the Group suggest from
time to time to any of the local or unit banks names of persons to
serve on the board of directors of your unit banks ?
Mr. LORD. Mr. Pecora, before every annual meeting of these local
banks the heads of the unit banks used to come in and discuss all
of their plans for their boards and for the next year's business with
me or with some of the other officers in the Group. Does that answer
your question?
Mr. PECORA. It is an answer to the question.
Mr. LORD. The matter was discussed just like you would discuss
it with any stockholder, a substantial stockholder.
Mr. PECORA. NOW will you answer the question a little bit more
specifically ?
Mr. LORD. May I have it again, please ?
Mr. PECORA. The reporter will read it.
(The question referred to was read by the reporter as above
recorded.)
Mr. LORD. I think that might have been done at times where a
bank perhaps needed some talent that we thought could be supplied
either locally or from our own organization. I do not recall specific
instances. Do you have such a specific instance in mind?
Mr. PECORA. I have before me what purports to be a photostatic
reproduction of a letter addressed to Mr. L. H. D. BaKer, of the
National Bank of Commerce, Union Guardian Building, Detroit,
Mich., dated July 24, 1931, which apparently was sent out by you.
Will you look at it and tell us if it serves to refresh your recollection of an instance where the name of an individual was suggested
by you on behalf of the Group to the officers or directors of a unit
bank for inclusion on the board of directors of such unit bank?
Mr. LORD. Yes; I recall the incident rather vaguely.
Mr. PECORA. Would you say that was a true and correct copy of a
letter sent by you to that gentleman?
Mr. LORD. I think that is; yes.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted and made a part of the record.
(Photostatic copy of letter dated July 24, 1931, addressed to
L. H. D. Baker, National Bank of Commerce, Union Guardian
4228
STOCK EXCHANGE PRACTICES
Building, Detroit, Mich., was received in evidence, marked " Committee Exhibit No. 4, Dec. 4, 1933.")
Mr. PECORA. I will read the exhibit to the committee [reading]:
COMMITTEE EXHIBIT NO. 4
JULY 24,
1931.
(Personal)
MB. L. H. D. BAKEB,
% National Bank of Commerce,
Union Guardian Building, Detroit, Michigan
MY DBAB LEE.—AS you may know, Mr. D. F. Valley i s giving a very considerable amount of his time toward the affairs of the Michigan Industrial
Bank. In order to accomplish what we want, I think he should be a director
in this bank and I am going to ask you if you will be good enough to send me
your resignation as a director so that we can have the Board elect Mr. Valley
in your place.
This is no reflection whatever upon you or your service to that institution.
I do not think it wise to ask any of our outside directors to resign and am,
therefore, taking the liberty of asking this favor of you.
Very truly yours,
, President,
ROL N
This letter was signed by you as president of the Group, was it not?
Mr. LORD. I believe so. 1 don't know whether it was signed by me
as president of the Group or not.
Mr. PECORA. The initials below, in the left-hand corner, are
"K.O.L."
Mr. LORD. Yes. I imagine it was written on the bank letterhead.
Mr. PECORA. It was signed by your name, was it not?
Mr. LORD. It was signed in my name.
Mr. PECORA. What were you going to say about this ?
Mr. LORD. My recollection of the circumstances is rather vague.
Mr. L. H. D. Baker was an employee or officer of the National Bank
of Commerce. The matter of Mr. Valley taking his place on the
Michigan Industrial Board was discussed personally with the president of the Michigan Industrial Board, and it was put up to them
|or their approval.
Senator COUZENS. Did he accept the suggestion?
Mr. LORD. I believe so, because he left the bank shortly after that.
Mr. PECORA. DO you know of any other instances where suggestions
of a generally similar character were made and carried out?
Mr. LORD. 1 do not recall any specifically.
Mr. PECORA. I have here what purports to be a photostatic reproduction of a memorandum entitled "Intra-Group Memorandum",
addressed to Mr. Joseph H. Brewer, president of the Grand Rapids
National Bank, from Mr. Patterson, executive vice president, Guardian Detroit Union Group, Inc., bearing date September 29,1931, and
which reads as follows [reading] :
I anticipate that it is going to be necessary to make a few changes in the
members of the board of directors of the National Bank of Ionia, but we will
not do so until the next meeting. What would you think of the advisability
of your going on the board in place of one man who we think has served his
purpose to the institution (I do not refer to either Messrs. Green, Robinson,
or Chapman) ? Inasmuch as the bank is located only a short distance from
you it probably would not require a great deal of your time, and I apprehend
that your presence on the board would give it the right kind of balance, and
as time goes on I am certain that the people of Ionia would more and more
STOCK EXCHANGE PRACTICES
4229
look to you for advice in their major matters. I have not mentioned the
matter to Mr. Lord, except in a very general way, about the Ionia suggestion,
and will not do so until I get your reaction to the suggestion.
Does the reading of this memorandum refresh your recollection
concerning the making of a similar suggestion with respect to the
personnel of the board of directors of the unit bank known as the
National Bank of Ionia?
Mr. LORD. N O ; I have no particular recollection of making a similar suggestion. I do recall that it was discussed, and I believe Mr.
Brewer did accept a directorship in that bank. I could not swear
to that, because I have not the record. I think he did finally go on
the National Bank of Ionia.
Mr. PECORA. Who was the director whose place was taken by Mr.
Brewer?
Mr. LORD. I do not know.
Mr. PECORA. I S there any way by which you could refresh youi
recollection?
Mr. LORD. I might find out. Would you like to have it?
Mr. PECORA. Could you do that readily at this moment?
Mr. LORD. I will try. [After conferring with an associate:] The
only man here who would know is Mr. Patterson, and he says he
does not recall. I do not recall, frankly.
Mr. PECORA. By the way: The Mr. Patterson referred to in this
intragroup memorandum as its executive vice president, that is,
as the executive vice president of the Guardian Detroit Union Group,
Inc., was at one time a national bank examiner for the district that
included the National Bank of Detroit, Mich., was he not?
Mr. LORD. Mr. Patterson was chief national bank examiner for
the seventh Federal district.
Mr. PECORA. Which included Detroit?
Mr. LORD. I t includes Detroit.
Mr. PECORA. That is the second largest district in the country, is
it not?
Mr. LORD. Yes. Previous to that time he had been chief examiner, I believe, for the Minneapolis district. I cannot tell you
the number of that district.
Mr. PECORA. When was he taken into the personnel of the
Guardian Detroit Union Group?
Mr. LORD (after conferring with associate). August 1929.
Mr. PECORA. That was shortly after the incorporation of the
Guardian Detroit Group, Inc.?
Mr. LORD. Yes, sir.
Mr. PECORA. Did Mr.
Patterson enter the service of the Guardian
Detroit Group directly from his position as chief national bank
examiner for the seventh district?
Mr. LORD. I do not know; I cannot answer that. I am sorry.
Mr. PECORA. Could you ascertain readily from Mr. Patterson if
that is a fact?
Mr. LORD. He savs; yes.
Mr. PECORA. While we are on this particular subject, may I ask,
were there any other officers or members of the personnel of the
Guardian Detroit National Group who, just prior to their inclusion
in the personnel of the Group, had been national bank examiners?
175541—34—PT 9-
3
4230
STOCK EXCHANGE PEACTICES
Mr. LORD. I think after Mr. Patterson came to us he engaged some
of the former examiners who had worked with him either in the
seventh district or in the Minneapolis district.
Mr. PECORA. HOW many such individuals were taken into the
service of the Group ?
Mr. LORD. Mr. Patterson says two, Mr. Pecora. I do not knowMr. PECORA. DO you know a Mr. R. L. Hopkins ?
Mr. LORD. Yes, sir.
Mr. PECORA. Was he
taken in as vice president of the Union Industrial and Savings Bank of Flint, which was one of the unit
banks of the Group I
Mr. LORD. He
Mr. PECORA.
was.
And had he been prior to that a national bank
examiner ?
Mr. LORD. He had, sir.
Mr. PECORA. He had examined
the Guardian Detroit Bank and the
National Bank of Commerce at the time of the merger of those two
institutions, had he not?
Mr. LORD. Yes, sir.
Mr. PECORA. Was he
still connected with the unit bank at the time
of the receivership of the Guardian Detroit Union Group?
Mr. LORD. I think he was, Mr. Pecora.
Mr. PECORA. DO you know a Mr. C. A. Bryan, who became vice
president of the Capital National Bank at Lansing, another one
of the unit banks of the Group?
Mr. LORD. Mr. Bryan came to us through Mr. Patterson and
worked with Mr. Patterson for some time as an examiner.
Mr. PECORA. Had he been a national bank examiner prior to his
becoming a vice president of the Capital National Bank of Lansing?
Mr. LORD. Yes,
sir.
Mr. PECORA. NOW do you know a Mr. W. J. Penningroth?
Mr. LORD. I do, sir.
Mr. PECORA. He was
another national bank examiner who was
made vice* president of another unit bank of the Group ?
Mr. LORD. Yes.
Mr. PECORA. Namely,
of the First National Bank & Trust Co.
of Niles?
Mr. LORD. Yes, sir.
Mr. PECORA. That makes
four, all told, including Mr. Patterson,
who came into the service of the Group or one or more constituent or
unit banks from the office of the Comptroller of the Currency as
national bank examiners; is that right?
Mr. LORD. I think so.
Mr. PECORA. DO you know of any others?
Mr. LORD. NO ; I do not. I will ask Mr. Patterson.
Mr. PECORA. HOW about persons who had been bank examiners
for the State Banking Department of Michigan? Do you know of
any such persons who were taken into the service of the Group?
Mr. LORD. I do not.
Mr. PECORA. Or of any of its unit banks?
Mr. LORD. NO, sir. There may have been,
Mr. Pecora, but I do
not know.
Mr. PECORA. NOW, I want to go back to the letter which you wrote
to Mr. Baker under date of July 24, 1931, marked "Committee's
Digitized for Exhibit
FRASER No. 4."
STOCK EXCHANGE PEACTICES
4231
Senator GORE. What Baker is that?
Mr. PECORA. Mr. Baker was connected with the National Bank
of Commerce, one of the unit banks, and in this letter it was suggested to Mr. Baker that a Mr. D. F. Valley be made a director of the
Michigan Industrial Bank, another of the unit banks controlled by
the group.
Senator GORE. I thought maybe he was a New York financier.
Mr. PECORA. NO, sir. Mr. L. H. D. Baker.
Now, in this letter, committee's exhibit no. 4, which you addressed
to Mr. L. H. D. Baker on July 24,1931, after referring to the activity
of Mr. D. F. Valley and the affairs of the Michigan Industrial Bank,
you say as follows:
In order to accomplish what we want, I think he should be a director in this
bank and I am going to ask you if you will be good enough to send me your resignation as a director so that we can have the board elect Mr. Valley in your
place.
Now, what was it that the Group, or you as the president of the
Group sought to accomplish at that time through the medium of
the election of Mr. Valley as a director of the Michigan Industrial
Bank in place of Mr. Baker ?
Mr. LORD. What did we seek to accomplish ?
Mr. PECORA. Yes. In other words, what di<l you mean by the
expression in your letter to Mr. Baker which reads as follows: " In
order to accomplish what we want, I think he should be a director
in this bank " etc. ?
Mr. LORD. Mr. Valley was a trained credit man, and as a director,
if he were a director in that bank, we felt he could considerably
strengthen the handling of these small credits in the Michigan Industrial Bank. Is there any reason why a stockholder should not
suggest a director, Mr. Pecora ?
Mr. PECORA. I am not disputing the question. I am simply attempting to ascertain the fact of the extent, if any, to which the
board of directors of the Group went in selecting or determining
the personnel of the boards of directors of unit banks, and I am
seeking to ascertain what the fact was particularly in view of your
statement to the House Committee on Banking and Currency on
April the 23d, 1930, wherein you expressed as a guiding principle
of the Group its policy of noninterference with the unit banks. Do
you see what I am driving at, Mr. Lord?
Mr. LORD. I see what you are driving at. I think that that policy
was carried out, Mr. Pecora. I do not consider a suggestion as to
a director interference by the Group, because Mr. Valley went in as
one—for instance, if you want to take the Michigan Industrial—as
one of 15 or 20 directors. I would not call that interference.
Mr. PECORA. DO you think that when the Group made suggestions to unit banks for the inclusion on their board of directors of
individuals nominated or designated by the Group, and those suggestions were carried out, that that was in line with the strict policy
of noninterference or usurpation of management?
Mr. LORD. Mr. Pecora, I do not know that that—that is a letter
to Lee Baker asking for his resignation.
Mr. PECORA. SO that somebody else might be named in his place ?
Mr. LORD. Yes.
4232
STOCK EXCHANGE PRACTICES
Mr. PECORA. And that resignation was forthcoming, and that somebody else was named in Mr. Baker's place, all in line with the
request embodied in your letter as president of the Group to Mr.
Baker ? Is that not so ?
Mr. LORD. I assume it happened; yes. Now, here is a list of the
directors of the Michigan Industrial Bank at the end of 1929.
Twenty-nine directors.
Mr. PECORA. Did you say before that it was customary or the
procedure for officers of the unit bank to submit a list of the persons
proposed for election as directors to the officers of the Group prior to
the annual meetings of the unit bank?
Mr. LORD. Mr. Pecora, many times if there was a vacancy on the
board of a local bank, the head of that local bank would come in
and discuss various men that he would like to recommend for election to that vacancy. And it was usually left: " Whatever man you
think is best is entirely satisfactory to us." Now it might be interfisting to this committee, and it might clarify the question, if it were
possible to take these boards of the various units and see what memjbers of those boards were what you might call Detroit representation
gather than local representation. Have you done that? I mean it
-would, I think, answer the broad question as to whether the Group
*Co. was attempting to dominate those boards in any way.
Mr. PECORA. DO you contend that the Group Co., through its
^executive officers or board of directors or committees of the board
of directors, did not attempt to dominate the affairs of the unit
banks?
Mr. LORD. Not beyond the rights of the stockholders.
Mr. PECORA. TO what extent within those rights, or what you
^conceive to be those rights, did the Group or its officers or directors
rattempt to dominate the affairs of such unit banks ?
Mr. LORD. I do not think we did it anywhere beyond the right
•that we had to exercise it.
Mr. PECORA. TO what extent did you attempt to exercise it?
Mr. LORD. I am not a lawyer.
Mr. PECORA. YOU do not have to be a lawyer to state facts.
Mr. LORD. All right. As I understand the right of the stockholder it is to elect the directors. Is that correct? The charters of
ihe Group companies provided that in voting that stock 75 percent
rof the directors of the local bank must reside within the community
/or within 50 miles of the community. Now if we take the separate
institutions where what you might call Group representatives were
directors, you will find that there are very few of them. We never
had a member on the Saginaw board. We never had a member on
the Port Huron board. We never had a member on either of the
Grand Eapids boards. We never had a member on the Lansing
board, I don't believe. Nor on the Kalamazoo board. The cases
Mr. PECORA. Those local banks had membership on the board of
directors of the Group, did they not?
Mr. LORD. They did; yes, sir.
Mr. PECORA. And in that way they became Group-minded, so to
sspeak, did they not?
Mr. LORD. We tried to educate them along sound banking lines.
STOCK EXCHANGE PEACTICES
423$
Mr. PECORA. AS those sound banking lines existed in the minds
of the members of the board of the Group or the officers of the
Group ?
Mr. LORD. Yes.
Mr. PECORA. Yes.
Now the fact is that no person could retain his
place on the board of directors of any of these local or unit banks
who was opposed by the officers or board of the Group, is that
not so?
Mr. LORD. Well, that is a difficult question to answer, because I do
not know of any conflict where there was opposition.
Mr. PECORA. Would it have been possible in view of the stock ownership or control of the unit banks by the Group for any person to
remain—be reelected to the board of directors of any unit bank over
the wishes of the officers and directors of the Group ?
Mr. LORD. Not as owning a majority of the stock, no.
Mr. PECORA. N O ; but even where the Group did not own a majority
of the stock it owned sufficient to give it management control, did it
not?
Mr. LORD. Well, it did, except for those seven small banks, Mr.
Pecora, which owned a majority of the stock.
Mr. PECORA. Yes. So that the condition itself was one that made
it impossible for anyone to defy the wishes of the Group or it&
board and remain on the board of directors of the local or unit bank
if the Group wanted to get them out?
Mr. LORD. That condition was possible, yes.
Mr. PECORA. Not only was possible but it actually existed, did it
not?
Mr. LORD. Well, such a thing never took place. It is a very difficult
thing—legally, as controlling the stock, if we had desired not to reelect a man on the directorate, certainly we could have done it, but
the situation, so far as I know, never arose.
The CHAIRMAN. Did the unit submit to you its list of directorsor proposed directors?
Mr. LORD. Most of the time. They would say " We would like to
reelect our board " or " We have a vacancy and we would like to
have Mr. So-and-so. Is he satisfactory?"
Mr. PECORA. Here is an instance illustrated in this memorandum
that I have heretofore read into the record, which Mr. Patterson
sent, to Mr. Brewer, in which he said:
I anticipate that it is going to be necessary to make a few changes in the
members of the board of directors of the National Bank of Ionia, but that we
will not do so until the next annual meeting.
Is that not clearly a statement of the purpose, intent, and desire on
the part of the board of the Guardian Detroit Union Group to make
changes in the personnel of the board of directors of the unit bank
known as the National Bank of Ionia ?
Mr. LORD. Mr. Pecora, I do not think I ever saw that memorandum before. I would like to have a chance to study it. I would
like to know a little more about the circumstances—whether it was
because of resignations that had been offered by some of those
directors or what the circumstances were.
4234
STOCK EXCHANGE PRACTICES
Mr. PECORA. Let me read the sentence immediately following the
first sentence which I have just read to you [reading] :
What would you think of the advisability of your going on the board in
place of one man whom we think has served his usefulness to the institution?
Does not that indicate a specific purpose to replace a particular
individual with another individual named by officers of the group ?
Mr. LORD. Mr. Pecora, I do not know the circumstances. Somebody might have offered to resign, and when Mr. Patterson says
" may have outlived his usefulness " it may have been a question,
of whether we urged him to stay on or let him resign. I do not
know the circumstances of the case. It is very difficult for me to
answer. I am sorry.
Mr. PECORA. NOW Mr. Lord, when a person became a director of
a unit bank he had to own a certain number of qualifying shares,
did he not?
Mr. LORD. Yes,
sir.
Mr. PECORA. Was any arrangement in effect between directors of
unit banks and the group with respect to transfer of those qualifying shares in the event of such a director ceasing to be a director
of a unit bank?
Mr. LORD. Yes,
sir.
Mr. PECORA. What was that arrangement, please?
Mr. LORD. I have here a receipt issued to me. May I read it?
Mr. PECORA. Yes.
Mr. LORD. This says:
NO S 30, 10 SHARES, UNION GUAEDIAN TRUST CO. DEPOSITARY RECEIPT
This is to certify that the undersigned holds on deposit 10 shares of the
capital stock of Union Guardian Trust Co. issued in the name of Robert O.
Lord subject to the terms of an agreement executed by him and by the Guardian
Detroit Union Group, Inc., a copy of which agreement appears on the reverse
side of this certificate.
UNION GUARDIAN TRUST CO.,
By E. C. HARRIS,
Depositary.
Authorized Officer,
Date, April 15, 1930.
The reverse side of this certificate reads as follows :
(The agreement referred to on the face of this receipt consists of a letter
from the Guardian Detroit Union Group, Inc., to the holder, and his acceptance
thereof, in the following form:)
You have deposited with Union Guardian Trust Co. depositary 10 shares of
the stock of Union Guardian Trust Co., which shares are owned by you and
held in your own name on the books of the corporation. We have deposited
with the same depositary 50 shares of the stock of Guardian Detroit Union
Group, Inc., issued in your name.
It is understood that upon the termination of your directorship of Union
Guardian Trust Co. the 10 shares of that company deposited by you as aforesaid shall be delivered to and become the property of the undersigned, and that
simultaneously the 50 shares of the Guardian Detroit Union Group, Inc., deposited by us aforesaid shall be delivered to you and shall become your property.
Meanwhile all dividends (including stock dividends) upon said shares of
Guardian Detroit Union Group, Inc., so held will be paid directly by that
company to you, and you will be entitled, as the shares are registered in your
name, to subscribe for any increase of the shares of that company.
In order to avoid duplication of payment, we will ask you to assign to
Guardian Detroit Union Group, Inc., your right to receive any and all dividends
(including stock dividends) upon the 10 shares of the Union Guardian Trust
STOCK EXCHANGE PBACTICES
4235
Co. referred to above, also your right as the owner of those shares to subscribe
to any increase of stock represented thereby.
Your approval of the arrangement outlined in this letter should be evidenced
by signing a duplicate copy hereof and returning the same to us, whereupon a
suitable depositary's receipt will be issued to you.
Very truly yours,
By
GUARDIAN DETROIT UNION GROUP, INC.
,
Secretary,
I hereby agree to the arrangement set forth in the foregoing letter and hereby
make the assignment of all dividends (including stock dividends) and subscription rights pertaining to the 10 shares of Union Guardian Trust Co. and direct
that all such dividends shall be paid to Guardian Detroit Union Group, Inc.
Mr. PECORA. NOW was a similar arrangement to that which you
have just read into the record made between every officer or director
of a unit bank and the Group ?
Mr. LORD. A somewhat similar arrangement, I think, Mr. Pecora,
except in the case of Saginaw.. I am not certain about that.
Mr. PECORA. Then generally speaking every person upon his becoming a director of a unit bank was required to enter into an
agreement whereby the shares of the unit bank which he held or
owned in order to qualify him to serve as a director were upon his
ceasing to be a member oi the board to be exchanged
Mr. LORD. That is right.
Mr. PiECORA (continuing). For stock, capital shares of the Group,
thereby depriving such person of the ownership of qualifying shares
sipon nis ceasing to be a member of the board of directors of the
mnit bank? Is that correct?
Mr. LORD. I would not say depriving him. I t was an agreement
lie voluntarily entered into having those director's shares exchangeable when he resigned as a director. He did not have to become a
•director. It was a voluntary matter.
Mr. PECORA. I know he did not have to become a director, but in
order to become a director he had to enter into such an agreement
as you referred to, did he not ?
Mr. LORD. In the case of Saginaw they did not, Mr. Pecora.
Mr. PECORA. With that solitary exception is that true?
Mr. LORD. There may have been other exceptions. That is the
one I do know about. That I do happen to recall.
Mr. PECORA. Generally speaking that was done?
Mr. LORD. Generally speaking I think that was done.
Mr. PECORA. NOW what was the reason for that, Mr. Lord? Can
you tell us?
Mr. LORD. I suppose because there was no desire to have the stock
floating around loose.
Mr. PECORA. DO you mean that, Mr. Lord ?
Mr. LORD. DO I mean that?
Mr. PECORA. Yes; do you mean that seriously, that the purpose of
this agreement was in order that the stock in the local bank or the
unit bank would not be floating around loose ?
Mr. LORD. Well, perhaps that is a poor answer.
Mr. PECORA. Well, suppose you make a better answer.
Mr. LORD. Well, I think it is a legal question. May I consult with
my associates here?
Mr. PECORA. Consult with anybody you want to. Tell us who you
are going to consult with here so the record can show.
4236
STOCK EXCHANGE PRACTICES
Mr. LORD (after consulting with associates). Mr. Pecora, the purpose of that was so that no former director should either profit or
lose by the ownership of those director's shares. That he should have
the same treatment as any other stockholder in the matter of
dividends and subscription rights.
Mr. PECORA. Well, was that same arrangement required to be
entered into by every stockholder of the group ?
Mr. LORD. NO. Perhaps I have not made myself clear. Supposing that I was a director of, we will say, the Kalamazoo bank for the
sake of argument. I own 10 shares. The Kalamazoo bank, we will
say for the sake of argument, had a profitable year, and they declared
an extra dividend. Why should I benefit at the expense of other
group stockholders through the ownership of those 10 director's
shares?
Mr. PECORA. Was that the reason for the making of this agreement
or arrangement between the group and all persons who became directors of any of the unit banks ?
Mr. LORD. That is one reason. So that all of the stockholders
would be treated on the same basis. Now, I might say in connection with this depositary agreement that, according to my recollection
and understanding, it was approved both by the State and the
national banking authorities.
Mr. PECORA. Have you any opinion rendered by any State or
national banking authority on that specific question that was submitted to you ?
Mr. LORD. I do not know whether it was in writing or whether it
was a verbal opinion.
Mr. PECORA. Why do you say then that it was approved ?
Mr. LORD. Because that is my recollection of it. So far as Mr.
Pole's department—who was then Comptroller.
Mr. PECORA. YOU do not know in what form it was expressed,
whether it was oral or written?
Mr. LORD. Mr. Pecora, I will see whether it was in writing.
[After consulting with associates:] Mr. Pecora, it seems to me that
the approval of the Comptroller is evidenced by the fact that every
single examination that was made of a national bank they looked
into the holding of those shares, and how they were held, and if they
had objected to it they would have said so and required us to hold
them another way.
Mr. PECORA. I S that not an assumption on your part, Mr. Lord?
Mr. LORD. I S it not a proper assumption on my part? I know
that the matter was discussed.
Mr. PECORA. With whom?
Mr. LORD. With Mr. Pole by Mr. Sherwin Hill.
Mr. PECORA. When?
Mr. LORD. I cannot tell you the date. In 1929. The exact date
I do not know.
Mr. PECORA. That is, Mr. Pole was then Comptroller of the Currency?
Mr. LORD. I believe he was.
Mr. PECORA. And Mr. Sherwin Hill was a director of the group ?
Mr. LORD. He was, I think, a director of the group. I am sure
he was.
STOCK EXCHANGE PBACTICES
4237
Mr. PECORA. And he took up with Mr. Pole the discussion
Mr. LORD. He discussed it with Mr. Pole.
Mr. PECORA (continuing). Of the question of the legality of
the agreement between these persons elected as directors of the
unit banks?
Mr. LORD. That is my understanding, Mr. Pecora. Mr. Hill is
not here or I would ask him. I am sorry. Certainly both the
State and national examiners were shown this form of receipt. They
knew all about it. There was not anything hidden from them, and
there was no objection that I ever heard from them on that question.
Mr. PECORA. Let me refer you to the following provision.of the
general banking laws of the State of Michigan—section 1207, the
laws relating to banking [reading]:
Every director must own and hold in his own name shares of the capital
stock of such company the aggregate par value of which shall not be less than
$1,000.
You are familiar with that provision of the Banking Laws of the
State of Michigan, are you not, Mr. Lord ?
Mr. LORD. Yes.
Mr. PECORA. DO
you know what principle was served by this
provision of the law ?
Mr. LORD. I think the principle was served that a man must own
outright, unpledged against a loan, his bank qualifying shares. In
fact in the State of Illinois, as I recall it, you can deposit your
qualifying shares with the cashier of the bank to prove that it is
unpledged. I do not recall whether the Michigan laws require the
actual deposit or not.
Senator COTTZENS. It could not have been done, could it?
Mr. LORD. Well, yes; it could have been done.
Senator COUZENS. Well, it was not done ?
Mr. LORD. I t was not done, so I assume it was not in the Michigan
law, Senator Couzens.
Mr. PECORA. Let me also read this further provision from the same
section of the Banking Laws of the State of Michigan:
That he [meaning a director] is, the owner in good faith of stock in the Trust
Co. as required to qualify him for such office, standing in his name on the
books of the Trust Co., and that such stock is not pledged as security for any
debt.
Mr. LORD. I think that is a fact.
Mr. PECORA. Does not that provision of law require an unqualified
ownership of the stock?
Mr. LORD. I do not see why it should.
Mr. PECORA. Sir?
Mr. LORD. I do not see why it should.
Mr. PECORA. DO you think that ownership of stock, coupled with
the agreement that you have testified to, represents an unqualified
ownership ?
Mr. LORD. Yes; I do, Mr. Pecora. Certainly to the extent as
required by the law.
Mr. PECORA. NOW, I have what purports to be a photostatic
reproduction of a letter addressed by Sherwin A. Hill, of the law
firm of Warren, Hill & Hamblen, to Mr. Kansom E. Olds, president
of the Capital National Bank, of Lansing, Mich., dated May 3,1930,
4238
STOCK EXCHANGE PEACTICES
which reads as follows, and I will read the entire letter to you,
because it relates to this general subject [reading] :
WAEREN, HILL & HAMBLEN,
Detroit, May 8, 1980.
KANSOM E. OLDS,
President the Capital National Bank,
Lansing, Mich.
DEAB ME. OLDS : Mr. Lord has handed me your letter of April 28 dealing with
the matter of directors' qualifying shares.
I appreciate the force of all that you say in your letter, as well as the points
covered in the memorandum enclosed, hut I still feel that the arrangement which
is being used relative to directors' shares is not in anywise in conflict with the
requirements of the banking law.
The National Banking Act contains two requirements in respect to directors"
shares:
(a) That each director must be the owner in good faith and in his own right
of the number of shares of stock of the aggregate par value required by statute*
standing in the director's name on the books of the association; and
(b) That such stock is not hypothecated or in any way pledged for any loan
or debt.
The same requirements are set forth in the oath of office requirp^ of each
director.
I think you will agree that there is nothing in the arrangement that interferes with requirement (b) as to nonhypothecating or pledging. Apparently
doubt arises in your mind as to whether or not a director by signing the agreement with the Group Co. and formally depositing his stock, has done something
to divest himself of his ownership in good faith of his qualifying shares.
The agreement which each director is asked to sign does not, if you will
examine it carefully, in any way minimize or curtail his absolute unrestricted
and sole ownership of the shares standing in his name. In fact it makes noreference to these at all. It is simply an undertaking on his part that upon
the termination of his directorship he will deliver for exchange 10 shares of
bank stock for a specified number of Group shares. It does not in anywise
relate to any particular shares but is simply an executory undertaking on the
director's part that upon the happening of the event he will produce 10 shares
of bank stock for exchange. Nor does it seem to me that the provision in the
agreement relating to payment of dividends in anywise affects the sole ownership in good faith of the bank shares. The Group Co. has undertaken ta
pay him dividends on Group shares set aside for delivery to him at some time
in the future when he shall offer performance of his executory contract, and
as a matter of convenience and to avoid duplication he assigns to the Group
Co. the collection and receipt of dividends on the bank.shares. As a matter
of fact, a director (except for liability for breach of his executory contract) could at any time sell or dispose of the bank shares standing in his.
name without the consent or approval of the Group Co. were it not for
the fact that under the arrangement in force the bank shares are endorsed in,
blank and deposited with an officer of the bank to be delivered to the GroupCo, upon termination of his directorship.
It may be that you feel that the director's good-faith ownership of the
qualifying shares is affected by his deposit of same with an officer of the bank,
under a receipt specifying their delivery to the Group Co. upon his ceasing
to be a director. My own opinion is that this does not affect the matter of
ownership in the sense as required by the statute, but if the members of your
Board would feel more comfortable in not having to make formal deposit of
these shares with an officer of the bank, whereby they are receipted for to be
delivered to the Group Co. upon the happening of the event named, I am
quite sure that this detail might be dispensed with in the event each director
signs the agreement for exchange and andorses his stock in blank.
Please let me hear from you, and if desired, I shall be glad to discuss the
matter with you on the first occasion when you are in Detroit, as I know
you are down frequently. I am enclosing herewith copy of directors' agreement with the Group Co. as the same appears on the reverse side of the depositary's receipt. It is probable, however, that you have one of these before
you.
Very truly yours,
SHEBWIN A. HILL.
STOCK EXCHANGE PBACTICES
4239*
Mr. PECORA. NOW, this letter would seem to indicate, Mr. Lord—
and I ask you if it does not indicate—that in May 1930 a serious
question arose as to the validity under the national banking laws
and the Michigan laws of this agreement between directors of unit
banks and the group. That is so, is it not, Mr. Lord?
Mr. LORD. I would not say that, a serious question had arisen when
a layman, a nonlawyer, asked the question as to the validity. It was
a very natural thing for Mr. Olds to want to know that it was all
right legally and that he was right about it.
Mr. PECORA. And he wrote to Mr. Hill, who was a member of the
law firm of Warren, Hill & Hamblen, who was a director of the
group ?
Mr. LORD. If I understood that letter correctly, he wrote to me
asking me, and I am also a layman.
Mr. PECORA. And then you passed the letter on to Mr. Hill ?
Mr. LORD. And then I passed the letter on to Mr. Hill.
Mr. PECORA. For answer?
Mr. LORD. Yes, sir.
Mr. PECORA. Or for a legal opinion?
Mr. LORD. Yes, sir.
Mr. PECORA. On the question raised by Mr. Olds ?
Mr. LORD. Yes, sir.
Senator GORE. YOU say you do not think it is a strange
thing for
a layman to write a letter propounding a legal inquiry like that.
Do you think it is at all strange that a layman should address such
a letter on a legal question to another layman?
Mr. LORD. NO. I t was quite natural because of the fact that I
was president of the group. It is quite natural that he should write
to me, Senator.
Senator GORE. One layman would seek legal advice from another
layman ?
Mr. LORD. Well, I do not think h& asked it of me on the ground
of my being able to give him legal advice.
Mr. PECORA. When a person was elected a director of the unit
bank he had, of course, to be the owner of qualifying shares ?
Mr. LORD. Yes, sir.
Mr. PECORA. And he got
Mr. LORD. He may have
those shares from the group ?
gotten those shares from the transfer of
were in the other man's name, or he may have
the group company by surrendering a proper
shares back in exchange for the 10 shares of
same basis that the original exchange had been
the 10 shares that
gotten them from
amount of group
qualifying, on the
made.
Mr. PECORA. DO you know of any instances where persons chosen
as directors of a unit bank purchased the necessary number of qualifying shares with moneys loaned to them by the group ?
Mr. LORD. I do not recall any, Mr. Pecora.
Mr. PECORA. I t is now just past 1. Suppose we adjourn now and
go into the question I was about to take up, at 2 o'clock.
The CHAIRMAN. Yes. The committee will take a recess until 2
o'clock.
(Thereupon, at 1 p.m. a recess was taken until 2 p.m. the same
day, Tuesday, Dec. 19, 1933.)
4240
STOCK EXCHANGE PRACTICES
AFTER RECESS
The subcommittee resumed at 2 p.m, on the expiration of the
recess.
The CHAIRMAN. The subcommittee will resume. Mr. Pecora, you
may proceed.
TESTIMONY OF BOBEBT 0. LORD, DETROIT, MICH,—Resumed
Mr. PECORA. Mr. Lord
Mr. LORD (interposing). Mr. Pecora, may I make a comment on
our discussion of this morning?
Mr. PECORA. Yes.
Mr. LORD. In regard
to the directorate of the outstate banks, during the lunch time I checked over, from the report of 1931, and
found that of the outstate banks the directors totaling 230, there
were only nine that you might call Detroit representation. Of that
number four were in Flint, and you know the circumstances surrounding the Flint difficulties on account of the defalcation there.
I have included Mr. Brewer's directorship at Ionia as a Detroit
representation although Mr. Brewer lives in Grand Rapids. In
other words, 9 out of 230 does not seem to me to indicate domination.
Mr. PECORA. Mr. Lord, apparently you misconceived the purpose
of my examination on that line this morning. I t was not for the
purpose of indicating, what I know was not the fact, namely, that
Detroit men were put on the boards of those out-of-town local units,
but rather that the set-up was such that the Group was in a position
to dictate the personnel of boards of directors of all the unit banks.
Mr. LORD. I do not know who else could, for they were the
stockholders.
Mr. PECORA. That is right. And that on occasion officers and
board members of the Group exercised that power, and made some
arbitrary changes in the personnel of state banks.
Mr. LORD. I conceive it to be their duty as stockholders to put in,
under the 75 percent directors' rulings, the best directors that could
be put in to operate in a conservative way the banks.
Mr. PECORA. But those " best directors " were serving under circumstances that made them aware at all times that they could
sit on the boards of directors of the units only so long as it pleased
the Group to have them sit, isn't that so ?
Mr. LORD. AS the principal stockholder, yes.
Mr. PECORA. Yes. And don't you think that that element tended
to make the boards of the local banks, or the unit banks, subject
at all times to the whim, caprice, decision, or determination of the
Group ?
Mr. Lord. No, I do not, and for the reason that there were
practically no changes made in the old boards. And the Group
looked to those directors to carry on those banks as they had previously carried them on. In spite of that power there was no exercise
of it. I haven't checked the directors of the four institutions before
the Group acquired stock and afterwards, but my guess is that a
dozen or fifteen out of all the directors would cover any changes
that were made, and those were normal changes.
STOCK EXCHANGE PBACTICES
4241
Mr. PECORA. NOW, one who was the unqualified owner of shares
of stock upon which dividends were paid would receive such dividends, wouldn't he ?
Mr. LORD. I did not hear the first part of your question.
Mr. PECORA. A person who is the unqualified owner of
Mr. LORD (interposing). What do you mean by " owner "?
Mr. PECORA (continuing). Of shares of stock.
Mr. LORD. I do not know what you mean by " unqualified owner."
Mr. PECORA. An absolute and outright owner for his own beneficial
right and interest.
Mr. LORD. Yes, sir; unless he assigned those dividends.
Mr. PECORA. Yes. Now, in case of persons who received from the
Group the necessary shares to qualify them to act as directors of
unit banks, those persons did not receive the dividends paid upon
that stock by the unit banks, did they ?
Mr. LORD. NO, because they assigned the dividends.
Mr. PECORA. Exactly. In other words, they turned over all their
dividends to the Group under this exchange plan.
Mr. LORD. Without changing the ownership of the stock, or affecting their ownership in any way.
Mr. PECORA. I t left the ownership in their names, but divested
them of some of the attributes of unqualified ownership.
Mr. LORD. Of the dividends, yes.
Mr. PECORA. Yes. How did those directors obtain their qualifying
shares from time to time ?
Mr. LORD. Well, I should say that in practically every case it was
a retention of the original stock that they had.
Mr. PECORA. That is, the original Group stock?
Mr. LORD. NO, sir; the original bank stock.
Mr. PECORA. The original bank stock?
Mr. LORD. Yes, sir. Now, take my own case: At the time of the
formation of the Group, I was the owner of something over 100
units, between 100 and 200 of those units, of the Guardian Detroit,
which carried with them the ownership in the bank of one fifth
of a share for each share of bank stock in the trust company, and
one full share in the securities company. When my stock was
turned in to the Group, I retained 10 shares for my directorship
and deposited them in escrow. In other words, I had the stock
originally, and the Group Co. gave me back what the full amount
would have been on the exchange, less my director's qualifying
shares.
Mr. PECORA. YOU retained title to those qualifying shares, impressed with the condition of this agreement that you spoke of
this morning?
Mr. LORD. Yes, sir.
Mr. PECORA. And that
agreement was one which,, in substance,
provided that upon your ceasing to be a director those shares, of
which you were the original owner and which you retained in order
to become a director
Mr. LORD (interposing). Yes, sir.
Mr. PECORA (continuing). No longer continued to be your
property?
4242
STOCK EXCHANGE PRACTICES
Mr. LORD. They were to be exchanged for shares of stock of the
Group.
Mr. PECORA. NOW, in the prepared statement which you read into
the record this morning, Mr. Lord, pages 2 and 3 thereof, you said,
among other things, as follows:
In view of this situation, in June of 1927 there was organized under the banking laws of the State of Michigan the Guardian Detroit Bank. Under the
plan and subscription agreement there was sold unified stock. Each subscriber
to stock in the Guardian Detroit Bank at the same time subscribed for an
equal number of shares of Guardian Detroit Co., an investment affiliate, and
for one fifth of the number of shares in Guardian Trust Co., a fiduciary
institution which had been organized under the banking laws of the State
abiut 2 years previously.
Then I will leave out the matter which immediately follows and
pass on to this statement:
There were thus created three independent corporations owned by the same
stockholders in no way subsidiary to each other.
What did you mean by the statement that:
There were thus created three independent corporations owned by the
/same stockholders in no way subsidiary to each other.
Mr. LORD. My understanding of that is that none of those corporations was owned by any of the other corporations.
Mr. PEOORA. Well, all three of them were owned by the same
stockholders.
Mr. LORD. Yes; by the same stockholders.
Mr. PECORA. SO tnat instead of being subsidiary corporations they
were affiliated corporations, weren't they?
Mr. LORD. I do not know how you would define " affiliated."
Mr. PECORA. Well, you did not mean to create the impression
by this language that those corporations were actually three corporations operating independent of one another, did you? I mean
•when you referred to them as three independent corporations.
Mr. LORD. Independent so far as their ownership was concerned,
tout owned by the same stockholders. In other words, the bank
did not own the stock of the trust company, nor did the trust company own the stock of the securities company. In other words,
they were independent of each other. That was the intention of
the statement.
Mr. PECORA. They were independent of each other as to corporate
Jorm?
Mr. LORD. That is what I meant.
Mr. PECORA. But they all had the same stockholders?
Mr. LORD. And each stockholder owned the same proportion in
each organization.
Mr. PECORA. Yes. Well, because of that common ownership of
the stock of the three companies you would not call them independent
in their relations one toward the other, would you?
Mr. LORD. I would think so.
Mr. PECORA. Well, were not the officers and directors of each of
these three so-called "independent corporations" selected by the
same persons, namely, the common-stock holders of all three companies?
STOCK EXCHANGE PRACTICES
4243
Mr. LORD. There were different directors in many of them.
Mr. PECORA. Weren't they all selected by the same persons,
namely, the owners of the stock?
Mr. LORD. They were selected by the same persons because they
were the same stockholders in the three corporations.
Mr. PECORA. NOW, on page 5 of your prepared statement you
stated, among other things, as follows:
In the early summer of 1929, in order to provide, among other things, an
increase in capital of the securities company without at the same time increasing the capital of the bank or the trust company, neither of which institutions
was in need of additional capital, there was organized the Guardian Detroit
Group, Inc. The additional capital amounted to $3,694,500, and was raised:
$747,000 through the acquisition of the entire capital stock of the It. O. L. Co.
Now, what was that K. O. L. Co. ?
Mr. LORD. I will have to go into a little of the history of the matter
in order to explain that. The Guardian Trust Co. was organized
in May of 1925. In the fall of 1926 a plan was prepared for the
organization of the Guardian Bank; that is, of the Guardian Detroit
Bank, and for the unified ownership of the shares of the said bank—
of the shares of the Guardian Trust Co. except directors' qualifying
shares—and of the shares of the securities company.
The Guardian Detroit Bank was organized, and its articles
approved by the banking commission on May 4, 1927, and subscriptions to the unified stock were made for the full number of
shares, 50,000 shares of $100 par value. Under this plan the owner
of the bank's stock became also the owner of a proportionate amount
of the stock of the trust company and of the securities company.
Under this arrangement for unified ownership a sale of the bank's
shares carried with it a proportionate amount of the stock of the
other two companies. Bank stock certificates contained a provision
for this unified ownership, and also contained an indorsement by
certain trustees evidencing the beneficial ownership of the proportionate amount of the stock of the trust company and of the securities
company, all in accordance with the plan above referred to.
In the organization plan above referred to it was provided that in
order to assure competent and interested management for said companies, each subscriber should waive, and by the execution of the
subscription arrangement the subscribers did waive, all right to
subscribe for additional shares, not to exceed 5,000, in order that
such additional unified stock might be sold to members of the executive staff and employees of the three companies as might from time
to time be designated by the directors of the bank, at such prices
and subject to such restrictions as the directors might prescribe, the
price, however, not to be less than the original subscription price of
the unified stock.
Mr. PECOKA. And what was that original price ?
Mr. LORD. I t was $249 a share. On or by June 1,1927, agreements
were entered into between the Guardian Detroit Bank and certain
officers of those companies granting to such officers an option to
purchase 3,000 shares of increased stock of the bank at a pro rata
interest in the stock of the other two corporations, as unified stock,
at $249 a share, the original issue price, this stock, if the options
were exercised, to be an increase in the bank's stock.
4244
STOCK EXCHANGE PRACTICES
Those stock-option contracts matured June 1, 1932. That is to
say, the officer in whose favor the contract was made had until June
1, 1932, to elect whether or not to purchase any pay for such stock.
In the plan and subscription agreement the bank directors were
not only authorized to sell up to 5,000 shares of such increased bank
stock but were given an irrevocable proxy by the subscriber to
create such additional stock.
On April 10, 1929, a plan was sent out to the holders of unified
shares setting forth the proposal to organize the Guardian Detroit
Group and to exchange Group shares for unified shares. One purpose set forth in this proposal was that of increasing the capital of
the Guardian Detroit Company by the sale of additional shares of the
new Guardian Detroit Group without increasing the capital of either
the bank or the trust company.
In this proposal of April 10, 1929, reference is made to the outstanding option contracts for tne purchase of 3,000 Guardian units
at $249 per share, the original issue price, which contracts would
mature in 1932 and which would necessitate an increase of the capital
stock, which might not then be needed or desirable.
The proposal of April 10, 1929, contemplated the issuance of
Guardian Group stock for Guardian units on the basis of 2 shares
of the new stock, of $50 par value, for 1 Guardian unit. In order
to do away with those options and avoid the necessity of increasing
the bank's stock, in order to fulfill those options, it was proposed
to issue 6,000 shares of Guardian Group stock, of $50 par value, at
$124.50 per share, being the equivalent of 3,000 Guardian units at
$249 per unit. In other words, it was desired to get rid of those
stock-option contracts and get the holders thereof to pay in 1929
the full amount of $749,000, which would be payable upon the exercise of their options in 1932 if they should then elect to exercise
them.
The holders of those stock-option contracts were not required to
exercise their options until June 1, 1932, and had they not relinquished, as they did do, in 1929, they would have saved themselves
$749,000 plus any liability for assessments thereon.
Mr. PECORA. Why do you say that?
Mr. LORD. Because the stock is worth it today.,
Mr. PECORA. All right. You may proceed.
Mr. LORD. There was, therefore, a valuable advantage to them in
having the right to purchase, but not under any obligations to purchase, Guardian units throughout the option period. The Guardian
Group stock which was actually issued in exchange for the other
shares, was given a $20 par value instead of a $50 par value as at
first proposed; and instead of asking the option holders to subscribe
for 6,000 shares of the Group at $124.60, they were asked to subscribe
for 15,000 Group shares, of $20 par value, at $49.80 per share, the
corresponding price.
As a part of the plan for issuing Group stock in exchange for the
old Guardian units, there was offered to the stockholders of the Guardian Detroit Group additional shares equal to 10 percent of their
holdings, after the exchange to be sold at $90 per share, of a par
value of $20 each.
STOCK EXCHANGE PEACTICES
4245
The holders of the stock option contracts were to have the same
right, to subscribe at $90 per Group share, of $20 par value, for 10
percent of the Group shares, which they would subscribe and pay for
in case they should be willing to surrender their option contracts
and subscribe for Group stock at the original price of the Guardian
units.
The essence of the transaction was that an officer held a valid contract granting him the option to purchase old Guardian units at
$249 which during the period expiring June 1, 1932, was being
asked to surrender that option and immediately subscribe for Guardian Group stock on the basis of the original unit price.
In order to assure the holders of those stock options of elimination of any possible income tax liability by surrendering their stock
option shares before maturity and acquiring Group stock in place of
the old units, advice was taken and the plan of organizing the K.
O. L. Co. was adopted.
Now, as regards the E. O. L. Co., which was organized under the
laws of Michigan, having 6,000 no par shares, those shares were acquired by the holders of stock option contracts, and the company
received therefore $750,000 in cash and the assignment of the stock
option contracts by the officers respectively holding the same. The
holders of those 6,000 shares of the R. O. L. Co. then exchanged
their shares for 15,000 shares of Guardian Group stock.
After this had been accomplished the Group Co. owned all the
stock of the R. O. L. Co. The stock option contracts were canceled,
and $747,000 was paid to the Group Co. as liquidating the outstanding shares, equivalent to $249 a share.
Mr. PECORA. For the 3,000 original units?
Mr. LORD. Yes, sir. The original holders of the stock options received 15,000 shares of Group stock, at the corresponding price of
$249 a share, at which the old Guardian units had been directed to
be sold to them during the period ending June 1,1932.
Now, is that clear to you, Mr. Pecora ?
Mr. PECORA. Mr. Lord, I noticed as you made that answer that
you read from a typewritten manuscript. Who prepared that manuscript ?
Mr. LORD. It was prepared by Mr. Bodman and myself.
Mr. PECORA. And Mr. Bodman is your attorney ?
Mr. LORD. He is attorney for the Group.
Mr. PECORA. Who were the officers to whom you have referred to
whom those were granted?
Mr. LORD. DO you want the amounts, too?
Mr. PECORA. Yes.
Mr. LORD. We will
take it in the matter of the 15,000 shares rather
than the 3,000, or in any way you may want it.
Mr. PECORA. Well, you may take it as of
•
Mr. LORD (interposing). At the original option?
Mr. PECORA. All right.
Mr. LORD. I received as part consideration for my coming to Detroit 1,000 of those options. Mr. Kanzler received 500, Dr. Fred T.
Murphy received 500, John C. Grier, Jr., received 500, C. A. Shepherd received 300, and James L. Walsh received 200, making the
total of 3,000.
175541—34—PT 9
4
4246
STOCK EXCHANGE PRACTICES
Mr. PECORA. NOW? you have stated in the course of your prepared
statement, this morning, that from time to time the Guardian Detroit
Union Group, Inc., acquired various local banks in and out of the
city of Detroit, but all in the State of Michigan, on an exchange of
stock basis ?
Mr. LORD. Yes.
Mr. PECORA. Did
all the existing stockholders of those various
unit banks turn in their shares for Group shares upon those acquisitions ?
Mr. LORD. SO far as I know as regards the Guardian Detroit Group,
Inc., not the other. I do not know the facts about that, of course.
Mr. PECORA. What was the general method of procedure by which
those acquisitions were effected?
Mr. LORD. The Group appointed a committee of three—but perhaps
I better start back of that: If a bank was considered as qualifying
from the standpoint of their standing, reputation, and goodness,
negotitions were usually carried on originally with the heads of those
particular institutions, to see whether they would be interested in becoming a member of the Group. If they were interested, and the
members of their boards were satisfied to have their institutions
become members of the Group, those banks appointed, each a committee of three, and the Group Co. appointed a committee of three,
and the Group Co.'s committee examined the assets of the particular
institution that was under consideration. The committee of three
representing that bank were given full access to any information
they wanted on the Group and on any of our institutions in the
Group.
The basis of the exchange was not figured on the basis of the relative market value of the shares, but of the real worth of the shares
based on the assets. Earning power was taken into consideration
also in arriving at a basis that was mutually satisfactory.
The offer was made to the shareholders of the bank whose shares
were sought to be. acquired, and I believe in most cases that offer
provided that it should become operative if and when 75 percent of
the stockholders of that institution agreed to it. They were asked,
if they agreed to it, to deposit their shares under a signed agreement.
If the 75 percent was acquired the plan was declared operative.
That in brief was the way matters were handled.
Mr. PECORA. And as a banking unit was acquired in that fashion
by the Group did the Group increase its capital stock in order to
enable it to acquire such a new unit?
Mr. LORD. Mr. Pecora, I do not recall the exact increases, but my
recollection is that the Group had authorized capital in excess at all
times of their needs.
Mr. PECORA. Of the amount that it actually originally issued?
Mr. LORD. Yes, sir. As I recall it, the authorized capital was
600,000 shares to start. I may be mistaken. And finally ended with
two and a half million shares authorized. Each issue of stock that
was issued in exchange for the shares of the acquired stock was
approved by the Michigan Securities Commission.
Mr. PECORA. On page 6 of your prepared statement that jou read
into the record this morning, you said, among other things, as
follows:
STOCK EXCHANGE PRACTICES
4247
The Guardian Detroit Group, Inc., was incorporated in May 1929 under the
provisions of the general corporation laws Act 84, Public Acts of 1921, as
amended, for the following purposes:
"To acquire, own, hold, dispose of, and deal in stocks, bonds, and other
evidences of indebtedness and securities, including those issued by any corporation, domestic or foreign, and to possess and exercise in respect thereto
all rights, powers, and privileges of individual owners thereof, including the
right to vote the same and to execute proxies therefor/'
Now, when was the amendment to that act of 1921 made you refer
to here ?
Mr. LORD. I don't know.
Mr. PECORA. Was it after the incorporation of Guardian Detroit
Group, Inc. ?
Mr. LORD. I cannot answer that. I don't know.
Mr. PECORA. Can you get the information from any of your
associates to enable you to answer?
Mr. LORD. Could I supply it later?
Mr. PECORA. I beg pardon ?
Mr. LORD. Could I try to supply it later for you ?
Mr. PECORA. All right. Now, reference was made in the course
of your testimony this morning to a corporation known as Keane,
Higbie & Co., of Detroit, Mich. What sort of a company was that?
Mr. LORD. I t was what was termed " an investment banking
house."
Mr. PECORA. An investment banking house ?
Mr. LORD. Yes, sir.
Mr. PECORA. Was that
the development or the outgrowth of a
stock brokerage firm or house?
Mr. LORD. I think it was the outgrowth of a municipal bond house,
Mr. Pecora.
Mr. PECORA. On page 11 of your prepared statement you read
into the record this morning you said as follows:
Admittedly, the institutions in the Guardian Detroit Union Group made
many mistakes, but to the best of my personal knowledge mistakes of judgment.
Will you enumerate the mistakes you referred to therein?
Mr. LORD. I am afraid no one could enumerate the mistakes that
were made in 1929 up to that time. I spoke of the principal mistake
in starting the Group at the peak of the Nation's prosperity.
Mr. PECORA. Well, was it actually started at the peak of prosperity?
Mr. LORD. The consolidation of the Union Commerce Corporation.
Mr. PECORA. That became effective in December 1929 ?
Mr. LORD. Yes, sir.
Mr. PECORA. Which
was 2 months after the first big slump in
the stock market that precipitated or marked the opening of what
we called this depression?
Mr. LORD. That is true, but negotiations for the consolidation of
those two groups were started in September prior to that.
Mr. PECORA. But they had not been consummated prior to December?
Mr. LORD. They had been announced in the newspapers, if I
iremember correctly.
Mr. PECORA. But not consummated ?
4248
STOCK EXCHANGE PRACTICES
Mr. LORD. I realize that.
Mr. PECORA. The consummation did not take place until
ber 16,1929?
Mr. LORD. December 1929.
Mr. PECORA. And that was when the depression after this
Mr. LORD (interposing). All right; perhaps it was a mistake that
we did not call off the consolidations, but nobody at that time expected the degression to continue as it has or expected the severity
of the depression as it proved.
Mr. PECORA. NOW you have mentioned one outstanding mistake;
What were some of the other of the " many mistakes " you referred
to on page 11 of your statement?
Mr. LORD. I would say, among other things, it was a mistake for
those institutions to own a joint-stock land bank.
Mr. PECORA. TO own what?
Mr. LORD. A joint-stock land bank. There was the Union Joint
Stock and the Ohio-Pennsylvania Joint Stock. It was a different
type of banking institution. We did, however, dispose of those at
some later date.
The CHAIRMAN. How much stock did you take in those banks?
Mr. LORD. I can give you the number of shares, I think.
The CHAIRMAN. HOW much did it cost you?
Mr. LORD. I haven't the details on that, Senator. Those institutions were acquired by the Union Commerce Corporation.
The CHAIRMAN. What became of that stock?
Mr. LORD. That stock was traded back for Group shares.
The CHAIRMAN. Traded back to whom?
Mr. LORD. Mr. Blair and his associates.
Senator ADAMS. Mr. Lord, a mere matter of definition, but you
spoke of the apparent mistake of incorporating the organization
at what you call the " peak of national prosperity." Is u prosperity " quite the correct term for what was existing at that time? I
say it is purely a matter of definition.
Mr. LORD. I considered that there was prosperity up till the summer of 1929. Everybody thought they were rich. Maybe they were
not.
Senator ADAMS. It was the "national delusion" perhaps, rather?
Mr. LORD. I think you are right.
Mr. PECORA. What were others of these " many mistakes " that
you have allusion to in your prepared statement?
Mr. LORD. I did not detail them, Mr. Pecora.
Mr. PECORA. I know you did not detail them in your prepared
statement. That is why I am asking you now to do so.
Mr. LORD. I did not in my own mind. I think it was a mistake
for any banks, commercial banks, to take such a substantial amount
of mortgages. Mortgages are perfectly safe investments, but not
for an institution which has demand deposits. Mortgages should
be carried by institutions in the nature of life insurance companies
or mortgage banks which are distinctly mortgage banks, and not
by commercial banks.
'Mr. PECORA. Why was such a policy adopted?
Mr. LORD. I t was an inheritance of many years, and it was the
practice in Detroit to loan on real estate, on homes, and it was our
mistake, sir.
STOCK EXCHANGE PEACTICES
4249
Mr. PECORA. Will you enumerate such other mistakes as composed
the " many mistakes " you referred to ?
Mr. LORD. I think one mistake that we made was that we did not
liquidate our securities companies immediately in 1929.
Mr. PECORA. Any others that you think of?
Mr. LORD. None in detail that I can recall at this time. I suppose
if I went through I could pick out a lot more.
The CHAIRMAN. Could you have liquidated your securities?
Mr. LORD. Some of them, yes. But everyone felt, the general
opinion was, that the depression was temporary and that recovery
was a matter of a few weeks or months.
Senator ADAMS. Very high-grade authorities for that?
Mr. LORD. On very high-grade authority.
Mr. PECORA. After the consolidation of the Guardian Detroit
Group, Inc., and the Union Commerce Corporation into the Guardian Detroit Union Group, Inc., what was, at their peak, the highest
amount of resources controlled by the Guardian Detroit Union
Group, Inc.?
Mr. LORD. I am sorry I cannot answer that. I think it was over
500 million, taking all the institutions.
Mr. PECORA. And what at their peak was the aggregate amount
of- deposits in the unit banks that were combined in this group ?
Mr. LORD. My recollection is somewhere upwards of 420 million.
Mr. PECORA. Can you tell the committee in how many different
cities or communities throughout the State of Michigan the Group
controlled or owned bank units?
Mr. LORD. My recollection is 16. I could tell them by checking
it up.
Mr. PECORA. And how many separate unit banks were comprehended in the Group?
Mr. LORD. At the start or at the time of the holiday, Mr. Pecora ?
Mr. PECORA. Well, say at their peak first, the peak number?
Mr. LORD. I cannot answer that. I think there were 27.
Mr. PECORA. There were 10 national banks, 10 state banks, 7
securities companies, 2 joint stock land banks, 3 building companies,
a title company, and a safe-deposit company, were there not?
Mr. LORD. That sounds about correct; yes, sir.
Mr. PECORA. NOW, what was the original issuing price of the
shares of the Group ?
Mr. LORD. YOU mean the par value ?
Mr. PECORA. The original issuing price.
Mr. LORD. There were no shares of the Group sold to the public,
of the Guardian Detroit Group, except on that 10 percent subscription under which they were sold at $90 per share.
Mr. PECORA. TO whom were those shares originally distributed?
Mr. LORD. They were distributed to the then stockholders.
Mr. PECORA. Of the banks that had been acquired ?
Mr. LORD. N O ; that started the Group. On the subscription
rights that were distributed to then stockholders of the Group who
had been stockholders of the banks acquired.
Mr. PECORA. That is the group composed of three institutions
whose ownership is covered by the unified stock?
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STOC& EXCHANGE PEAOTICES
Mr. LORD. Yes, sir. You see, that was turned into Group stock,
and Highland Park Institutions were acquired, and those stockholders were given the right to subscribe to the extent of 10 percent
of their holdings.
Mr. PECORA. IfOW, what sources of income did the Group have
after it consolidated with the Union Commerce Corporation on
December 16, 1929?
Mr. LORD. I t was principally from the dividends on the stock of
the institutions.
Mr. PECORA. YOU say that was its principal income?
Mr. LORD. That was its principal income.
Mr. PECORA. Did it have income from other sources?
Mr. LORD. It had income from its cash and minor assets that it
might have, but that did not amount to a great deal as compared
with the dividends from its units.
Mr. PECORA. Did the Group receive any payments from any of
the unit banks for services of a supervisory or advisory nature?
Mr. LORD. I think at one time there was a slight service charge
made, and the basis on which it was made and the amount I do not
recall, Mr. Pecora. That did not come under my scope, the arrangement there.
The CHAIRMAN. YOU mean to say that of these upwards of 420
millions of deposits, 65 percent have been paid ?
Mr. PECORA. N O ; he was referring this morning in that testimony to only one bank.
Mr. LORD. Just to the Guardian National Bank of Commerce of
Detroit, Senator Fletcher.
Mr. PECORA. HOW much of these deposits have been paid, of the
420 million?
Mr. LORD. I can only give you a very rough estimate. At the peak
of 420 million, the aggregate deposits that are held unpaid today
and are tied up in the course of being paid through liquidation of
banks that are closed or are in the hands of conservators, would run
somewhere, as I recall it, around 90 million dollars. All the rest of
it has either been paid back or is in banks that are paying a hundred
percent, and you or I, who care to, can go in and get our money
any time we want. That is merely an estimate, but I think that
would be approximately correct, about 90 million dollars.
The CHAIRMAN. YOU mean to say the depositors have lost about
90 million?
Mr. LORD. They have not lost it, because that is in course of
liquidation in those banks.
Mr. PECORA. NOW, did the directors and officers of the Group
exercise any control over the declaration of dividends by the unit
banks ?
Mr. LORD. Exercise any control?
Mr. PECORA. Yes.
Mr. LORD. NO, sir.
Mr. PECORA. Did they
exercise any judgment at all with respect
to the declaration of dividends by the unit banks?
Mr. LORD. They frequently suggested to the board the amount
which they should consider in the matter of dividends.
STOCK EXCHANGE PBACTICES
4251
Mr. PECORA. HOW frequently were such suggestions mad$ to the
various unit banks?
Mr. LORD. I assume every dividend date, because the units wanted
to know what their contribution was to be.
Senator COUZENS. Contribution to what?
Mr. LORD. TO the income of the Group Co., Senator Couzens.
Mr. PECORA. That is, the Group Co., in order to pay dividends to
its stockholders, had to first receive dividends from the unit banks?
Mr. LORD. That is correct, sir.
Mr. PECORA. And the amount of dividends paid by the Group^ to
its stockholders depended almost entirely upon the amount of dividends that the Group received from the unit banks ?
(Mr. Lord made no reply to the question.)
Mr. PECORA. I have what purports to be a copy of a resolution
which was adopted by the board of directors of the Guardian Detroit Group, Inc., on June 14, 1929, as appears from page 39 of the
minute book of that company. Will you look at it and tell me if
you recognize it to be a true and correct copy of the resolution so
adopted on that date?
Mr. LORD (after examining document). Mr. Pecora, I would not
know whether it was.
Mr. PECORA. What is that ?
Mr. LORD. I would not know whether that is correct or not. I
haven't the original of the minutes. I assume it was copied by your
representatives and it is correct. I do not know whether it is correct.
I haven't the original minutes here.
Mr. PECORA. Well, we have what purports to be a photostatic
reproduction of page 39 of the minute book of the board of directors
of the Guardian Detroit Group, Inc., reciting that resolution. Will
you look at it and tell us if you recognize that to be a true and correct
copy of that page of the minute book?
Mr. LORD (after comparing documents). That seems to be correct.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted and entered on the record.
(Typewritten sheet purporting to be a copy of page 39 of Minute
Book of Guardian Detroit, Group, Inc., was thereupon designated
" Committee Exhibit No. 5, December 19,1933.")
Mr. PECORA. I will read page 39 of the minute book into the record:
Meeting of the directors of the above-named company—
Namely, Guardian Detroit Group, Inc.—
held June 14, 1929, in the office of the company, Penobscot Building, Detroit,
Mich., at 12:15 p.m.
Meeting of the board of directors of the Guardian Detroit Group, Inc., was
held at the time and place above named.
Mr. H. E. Bodman, chairman of the board, presided, and L. K. Walker acted
as secretary of the meeting.
All of the directors of the company were present except Mr. Edsel D. Ford.
A waiver of notice of the meeting, signed by Mr. Ford, was presented and
ordered placed on file.
The following resolution was offered, and being duly seconded, was unanimously
adopted:
" Whereas dividends have been declared upon the stock of Guardian Detroit
Bank, Guardian Trust Co. of Detroit, Guardian Detroit Co., Highland Park
State Bank, and Highland Park Trust Co., payable in each instance June 28,
1929; and
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STOCK EXCHANGE PRACTICES
" Wher&s this company will be in receipt of funds resulting from the payment of such dividends sufficient to cover the dividends hereinafter declared:
Now therefore be it
" Resolved, That a regular dividend of 50 cents per share and an extra
dividend of 25 cents per share be and the same are hereby declared upon the
stock of this company payable July 1, 1929, to stockholders of record at the
close of business June 20, 1929."
There being no business to come before said meeting, same is adjourned.
L. K. WALKER, Secretary.
From time to time, Mr. Lord, did you, as the president of the
Group, convey requests, both orally and in writing, to various bank
units in the Group suggesting the dividend rate which such bank
units should declare?
Mr. LORD. I think I conveyed suggestions to the board for their
consideration.
Mr. PECORA. Were those suggestions ever rejected?
Mr. LORD. I would say that they were in cases.
Mr. PECORA. In about what proportion of the cases did a rejection
of the suggestion follow.
Mr. LORD. I would say a very small proportion, because the suggestions were always reasonable.
Mr. PECORA. NOW I show you what purports to be a photostatic
copy of a letter addressed by you as president of the Group to Mr.
Johfr N. Stalker, president of the Union Guardian Trust Co. of
Detroit, dated June 4, 1930. Will you look at it and tell me if
you recognize it to be a true and correct copy of such a letter sent
by you to Mr. Stalker on or about that date?
Mr. LORD. I t is pretty difficult to read, Mr. Pecora. Is this the
only copy you have of it?
Mr. PECORA. Yes.
Mr. LORD (after
perusing document). I would think that was
the true and correct copy.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted and entered in the record.
. (Photostat of letter from Eobert O. Lord to John N. Stalker,
dated June 4, 1930, was thereupon designated " Committee Exhibit
No. 6, December 19, 1933.")
Mr. PECORA. The letter received in evidence as Committee's Exhibit No. 6 reads as follows:
JUNE 4, 1930.
Mr. JOHN N. STALKER,
President Union Guardian Trust Co.,
Detroit, Mich.
DEAR MB. STALKER : To provide for the dividend requirement of the Guardian
Detroit Union Group, Inc., on the basis of an annual disbursement of $3.20
per share, a dividend should be declared at the June meeting of your board
of directors. I would suggest, therefore, that it would be in order for your
Board to declare a quarterly dividend equal to 20 percent annually.
This dividend should be payable not later than June 27, 1930, to stockholders of record, June [it ar pears to be] 16, and a check for $248,024.00
covering the shares standing in the name of Guardian Detroit Union Group,
Inc., as well as directors qualifying shares, the dividends on which have
been assigned to us, should be in the hands of Mr. B. K. Patterson, treasurer,
Penobscot Building, Detroit, Mich., on the 27th instant or on the day following.
Please be good enough to promptly confirm this arrangement and advise
me upon the declaration of your dividend.
Yours very truly,
STOCK EXCHANGE PEACTICES
4253
Signed, I take it, by you as president.
Now, did you after you sent this letter to Mr. Stalker, receive from
him a reply in writing, a photostatic copy of which I now show you?
Mr. LORD (after perusing document). I assume this came to me.
Mr. PECORA. I offer that in evidence.
The CHAIRMAN. Let it be admitted and entered in the record.
(Letter dated June 5, 1930 from John N. Stalker to Eobert O.
Lord was thereupon designated " Committee Exhibit No. 7, December
19, 1933 ".)
Mr. PECORA. The letter just received in evidence as committee's
Exhibit No. 7 reads as follows, on the letterhead of Guardian Detroit
Union Group, Inc. [reading] :
INTRAGROUP MEMORANDUM
Date: June 5, 1930.
To: Mr. Bobert O. Lord.
From: Mr. John N. Stalker.
DBAB MR. LORD : We have your letter of the 4th instant with respect to the
5 percent quarterly dividend, which you suggest that we pay this month. I
presume a dividend of this amount is necessary to the fulfillment of your plan
and the officers are prepared to recommend it to the Board. However, as you
are aware, a dividend of this amount has not been earned. In addition to that,
the Trust Company is setting up no reserves and we feel that is not as it
should be. There is no doubt in my mind that the company will suffer some
losses.
I want to bring up at this time, so that it will not be overlooked, the fact that
in turning over our Bond Department to the Guardian Detroit Company we lost
a very important source of earnings, which even under present conditions would
mean over $300,000 per year. Were our earnings sufficient to justify dividends
at the annual rate of 20 percent, we would not raise a. question of the loss
in income from the Bond Department, but under the circumstances, we feel
that the Trust Company is entitled to and must have some relief the latter
part of the year.
JOHN N. STALKER.
Mr. PECORA. When you received this letter from Mr. Stalker in
which he pointed out that the suggested dividend rate of 20 percent
per annum which was embodied in your letter to Mr. Stalker of
June 4, 1930, had not been earned, and that no reserves had been set
up by the company, what did you do about the matter ?
Mr. LORD. Have you no further correspondence on the subject?
Mr. PECORA. Have you no recollection?
Mr. LORD. I have no recollection. I assumed the company had a
substantial undivided profit account from which it could pay its
dividend.
Mr. PECORA. And you are willing to assume that the directors of
this unit bank, despite the fact that its president had brought to
your attention immediately upon receipt by him of your letter suggesting, as you call it, a dividend declaration at the rate of 20 percent per annum, carried out your suggestion?
Mr. LORD. Mr. Pecora, I assumed that the directors of the Union
Guardian Trust Co. used their judgment in the declaration or nondeclaration of the dividend.
Mr. PECORA. And their judgment coincided with your suggestion,
did it not?
Mr. LORD. Apparently. I have no record to show whether that
amount was declared at that time.
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STOCK EXCHANGE PEACTICES
Mr. PECORA. And that despite the fact that its president, upon
receipt of your suggestion, pointed out the bad practice involved
in declaring a dividend at a rate exceeding its earnings?
Mr. LORD. I would not call it bad practice if they had a substantial
undivided profit account.
Mr. PECORA. This took place in June 1930?
Mr. LORD. Yes, sir.
Mr. PECORA. The general
business conditions were not good at that
time, were they?
Mr. LORD. They were better, as I recall it. We had quite a bulge
in June 1930.
Mr. PECORA. Did they seem to be better in view of the fact that
Mr. Stalker called your attention to a falling off in earnings?
Mr. LORD. I cannot answer your question, Mr. Pecora. I assume
that the directors, if they had not thought it was proper to declare
a dividend, would not have declared it.
Mr. PECORA. DO you think that the directors were influenced in
their judgment by the suggestion that you made to them?
Mr. LORD. N b , I do not—not those directors.
Mr. PECORA. Did you suggest to the directors or to Mr. Stalker
that, despite the fact that the earnings were not at a rate which would
justify the declaration of a dividend at the rate that you suggested,
they should make that good out of undivided profits or surplus ?
Mr. LORD. I do not recall, sir.
Mr. PECORA. But in any event, that is what they did?
Mr. LORD. Accepting your statement; yes.
Mr. PECORA. And that despite the fact that coupled with a falling
off in earnings the bank had not set up any reserves against losses
or depreciation of securities value?
Mr. LORD. Might I make this comment ? As I recall it, the Guardian Trust Co. and the Union Trust Co. were consolidated in the
spring of 1930. I may be incorrect about that. I t is quite likely that
the board of directors figured sufficient earnings and savings in expenses to justify that dividend—savings through the consolidation
of those two institutions.
Mr. PECORA. Didn't you notice in this memorandum addressed to
you by Mr. Stalker that he said—
Were our earnings sufficient to justify dividends at the annual rate of 20
percent, we would not raise the question of the loss in income from the bond
department.
Mr. LORD. May I hear your question again ?
Mr. PECORA. Did you notice that statement of Mr. Stalker and give
it any thought ?
Mr. LORD. I assume I did, sir.
Mr. PECORA. Was the thought that you gave it of a character which
led to the conclusion that you should insist upon the observance of
the suggestion that you made about the dividend rate that should be
declared ?
Mr. LORD. I do not recall whether my suggestion was made direct
to the board of directors or whether Mr. Stalker discussed the matter
with his own board of directors and they took that action, or not.
That was—what? Nearly 4 years ago?
Mr. PECORA. Three and a half years ago.
STOCK EXCHANGE PRACTICES
4255
Mr. LORD. I can only answer on this assumption, that the facts
were laid before that board of directors and their conclusions were
that if they did declare the dividend it was a proper declaration.
Mr. PECORA. Mr. Stalker in his memorandum to you also said :
However, as you are aware, a dividend of this amount has not been earned.
You were aware of that fact, were you not—that the dividend
rate had not been earned ?
Mr. LORD. I was told that.
Mr. PECORA. Did you, in the face of that, continue to advance the
suggestion that the dividend rate be declared according to your
idea of it?
Mr. LORD. Mr. Pecora, I do not recall whether there was any further suggestion after the original letter to which Mr. Stalker replied. Have yop. any further letter from me on the subject?
Mr. PECORA. Have you no further recollection of the matter ?
Mr. LORD. I have not, sir.
Mr. PECORA. Let me call your attention to this further statement
in Mr. Stalker's memorandum to you:
I presume a dividend of this amount (namely, 5 percent quarterly or 20
percent annually) is necessary to the fulfillment of your plan.
What was that plan?
Mr. LORD. I do not know what he was talking about, except the
budget, to carry the Group companies' dividend and whatever expenses they had.
Mr. PECORA. Well, conceivably was the plan referred to by Mr.
Stalker in his memorandum to you one whereby the Group's board
of directors had to determine upon the amount of dividend that the
Group would pay to its stockholders, and in order to enable the
Group to pay that amount of dividend it called upon the unit banks
to make certain dividend declarations to meet the requirements of
the Group dividend?
Mr. LORD. Mr. Pecora, I know of no cases where the group determined in advance what the dividends should be, except for a few
days, based on the report of the directors.
, Mr. PECORA. Perhaps repeating the following sentence from your
leiter of June 4, 1930, to Mr. Stalker would serve to refresh your
recollection on this subject; so I will read it to you :
DEAR ME. STALKER : To provide for the dividend requirements of the Guardian
Detroit Union Group, Inc., on the basis of an annual disbursement of $3.20 per
share, a dividend should be declared at the June meeting of your board of
directors. I would suggest, therefore, that it would be in order for your board
to declare a quarterly dividend equal to 20 percent annually,
Mr. LORD. For that quarter.
Mr. PECORA. I beg your pardon?
Mr. LORD. At the rate for that quarter.
Mr. PECORA. Yes. I am reading your letter now.
Mr. LORD. For that particular quarter.
Mr. PECORA. YOU state specifically here that to provide for the
dividend requirements of the Guardian Detroit Union Group, Inc.,
you suggest to Mr. Stalker's board that they declare a quarterly dividend at the rate of 20 percent per annum.
Mr. LORD. That is correct.
4256
STOCK EXCHANGE PBACTICES
Mr. PECORA. Does not that indicate3 Mr. Lord, that the dividend
policy of the Group was such that, first, the Group determined what
dividend it wanted to pay or deemed< it advisable to pay to its OWE
stockholders, and then passed the word along by way ot suggestion,
if you please, to the boards of directors and executive officers of tiie
unit banks to have them declare appropriate dividends to enable the
Group to pay its dividend to its stockholders?
Mr. LORD. Mr. Pecora, it was not possible for the Group to determine what it wanted to pay in the way of dividends without having
more or less accurate estimates and figures as to the earnings of the
units. As I recall it, the dividend that was declared in April of
1930 was an 80-cent dividend.
Mr. PECORA. That is, a quarterly dividend?
Mr. Lorn At the rate of $3.20 per annum.
Mr. PECORA. That was on shares having a par value of how much!
Mr. LORD. On shares having a par value of $20.
Mr. PECORA. Which was an annual dividend rate of how much on
the par value?
Mr. LORD. Sixteen percent, in round figures. I t was a normal and
natural thing that any board of directors or any management would
want to continue dividends at the rate started. But certainly
Mr. PECORA. Would it want to do that regardless of earnings?
Mr. LORD. I t would not.
Mr. PECORA. I did not mean to interrupt you. You said, "But
certainly "
Mr. LORD. N O ; it would not, regardless of earnings. It would not
want to do it regardless of earnings. That would not be sound.
Mr. PECORA. But is not that exactly what was done in this instance, in the making of this suggestion of yours originally made
under date of June 4, 1930, to the president of the Union Guardian
Trust Co.?
Mr. LORD. There was no reason why that board of directors should
accept that suggestion.
Mr. PECORA. What was the reason for your renewing the suggestion after Mr? Stalker informed you, or reminded you, rather, of
what apparently you already knew, namely, that the bank had not
earned a dividend at the quarterly rate of 20 percent ?
Mr. LORD. Did I renew the suggestion, or was the matter discussed with the board and they approved it? I do not know, Mr.
Pecora. I do not recall. I am asking that as a question.
Mr. PECORA. Well, on that perhaps your recollection will be refreshed by what I now show you, and that is what purports to be a
photostatic reproduction of a memorandum addressed to you by Mr.
Stalker under date of June 26, 1930. Will you look at it and tell
us if you recognize that as a true and correct copy of such a memorandum received by you from Mr. Stalker ?
Mr. LORD. I do not quite get the connection with this other side.
Mr. PECORA. DO you recognize that as being a true and correct
copy of a memorandum that you received ?
Mr. LORD. I presume it is. It is addressed to me.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. It may be received.
STOCK EXCHANGE PBACTICES
4257
(Photostatic copy of memorandum addressed to Mr. Lord by Mr.
Stalker under date of June 26, 1930, was received in evidence,
marked " Committee Exhibit No. 8, December 19, 1933.")
Mr. PECORA. The memorandum received in evidence as Committee's
Exhibit No. 8 of this date reads as follows: It is on the letterhead
of the Guardian Detroit Union Group, Inc., Intra-Group memorandum to Mr. Eobert O. Lord from Mr. John N. Stalker, dated
June 26,1930 [reading] :
COMMITTEE EXHIBIT NO. 8
GUARDIAN DETROIT UNION GROUP, INC.
INTRA-GROUP MEMORANDUM
Date: June 26, 1930.
To: Mr. Robert O. Lord.
Prom: Mr. John N. Stalker.
MY DEAR BOB : I commented in a recent letter on the matter of the dividends
which should be paid by the Union Guardian Trust Company the latter half
of this year. The loss of our Bond Department affects our earnings very
seriously. For the five years from 1925 to 1929 inclusive, the net earnings of that
department after the payment of expenses average a trifle over $296,000.00 a
year. If we had those earnings today, I believe we could pay a 20 percent
dividend or $1,000,000.00 a year. We do not in any way question the transfer
of the Bond Department to the Guardian Detroit Company. This seems to us
logical and proper. The effect on our earning capacity, however, cannot be
ignored.
As against $500,000.00 in dividends which we are paying the first six months
of this year, our earnings will probably not run over $425,000.00 and this
without setting up any reserves at all. Our policy in the past has always
been to set up liberal reserves, although we were fortunate enough to need
them only to a very limited extent. At the present time we feel that reserves
are rather urgently required, and find ourselves unable to provide them.
Mr. Blair and I are of the opinion that for the last half of this year, dividends aggregating $400,000.00 or at the annual rate of 16 percent is the
maximum that this company should undertake to pay. This would make 18
percent for the year. As our accruals for the next dividend period should
•commence the first of next month, we would be glad to get your opinion and
advice on this subject.
JOHN N. STALKER.
Now, from this letter it would appear, would it not, that the
bank, Mr. Stalker's bank, that is, the Union Guardian Trust Company, had adopted your suggestion embodied in your letter of June
4, 1930, that they declare a quarterly dividend at the annual rate
of 20 percent?
Mr. LORD. I do not recall what the directors did declare. I would
say that
Mr. PECORA. Does not Mr. Stalker in this memorandum to you
specifically say that the dividend they had declared for the first half
of the year, which included the quarter that you wrote to him about
under date of June 4, amounted to $500,000, which was at the rate
of 20 percent per annum?
Mr. LORD. Yes.
Mr. PECORA. Does
it seem to you, Mr. Lord, that when Mr. Stalker
in his letter to you of June 5, 1930, pointed out in response to your
suggestion that the quarterly dividend be at the 5 percent rate or 20
percent per annum, that they were not earning that much and that
no reserves had been set up, that nevertheless he recommended your
suggestion to his board of directors because it was your suggestion ?
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STOCK EXCHANGE PRACTICES
Mr. LORD. I would not think so. .
Mr. PECORA. And not his judgment?
Mr. LORD. I would not think so; no. I t was apparently the judgment of the board that the dividend should be declared; and the
basis on which Mr. Stalker recommended it to the board I do not
know. I suppose that whatever he recommended was sincere.
Mr. PECORA. If it was the judgment of the board or Mr. Stalker's
judgment that it should be recommended to the board, what do you
suppose he meant when he wrote to you on June 5, 1930, pointing
out that you were suggesting a dividend rate in excess of earnings
and that the company had set up no reserve against loss? What
did you think he was writing that letter to you for—in order to
express his hearty approval of your suggestion?
Mr. LORD. N O ; I presume not.
Mr. PECORA. What did you suppose he wrote it to you for, then,
Mr. Lord?
Mr. LORD. TO give me his own personal reaction to that suggestion.
Mr. PECORA. But was there not at least a mild suggestion from
him that you ought to revise your suggestion to his board ?
Mr. LORD. I do not know that there was.
Mr. PECORA. YOU did not so construe it, anyway?
Mr. LORD. NO. I construed that the board would make up their
own mind about the declaration of the dividend.
Mr. PECORA. YOU had already made up your mind and passed it
on to the board?
Mr. LORD. AS a suggestion, purely.
Mr. PECORA. Which was followed, though, despite the circumstances, the unwisdom pointed out by Mr. Stalker in his reply to
your letter. Is not that so?
Mr. LORD. Apparently.
Mr. PECORA. A S a matter of fact, Mr. Lord, was it not the invariable
custom and policy of the Group at about the time that the Group
was making or had made its dividend declarations to its own stockholders to send communications generally similar in form to this one
of June 4,1930, which you sent to Mr. Stalker, to the executive heads
or officers of all of the unit banks ?
Mr. LORD. YOU stated in the first, about the time the Group had
declared its dividend to its stockholders? No; I do not think so,
Mr. Pecora. I think that a few weeks before the dividend date had
arrived a suggestion was sent to the unit banks as to the amount which
we would like to have them put before their boards for their consideration.
Senator COUZENS. What is the deposit liability of the Union
Guardian Trust Co. at this time?
Mr. LORD. At present?
Senator COTJZENS. Yes.
Mr. LORD. I cannot answer that, Senator. I am sorry.
The CHAIRMAN. I S there any stockholders' liability?
Mr. LORD. Five million dollars of stock.
The CHAIRMAN. Yes; but what does the law require ?
Mr. LORD. The State law?
The CHAIRMAN. Yes.
Mr. LORD. The same as
the national law—double liability.
STOCK EXCHANGE PBACTICES
4259
Senator COTJZENS. Has any double liability been paid yet?
Mr. LORD. I think so, Senator.
Mr. PECORA. Mr. Lord, I show you what purports to be a photostatic reproduction of a letter addressed by you under date of March
4,1930, to Mr. Frank Brandon, president of the City National Bank
& Trust Co. of Niles, Mich. Will you look at it and tell me whether
you recognize it to be a true and correct copy of such letter sent
by you to Mr. Brandon on or about March 4,1930?
Mr. LORD. I would think so.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. I t will be admitted.
(Photostatic copy of letter dated March 4, 1930, to Mr. Frank
Brandon from Kobert O. Lord, was received in evidence, marked
" Committee Exhibit No. 9, December 19, 1933.")
Mr. PECORA. The letter received in evidence as Committee's Exhibit No. 9 of this date reads as follows [reading] :
COMMITTEE EXHIBIT NO. 9
MARCH 4,
1930.
Mr. FRANK M. BRIANDON,
President City National Bank & Trust Co., Niles, Mich.
provide the dividend requirements of the Guardian
Detroit Union Group, Inc., on the basis of an annual disbursement of $3.20
per share, the dividend should be declared at the March meeting of your
Board of Directors. I would suggest, therefore, that it would be in order for
your board to declare a dividend of 2y2% for this quarter. This dividend
should be payable not later than March 27th to stockholders of record March
17th, and a check to cover the dividend on the shares standing in the name of
Guardian Detroit Union Group, Inc., as well as the shares standing in the
names of your directors, should be in the hands of Mr. B. K. Patterson,
Treasurer, Penobscot Bldg., Detroit, on that date or on the date following.
Your proportionate share of. the expenses of the Group Company, incurred on
account of services rendered by that company, will be figured and a memorandum sent you at a later date.
Please be good enough to promptly confirm this arrangement and advise me
upon the declaration of your dividend.
Very truly yours,
DEAR MR. BRANDON: TO
9
president.
You signed that, I presume, as president, did you, Mr. Lord?
Mr. LORD. I presume so.
Mr. PECORA. Comparing the phraseology of this last letter, exhibit no. 9, the one that I have just read, with the phraseology of
your letter to Mr. Stalker marked " Exhibit No. 6 ", it would seem
that the leters are practically identical in form. Does that occur
to you, Mr. Lord, as being the fact?
Mr. LORD. Somewhat; yes.
Mr. PECORA. Was this a form letter that was used by the Group
in order to advise the officers of the unit banks what dividends they
should declare?
Mr. LORD. I would not call it a form letter; no.
Mr. PECORA. Was it by accident that practically the identical
phraseology is used in these letters?
Mr. LORD. I would think so; yes. I do not recall that there were
ever any form letters used on that.
Mr. !PECORA. Perhaps a similar accident occurred when this letter
was drafted to Mr. Stalker and sent on March 4, 1930, a photostatic
copy of which I now show you, and which I ask you to please look
at and tell me if it is a true and correct copy of such letter.
4260
STOCK EXCHANGE PRACTICES
Mr. LORD. I do not get your point on the form letter, Mr. Pecora.
They are expressed very much in the same way, almost identically.
Mr. PECORA. Would not that indicate that a form of letter suitable
for this purpose had been prepared and was being consistently
used?
Mr. LORD. I do not think so.
Mr. PECORA. Then the drafting of these letters in identical phraseology was always an accident—or was it by desigp?
Mr. LORD. I do not know that it was an accident. I may have
told my secretary to get out some previous letters that had been
written on the question of dividends, and he may have read the
letter and said that was the simplest.
Mr. PECORA. I S not that another way of saying a form letter
was used on these occasions ?
Mr. LORD. I would not think so, Mr. Pecora.
Mr. PECORA. The same form of letter was followed in all these
instances.
Mr. LORD. The same general language; yes, sir.
Mr. PECORA. I offer in evidence the letter which has just been
shown the witness.
The CHAIRMAN. Let it be marked.
(The document referred to, letter, Mar. 4, 1930, Lord to Stalker,
was received in evidence, marked "Committee Exhibit No. 10",
Dec. 19,1933, and the same was subsequently read into the record by
Mr. Pecora.)
Mr. PECORA. The letter last offered in evidence as exhibit no. 10,
of this date, is as follows [reading] :
MABCH 4, 1930,
Mr. JOHN N. STALKER,
President, Union Trust Company,
Detroit, Michigan.
DEAR MB. STALKER: TO provide the dividend requirements of the Guardian
Detroit Union Group, Inc., on the basis of an annual disbursement of $3.20 per
share, the dividend should be declared at the March meeting of your Board of
Directors. I would suggest, therefore, that it would be in order for your board
to declare a dividend of 4 percent for this quarter. This dividend should be
payable not later than March 27th to stockholders of record March 17th, and
a check to cover the dividend on the shares standing in the name of Guardian
Detroit Union Group, Inc., as well as the shares standing in the names of
your directors, should be in the hands of Mr. B. K. Patterson, Treasurer,
Penobscot Bldg., Detroit, on that date or on the day following. Your proportionate share of the expenses of the Group Company, incurred on account of
services rendered by that company, will be figured and a memorandum sent
you at a later date.
Please be good enough to promptly confirm this arrangement and advise me
upon the declaration of your dividend.
Yours very truly,
f
president.
Signed by you as president.
I notice that the language of this letter is identical with the
language of the other letter—not generally the same, but actually
the same.
Mr. LORD. I S there any objection?
Mr. PECORA. I am not offering any objection. I am simply trying to develop the facts as to whether or not a form of letter had
STOCK EXCHANGE PRACTICES
4261
been agreed upon and prepared and consistently used in all these
instances.
Mr. LORD. I do not think I know of any discussion ever had on
that form of letter. Probably it was my own dictation of the letter,
my own thought in the letter, my own way of expressing it.
Mr. PECORA. Did you have this phraseology memorized ?
Mr. LORD. NO. I probably took preceding letters.
Mr. PECORA. And told your secretary to follow that language?
Mr. LORD. Yes.
Mr. PECORA. YOU
still would not call that the adoption of a form
letter.
Mr. LORD. N O ; because every letter sent out was not that way,
was it?
Mr. PECORA. What is that?
Mr. LORD. Was every letter sent out in regard to dividends exactly
like that?
Mr. PECORA. Every one I have seen.
Mr. LORD. I have no copies of the correspondence, Mr. Pecora,
except what you have shown me.
Mr. PECORA. Were you the author of this form of letter? I will
not call it a form letter. I will call it a form of letter.
Mr. LORD. I assume I was, if I signed it. I do not know, Mr.
Pecora.
Mr..PECORA. YOU did sign it, did you not?
Mr. LORD. I said I signed it, and I'assume I was the author.
Mr. PECORA. But then you said " I do not know." What is the
fact? Are you the author of this form of letter?
Mr. LORD. I assume so.
Mr. PECORA. Dont' you know so ?
Mr. LORD. AS long as I signed it, I probably was the author. I
have not any reason to think otherwise as to any letter I signed.
Mr. PECORA. If it was not the policy of the Group, expressed by
these letters to the executive officers of the unit banks, to have the
Group first determine the dividend it would pay to its stockholders,
and then notify the unit banks that in order to enable the Group to
pay that dividend the unit banks would have to make certain dividend
contributions in the form of dividends at rates specified by you, then
what do you mean when, in preparing this form of letter, you state,
in the opening sentence in all cases, as follows [reading] :
To provide the dividend requirements of the Guardian Detroit Union Group,
Inc., on the basis of an annual disbursement of $3.20 per share, the dividend
should be declared at the March meeting of your board of directors. I would
suggest, therefore, that it would be in order for your board to declare a
dividend of 4 percent for this quarter.
Mr. LORD. I t was necessary to budget the expenses and the dividends of the group corporation, of course, up to the next quarter, or
within a few weeks of the declaration of the dividend. How could
we know?
Mr. PECORA. But didn't you really put the cart before the horse
in these instances, because it would seem from your letters to these
bank officers that you first notified them what dividend disbursement
was going to be made?
175541-—34—-PT 9
5
4262
STOCK EXCHANGE PRACTICES
Mr. LORD. NO ; I notified them what would be required to maintain
a certain dividend on the Group stock.
Mr. PECORA. Then, in order to maintain an annual disbursement
of $3.20 per sharei to the stockholders of the Group stock, you made
the suggestions to the heads of the unit banks concerning the amount
of dividends that those unit banks should declare and pay to the
Group, did you not?
Mr. LORD. Suggestion; yes.
Mr. PECORA. I t never was more than a suggestion, of course ?
Mr. LORD. I do not think so; no.
Mr. PECORA. In form, anyway; because you are careful to say " I
would suggest, therefore, that it would be in order for your board
to declare a dividend " at a certain rate. But don't you think, Mr.
Lord, as you look back on the events, that these suggestions of
yours, couched as suggestions in the phraseology that you used, were
really accepted by the officers and directors of the unit banks as
commands from the throne?
Mr. LORD. Knowing those boards, no; I would not think so.
Senator COUZENS. Was there any case where it was not followed
out?
Mr. LORD. I think there were, Senator Couzens. I would have to
check it up. I recall several cases where the amount was changed*
or no dividend at all was paid.
Mr. PECORA. Those several cases were very, very few in number,
were they not?
Mr. LORD. AS I say, I don't know exactly what cases there were,
but I have a recollection of my suggestion being changed.
Mr. PECORA. I observe that in your letter to Mr. Stalker of
March 4, 1930, the letter received in evidence as exhibit no. 10, you
suggested that his board, the board of the Union Trust Co. of
Detroit, should declare a quarterly dividend at the rate of 4 percent
for the quarter; but in the letter you wrote to him under date of
June 4, 1930, which was the ensuing quarter, you suggested that the
dividend rate for the quarter be 5 percent instead of 4 percent.
When you made that suggestion and suggested an increase in the
dividend rate for the second quarter of the year 1930 to Mr. Stalker's
bank, did you know that their earnings had fallen off, and they were
not equivalent to 4 percent for the quarter?
Mr. LORD. I would not know whether I knew at that time or not.
Mr. PECORA. Didn't you say
Mr. LORD. I assume if I made that suggestion of an increase, I
assumed the earnings were sufficient to justify it.
Senator COUZENS. In making all these suggestions to your units,
did you just do it arbitrarily, or did you have a record of the
earnings ?
Mr. LORD. We had a record of the earnings, but in this particular case, Senator Couzens, the merger took place in that period
between the two trust companies, and it was a very probable thing
that I had no earnings figures at that time, in view of the details of
consolidation.
Senator COUZENS. SO, notwithstanding the fact that you had no
record of the earnings, you fixed the dividend for them.
Mr. LORD. I suggested a 5-percent rate.
STOCK EXCHANGE PRACTICES
4263
Mr. PECORA. AS a matter of fact, Mr. Stalker's reply to your
letter of June 4, 1930, which has been received in evidence here as
Committee's Exhibit No. 7, tells you, or says specifically [reading]:
However, as you are aware, a dividend of this amount has not been earned.
Does not that refresh your recollection to the point where you can
tell this committee that when you wrote to Mr. Stalker on June 4,
1930, suggesting a dividend rate for the quarter of 5 percent, that
you knew tlie earnings did not justify it?
Mr. LORD. Not to me; no. May 1 ask this, Mr. Pecora: Do you
know what the earnings were for that 6 months? Do you know
that the board of directors may not have gotten up-to-date earnings
at the time of the declaration of their dividend, and justified it ? I
do not know.
Mr. PECOKA. I simply know what Mr. Stalker, the president of
the bank, knew, and said in his letter to you of June 5, 1930, that
you knew, where he said [reading] :
However, as you are aware, a dividend in this amount has not been earned.
Don't ask me what I know. I know only what the record shows,
and this letter is part of the record, and was addressed to you, and
reminds you of what was apparently a matter of knowledge on your
part at that time, namely, that the dividend of 5 percent had not
been earned. Now you tell us what you know about that, will you?
Mr. LORD. I have no recollection except from the correspondence
that you gave me. I assume that the directors discussed the situation thoroughly, and in their judgment felt if safe and proper to
declare that dividend, or they would not have done it.
Mr. PECORA. DO you persist in saying that, Mr. Lord, in the light
of what Mr. Stalker wrote to you under date of June 5, 1930?
Mr. LORD. I do not declare dividends. I was one director out of
50 or 60.
Mr. PECORA. We know you had no legal power to declare the dividends, but we also know that you were the president of the group
which owned these banks, controlled the designations of members of
the board, and had effected an arrangement whereby persons becoming members of the board entered into an agreement to exchange,
upon the termination of th&ir membership upon the board, their
qualifying shares for stock of the group. We know that, and so do
you, do you not?
Mr. LORD. Surely.
Mr. PECORA. NOW, Mr. Lord, I show you what purports to be a
photostatic reproduction of a letter addressed by you to Mr. Henry
H. Sanger, president of the National Bank of Commerce, of Detroit,
Mich., under date of March 4, 1930. Will you look at it and
tell us if you recognize it to be a true and correct copy of a letter
sent by you to Mr. Sanger on that date ?
Mr. LORD. I think so; yes, sir.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted.
(The document referred to, letter, March 4, 1930, Lord to Sanger,
was received in evidence, marked " Committee Exhibit No. 1 1 " , December 19, 1933, and the same was subsequently read into the record
by Mr. Pecora.)
4264
STOCK EXCHANGE PRACTICES
Mr. PECORA. The letter which is received in evidence and marked
Committee's Exhibit No. 11 of this date reads as follows [reading] :
MABOH 4,
1930.
Mr. HENRY H. SANGEB,
President National Bank of Commerce,
Detroit, Michigan,
DEAR ME. SANGER: TO provide the dividend requirements of the Guardian
Detroit Union Group, Inc., on the basis of an annual disbursement of $3.20
per share, the dividend should be declared at the March meeting of your Board
of Directors. I would suggest, therefore,, that it would be in order for your
board to declare a dividend of 5 percent for this quarter. This dividend should
be payable not later than March 27th to stockholders of record March 17th, and
a check to cover the dividend on the shares standing in the name of Guardian
Detroit Union Group, Inc., as well as the shares standing in the names of your
directors, should be in the hands of Mr. B. K. Patterson, Treasurer, Penobscot
Bldg., Detroit, on that date or on the day following. Your proportionate share
of the expenses of the Group Company, incurred on account of services rendered
by that company, will be figured and a memorandum sent you at a later date
Please be good enough to promptly confirm this arrangement and advise me
upon the declaration of your dividend.
Very truly yours,
, President.
And that is signed by you as president. Do you know whether
Mr. Sanger, upon the receipt of this letter just received in evidence,
made any protest or made any suggestions to you with regard to
your suggested dividend rate for the quarter of 5 percent?
Mr. LORD. I do not recall what he replied to that.
Mr. PECORA. AS possibly serving to refresh your recollection on
that, I show you what purports to be a photostatic copy of a letter
addressed to you by Mr. Sanger under date of March 11,1930. Will
you be good enough to look at it and tell me if you recognize it to
be a true and correct copy of such a letter received by you?
Mr. LORD. I assume so.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted.
(The document referred to, letter, March 11,1930, Sanger to Lord,
was received in evidence, marked " Committee's Exhibit No. 12,
December 19, 1933, and the same was subsequently read into the
record by Mr. Pecora.)
The CHAIRMAN. DO I understand, Mr. Lord, that the directors
themselves did not receive any dividends?
Mr. PECORA. They had assigned them to the Group.
Mr. LORD. They had assigned the dividends of the unit to the
Group. They did receive dividends.
The CHAIRMAN. The dividends payable on their stock went to the
Group?
Mr. LORD. Yes; and in turn they were to receive the dividend
from such Group stock as would have been exchanged if an exchange
had been made.
Mr. PECORA. That was part and parcel of the agreement referred
to this morning?
Mr. LORD. I t is in the record.
Mr. PECORA. The letter just offered and received in evidence, and
marked " Committee's Exhibit No. 12 " of this date, reads as follows. I t is on the letterhead of the National Bank of Commerce
of Detroit [reading]:
STOCK EXCHANGE PBACTICES
4265
MAKCH 11, 1930.
Mr. R. O. LOBD,
President Guardian Detroit Union Group,
Detroit.
DEAB MB. LORD : Your letter of March 14, suggesting that the Board of Directors of the National Bank of Commerce declare a quarterly dividend of 5
percent, at $250,000, was submitted to our Board meeting today.
In view of the fact that our earnings for the present quarter, from present
indications, will little more than cover our regular dividend of 4 percent, they
felt that only our regular dividend should be declared for this quarter. However, if this will upset your calculation to pay the regular quarterly dividend
of 80 cents a share on the Group stock, they will be glad to consider the
declaration of an additional 1 percent at the next meeting of our Board,
March 18th.
Will you please let me have your views in the matter?
Very truly yours,
H. H. SANGER, President.
When you received this letter from Mr. Sanger, do you recall what
}^ou did about it?
Mr. LORD. NO ; I do not recall, Mr. Pecora.
Mr. PECORA. Perhaps this letter, a photostatic copy of which I
now show you, will serve to refresh your recollection. Will you
please look at it and tell me if you recognize it to be a true and correct
copy of a letter sent by you to Mr. Sagger in reply to his letter of
March 11, 1930?
Mr. LORD. I assume so.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted.
(The document referred to, letter, March 13,1920, Lord to Sanger,
was received in evidence, marked " Committee Exhibit No. 13 ", Dec.
19, 1933, and the same was subsequently read into the record by
Mr. Pecora.)
Mr. PECORA. The letter just received in evidence as committee's
exhibit no. 13 of this date is as follows [reading] :
MAKCH 13, 1930.
Mr. H. H. SANGER,
President, the National Bank of Commerce,
Detroit, Mich.
DEAR MB. SANGER: I have your letter of the 11th advising ine of the action
of your board in declaring a regular 4 percent dividend instead of 5 percent as
suggested. We are counting on the 5 percent dividend and I hope, therefore, you
will have your board declare an additional one percent at the next meeting on
March 18. The fact that they are declaring a dividend at this rate for the
present quarter does not necessarily mean that the same rate will continue
throughout the year. I think each situation will have to be studied to determine
what dividend it is advisable to declare for each auarter.
Trusting the suggestion is satisfactory, I am,
Very truly yours,
, President.
Signed by yourself as president.
Does not the evidence an instance where you did not abide by
the independent judgment of the board of directors of a unit bank
with regard to the declaration of a dividend ?
Mr. LORD. I gather that Mr. Sanger's letter in regard to the extra
dividend of the bank represented the board's decision and judgment
on it, don't you?
Mr. PECORA. N O ; SO long as you ask me, I emphatically do not.
Mr. LORD. Well, I do.
4266
STOCK EXCHANGE PRACTICES
Mr. PECORA. Let me have that letter of Mr. Sanger's, and we will
analyze it a little. The letter I refer to is a letter of Mr. Sanger to
you, under date of March 11, 1930, which specifically tells you this
treading] :
In view of the fact that our earnings for the present quarter, from present
indications, will little more than cover our regular dividend of 4 percent, they
felt that only our regular dividend should be declared for this quarter.
Now Mr. Lord, do you think that when Mr. Sanger wrote you to
that effect, that he was telling you that his board was favorable to
a 5 percent rate for the quarter?
Mr. LORD. Would you please read the next sentence ?
Mr. PECORA. Will you answer my question based upon that part
of the letter?
Mr. LORD. I think you have to consider the letter as a whole.
Mr. PECORA. I will read the next sentence.
Mr. LORD. I do not recall the exact wording. You may be right.
Mr. PECORA (continuing reading):
Howeverr if this will upset your calculation to pay the regular quarterly
dividend of 80 cents a share on the Group stock, they will be glad to consider
the declaration of an additional 1 percent at the next meeting of our board,
March 18th.
Will you please let me have your views in the matter?
Do you think that that represents the judgment of Mr. Sanger
to you that his board was willing, on their independent judgment,
to declare a quarterly dividend at the rate 5 percent, as suggested
by you ?
'Mr. LORD. I think it represents their willingness to consider the
extra 1 percent at the next meeting, just as Mr. Sanger says.
Mr. PECORA. It represents their willingness after having pointed
out to you the unwisdom of declaring a quarterly dividend of 5
percent, to yield to the command from the throne, does it not ?
Mr. liORD. I would not think so.
Mr. PECORA. It does to me; so long as you asked me before, that
is my view of it.
After you were indulgent enough to respond to Mr. Sanger's suggestion for your views in the matter, did you send him your views?
Or, rather, you did send him your views under date of March 13,
by the letter marked in evidence as Committee's Exhibit No. 13.
What did Mr. Sanger's board do ?
Mr. LORD. I do not recall, sir.
Mr. PECORA. Will you look at this photostatic copy of what purports to be a letter sent to you by Mr. Sanger and see if that enlightens or refreshes your recollection as to what they did ? Is that
a true copy of a letter you received from Mr. Sanger 1
Mr. LORD. SO far as I know, yes.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted.
(The document referred to, letter, March 18, 1930, Sanger to Lord,
was received in evidence, marked "Committee's Exhibit No. 14",
Dec. 19, 1933, and the same was subsequently read into the record
by Mr. Pecora.)
Mr. PECORA. The letter received in evidence and marked " Committee's Exhibit No. 14 " of this date is on the letterhead of the National Bank of Commerce of Detroit and reads as follows [reading] :
STOCK EXCHANGE PRACTICES
4267
MARCH 18,
1930.
Mr. R. O. LOBD,
President Guardian Detroit Union Qrdup, Inc.,
Detroit.
DEAR BOB :
Before that he addressed you as " Dear Mr. Lord."
[Continuing reading:]
DEAR BOB: Your letter of March 13, in re extra dividend, was submitted to
our directors at a meeting held today, and an extra dividend of one percent
or $50,000 was declared payable March 27th, out of undivided profits.
Very truly yours,
H. H. SANGEB, President.
Mr. Lord, does this correspondence indicate that Mr. Sanger and
his board of directors were exercising their free, independent, and
untrammeled judgment about the dividend?
Mr. LORD. I would think so, knowing that board of directors,
Mr. Pecora.
Mr. PECOEA. Who were the members of the board, knowing them
as you did?
Mr. LORD. Just a minute. I will get them for you. [After examining papers.] Do you want a list of the board of directors of the
National Bank of Commerce at that time ?
Mr. PECORA. Yes.
Mr. LORD. Frank W. Blair, Harry C. Bulkley, Harry S. Covington, Harry V. Earhart, George E. Fink, Harry S. Finkenstaedt,
Burch Foraker, Edsel B. Ford, John H. French, George K. Hebb,
Carlton M. Higby, Charles H. Hodges, James Inglis, James B.
Jones, Samuel E. Kingston, Charles A. Kinney, George H. Klein,
Charles F. Lambert, Dwight B. Lee, myself, Alving Macauly, Francis C. McMath, Charles S. Mott, Edwin H. Nelson, John E. Eussell,
Murray W. Sayles, Henry H. Sanger, Allan Shelden, Hal H. Smith,
Oscar W. Smith, John N. Stalker, John M. Toolin, Carl V. Tuttle,
Charles B. Warren, L. A. Young.
Mr. PECORA. HQW many of those directors were also directors at
that time of the group—quite a few of them, weren't there?
Mr. LORD. Yes; quite a few, sir.
Mr. PECORA. Were all of these directors also stockholders of the
group?
Mr. LORD. They had to be.
Mr. PECORA. Were they substantial stockholders?
Mr. LORD. Some of them.
Mr. PECORA. Which of them were substantial stockholders ?
Mr. LORD. Mr. Mott was probably the most substantial and Mr.
Edsel B. Ford, both of whom were directors.
Mr. PECORA. HOW about Mr. Blair?
Mr. LORD. Mr. Blair was a fairly substantial stockholder. I do
not know what holdings he had at the time.
The CHAIRMAN. The committee will take a recess until 10:30 in
the morning.
(Whereupon, at 4:15 p.m., Tuesday, Dec. 19, 1933, an adjournment was taken until tomorrow, Wednesday, Dec. 20, 1933, at
10:30 a.m.)
4268
STOCK EXCHANGE PRACTICES
COMMITTEE EXHIBIT NO. 1, DECEMBER 19, 1933
ABTICLES OF ASSOCIATION OP GUARDIAN DETROIT GKOUP, INC.
We, the undersigned, desiring to become incorporated under the provisions
of Act No. 84 of the Public Acts of 1921, entitled "An Act to provide for the
organization, regulation, and classification of domestic corporations; to prescribe their rights, powers, privileges, and immunities, to prescribe the conditions upon which corporations may exercise their franchise", etc., do hereby
make, execute, and adopt the following articles of association, to wit:
ARTICLEI
The name assumed by this association, and by which it shall be known in
law is Guardian Detroit Group, Inc.
ARTICLE II
This corporation intends to proceed under Section 1, Chapter 1, Part 1.
of the above act.
ARTICLE III
The purpose or purposes of this corporation are as follows: To acquire,
own, hold, dispose of, and deal in stocks, bonds, and other evidences of indebtedness and securities including those issued by any corporation, domestic or
foreign, and to possess and exercise in respect thereto all the rights., powers,
and privileges of individual owners thereof including the right to vote the same
and to execute proxies therefor.
ARTICLE IV
Principal place where company will operate is Detroit, in the County of
Wayne, State of Michigan.
Address of main office in Michigan is Penobscot Building, Detroit.
ARTICLE v
The total capital stock authorized is Seven Million Five Hundred Thousand
Dollars.
The amount subscribed is One Thousand Dollars.
The amount paid in is One Thousand Dollars.
The number of shares of common stock is 150,000 of the par value of Fifty
Dollars each.
Amount of common stock, paid for in casb is One Thousand Dollars.
The amount of actual capital, in cash or property or both, which this corporation owned and possessed at the time of executing these articles is One
Thousand Dollars.
ARTICLE VI
The term of this corporation is fixed at Thirty years.
ARTICLE VII
Names of stockholders, their residences, and shares subscribed by each are:
Henry E. Bodman, 20 McKinley Place, Grosse Pte. Farms, Mich
1
Edsel B. Ford, 100 Lake Shore Road, Grosse Pte. Shores, Mich.
1
John C. Grier, Jr., 8100 East Jefferson Avenue, Detroit, Mich
1
Sherwin A. Hill, Northville, Mich
1
Ernest Kanzler, 2501 Iroquois Avenue, Detroit, Mich
1
Robert O. Lord, 17 McKinley Place, Grosse Pte. Farms, Mich
12
Fred T. Murphy, 17620 East Jefferson Avenue, Grosse Pointe, Mich
1
Phelps Newberry, 36 Cloverly Road, Grosse Pte. Farms, Mich
1
James L. Walsh, 8161 East Jefferson Avenue, Detroit Mich
1
ARTICLE VIII
The officers and directors for the first year of the corporation's existence
are as follows:
STOCK EXCHANGE PRACTICES
4269
DIRECTORS
Henry E. Bodman, Penobscot Building, Detroit, Mich.
Bdsel B. Ford, Ford Motor Co., Dearborn, Mich.
John C. Grier, Jr., Penobscot Building, Detroit, Mich.
Sherwin A. Hill, Union Trust Building, Detroit, Mich.
Ernest Kanzler, Penobscot Building, Detroit, Mich.
Robert O. Lord, Penobscot Building, Detroit, Mich.
Fred T. Murphy, Penobscot Building, Detroit, Mich.
Phelps Newberry, Penobscot Building, Detroit, Mich.
James L. Walsh, Penobscot Building, Detroit, Mich.
OFFICERS
Henry E. Bodman, chairman of the board, Penobscot Building, Detroit, Mich.
Robert O. Lord, president, Penobscot Building, Detroit, Mich.
John C. Grier, Jr., vice president, Penobscot Building, Detroit, Mich.
James L. Walsh, vice president, Penobscot Building, Detroit, Mich.
Phelps Newberry, vice president and treasurer, Penobscot Building, Detroit,
Mich.
Lewis K. Walker, secretary, Penobscot Building, Detroit, Mich.
Arthur H. Vogt, assistant treasurer, Penobscot Building, Detroit, Mich.
Robert C. Lehman, assistant secretary, Penobscot Building, Detroit, Mich.
ARTICLE LX
The holders of the stock of this corporation shall be individually and
severally liable (in proportion to the number of shares of its stock held by
them respectively) for any statutory liability imposed upon this corporation
by reason of its ownership of shares of the capital stock of any bank or
trust company.
This corporation reserves and shall have the right from time to time
upon the affirmative vote of three fourths of its directors to issue and dispose
of all or any of its unissued or increased stock for the purpose of acquiring
stock of banks or trust companies, without offering to the stockholders of
this corporation for subscription any of the stock so to be disposed of.
In witness whereof we, the parties designated as provided by law by the
parties associating, as shown under article VII of these articles, for the
purpose of giving legal effect to these articles, hereunto sign our names this
Oth day of May, A.D. 1920.
HENRY E. BODMAN,
JOHN C. GRIER, Jr.,
ROBERT O. LORD.
STATE OF MICHIGAN,
County of Wayne, ss:
On this 9th day of May, A. D. 1929, before me, a Notary Public in and for
said County personally appeared Henry E. Bodman, John C. Grier, Jr., and
Robert O. Lord known to me to be the persons named in, and who executed
the foregoing instrument, and severally acknowledged that they executed the
same freely and for the intents and purposes therein mentioned.
JOSEPH F. WEBB, Jr.,
Notary Public, Wayne County, Michigan.
My commission expires November 19, 1929.
This is to certify that at the organization meeting of the incorporators of
Guardian Detroit Group, Inc., a corporation to be formed under Act 84, Public
Acts of 1921, of the State of Michigan, as amended, held this 9th day of May,
1929, the following resolution was unanimously adopted and that the undersigned was elected to act and did act as Secretary of said meeting:
" Resolved, That Henry E. Bodman, John C. Grier, Jr., and Robert O. Lord
be, and they are hereby, designated to sign and acknowledge the Articles of
Association of Guardian Detroit Group, Inc., for themselves and for the
remainder of the incorporators of said corporation.
" JOHN O. GRIER, Jr.,
" Secretary of the Organization Meeting of QuarWkm Detroit Group, Inc."
STOCK EXCHANGE PRACTICES
WEDNESDAY, DECEMBER 20, 1933
UNITED STATES SENATE,
SUBCOMMITTEE OF THE COMMITTEE ON
BANKING AND CURRENCY,
Washington, D.G.
The subcommittee met at 10:30 a.m., pursuant to adjournment
on yesterday, in Eoom No. 301 of the Senate Office Building, Senator Duncan U. Fletcher presiding.
Present: Senators Fletcher (chairman), Gore (substitute for
Barkley), Adams (proxy for Costigan), Norbeck, Couzens, and
Townsend.
Present also: Ferdinand Pecora, counsel to the committee; Julius
Silver and David Saperstein, associate counsel to the committee;
and Frank J. Meehan, statistician to the committee.
The CHAIRMAN. The subcommittee will come to order, please,
You may proceed, Mr. Pecora.
Mr. PECORA. Mr. Lord, you will resume the stand.
Mr. LORD. Yes,
sir.
TESTIMONY OF ROBERT 0. LORD, PENOBSCOT BUILDING,
DETROIT, MICH.—Resumed
Mr. PECORA. Mr. Lord, do you recall a transaction involving the
purchase of a block of about 1,000 shares of the stock of the Grand
Rapids National Bank, in the name of Mr. Joseph H. Brewer ?
Mr. LORD. Very vaguely.
Mr. PECORA. HOW much do you recall of that transaction?
Mr. LORD. Practically nothing, Mr. Pecora.
Mr. PEOORA. DO you recall that there was such a transaction?
Mr. LORD. Not as to the exact number of shares, but that there was
some stock purchased in the name of Mr. Brewer.
Mr. PECORA. What, if anything, did you have to do with that
transaction?
Mr. LORD. I should say very little.
Mr. PECORA. Well, what was that very little?
Mr. LORD. I knew that Mr. Brewer was buying some of the Grand
Rapids National Bank stock.
Mr. PECORA. What did you have to do with it?
Mr. LORD. In what way, Mr. Pecora ?
Mr. PEOORA. In any
way.
Mr. LORD. My recollection is very dim on that transaction, but
it took place, as I recall it, in the summer of 1929. Mr. Brewer was
at that time connected with the Grand Rapids National Bank. He
4271
4272
STOCK EXCHANGE PRACTICES
was very aggressive in the affairs of the bank, very anxious that his
bank should become a member of the Group. And I understood that
he was purchasing some of the stock. My recollection is that the
stock was carried for him by the Guardian Detroit Co.
Mr. PECORA. The Guardian Detroit Co. was the securities affiliate
of the Guardian Detroit Bank, wasn't it?
Mr. LORD. Yes, sir.
Mr. PECORA. And you
were the president, then, of the Guardian
Detroit Bank?
Mr. LORD. It was the security affiliate of the Group. I was then
the president of the bank and also of the Group.
Mr. PECORA. And of the Group also?
Mr. LORD. Yes, sir.
Mr. PECORA. Well
Mr. LORD (continuing).
But (juite inactive in the securities company. I was vice president of it, as I recall it, and inactive.
Mr. PECORA. DO you recall how much was involved in that transaction in the matter of dollars and cents ?
Mr. LORD. NO, sir; I do not.
Mr. PECORA. DO you recall
that it was in excess of the sum of
$850,000?
Mr. LORD. NO; I do not recall any figure at all.
Mr. PECORA. DO you recall the circumstances under which the
Guardian Detroit Co. financed the purchase of that stock for Mr.
Brewer ?
Mr. LORD. Not in detail. I remember they carried it for him.
Mr. PECORA. DO you recall at whose instance Mr. Brewer purchased the stock?
Mr. LORD. I suppose at his own instance. He was a substantial
stockholder at the time in the Grand Rapids National Bank, and I
suppose he wanted to acquire additional stock.
Mr. PECORA. At the time of that transaction was the Grand
Rapids National Bank one of the unit banks of the group?
Mr. LORD. I would say it was in process of negotiation at the
time.
Mr. PECORA. And Mr. Brewer was the president of the Grand
Rapids National Bank?
Mr. LORD. I think he was chairman of the board, but am not
certain. He and Mr. Waters were associated together. Just what
title Mr. Brewer held I do not recall.
Mr. PECORA. But negotiations on behalf of the Group toward acquisition of the Grand Rapids National Bank had progressed to
the point where at about the time of this stock transaction it was
practically assured that the Group would acquire control of the
Grand Rapids National Bank. Is that your recollection?
Mr. LORD. I wouldn't say no, that it was assured, but I ^ould
say it was tending favorably in that direction.
Mr. PECORA. Well, all the plans had been completed but not consummated about that time?
Mr. LORD. I am not certain of that, Mr. Pecora.
Mr. PECORA. DO you recall anything more in connection with that
transaction than you have just now testified to?
STOCK EXCHANGE PRACTICES
4273
Mr. LORD. AS I recall, Mr. Brewer never took up that stock, never
was able to, and never paid for it. It therefore belonged to the
Guardian Detroit Co.
Mr. PECORA. HOW long did the Guardian Detroit Co. carry that
stock for Mr. Brewer?
Mr. LORD. I do not recall.
Mr. PECORA. Was it a period of more than a year or two ?
Mr. LGBD. I do not recall the-length of time.
Mr. PECORA. Who eventually took up the stock?
Mr. LORD. I would think the Guardian Detroit Co. took up the
stock.
Mr. PECORA. And during the time that the Guardian Detroit Co.
carried that stock for Mr. Brewer did Mr. Brewer pay interest on
the loan?
Mr. LORD. I do not know.
Mr. PECORA. DO you recall having had any correspondence with
Mr. Brewer in connection with that transaction?
Mr. LORD. I do not recall any personally; no. I might have had,
but
Mr. PECORA (interposing). What was that?
Mr. LORD. I say I might have had but I do not recall it.
Mr. PECORA. Well, then, possibly for the purpose of refreshing
your recollection, will you look at this paper which I now show you,
and which purports to be a ph6tostatic reproduction of a letter addressed by you, under date of August 24, 1929, to Mr. Joseph H.
Brewer ? Will you look at it and then tell me, first, if you recognize
it as a true and correct copy of such letter ?
Mr. LORD (after reading the photostat). I would say that that is
my letter.
Mr. PECORA. Mr. Chairman, I offer it in evidence, and ask that it
may be made a part of the record.
The CHAIRMAN. Let it be admitted, and the committee reporter
will make it a part of the record.
(The letter dated August 24, 1929, addressed to Joseph H. Brewer
by Robert O. Lord, was marked " Committee Exhibit No. 15, Dec.
20, 1933 ", and will be found immediately following where read by
Mr. Pecora.)
Mr. PECORA. The letter received in evidence as Committee Exhibit
No. 15 of this date, is as follows:
AUGUST 24,
1929.
(Personal)
MB. JOSEPH H. BREWER,
Grand Rapids Trust Buildmo, Grand Rapids, Mich.
DEAR MB. BBEWEB: Understanding that there appears to be a movement on
the part of outsiders to buy a substantial interest in the Grand Rapids National
Bank, and desiring to be of any possible service to Mr. Dudley Waters and his
associates in the bank, we are willing to have you buy for us not to exceed—
That figure is not clear. I do not know whether that is 1,000 or
1,600 shares—
of the stock of the Grand Rapids National Bank, at a price not to exceed $515«
a share.
This stock should be bought by you, issued in your name, and endorsed in
blank and forwarded to us. We will hold the stock, and you may consider this
our commitment for a period of six months from the date of purchase, to return
this stock to you or to your order, at its actual cost to us plus interest at the*
rate of 7% per annum on our investment in the stock.
4274
STOCK EXCHANGE PRACTICES
Please advise me from time,to time as to the amount of stock which ha*
been purchased, and send the stock to the Guardian Detroit Company either
for my attention or for the attention of Mr. John C. Grier, Jr.
Very truly yours.
And it is signed by you as president of the Guardian Detroit
p
Mr. LORD. I do not know whether I signed it as president of the
bank or the Group.
Mr. PECORA. Well, I judge it was of the bank, because the letter
appears to have been written on the letterhead containing in its
upper right-hand corner the printed inscription: " Guardian Detroit
Bank."
Would that indicate that it was written on the letterhead of the
bank and therefore written as the president of the bank?
Mr. LORD. It might have been written on that letterhead. Yes;
it would indicate it, as far as that is concerned.
Mr. PECORA. And that it was written by you in your capacity as
the president of that bank rather than the president of the Group?
Which was it?
Mr. LORD. Well, that would indicate it was written on bank
stationery.
Mr. PECORA. Well, was it a letter that you sent to Mr. Brewer in
your capacity as president of the Guardian Detroit Bank, or is it
your personal recollection that you wrote to him as president of the
Guardian Union Group, Inc. ?
Mr. LORD. Mr. Pecora, without seeing the original I would not
know, because it is quite possible that a carbon of the bank's
stationery might have been used.
Senator ADAMS. YOU just stated a minute ago, if I recall correctly, that your part in the Group was a very inactive part.
Mr. LORD. NO ; in the Guardian Detroit Co., the securities company.
Senator ADAMS. Oh, in the securities company.
Mr. LORD. Yes, sir. The transaction, apparently, was handled entirely through the securities company, and the stock as I recall it was
delivered to the securities company.
Senator ADAMS. YOU were inactive in the securities company?
Mr. LORD. Yes, sir.
Senator ADAMS. Then
the probability would be that you were
acting in your capacity as president of the bank, because of your
inactivity in the affairs of the securities affiliate.
Mr. LORD. Well, the bank did not buy that stock, and therefore I
could not have been acting in my capacity as the president of the
bank.
Senator ADAMS. Well, the letter would indicate some activity along
that line.
Mr. LORD. The bank never did buy * the stock. The stock was
bought by the securities company.
The CHAIRMAN. And the money was furnished actually by the
securities company?
Mr. LORD. Yes, sir.
The CHAIRMAN. And
the stock was turned over to the securities
company?
Mr. LORD. Yes, sir. Neither a national nor a State bank can buy
stock.
STOCK EXCHANGE PRACTICES
4275
Senator ADAMS. Well, we have had a lbt of experience around here
about things it has been said could not be done and yet that were
done.
Mr. LORD. Well, I haven't the books of the securities company, but
I think they will show that the transaction was handled entirely
through the securities company.
Senator ADAMS. All that I am saying is, that because there is a
legal obstacle to it is no reason for saying it was not done, judging
by our experience here.
Mr. PECORA. Mr. Lord, has the reading of this letter awakened in
your mind any additional recollection of the facts respecting this
transaction?
Mr. LORD. NO ; I think not.
Mr. PECORA. Well, on whose initiative was thi^ transaction undertaken, yours or Mr. Brewer's?
Mr. LORD. I would say on,Mr. Brewer's. Mr. Brewer had come
to us, and he was very anxious to have this institution a part of
the Group, and he spoke of
Mr. PECORA (interposing). Was he anxious to have it done, or
were you anxious that it should be done?
Mr. LORD. He approached me first in regard to his bank becoming a member of the Group. I had known Mr. Brewer for 15 or 20
years, when I was with the Harris Trust & Savings Bank of Chicago. We were old friends. He came into my office one day to talk
about his institution, that is, the Grand Eapids National Bank and
the Grand Kapids Trust Co., becoming a member of the Group. He
was very much in favor of group banking, the group-banking idea,
and thought it would be a very fine thing for the State and tor his
institutions.
Mr. PECORA. The Group at that time had been in existence about 3
months, hadn't it ?
Mr. LORD. Approximately; yes, sir.
Mr. PECORA. It was incorporated in May of 1929 ?
Mr. LORD. Yes, sir.
Mr. PECORA. And it
was not,until December 16 of that year that
the Guardian Detroit Group merged with the Union Commerce Corporation, the other bank holding company?
Mr. LORD. That is right.
Mr. PECORA. NOW, you say in this letter addressed by you to Mr.
Brewer:
Understanding that there appears to be a movement on the part of outsiders to buy a substantial interest in the Grand Rapids National Bank, and
desiring to be of any possible service to Mr. Dudley Waters and his associates
in the bank, we are willing to have you buy for us not to exceed
And I do not know whether that is 1,000 or 1,600 shares.
Mr. LORD. I do not recall which.
Mr. PECORA. Continuing, the letter says:
shares of, jfche stock of the Grand Rapids National Bank, at a price not to
exceed $515 a share.
Well, now, from that language, Mr. Lord, it would appear that
the purchase was to be made not in behalf of Mr. Brewer but in
behalf of the gentlemen named, Dudley Waters and certain unnamed
associates of Mr. Waters. Who is Mr. Waters ?
4276
STOCK EXCHANGE PRACTICES
Mr. LORD. Mr. Waters I would say was the executive head of that
bank.
Mr. PECORA. And who were the associates to whom you referred
in that letter?
Mr. LORD. His own officers and directors.
Mr. PECORA. Who were the so-called " outsiders " who had started
a movement to buy a substantial interest in that Grand Rapids National Bank at that time ?
Mr. LORD. My recollection was that there were a lot of sharpshooting brokers in Grand Rapids who were trying to pick up that
stock, and
Mr. PECORA (interposing). Why do you call them " sharp-shooting
brokers"? Because they were trying to pick up the bank's stock.
Wouldn't that description also apply to anyone else trying to pick
up the stock?
Mr. LORD. I did not hear the question.
Mr. PECORA. I say, why do you call them " sharp-shooting brokers ""
simply because they were trying to pick up the bank's stock?
Mr. LORD. Because they had gotten a list of the bank's stockholders, which is always published, and were approaching those
stockholders, endeavoring to buy the stock without telling the individuals that there was a possibility of the bank's becoming a member of the Guardian Group.
Mr. PECORA. Then the purpose of those brokers, as I understand
your answer, was to buy a sufficiently substantial block of the stocky
in the Grand Rapids National Bank, as to, perhaps, put them in a
position where they might prevent your Group from acquiring
control of the bank. Was that it ?
Mr. LORD. NO, I think not. I would say their position was, in
order to scalp the profit on it.
Mr. PECORA. I see. And was it your purpose to have Mr. Waters
and his associates to scalp that profit instead of the sharp-shooting
brokers ?
Mr. LORD. NO. It was not with the idea that they were going to
make a profit. It was with the idea of those gentlemen retaining
their interest in the stock, and in turn retaining their interest in the
Group stock which was exchanged for Grand Rapids National
Bank stock on the basis of actual value, not on the basis of market
value.
Mr. PECORA. The Grand Rapids National Bank had not yet been
acquired by the Group ?
Mr. LORD. The matter was in process of negotiation at that time.
The CHAIRMAN. Did the stock go up after that ?
Mr. LORD. I do not recall. I suppose it did. The whole market
was going up at that time.
The CHAIRMAN. What became of it finally ?
Mr. LORD. May I say this, Mr. Pecora: That both Mr. Brewer
and Mr. Waters, as I think the record will show, had among their
holdings a greater amount of stock in the Guardian Group than
they did 2 or 3 years before. In other words, it wasn't their
idea to acquire that stock at a price and sell out either that stock
or the Group stock at a higher price. Their interest was in remaining in the Guardian Group and continuing as a part of the whole
picture.
STOCK EXCHANGE PBACTICES
4277
Mr. PECORA. In the light of the testimony that you gave yesterday and the exhibits that were introduced into the record while you
were on the stand yesterday, do you still say that the officers and
the board of the Group never attempted to control or dictate the
dividend policy of the unit banks in the Group ?
Mr. LORD. I do, sir. And in that connection may I refer to and
read a portion of the minutes of the Trust Co. meeting at which that
matter of dividends that was discussed on yesterday was taken up
and declared ? Here is a copy of the minutes of the regular meeting
of the board of directors of the Union Guardian Trust Co. held
Wednesday, June 11, 1930, at 12 noon. Here are the directors who
were present:
Frank W. Blair (chairman of the board), Frederic G. Austin,
Paul F. Bagley, Judson Bradway, John A. Bryant, Harry C. Bulkley, Frank Couzens, J. Walter Drake, Charles R. Dunn, John W.
Finkenstaedt, Adolph Finkenstaedt, Burch Foraker, Luman W.
Goodenough, C. H. Haberkorn, Jr., Harley G. Higbie, Sherwin A.
Hill, Charles H. Hodges, Hobart B. Hoyt, James Inglis, Andrew L.
Malott, Francis C. McMath, Fred T. Moran, Charles S. Mott, William K. Muir, Fred T. Murphy, Edwin H. Nelson, Phelps Newberry,
Ransom E. Olds, Joel H. Prescott, George B. Russel, John R.
Russel, Murray W. Sales, Hal H. Smith, John N. Stalker, B. F .
Stephenson, George W. Trendle, Luther S. Trowbridge, Carl B.
Tuttle, Arthur T. Waterfall, Clarkson C. Wormer, Jr.
And here is the. portion
Mr. PECORA (interposing). What was the date of that meeting ?
Mr. LORD. June 11, 1930.
Mr. PECORA. All right.
Mr. LORD. Here is the portion of the minutes relating to the
dividend:
The chairman of the board then made a report with respect to the earnings
and expenses of the Trust Co. and its subsidiaries for the month of May 1930,
and for the 5 months' period ending May 31, 1930, and recommended, in
accordance with the suggestion of the Group, the payment of a quarterly
dividend of 5 percent.
Whereupon, on motion
Mr. PECORA (interposing). Will you repeat that last clause, and
recommended what?
Mr. LORD. It says:
and recommended, in accordance with the suggestion of the Group, payment
of a quarterly dividend of 5 percent.
Whereupon, on motion duly supported and carried, the following resolution
was adopted:
" Resolved, That a dividend of 5 percent on the capital stock of this company
be, and is hereby declared, payable June 27, 1930, to the stockholders of the
company of record at the close of business June 16, 1930."
Now, if I may continue on this subject of the dividend, I have some
information which I think would clarify this whole question which
was discussed here on yesterday. I have some figures here I must
refer to. Take the period of 3 years, 1930, 1931, and 1932: In
1930
Mr. PECORA (interposing). Go ahead. I am listening to you.
Mr. LORD. In 1930 the operating earnings of the banks and the
trust companies were in excess of $5,800,000. The dividends declared
175541—34—PT (
4278
STOCK EXCHANGE PRACTICES
by those units that year were approximately $4,330,000. That is,
tne dividends declared by the units of the Group.
Now, in 1931 the operating earnings of the banks and the trust
companies were $3,887,000 plus, and the dividends declared on the
stock by the units of the Group Co. were $3,171,750. In 1932 the
operating earnings of the banks and the trust companies were
$2,619,000 plus, and dividends were declared that year to the extent
approximately of $662,000, by those banks and trust companies to the
Group Corporation.
Mr. PECORA. That was for the year 1932, was it?
Mr. LORD. Yes; for
1932.
Mr. PECORA. And it was sometime during that period that the
Comptroller of the Currency sent out a request to banks to cut down
on their dividends, to conserve their cash resources as much as possible
in view of the times.
Mr. LORD. Sometime in 1932?
Mr. PECORA. Yes.
Mr. LORD. In the latter
part of 1932 we had very full discussions
with Mr. Layburn, the chief national bank examiner of the district,
as to which bank should or was entitled to declare dividends. That
was gone over very fully, and
Mr. PECORA (interposing). Well, won't you
Mr. LORD (interposing). May I go on with this?
Mr. PECORA. Won't you please answer my question. I did not ask
you about Mr. Layburn. I asked you if it was not true that during
1932 the Comptroller of the Currency sent out a request to banks
to cut down on dividend declarations and conserve cash resources
as much as possible in view of the times.
Mr. LORD. Do you mean a general request?
Mr. PECORA. Yes.
Mr. LORD. I do not recall a request being directed to this bank.
There might have been published an announcement as to dividends,
and the general policy of the Comptroller's Department.
Mr. PECORA. Don't you recall such a request having been brought
to your attention in 1932?
Mr. LORD. I do not.
Mr. PEOORA. We will come to that later. You may now go ahead.
Mr. LORD. Taking the 3-year period, the operating net earnings
were more than $12,300,000 and the dividends declared were about
$8,164,000. In other words, in that period the unit banks and trust
companies declared in the matter of dividends slightly less than two
thirds of their operating net earnings. On yesterday particular stress
was laid
The CHAIRMAN (interposing). About what percent was that?
Mr. LORD. About 66% percent.
The CHAIRMAN. Well, I mean
Mr. LORD (continuing). Or about two thirds of the net earnings.
Mr. PECORA. Let me ask
The CHAIRMAN (continuing). Two thirds of what?
Mr. LORD. Of their operating earnings.
The CHAIRMAN. What percent on the entire capital
dend?
Mr. PECORA. In other words, the rate of dividend.
was that divi-
STOCK EXCHANGE PRACTICES
4279
Mr. LORD. I have not the,various rates, but can figure it out. They
-were at different rates throughout the period.
Senator COTJZENS. The chairman wants to know what percent it
was on the Group stock.
Mr. LORD. I have tried to explain that it was at different rates in
different years, and even in different quarters. In 1930 I think the
rate paid was $3.20 a share on the Group stock. In the two years
following it was gradually cut down.
Mr. PEOORA. And it was of a par value of $20 a share ?
Mr. LORD. Yes, sir. Sixteen percent on the par value of the stock
at the start, and was finally cut down to a very smal} percentage.
Mr. PECORA. GO ahead.
Mr. LORD. On yesterday in our testimony there was particular
stress laid upon the dividends of the Union Guardian Trust Co. and
on the National Bank of Commerce.
I would like to bring out the earnings of those institutions for the
3 years. For the 3-year period the earnings of the Union Guardian
Trust Co. were $1,675,000 plus. The dividends declared in that
period were $1,475,000.
In the case oi the National Bank of Commerce, you will recall there
was a consolidation of the National Bank of Commerce with the
-Guardian Detroit Bank as of December 31, 1931. Therefore it is
necessary, in discussing these dividends and earnings, of course, to
take the consolidated figures. For the 3-year period the consolidated
figures of the institution which finally constituted the Guardian
^National Bank of Commerce, the operating earnings were $5,140,000
plus, whereas the dividends declared during that 3-year period were
only $3,736,800.
Another fact that I would call to the attention of this committee
is that during that 3-year period that we are discussing on the question of dividends, the Group Co. received in dividends from the
bank and trust company units approximately $8,164,000, whereas
during that same period the Group Co. purchased slow or criticized
assets from the units of more than $8,400,000, or more than $200,000
in excess of the dividends paid out by these units to the Group
Corporation.
In addition to that, I want to refer to my statement of yesterday
and state that during that same period, or approximately the same
period, if we include the fall and winter of 1929, the big stockholders
who you might say were benefited by these dividends, contributed
for the protection of the despositors, as I figure out the amount, more
than $12,000,000 of their own resources for the protection of the
depositors; and on top of that those same stockholders took out of
their own pockets $15,0000,000 more for the protection of the whole
situation in Detroit.
The CHAIRMAN. When was that?
Mr. LORD. In that 3-year period. There was a total of $27,000,000
out of the personal resources of those stockholders.
The CHAIRMAN. And that extended over the whole 3 years?
Mr. LORD. It extended over the whole 3 years.
The CHAIRMAN. When did the bank troubles begin? When did
the run begin on your bank?
4280
STOCK EXCHANGE PRACTICES
Mr. LORD. Senator Fletcher, I should say that the bank troubles
in Detroit began at the time that the Detroit banks, in order to
protect 150,000 depositors in the American State Bank, assumed the
deposit liabilities of that bank.
The CHAIRMAN. When was that?
Mr. LORD. My recollection is that it was in the winter of 1931*
I t would be either 1930 or 1931. The clearing-house banks in Detroit at that time, perhaps foolishly if we had realized the trend of
the depression, the terrific velocity of the depression—perhaps we
would and should have let that bank go; but in the clearing-house
meeting, after full discussion, it was decided by these banks that
the thing to do for those 150,000 depositors, for the other banks
in Detroit was to assume those deposit liabilities, which we did. As I
recall it, the deposits in the American State Bank at that time were
$30,000,000 odd. I have not the figure definitely in mind. But it
was very largely a savings bank with branches throughout the city
of Detroit, with workers' funds in it, and we felt that it was a
very serious matter to let that bank go down.
The CHAIRMAN. Had there been any run started on that bank?
Mr. LORD. There certainly, had, and it finally reached the point that
the banks in town bought whatever good assets they could find to protect the bank. But the velocity of the run was so serious that it
was absolutely necessary for the banks to assume that liability
unless the American State Bank was to be closed.
The CHAIRMAN. YOU do not remember whether that was in 1930
or 1931?
Mr. LORD. May I refer to a paper?
The CHAIRMAN. Yes.
Mr. LORD (after referring to a paper). I t was March 1931.
The CHAIRMAN. That is when the real trouble began ?
Mr. LORD. That is when the real trouble began. There had
been
seepage of deposits in the Michigan banks.
Mr. PECORA. It began to become acute about that time ?
Mr. LORD. I t began to become very acute.
The CHAIRMAN. Were the unit banks involved at the same time ?
Mr. LORD. Throughout the State ?
The CHAIRMAN. Yes.
Mr. LORD. NO, sir; oh, no.
The CHAIRMAN. They had no trouble then ?
Mr. LORD. NO ; except the seepage due to the
depression; but there
were no active runs. Following that, a few months later—well, to
take the Detroit situation alone, there were a number of private
banks in Detroit, particularly Polish banks, in Hamtramck. I believe there were 11 of them. All of them closed their doors. Hamtramck is very largely a Polish district, and you know what that
class of depositors will do to a bank when they want their money.
They will just come and get it.
In the summer, as I recall it—I think it was 1931—there were
3 or 4 banks that failed in Toledo. My recollection is that the
deposits involved in those three Toledo bank failures totaled approximately $75,000,000. We used to keep for our own information
a record of the Postal Savings deposits in Detroit to watch the
trend of the deposit situation. Normally the deposits in Postal
STOCK EXCHANGE PRACTICES
4281
Savings in Detroit used to run about $7,500 a day. Due to these
Toledo bank failures, due to the local situation, and due to the surrounding situation in the outlying districts of Detroit and throughout the State, with all of these bank failures, there were days when
those Postal Savings deposits reached nearly $30.0,000. So you can
:see the trend of the withdrawal of deposits from the bigger Detroit
banks. The figures that I think I gave you yesterday showing the
•decrease in deposits from the peak of $420,000,000 plus to whatever
it was when the bank holiday came—my recollection is about $275,000,000 or $285,000,000—that decrease was the result of all these bank
troubles and of the depression and of the public fear and unrest.
That is the situation that we faced in Detroit.
Now, to continue about this question of dividends. Perhaps we
•should not have declared two thirds of the operating earnings out
in dividends. Perhaps we should have paid half of that. Perhaps
we should have paid no dividens; but at the time the action was
taken it was taken after full consideration, after study of the situation ; it was taken at a time when the Administration and when the
business leaders of the country were urging corporations to continue
dividends in order to keep up the buying power of the Nation, to
•create employment, and to help the worker. Perhaps we were mistaken. I think we were, if our foresight had been as good as our
hindsight. If we had realized that the depression was to continue
for the time it has, I think we would have said, right off the bat,
"" No more dividends until the depression is over." But when the
action was taken, it was taken after careful consideration and it
seemed the wise thing to do.
Mr. PECORA. In other words, you thought that prosperity was just
around the corner?
Mr. LORD. They said so in the paper about every 2 days.
Mr. PECORA. But you had no idea how far from your position that
corner was?
Mr. LORD. NO ; and no one else did.
Mr. PECORA. YOU assumed it was quite near, from your dividend
policy?
Mr. LORD. We assumed and hoped it was quite near. We were
told it was quite near.
Mr. PECORA. YOU have been good enough to tell this committee
that during the years 1930,1931, and 1932 the Group purchased from
various of its unit banks slow or doubtful assets of an aggregate
value of over $8,000,000?
Mr. LORD. Yes, sir.
Mr. PECORA. From
what banks were those assets purchased by
the Group?
Mr. LORD. Mr. Pecora, a record given to me shows—do you want
the trust companies also?
Mr. PECORA. Yes.
Mr. LORD. Union Guardian Trust Co., $7,500,000.
Mr. PECORA. When was that done?
Mr. LORD. That was done in two pieces: At the
end of 1931,
$4,000,000, if my recollection is correct; and at the end of 1932,
$3,500,000.
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STOCK EXCHANGE PRACTICES
The CHAIRMAN. What does that refer to now—the purchase of
assets ?
Mr. LORD. The purchase at the carrying value on the books of the
institution of slow and doubtful assets by the Group.
The CHAIRMAN. Were they turned over to the Group ?
Mr. LORD. Yes.
The. CHAIRMAN. And that was done to help the trust companies ?
Mr. LORD. TO help the institution; yes, sir.
Mr. PECORA. During those 2 years of 1931 and 1932 what dividends,,
if any, were declared by the Union Guardian Trust Co. ?
Mr. LORD. I am not sure I have those figures, Mr. Pecora.
Mr. PECORA. Well, perhaps I can give you those figures
Mr. LORD. Yes; I have them here. In 1931 and 1932, you say?
Mr. PECORA. Well, take 1930, also.
Mr. LORD. In 1930 the approximate dividend of the Union Guardian Trust Co. was $925,000. In 1931, $500,000; in 1932, $50,000.
The CHAIRMAN. I would like to understand that a little better*
Suppose that I am a stockholder in that bank. You tell me the total
dividends are so many hundreds thousands of dollars. What did the
stockholders get? What was the rate percent?
Mr. LORD. There was $5,000,000 of capital stock of the Union
Guardian Trust Co. All of that capital stock, except the directors'"
qualifying shares, was owned by the Group Co. Had you been the
Group Co. owning that capital stock, your rate of dividend in 1930
would have been 18.5 percent. In 1931 it would have been 10 percent. In 1932 it would have been 1 percent. Does that answer your
question?
The CHAIRMAN. Yes; that is what I wanted.
Mr. PECORA. NOW, from what other banks in the Group did the
Group purchase slow and doubtful assets during those 3 years?
Mr. LORD. The City National Bank & Trust Co. of Battle Creek,
$198,068.93. Does that answer your question?
Mr. PECORA. Yes.
Mr. LORD. Shall I continue with the purchase of
Mr. PECORA. Yes.
Mr. LORD. The National Bank of Ionia
Mr. PECORA. A S you give the names of the banks
the assets?
from which the
group purchased slow and doubtful assets, will you also give the
dividends paid during those years in which the purchases were
made?
Mr. LORD. City National Bank & Trust Co.—may I find out just
when those purchases were made? [After conferring.] We know
that the purchases were made in 1931 and 1932.
Mr. PECORA. I S that the Battle Creek City National Bank & Trust
Co.?
Mr. LORD. Yes, sir. This memorandum here [indicating] shows
that the purchase from the City National Bank & Trust Co. of
Battle Creek was January 8, 1932. In 1932 the City National Bank
& Trust Co. of Battle Creek paid no dividends.
Mr. PECORA. What dividends had they paid for the year preceding,
that is, the year 1931?
Mr. LORD.' They paid $24,422.20.
Mr. PECORA. IBepresenting what rate of dividend on the par
capital stock?
STOCK EXCHANGE PEACTICES
4283
Mr. LORD. I will have to get a report and find out what the
capital stock was at that time. I think it was $500,000 capital. I
will have to check it. [After referring to memoranda.] The capital
stock of the City National Bank & Trust Co. of Battle Creek on
December 31, 1931, was $600,000. Therefore the dividend amounted
to approximately 4 percent.
The next purchase was National Bank of Ionia, made on January
11,1932, $149,468.90. The National Bank of Ionia paid no dividends
either in 1931 or 1932.
The next purchase was City National Bank & Trust Co. of Niles,.
$148,491.18, on January 8, 1932. In 1932 the City National Bank
& Trust Co. of Niles paid no dividends.
Senator COTJZENS. What did they pay in 1931 ?
Mr. LORD. Three thousand seven hundred and fifty dollars, or at
the rate of—they had a capital of $150,000 on December 1, 1931—
$3,750 would be about 2% percent, I believe.
The Guardian Bank of Dearborn. The purchase of those assets
was made December 29, 1931, just before the close of the year.
The Guardian Bank of Dearborn in 1932 paid $2,500 in dividends;
in 1931, $25,997.50; and the capital stock on December 31, 1931, was
$400,000. That meant about six and a fraction percent dividend in
1931 and a fraction of 1 percent in 1932.
Mr. PECORA. What was the amount of the take-out of doubtful
assets ?
Mr. LORD. The Guardian Bank of Dearborn, from this record
given me, shows $130,646.79.
The Guardian Bank of Grosse Pointe—the take-out was made on
December 31, 1931, amounting to $99,590.18. The Guardian Bank
of Grosse Pointe paid no dividends either in 1932 or 1931.
The next item is Grand Rapids National Bank. The take-out was
on December 30, 1931. The amount reported to me was $92,353.04.
The Grand Rapids National Bank paid $25,000 in dividends in
1932 and $99,837.50 in 1931. It had a capital stock at the close of
December 1931 of $1,000,000.
In other words, they paid 2y2 percent in 1932 and slightly under
10 percent in 1931.
Mr. PECORA. And also, in other words, in 1931 the Grand Rapids
National Bank paid out in dividends $99,000, whereas at the end of
that year the Group found it necessary to take over slow and doubtful assets from that bank in the sum of $92,000 and odd?
Mr. LORD. Yes.
Mr. PECORA. It
is true, is it not, that the Group owned all of the
capital stock of the Grand Rapids National Bank?
Mr. LORD. Except directors' qualifying shares; yes, sir.
Mr. PECORA. AS to which the Group had an agreement with the
directors who held those qualifying shares to exchange them for
shares of the Group ?
Mr. LORD. When they ceased to be directors. Mr. Pecora, you say
" necessary to take out." I cannot answer that question.
Mr. PECORA. I assumed it was necessary.
Mr. LORD. Advisable; certainly.
Mr. PECORA. Because it was done ?
Mr. LORD. I t was advisable or it would not have been done.
4284
STOCK EXCHANGE PRACTICES
Mr. PECORA. Well, call it advisable.
Mr. LORD. The last record of purchases of assets was the Guardian
Bank of Trenton. That was on December 29, 1931. It amounted to
$78,090.90. The Guardian Bank of Trenton paid no dividends either
in 1931 or 1932.
Mr. PECORA. Does that complete the list ?
Mr. LORD. That completes the list, Mr. Pecora.
The CHAIRMAN. What was your idea, Mr. Lord, in purchasing
stock of these banks and taking them over when they were not
paying any dividends at the time?
Mr. LORD. They were paying dividends, sir.
The CHAIRMAN. YOU just said they did not pay any for the year
you bought them.
Mr. LORD. That was after we bought them. Senator Fletcher,
all of the capital stock of the unit banks of the Group had been
acquired by the first of May, I should say, of 1930, and those banks
that were purchased were, I think, without exception, regular dividend payers—certainly the older banks for quite a period of years.
The. only bank that was added to the Group after April 1930 or
May 1930, whatever the final date was, was the Guardian Bank of
Royal Oak, which we organized out of the Group funds without
issuing any stock. We put $175,000 into that capital structure to
put a bank in a community of 25,000 people that had not had a
bank for two years. There were no banking facilities there. There
had been three banks in Royal Oak, with total deposits at the time
of something over $11,000,000, as I recall it. They were all gone.
There were no banking facilities at all in Royal Oak; and the people
there, some of the prominent business men, urged us continuously
to start a bank, which we finally did. That bank is a 100 percent
open and going great guns.
The CHAIRMAN. It seems that some of these banks which you
bought in 19S0 paid no dividends in 1931.
Mr. LORD. Correct.
The CHAIRMAN. What was the occasion for the banks dropping
off—the overhead increasing?
Mr. LORD. NO, not overhead increasing. It was a case of the depression and the business situation, Senator.
The CHAIRMAN. I would like to get clear, for my own information,
this point. Perhaps I am stupid about it. But suppose I owned
stock, say, 1,000 shares, in one of those unit banks and the Group
suggested to that unit bank that it declare a dividend of 5 percent,
and it declared that dividend of 5 percent. I own 1,000 shares as a
director of the bank. That dividend does not come to me, but it
goes to the Group, as I understand. I hold stock of the Group. I
have to have that, do I not;
Mr. LORD. AS a director in one of the unit banks you own 10 shares
of the par value of $100 each.
Mr. PECORA. In other words, the minimum amount required by
the law?
Mr. LORD. Yes, sir.
The CHAIRMAN. I understand
declared a 5 percent dividend?
that. What would I receive if you
STOCK EXCHANGE PRACTICES
4285
Mr. LORD. YOU would receive the dividend that you would have
gotten in the ownership of Group shares if you were not a director
in that bank.
Mr. PECORA. In other words, the dividend on the stock of the bank
which the director had to qualify would not go to that director, but
would go to the Group ?
Mr. LORD. Because the director had assigned those dividends.
Mr. PECORA. And in return for that the Group would, upon the
declaration of its dividends, pay over to that director the amount
of dividend that he would be entitled to receive if he had at that
time the shares of Group stock taken on some basis of exchange, that
he would be entitled to receive for the bank stock upon the termination of his directorship ?
Mr. LORD. That is correct.
The CHAIRMAN. That is rather involved, to me; but as a practical
illustration tell me what dividend I would get if I had a thousand
shares.
Mr. LORD. It would depend upon what bank and the basis of exchange for the shares of that bank for Group stock, Senator. It
was different depending upon the appraised value of those shares.
The CHAIRMAN. What I am trying to> get at is this. As a director
of the Group bank declaring a dividend of 5 percent I would be
entitled to $50 dividend. But that does not come to me; that goes
to the Group. I get the dividend of the Group from the stock that
I own in that Group. What do I actually get out of that dividend?
Mr. LORD. We would have to take a particular instance and figure
it out. I will be glad to do it for you if you want me to.
Senator COUZENS. AS a matter of fact, you might not get anything
if the Group did not pay.
The CHAIRMAN. The Group was paying 3 percent, was it not?
Mr. LORD. Sixteen percent.
Mr. PECORA. $3.20 on the par value, which was $20 a share, which
would be at the rate of about 16 percent per annum.
The CHAIRMAN. In other words, a director would get a certain
dividend, a certain percent on his investment, if he got the dividend
as a director of the bank, based on the declaration of dividends there.
But he would get more if he took his dividend from the Group stock?
Mr. LORD. He might, or he might get less. Let us take perhaps
the simplest instance. The old units of the Guardian Detroit Group,
that is, the so-called " unified stock " of the Guardian Detroit Bank,
were exchanged for Guardian Group stock on the basis of five for
one. The old stock was $100 par and the Guardian Group stock
was $20 par. So you had exactly the same aggregate par value*
Now, if the Guardian Detroit Bank had declared a 10 percent dividend on its stock, that 10 percent dividend would go to the Group
Co. Had you retained your old Guardian Detroit unit stock you
would have gotten that 10 percent. The Group Co. itself, by the
action of its own board, might declare that full 10 percent in dividends and might declare only 5 percent in dividends on your $20
par shares. I t depended on whatever the Group directors declared
out.
Does that clarify it a little bit?
4286
STOCK EXCHANGE PEACTICES
The CHAIRMAN. At $3 a share you would get more dividend from
the Group than you would from the bank?
Mr. LORD. On the basis of par value, if all that the Guardian
Detroit Bank declared into the Group was declared on the Group
stock also, your basis of percentage on your par value of that stock
would have been exactly the same, because you had five shares at
$20 par value in exchange for one share at $100.
The CHAIRMAN. I understand.
Mr. PECORA. Mr. Lord, Mr. A. A. F. Maxwell was secretary of the
Group in 1931, was he not?
Mr. LORD. He was secretary at one time. When he resigned as
secretary I do not recall.
Mr. PECORA. And as such secretary did he from time to time send
letters to the executives of different bank units of the Group with
regard to the declaration of dividends by such bank units?
Mr. LORD. He might have.
Mr. PECORA. DO you know of instances in which he did?
Mr. LORD. Not definitely, no, because I have none of his
correspondence.
Mr. PECORA. Did he have a different form of letter from the one
that you had in communicating with executives of unit banks on the
matter of dividend declarations by such banks ?
Mr. LORD. I do not know anything about his letters, Mr. Pecora.
Mr. PECORA. Will you look at this document which I now show
you and which purports to be a photostatic reproduction of a letter
sent by Mr. Maxwell, secretary of the Guardian Detroit Union
Group, Inc., under date of June 11, 1931, to Mr. H. S. Reynolds,
president of the Union & Peoples National Bank of Jackson, and tell
me if you recognize it as a true copy of such a letter ?
Mr. LORD. Mr. Pecora, I have never seen this before. I have no
way of identifying it except that it is certainly a photostat and shows
the Guardian Detroit Union Group on the top of it. There is no
way in which I could identify it. I never saw it before. There is
no way I could identify it.
Mr. PECORA. It is the correspondence of another man, written
not by him in his individual capacity or right but written by him
as secretary of your Group.
Mr. LORD. But I did not pass on his correspondence, Mr. Pecora.
Mr. PECORA. There was a Mr. Reynolds that was president of the
bank referred to in that photostatic copy of a letter?
Mr. LORD. Yes, indeed.
Mr. PECORA. May we have, that photostatic copy marked for
identification ?
(The document referred to, letter, June 11, 1931, Maxwell to
Reynolds, was marked for identification " Committee's Exhibit No.
16 ", Dec. 20,1933.)
Mr. PECORA. Was it part of Mr. Maxwell's duties as secretary of
the group to communicate with the executive heads of unit banks
of the group on the matter of dividends?
Mr. LORD. He was secretary of the company. I would not say
that it was particularly part of his duties.
Mr. FECORA. Whose duties was it to send out such letters?
Mr. LORD. Excuse me, Mr. Pecora. I did not get the question.
STOCK EXCHANGE PEACTICES
4287
Mr. PECORA. Of course you did not get the question. One of
;your associates was talking to you while I was addressing the question to you.
Mr. LORD. May I have the question?
(The pending question was read by the reporter.)
Mr. LORD. I do not know that it was anyone's specific duty. The
letters that you presented yesterday would indicate that perhaps it
was my duty.
Mr. PECORA. Can't you tell us definitely whose duty it was to send
-out such letters? You were the president of this group from its
inception, and you surely ought to be able to tell us something about
"the assignment of duties.
Mr. LORD. Mr. Maxwell was secretary, and it may be that at times
he was asked to send out such letters as he did send out in confirmation of verbal arrangements that had previously been made, and
verbal conversations and suggestions as to the question of dividends.
I n practically every case of the letters that you referred to yesterday
in the matter of dividends, those letters were, more or less confirmation of personal conversations that were had with the heads of these
various units. We had a budget. We knew what the banks were
earning. We watched their earnings, and there was always discussion
of the dividends with the heads of these institutions as to what
their institutions would be justified in paying as dividends.
Mr. PECORA. Let me read to you the language employed by Mr.
Maxwell in this letter of June 11, 1931, addressed to Herbert S.
Ueynolds, president of the Union & Peoples National Bank of
Jackson [reading] :
GUARDIAN DETROIT UNION GROUP
Intra-group Memorandum
June 11, 1931.
To Mr. Herbert S. Reynolds,
President, Union and Peoples National Banfc, Jackson.
Jfrom Mr. A. A. F. Maxwell,
tfecietary, Guardian Detroit Union Group, Inc.
To provide for the dividend disbursement for the quarter ending June 30th,
1931, on the capital stock of the Guardian Detroit Union Group, Inc., units of
the group are asked to declare dividends on their capital stock which are to be
payable in each instance not later than June 26, 1931, to holders of record on
that date.
Your proportionate share of the disbursement calls for a quarterly dividend
•of 5.9 per cent ($41,500) on the capital stock of your institution. Please forward your check covering the shares registered in the name of Guardian
Detroit Union Group, Inc., and your directors (the dividends on which have
heretofore been assigned) to Mr. Bert K. Patterson, vice president and treasurer, said check to be received not later than June 29th, 1931.
Your acknowledgement of the receipt of this memorandum and advices when
your board has taken the necessary dividend action will be very much
appreciated.
Secretary.
Mr. PECORA. That language would indicate to you, would it not.
that the group was asking the Union & Peoples National Bank of
Jackson, in June 1931, to declare a quarterly dividend at the rate
of 5.9 percent, because that was that bank's proportionate share of
the dividend disbursement which was to be made by the group.
Mr. LORD. That letter of itself would indicate it; yes.
4288
STOCK EXCHANGE PEACTICES
Mr. PECORA. Would you suppose that Mr. Maxwell, in writing
such a letter, was transcending his duties as secretary of the group 1
Mr. LORD. I would suppose that Mr. Maxwell, in writing such a
letter, was writing it in confirmation of previous conversations that
I or some of his seniors had had with Mr. Reynolds in the matter
of dividends.
Mr. PECORA. There is absolutely no mention of any previous conversation in this letter, is there?
Mr. LORD. N O ; but I know how the question of dividends was
handled and discussed.
Mr. PECORA. HOW was it handled in this particular case?
Mr. LORD. I do not recall, but I know the general way it was
handled. Mr. Reynolds would come to Detroit 2 or 3 or 4 times a
month to discuss the affairs of his institution and policies, and the
question of dividends undoubtedly came up in those discussions.
Mr. PECORA. YOU are quite sure of that, are you not?
Mr. LORD. On the basis of the way things were handled, Mr.
Pecora.
Mr. PECORA. I say, you are quite sure of that ?
Mr. LORD. TO the best of my recollection. I cannot pin it on that
particular date, but I do know that these discussions were constantly
had with Mr. Reynolds and the other heads of these units.
Mr. PECORA. Could you refer this committee to any correspondence
on that, to show that that was the custom and the practice ?
Mr. LORD. NO, sir: I could not; but I think if some of these unit
heads were asked, they would tell you that was the way the thing was
handled.
Mr. PECORA. All the correspondence heretofore put in evidence
with regard to the declaration of dividends by the unit banks makes
absolutely no mention of any prior conference.
Mr. LORD. I realize that.
Mr. PECORA. NOW, I want to resume the matter of the transaction
whereby there was acquired for Mr. Brewer
Senator ADAMS. Was this 5.9 percent dividend actually declared?
Mr. PECORA. By this Jackson bank? Do you know, Mr. Lord?
Mr. LORD. I do not know. I have not the record on that. What
year was that? I can tell you what they paid during the year.
Mr. PECORA. For the quarter ending in June 1931.
Mr. LORD. I have no quarterly record at all.
Senator COUZENS. What was the yearly record?
Mr. LORD. In 1931 the bank paid, according to the figures shown
Mr. PECORA. $173,000, was it not?
Mr. LORD. $173,000.
Senator COUZENS. What percent was that?
Senator ADAMS. What was the capital?
Mr. LORD. I will have to look up the capital. [After examining
papers:] On October 31 the capital stock was $700,000. I t was
about a 25 percent dividend.
Senator COUZENS. SO, in effect, that dividend of 5.9 percent was
paid.
Mr. LORD. I assume it was, Senator. I do not have it broken
down.
STOCK EXCHANGE PRACTICES
4289
Mr. PECORA. We can take it out of the realm of assumption or
speculation if you will look at this letter which I now show you.
Please tell us if that is a true and correct photostatic reproduction
of a letter sent by Mr. Reynolds to you on the date it bears.
Mr. LORD. I recognize this signature of Mr. Keynolds, You said
the letter was addressed to me. It is not.
Mr. PECORA. I t is addressed to " Dear Pat."
Mr. LORD. Mr. Patterson.
Mr. PECORA. He was vice president.
Mr. LORD. Vice president and treasurer.
Mr. PECORA. I offer that letter in evidence.
The CHAIRMAN. Let it be submitted.
(The document referred to, letter Dec. 12, 1931, Reynolds
to Patterson, was marked " Committee's Exhibit No. 17 ", December
20, 1933, received in evidence, and the same was subsequently read
into the record by Mr. Pecora.)
Mr. PECORA. The letter received in evidence as Committee's Exhibit No. 17 of this date is as follows: It is written on the letterhead
of the Guardian Detroit Union Group, Inc., and entitled "InterGroup Memorandum." (Reading:)
GUABDIAN DETROIT UNION GROUP,
INTBA-GROUP MEMORANDUM,
December 12, 1981.
To B. K. PATTERSON,
Executive Vice President and Treasurer, Guardian Detroit Union Group,
Inc., Detroit.
From H. S. REYNOLDS,
President, Union and Peoples National Bank, Jackson.
DEAR PAT : During this year we paid in to the group the following dividends:
March, $31,500.
June, $41,500.
September, $50,000.
We are accruing at the rate of $31,500 and with the payment of this amount
will pay $154,500 for this year, or at the rate of $4.41 plus on our 35,000
shares.
I would like very much not to go beyond this amount unless you feel it is
absolutely necessary, but of course will do our part.
Yours sincerely,
H. S. REYNOLDS.
Mr. PEOORA. Mr. Reynolds apparently was anticipating the slogan
of the N.R.A. at that time, about " doing our part", only the part
was the part that the group desired them to perform.
Mr. LORD. During that year the operating earnings of the Jackson
bank were $226,000 plus, and he paid out $173,000 in dividends.
Mr. PECORA. During the year 1931, a year when economic conditions were getting worse, generally speaking.
Mr. LORD. A S we look back; yes.
Mr. PECORA. A S you knew then.
Mr. LORD. I did not know they would get worse.
Mr. PECORA. They were getting worse currently during the year,
were they not?
Mr. LORD. I do not know that they were getting any worse, Mr.
Pecora.
Mr. PECORA. YOU, as the president of a bank and as the head of
this group controlling some twenty-odd banks in the State of Michi
4290
STOCK EXCHANGE PRACTICES
gan, were not aware of the trend of economic conditions currently
during the year 1931 ?
Mr. LORD. That was the period when business was expected to*
improve. You know that.
Mr. PECORA. I also know that the expectations were not realizedDidn't you know that?
Mr. LORD. They were not realized, but I did not know that they
would not be realized.
Mr. PECORA. YOU knew that currently they were not being realized,,
didn't you?
Mr. LORD. True.
Mr. PECORA. TO return to this transaction involving the acquisitionof the 1,600 shares of the Grand Eapids National Bank stock, you*
have already identified a copy of a letter which you addressed to Mr~
Brewer under date of August 24,1929. Will you now be good enough
to look at this document which I show you, and which purports t a
be a photostatic reproduction of a letter addressed by you to Mr.
Brewer under date of September 18, 1929, and after looking at it y
tell me if you recognize it to be a true and correct copy of a letter
sent by you to Mr. Brewer on that date.
Mr. LORD.
Yes.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted and entered in the record.
(The document referred to, letter, Sept. 18, 1929, Lord to Brewery
was received in evidence, marked "Committee's Exhibit No. 18'%
Dec. 20, 1933, and the same was subsequently read into the record
by Mr. Pecora.)
Mr. PECORA. The letter received in evidence as Committee's Exhibit No. 18 of this date, is apparently written on the letterhead of
the Guardian Detroit Bank, dated September 18, 1929, and reads as
follows [reading]:
Mr. JOSEPH H. BREWER,
(Personal)
SEPTEMBER 16, 1929.
Grand Rapids Trust Building,
Grand Rapids, Michigan.
DEAB MB. BBEWEB : Supplementing my letter to you of August 24, this will
confirm our verbal understanding under which you have bought for us a total
of One Thousand Six Hundred and One shares of stock of Grand Rapids National
Bank at an aggregate cost of $862,895.75. You may consider that our agreement
as to holding this stock, with your right to take it back from us, continues thesame as covered in my letter to you of August 24, you to pay us the actual
cost plus interest at the rate of 7 per cent per annum on our investment in thestock.
Very truly yours,
President.
Mr. PECORA. Following the sending of this letter by you to Mr.
Brewer, did you, under date of November 18, 1929, send to Mr.
Brewer another letter relating to that same subject, a photostatic
copy of which I now show you ?
Mr. LORD. Yes, sir.
Mr. PECORA. I offer that letter in evidence.
The CHAIRMAN. Let it be admitted.
(The document referred to, letter, November 18, 1929, Lord to«
Brewer, was received in evidence, marked " Committee's Exhibit No
STOCK EXCHANGE PBACTICES
4291
19 ", December 20,1933, and the same was subsequently read into the
record by Mr. Pecora.)
Mr. PECORA. The letter which has been received in evidence and
marked " Committee's Exhibit No. 19 " of this date reads as follows
[reading] :
NOVEMBER 18,
1929.
MR. JOSEPH H. BREWER,
President, Grand* Rapids National Bank,
Grand Rapids, Michigan.
MY DEAR JOE : I did not telephone you today regarding the dinner which you
and Mr. Waters suggested be held some time next week because we have all of
us been up to our necks in trying to push through at an early date the Union
Commerce and Guardian consolidation.
I will interrupt my reading to ask you, Mr. Lord, this question.
That refers to the consolidation of the two bank holding companies
which became effective on December 16, 1929 ?
Mr. LORD. Yes, sir.
Mr. PECORA. Under
the name of the Guardian Detroit Union
Group, Inc.
Mr. LORD. Yes, sir.
Mr. PECORA. Resuming
the reading of the letter [continuing
reading] :
As a matter of fact, I gave up my trip East and have been on the job over
the week-end, having in mind that everything possible should be done to speed
up the consolidation details, and there is going into the mail tonight a notice
to the Guardian and Union Commerce stockholders, a copy of which notice
is enclosed herewith for your information. I see no reason why we can not
get together a crowd of Guardian and Union Commerce officials or directors
to attend a dinner in Grand Rapids some time next week. Mr. Blair is still
away, and as he has been feeling pretty rotten, we have hesitated to ask him
co come back. However, he is expected back the latter part of this week, and
just as soon as he returns I will get in touch with him and telephone you so
chat a definite date can be set.
In connection with the merger, we are trying to straighten out a lot of
uncompleted details. You will recall that under an arrangement with you we
bought 1601 shares of Grand Rapids National Bank stock at an aggregate cost
of $862,895.75. This stock will be exchangeable, upon consumation of our
examination of the Grand Rapids National and upon your being satisfied with
the Guardian-Union situation, for three and a half shares of our stock for each
share of yours, or a total of 5,603.5 shares. If agreeable to you, I would appreciate it if you would put this matter in the form of a note to the Guardian
Detroit Bank or to the Guardian Detroit Company, the note to be signed by
either you personaUy or you and Mr. Waters according to your respective interest in this stock; and I would also appreciate it if you would collateralize
the note with, say, $200,000 of additional security in the form of bonds or
other marketable stocks. I realize that this suggestion is not strictly in accord
with the original arrangement made with you, but I am making this request
in view of our expectation of being full partners with you and your institutions
at an early date. The matter of our carrying charges on this investment was
to be figured originally at 7 per cent. I am quite willing to reduce this to the
current rate of 6 per cent if you will handle the matter on the basis suggested,
and if you will sign and return one of the enclosed notes for the face amount
of the principal, namely, $862,895.75, I can have a memorandum sent to you at
a later date after the interest has been figured.
In further reference to that certain loan in the Grand National about which
I spoke to you, I feel very strongly that if I were in your position I would
arrange to have the loan paid at this time. I have information on the outside
which leads me to believe that the company's business is in far from good
shape and that their prospects for the coming year are not very encouraging.
With personal regards, I am
Very sincerely,
,
President.
4292
STOCK EXCHANGE PRACTICES
Mr. PECORA. Did Mr. Brewer agree to the suggestion you made to
him in this letter about sending in his note, or a note signed by him
and Mr. Waters jointly, for the purchase price of those 1,601 shares
of Grand Kapids Bank stock, and collateralizing it in part not only
with the stock itself, but with $200,000 worth of marketable
securities ?
Mr. LORD. Mr. Pecora, I do not recall the final outcome, how much
stock Mr. Brewer took up, or how much stock Mr. Waters took up.
I have no record.
Mr. PECORA. YOU have no recollection beyond that which you have
just given us?
Mr. LORD. NO, I have not.
Mr. PECORA. Will you be good enough to look at this letter, which
purports to be a photostatic reproduction of a letter sent to you by
Mr. Brewer under date of November 21,1929, apparently in reply to
your letter to him of November 18,1929, and tell me if you recognize
it to be a true and correct copy of a letter received by you from Mr.
Brewer on that date ?
Mr. LORD. Yes, sir.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted
and entered in the record.
(The document referred to, letter, November 21, 1929, Brewer to
Lord, was received in evidence, marked " Committee's Exhibit No.
20 ", December 20, 1933, and the same was subsequently read into
the record by Mr. Pecora.)
Mr. PECORA. The letter which has been received in evidence as
Committee Exhibit No. 29 of this date is written on the letterhead of
the Grand Kapids Trust Co., Grand Rapids, Mich., dated November 21, 1929, and reads as follows:
GRAND RAPIDS TRUST CO.,
GRAND RAPIDS, MICH., November 21, 1929.
ROBERT O. LORD,
President Guardian Detroit Bank,
Detroit, Mich.
DEAR MR. LORD : Referring to the request contained in your letter of the 18th
instant, that I forward you note for $862,805.00 for 1,601 shares of Grand
Rapids National Bank stock:
As I said to you over the telephone this morning, while I want to be of any
assistance I can in the working out of your plans and do not want to embarrass
you in any way at the same time I prefer that our original arrangement as set
forth in your correspondence, should stand. You will recollect that when I suggested you purchase this stock I told you that in view of the large holding
which I then had in the Grand Rapids National Bank I did not feel that I
should take on any additional shares. You very kindly offered at that time to
loan me the money on my note and I was obliged to decline the offer. I am
not in any different situation now than I was then and do not feel that I can
assume the obligation which you ask me to take on.
I understand, as you indicated in our conversation this morning, that it is
desirable that your institution should not be carrying a large amount of its
own stock and for that reason yoju would like to have me take this off your
hands. If there is any other way in which I can assist in relieving the situation without changing my status I will be glad to cooperate with you.
As I said this morning, possibly by talking the matter over we might evolve
some plan. Enclosed herewith you will find my check for $4,002.50, being a
quarterly dividend on the 1601 shares which, through inadvertence in my office,
has not been forwarded to you before.
Yours very truly,
JOSEPH H. BREWER.
STOCK EXCHANGE PRACTICES
4293
Mr. PECOKA. Does this letter serve to refresh your recollection concerning the action that was taken with regard to this transaction
with Mr. Brewer ?
Mr. LORD. Mr. Pecora, my recollection on the final outcome of that
is very vague. I think that the Guardian Detroit Co. finally had to
take over all that stock.
Mr. PECORA. By the way, Mr. Lord, does the reading of this letter
refresh your recollection concerning the inpeption or initiation of this
transaction to this extent? Does it indicate to you now that the
reason for the acquisition of these 1,601 shares of the Grand Rapids
National Bank stock was to prevent its falling into the hands of socalled " outsiders" at the time when you, in behalf of the group,
were negotiating to have the group acquire control of the Grand
Rapids National Bank?
Mr. LORD. Mr. Pecora, without seeing all the correspondence and
without having a chance to go through it, my recollection is so vague
on that that I just do not feel that I can testify.
Mr. PECORA. Mr. Lord, you have had the benefit, up to the present
moment, of all the correspondence with the exception of one more
letter which I will come to presently.
Mr. LORD. I t is quite possible that we desired to buy those 1,600
shares with Mr. Brewer in order to be sure that the plan of consolidation would go through.
Mr. PECORA. Let us see if this will refresh your recollection more
sharply than that. He says in this letter, among other things, as
follows [reading]:
You wiU recollect that when I suggested you purchase this stock, I told you
that in view of the large holding which I then had in the Grand Rapids
National Bank I did not feel that I should take on any additional shares.
Does not that expression in Mr. Brewer's letter to you of November 21,1929, clearly indicate to you now that you inspired this transaction, because of your desire to prevent 1,601 shares of the Grand
Kapids Bank stock from falling into the hands of outsiders who, you
understood, in August 1929 were trying to purchase it?
Mr. LORD. I would say, Mr. Pecora, that Mr. Brewer probably
came to me and said:
These brokers are buying the stock, If you want this transaction to go
through and be completed, the stock must be purchased.
As I say, my recollection is so vague that I hesitate to testify.
I t took place 4 years ago. The bulk of the arrangements were
made by personal conversation with Mr. Brewer. I t was made at
a time when, as that correspondence showed, we were in the throes
of a merger of the two groups, and my own recollection on it is so
vague that I hesitate to attempt to give you the details.
Mr. PECORA. I S not that recollection refreshed by this correspondence?
Mr. LORD. Somewhat; yes.
Mr. PECORA. I S it refreshed to the extent that you
Mr. LORD. Not in full; no; because I cannot remember all the conversations that were had with Mr. Brewer. Mr. Waters, as I recall
it, was in Europe, or on his way back from Europe, and Mr. Brewer
was working for Mr. Waters and for himself.
175541—34—PT 9
7
4294
STOCK EXCHANGE PRACTICES
Mr. PECORA. But here is Mr. Brewer, in his letter of November
21, 1929, to you, reminding you that when he suggested you purchase that stock he told you that in view of the large holding which
he then had in his own bank stock he did not feel that he should take
on any additional shares.
Mr. LORD. Mr. Pecora, if that were so, why should we carry the
stock and give Mr. Brewer the opportunity of buying it ?
Mr. PECORA. That is what I want you to answer.
Mr. LORD. I do not know. I think Mr. Brewer's recollection of
that was probably different from mine.
Mr. PECORA. Did you send Mr. Brewer a reply to this letter ?
Mr. LORD. I do not know.
Mr. PECORA. In which you indicated a difference of opinion or
recollection from his?
Mr. LORD. I do not recall. I may have discussed it with him. I
may have written him. I do not recall.
Mr. PECORA. NOW, let me show you another letter, a photostatic
copy of which I show you, and which purports to be a copy of a
letter addressed by you to Mr. Brewer on this subject under date of
January 22, 1930.' Will you look at it and tell me if it is a true and
correct copy of such a letter sent by you to Mr. Brewer ?
Mr. LORD. Yes, sir.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted.
(The document referred to, letter, Jan. 22, 1930, Lord to Brewer,
was received in evidence, marked " Committee's Exhibit No. 2 1 " ,
Dec. 20, 1933, and the same was subsequently read into the record by
Mr. Pecora.)
Mr. PECORA. The letter which has been received in evidence as
Committee's Exhibit No. 21 of this date reads as follows [reading] :
Mr. J. H. BREWER,
(Personal)
JANUABY 22, 1930.
% Grand Rapids Trust Company,
Grand Rapids, Michigan.
DEAR JOE: I have been thinking over the question of the 7,204 shares of
Guardian Detroit Union Group stock which the Detroit Company is now carrying. This stock was purchased primarily for you or for you and Mr. Waters,
and while at the present time with a market of $120 the cost is two or three
points in excess of that market, I think the fair thing would be for you to take
over the stock because, frankly, I believe that within a year the stock will be
worth anywhere from 25 to 53 points more than its present selling price.
My suggestion would be that the amount due on the stock be covered in two
notes, one for $500,000 to the Guardian Detroit Bank and one for the balance
of $379,433.45 to be made to the Guardian Trust Company. Our loaning limit
in the bank is $800,000 unless we go to the board and secure the consent of
two-thirds of the board members. We probably could make a temporary loan,
using this stock as the major part of the collateral. However, it is likely that
a loan of this size might be criticised by the Banking Commissioner if it had
too large a proportion of Guardian Detroit Union Group stock as collateral.
It would be my suggestion, if you have a substantial amount of other collateral
of a readily marketable character, that perhaps some of the bank stock be
removed and the other collateral be used. This would make the loan look less
heavy with Guardian Detroit Union Group stock as security.
I realize that it is likely you will want to liquidate at some later date a portion of this bank stock, but I feel it would be very distinctly to your advantage
to hold this stock for the next three to five years. I think with our situation
throughout the State and with the economies we can make and the business
STOCK EXCHANGE PRACTICES
4295
which we can build up that this stock should be worth within a five-year
period not less than $300 a share, and I, personally, would be very happy to
see you benefit by holding the stock rather than by selling it at anywhere near
present prices. Perhaps you have other securities that could be liquidated
so that you would not be carrying quite as heavy a loan against the bank
stock. So far as the bank and trust company are concerned, we are willing
to carry you on a substantial loan for any reasonable period, and it would be
my suggestion that the notes covering this particular transaction be made out
for a period of six months with the idea that they would be renewed for another period of six months, subject, of course, to the understanding that the
loan would be placed elsewhere or taken care of in some other way if the
Banking Commissioner requires us to take such a loan out of the bank on
account of the collateral being represented in too large an amount by Guardian
Detroit Union Group stock.
I am enclosing herewith a statement prepared by the Guardian Detroit Company which shows the status of the transaction with interest figured up to
February 1. This statement also shows, as you will note, the two credits on
account of dividends and also the $60 check which you sent covering the sale
of one-half share of stock.
If these suggestions which I have made are satisfactory to you, if you will
let me know what additional collateral you can substitute for a part of the
J>ank stock, I will be glad to have the notes made out and sent to you so the
transaction can be completed by February 1.
I shall be glad to have your ideas on the subject.
Very sincerely,
(Signed)
ROBEKT O. LORD,
President.
Now, does the reading of this letter refresh your recollection
concerning the way this transaction was eventually handled ?
Mr. LORD. Well, the. reading of that letter refreshes my recollection up to date, but I could not tell you, except that Mr. Joseph H.
Brewer finally ended up with a loan with the Guardian Detroit
Bank or the Guardian National Bank of Commerce.
Mr. PECORA. Was that because Mr. Brewer finally agreed to take
over this stock while it was being carried for him by either the
Guardian Detroit Bank or the Guardian Detroit Co. ?
Mr. LORD. I don't recall what he took over of the stock, Mr. Pecora.
Mr. Brewer had holdings in the Grand Kapids National. He had a
loan in the Guardian National Bank of Commerce. He put up
Guardian stock. He put up outside collateral.
The CHAIRMAN. DO you recall, Mr. Lord, that the notes referred
to in this letter were actually executed by Mr. Brewer ?
Mr. LORD. Well, I do recall that Mr. Brewer had a loan in the
Guardian Bank, and whether it originated in this transaction or
from some later transaction I could not swear to it. I suppose it was
in connection with this transaction.
The CHAIRMAN. DO you remember the amount of that loan?
Mr. LORD. NO : I don't have the figure.
Mr. PECORA. NOW, I want to go back for a moment, Mr. Lord, to
your letter to Mr. Brewer of November 18, 1929, marked " Committee's Exhibit No. 19." I n the concluding paragraph of that letter
you make this statement:
In further reference to that certain loan in the Grand Rapids National about
which I spoke to you, I feel very strongly that if I were in your position I
would arrange to have the loan paid at this time. I have information on the
outside which leads me to believe that the company's business is in far- from
good shape and that their prospects for the coming year are not very
encouraging.
4296
STOCK EXCHANGE PRACTICES
What was that " certain loan " that you refer to in this letter ?
Mr. LORD. I cannot tell you the name of the corporation, but it
was the loan to an industrial company in Grand Eapids; had nothing
to do with this transaction whatever.
Mr. PECORA. NOW will you look at this document which I now
show you and which purports to be a photostatic reproduction of a
letter from Mr. Brewer addressed to Mr. B. K. Patterson, vice president of the group, under date of April 13,1931, to which is attached
and in which reference is made to a letter addressed to Mr. Brewer as
President of the Grand Eapids National Bank under date of April
20, 1931, signed by Henry F. Quinn, national bank examiner? Will
you look at those documents and tell me if they refresh your
recollection in any way with regard to the subject matter thereof?
Mr. LORD. I don't recall having seen this before, but I can identify
this as Mr. Brewer's signature, sir.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted.
(Memorandum dated April 13, 1931, from Joseph H. Brewer to
B. K. Patterson, together with attached letter dated April 10, 1931,
from Henry F. Quinn, national bank examiner, to Joseph H. Brewer,
and also attached tabulation of loans and discounts and bonds and
securities was thereupon designated " Committee Exhibit No. 22,
Dec. 20, 1933 ", and the same appear immediately following as read
by Mr. Pecora.)
Mr. PECORA. The letter that has been received in evidence and
marked " Committee's Exhibit No. 22 " of this date, reads as follows
[reading]:
GUABDIAN DETROIT UNION GROUP
Intra-Group Memorandum
Date April
To Mr. B. K. Patterson, Vice President, Guardian Detroit Union
From Mr. Joseph H. Brewer, President, Grand Rapids National
DEAR MB, PATTERSON : I enclose herewith copy of letter from
F. Quinn.
What are your suggestions?
Very truly yours,
(Signed)
13, 1931.
Group, Inc.
Bank
Mr. Henry
Jos. H. BREWER,
President.
There is a stamped and hand-written memorandum in the lower
right-hand corner of this letter reading as follows:
" To Mr. Waldo from B. K. Patterson, date 4r-l7.
"We must"—"must" being underscored—"charge these off.
K. O. L. does not "—" does not" being underscored—" want to disturb the earnings picture. What shall all do ?"
Accompanying the letter to Mr. Patterson from Mr. Brewer is a
€opy of a letter addressed to Mr. Brewer reading as follows
{reading] ;
APRIL 30,
Mr.
1931.
JOSEPH H. BREWEB,
President Grand Rapids National Bank,
Grand Rapids, Mich.
DEAR SIR : There is herewith attached a schedule of estimated losses resultant
from the examination of the Grand Rapids National Bank, Grand Rapids,
Michigan, as of March 27,1S31.
STOCK EXCHANGE PRACTICES
4297
Included in this list, as you will note, are certain items listed in the previous
examination as losses that were not absorbed by the bank.
Losses as herein estimated should, of course, be promptly eliminated from
the banks4 assets.
Yours very truly,
(Signed)
HENRY F. QTJINN
National Bank Ewammer,
And attached to Mr. Quinn's letter is a schedule entitled " Loans
and Discounts ", and then follows enumeration of various loans, the
aggregate amount of which is $111,196.46.
Senator TOWNSEND. What is the date of the letter ?
Mr. PECORA. The date of the bank examiner's letter is April 10,
1931, and it is forwarded by Mr. Brewer to Mr. Patterson, vice
president of the Group, on April 13, 1931.
The schedule is as follows:
LOANS AND DISCOUNTS
Name
Amount
Dewey R. Moll
Richard Marquardt
Mackinaw Shores Club
Fred Steenman
C. T. Allen
W. B. Banks
Pat Birney
F. W. Cavender
A. D. Crimmins
F. G. Deane
Dudley Lumber Company
Earl Eifert
Ray D. Fonger
H. M. Freeman
Festus Garratt
Grand Rapids National Company
Beecher Hale
C. O. Hart
E. K. Hill
Myron B. Hopkins
C. M. Hurd
H. L. Johnson
W. F. Mille
»
G. W. Nicholson
J. W. Parkhurst
Tavis Lumber Company
P. J. Peterson
B. Vande Meulen
W. E. Williams
Portage Point Association
_
$79.42
380,75
270.00
49.353, 500; 0O
4, 000. 0t>
3, 526.33
5, 503. 87
9,000.00
5,000.00
9,100.00
2,374.27
2,515* OO
5,, 000.0G
750. 00
8, 000.00
4,196.00
l'3y107.0O
391. 75
976. 51
844.20
1,156.9a
4,. 000.00
3,070. 88
3r800.00
3,000.00
3,000.00
6,000. 0O
2,962.25
5,692.00
111, 196.46 S.
BONDS AND SECURITIES
Continental States Utilities
Seaboard All Florida
American Tel. & Tel. Stock
16,706.25
4,275.00
21r00O.00
153,277.71 S.
Depreciation on fixed assets, accrued throughout the fiscal period
by reserves but not charged off at the end of the fiscal period
as should have been done
Total
28,287.85
181, 565 5a
4298
STOCK EXCHANGE PEACTICES
Mr. PECORA. NOW, referring to the memorandum in the lower
right-hand corner of Mr. Brewer's letter to Mr. Patterson [reading]:
R. O. L. does not want to disturb the earnings picture—
The reference to " R. O. L." is a reference to you, is it not, Mr.
Lord?
Mr. LORD. I would assume so; yes.
Mr. PECORA. What is conveyed to your mind by that memorandum "R. O. L. does not want to disturb the earnings picture?"
Mr. LORD. I suppose that the charge-off should be made either
hj lift-outs or by charges to reserves. Now, the record shows I
:have given you this morning that in 1931 the Group Co. lifted out
3iinety-two thousand and odd also.
Mr. PECORA. Ninety-two thousand and odd dollars ?
Mr. LORD. Dollars of assets.
Mr. PECORA. And that was at the end of the year in which the
bank declared ninety-nine thousand and odd dollars of dividends?
Mr. LORD. Yes. And during that year also, according to the
figures I have here, the bank wrote off on its own books 153,000 plus.
Mr. PECORA. N O ; but what I want particularly to have you tell
us, Mr. Lord, is what you had in mind when you indicated that you
did not want to " disturb the earnings picture."
Mr. LORD. I suppose it was the suggestion that those assets be
taken out without charging them against current earnings.
Mr. PECORA. Was that a general policy that was followed, in these
unit banks?
Mr. LORD. What, the general policy?
Mr. PECORA. Take out slow or doubtful assets or bad loans in a
fashion that would not disturb the earnings picture.
Mr. LORD. Mr. Pecora, the practice of banks
Mr. PECORA (interposing). No, no; not the practice of banks: the
practice of these banks is what I want.
Mr. LORD. AH right, the practice of these banks and other
banks
Mr. PECORA (interposing). No; please confine yourself to the practice of the unit banks. " Sufficient unto the day is the evil thereof."
Mr. LORD. The practice of these unit banks was to accumulate
reserves for just such a time as we ran into in 1930, 1931, and 1932,
accumulate undivided profits for the protection of that bank and its
depositors, and to take care of such necessary write-offs as took
place.
Now, you know and I know that the banks during the past 3 years,
few if any banks in the United States have been able to make their
charge-offs out of current earnings. They have made the charge-offs
out of reserves built up in former years, out of undivided profits, or
from some other part of their capital structure.
Mr. PECORA. Did the Grand Rapids Bank have any such reserves
available to absorb these bad loans?
Mr. LORD. They must have had
Mr. PECORA. At the end of 1931 ?
Mr. LORD. They must have had a
capital structure that absorbed
the 153,000.
Mr. PECORA. I asked you about reserves, not capital structure.
Mr. LORD, I haven't the figures on the reserves.
STOCK EXCHANGE PEACTICES
4299
Mr. PECORA. Well, I am still uncertain as to what you meant by
your desire " not to disturb the earnings picture."
Mr. LORD. I thought I answered that question when I said not to
charge those losses which perhaps were incurred from loans made in
previous years to the current year's earnings but rather to reserves
or undivided profits.
Mr. PECORA. HOW do you know that the loans referred to by Bank
Examiner Quinn were loans made in previous years? The date of
those loans is not given.
Mr. LORD. NO loss would develop in 3 months, and that letter was
written in April, was it?
Mr. PECORA. April 1931. Now, I ask you again, was it the general policy of th$ banks that were units of your group to so handle
bad loans as not to disturb the earnings statements or pictures of
those banks ?
Mr. LORD. The general policy of the banks is to set aside reserves
out of earnings, to charge losses againt reserves rather than directly
against earnings. Now, in some jrears certain charges are made
directly against earnings and in addition against reserves or against
undivided profits.
Mr. PECORA. Doesn't that tend to give an inaccurate, picture of
earnings ?
Mr. LORD. NO. I think an operating earning statement, of earnings from operations, gives the most accurate picture of a bank's
earning capacity.
Mr. PECORA. NOW, where a bank, we would say, made earnings or
had earnings from operations of $500,000 in a given period of time,
and where during that given period of time it became necessary for
the bank to make some dispostion of bad loans amounting to, say,
$250,000, and the disposition made was a write-off or a take-out
as you call it-^—
Mr. LORD (interposing). Well, there i,s a big difference between
a write-off and a take-put.
Mr. PECORA. NO, I am not referring to the two things as the same.
You say " take-out." I will withdraw that question.
Where the bad loans are taken care of by a write-off or by the
setting up of reserves that has the effect of preserving the appearance of the bank having actually earned from operations $500,000?
Mr. LORD. Not if the reserves statement is given also as it is
shown in the balance sheet of any bank. I don't think there is any
misconception from the standpoint of presenting the figures.
Mr. PECORA. Then what did you have in mind when you indicated to Patterson that you did not want to disturb the earnings
picture?
Mr. LORD. I wanted an accurate picture of the operating earnings
of the Grand Rapids National Bank to be shown. These losses
were losses picked up from previous years' operations.
Mr. PECORA. YOU wanted the earnings to remain unimpaired or
undiminished by reason of these write-offs, didn't you?
Mr. LORD. I wantecl the earnings to be shown on the basis of the
current year's operations.
Mr. PECORA. YOU wanted those earnings so shown that they would
not be diminished by reason of these write-offs ?
4300
STOCK EXCHANGE PRACTICES
Mr. LORD. I would not say so.
Mr. PECORA. Well, is that a misstatement that I am making?
Mr. LORD. I would not say that was the only reason.
Mr. PECORA. Whether it was the only reason or not, was it a
reason ?
Mr. LORD. Mr. Pecora, I wanted the earnings of the Grand Rapids
National to show accurately for the current period. I cannot answer
it any better way than that. I am sorry.
Mr. PECORA. YOU wanted the earnings to show accurately without
their being diminished in amount by reason of write-offs for bad
loans ?
Mr. LORD. Out of current earnings for previous loans made before
1931.
Mr. PECORA. Can't you answer my question categorically?
Mr. LORD. YOU mean yes or no ?
Mr. PECORA. Yes.
Mr. LORD. Will you repeat
The SHORTHAND REPORTER
the question?
(Mr. Randolph):
You wanted the earnings to show accurately without their being diminished
in amount by reason of write-offs for bad loans?
Mr. LORD. Yes; I will answer that.
Mr. PECORA. And was that the general policy of the unit banks ?
Mr. LORD. I spoke of the policy in setting up reserves and charging
losses against reserves as against current performance.
Senator COUZENS. It would appear that the bank at that time did
not have any reserves adequate to charge these off ?
Mr. LORD. Senator Couzens, I do not know what their reserves
were.
Senator COUZENS. I t would appear that way.
Mr. LORD. I t would appear so if the Group Co. lifted out that
$92,000, or that they did not want to disturb the reserves.
Senator COUZENS. In other words, when the bank examiner sent
those lists to charge off you had no place to charge off. Then what
would happen was to have them lifted out unless you wanted them
to affect the current earnings ?
Mr. LORD. Part of them were lifted out, and there were charge-offs
during that year of 150,000. But there must have been reserves.
Senator COUZENS. I am referring to this particular instance at this
particular time.
Mr. LORD. Senator, I do not know what in the final charge-off
those were charged against, whether they were part of the lifted-out
assets or whether they were part of the assets that were charged on
the bank's own books.
Senator COUZENS. Yes; but Mr. Brewer, who was president of the
bank, was writing you for instructions or suggestions as to how he
would handle the bank.
Mr. LORD. All right.
Senator COUZENS. And yet you have testified all along here that
these directors had their own independent judgment, which they
evidently had not.
Mr. LORD. He asked for suggestions, Senator.
Senator COUZENS. Yes. Well, why did he have to ask for suggestions when the whole power and control of the institution was
STOCK EXCHANGE PRACTICES
4301
assumed to be in the board of directors, based on your assurance
before the
Mr. LORD (interposing). He did not have to ask for suggestions.
He chose to get outside advice from the Group, which was one of
the functions of the Group, to give advice.
Senator COTJZENS. He did not have independent judgment, then.
Mr. PECORA. Mr. Lord, do you recall that sometime in January
of this year an arrangement was entered into whereby Mr. Brewer
obtained a loan of $15,000 from the Group ?
Mr. LORD. Yes.
Mr. PECORA. Tell the committee about that arrangement.
Mr. LORD. Mr. Pecora, I can tell you from hearsay. I
would
rather that it be handled by someone who knows more about it
than I.
Mr. PECORA. YOU were a party to the conversations in which that
arrangement was effected, weren't you?
Mr. LORD. I don't think so. I can tell you the hearsay, if you
want.
Mr. PECORA. Let us see what you can tell us.
Mr. LORD. All right. Mr. Brewer had a substantial loan with us.
He was carrying substantial life insurance for the protection of his
loan and his family.
Mr. PECORA. When you say " with us ", to whom do you refer?
Mr. LORD. I mean the Guardian National Bank of Commerce.
Mr. PECORA. Pardon me—was that loan account created by this
transaction whereby 1,601 shares of the Grand Eapids National
Bank stock were acquired in 1929 ?
Mr. LORD. I don't know, Mr. Pecora. That loan had been on the
books for sometime. I don't know where it originated from.
Mr. PECORA. HOW large a loan was it?
Mr. LORD. I would say somewhere between four and five hundred
thousand dollars at the end. I t had been larger and had been substantially reduced.
Mr. PECORA. All right; go ahead.
Mr. LORD. NOW, speaking of this $15,000 loan, Mr. Brewster was in
need of funds, either to pay his life insurance or interest or some
other obligations. He came to the Guardian National Bank of
Commerce to borrow the money. We felt that our holdings of
Mr. Brewer's paper was sufficient and refused to loan him the money.
He asked to secure the loan from the Group Co. itself. The Group
Co. had certain obligations to meet in New York and Chicago and did
not care to disburse their funds. Mr. Brewer was a close personal
friend of Mr. Shorts.
Mr. PECORA. Who was Mr. Shorts?
Mr. LORD. President of the Second National Bank & Trust Co.
of Saginaw.
Mr. PECORA. That was one of the units in your Group ?
Mr. LORD. That was one of the units in the Group.
Mr. PECORA. Yes.
Mr. LORD. Mr. Shorts
was very anxious to help Mr. Brewer.
He apparently talked it over with hisi associates up there and suggested that their bank would be willing to declare to the Group Co. a
dividend of approximately $15,000 if the Group Co. would help out
4302
STOCK EXCHANGE PRACTICES
Mr. Brewer. Now, the Group Co. did loan that money finally to
Mr. Brewer. The exact amount I think was $15,000. Mr. Brewer
was the head of the two Grand Rapids institutions. I t was felt
by the Group Co. that it would be very unfortunate if Mr. Brewer
was plunged into financial difficulties. I t would be unfortunate for
the institutions in Grand Rapids.
Now, that is very largely hearsay. I did not handle the loan. I t
was a matter either with Mr. Shorts or with Mr. Brewer.
Mr. PECORA. Are you sure that that is all hearsay ?
Mr. LORD. I would say most of it. I knew that the loan was made.
But according to my recollection it was—I may have had some part
in part of it.
Mr. PECORA. NOW, the reason I asked you that question is because
I have copy of what purports to be a memorandum dated January 13,
1933, and which is captioned " Memorandum of understanding between Messrs. Shorts, Bodman, Brewer, Kanzler, Longley, and Lord."
For your information I will read that memorandum and see if it
refreshes your recollection.
Mr. LORD. I t may.
Mr. PECORA [reading]:
Upon the representation of Mr. Brewer that he was unable to meet interest
payments on his obligations in Grand Rapids with the Grand Rapids National
Bank, the Grand Rapids Savings Bank, and the old Kent Bank and with the
Manufacturers Trust Co. of New York, and that he had requirements from the
beginning of the year until September of some $38,000 to maintain his life
insurance and his interest payments, and upon a further showing that he
needed $15,000 at once to carry him until April 1, and by the further statement that he felt he could take care of these interest and insurance obligations
out of receipts that he would acquire from his two hotel properties, the Pantland Hotel and the Morton House in Grand Rapids, it was decided that $15,000
would be loaned to Mr. Brewer upon Pantland Hotel stock, value $45,000.
It was a further part of this arrangement that Mr. Shorts would arrange
to have the dividend of the Second National Bank & Trust Co. declared at as
early a date as possible in order to reimburse the Group Co. for this disbursement.
This whole loan is made on the sole basis that it is to the interest of the
Group Co. that, particularly at this time, no disturbance arises in Grand
Rapids as a result of Mr. Brewer's being unable to meet these payments,
which disturbance it is agreed is very likely to arise and seriously affect our
Grand Rapids unit. It is felt that this arrangement is to the interest of the
New York and Chicago banks who have a large interest in the Group Co.'s
units continuing without any unnecessary disturbance, particularly at this
time, while other major matters are being arranged for.
Mr. LORD. That is in line with my statement to you, is it not ?
Mr. PECORA. Yes; substantially so.
Mr. LORD. That is my understanding.
Mr. PECORA. Yes; I would be disposed to compliment you on your
recollection of this.
Mr. LORD. Thank you, sir.
Mr. PECORA. NOW, it is clear, is it not, that in January of this
year the situation presented by this memoraudum was that Mr.
Brewer needed immediately $15,000 to take care of certain pressing
obligations; that the Group made him a loan of $15,000 to accommodate Mr. Brewfer and enable him to take care of his private
obligations, but that the Group, as part of the arrangement for the
making of that loan to Mr. Brewer, had arranged with Mr. Shorts,
STOCK EXCHANGE PRACTICES
430$
the head of the Saginaw bank, the Second National Bank & Trust
Co., to have that bank declare a special dividend which would be
paid to the Group as a stockholder of the Saginaw bank in an
amount that would more than cover the $15,000 loan which the
Group made to Mr. Brewer?
Mr. LORD. I think that is so, and I see nothing out of the way
with it. If the Saginaw bank's earnings were sufficient to declare
a special dividend of $15,000 to the Group and the Group cared to
loan it to Mr. Brewer on his security, I see nothing out of the way
about it.
Mr. PECORA. YOU see nothing wrong with a unit bank declaring
a special dividend?
Mr. LORD. NO.
Mr. PECORA. Which was to be paid to the Group ?
Mr. LORD. Yes.
Mr. PECORA. In
order to reimburse the Group for the making of a
loan to Mr. Brewer ?
Mr. LORD. With security as collateral.
Mr. PECORA. YOU thought that was a proper exercise of the
Group's influence over its unit bank, did you?
Mr. LORD; DO you think it was the Group's influence ?
Mr. PECORA. What is that?
Mr. LORD. I don't think it was the Group's influence. I think
this suggestion probably came from Mr. Shorts.
Mr. PECORA. Did Mr. Shorts suggest that the Group make this
loan to Mr. Brewer and in return for the making of such loan
his bank would declare a special dividend which would be paid
to the Group and the amount of which would more than cover the
loan?
Mr. LORD. Mr. Pecora, I am quite certain that nobody in the operating heads, either Mr. Kanzler or myself, of the Group, suggested
to the Saginaw bank that they declare the dividend to help Mr.
Brewer. The suggestion must have come from Mr. Shorts.
Mr. PECORA. Well now, this memorandum that I have read to you
is entitled, I repeat, " The memorandum of understanding between
Messrs. Shorts, Bodman, Brewer, Kanzler, Longley, and Lord."
Mr. LORD. Yes.
Mr. PECORA. NOW,
Mr. Shorts was the executive head of the
Saginaw bank, was he not?
Mr. LORD. Yes, sir.
Mr. PECORA. Mr. Bodman
was not connected with the Saginaw
bank, was he ?
Mr. LORD. NO, sir.
Mr. PECORA. Mr. Brewer
was not connected with the Saginaw
bank, was he ?
Mr. LORD. NO, sir.
Mr. PECORA. Mr. Kanzler was not connected with the Saginaw
bank, was he?
Mr. LORD. NO, sir.
Mr. PECORA. Mr. Longley was not, was he ?
Mr. LORD. NO. sir.
Mr. PECORA. And you
Mr. LORD. NO, sir.
were not?
4304
STOCK EXCHANGE PEACTICES
Mr. PEOORA. SO that, at this conference of 6 persons named, only
1 was an officer or director of the Saginaw bank, and the other 5
were officers and/or directors of the Group; is that correct ?
Mr. LOUD. Yes, sir. Isn't it possible the suggestion could have
come from that one out of the six ?
Mr. PECORA. For the benefit of the other 5 ?
Mr. LORD. For the benefit of Mr. Brewer.
Mr. PECORA. For the benefit of the Group represented by the other
five, wasn't it?
Mr. LORD. I would say for the benefit of Mr. Brewer.
Mr. PECORA. Well, the 5 of the 6 persons who took part in this
understanding or reached this understanding were officers and directors of the Group and the other one was an officer and director of
the bank, the Saginaw bank. That is the situation.
Mr. LORD. Well, they were not all officers, but they were all
directors.
The CHAIRMAN. YOU referred to some institution in Grand Rapids
that Mr. Brewer was interested in. The First National Bank was
one, and what was the other?
Sir. LORD. The Grand Rapids National Bank and the Grand
Rapids Trust Co., Senator Fletcher.
The CHAIRMAN. And what became of them?
Mr. LORD. Well, the Grand Rapids National has been reorganized,
and I think the trust company is in process or has been. Mr.
Brewer is head of the new Grand Rapids reorganized bank.
The CHAIRMAN. When was that reorganized?
Mr. LORD. Some time this summer, as I remember.
Mr. PECORA. NOW, I want to go back to Mr. Brewer's letter td you
of November 21, 1929, which was received in evidence as exhibit no.
20 this morning, and let me read this portion of the letter to you
[reading] :
I understand, as you indicated in our conversation this morning, that it is
desirable that your institution should not be carrying a large amount of its own
stock, and for that reason you would like to have me take this off your hands.
Mr. LORD. What he was referring to was carrying Group stock.
Mr. PECORA. I was just going to ask you. What is that?
Mr. LORD. What he was referring to was Guardian Detroit Union
Group stock.
Senator COUZENS. Who put up the money to buy these 1,601 shares
of Grand Eapids National?
Mr. LORD. The securities company from their capital.
Mr. PECORA. YOU mean the Guardian Detroit Co., which was the
securities affiliate of the Guardian Detroit Bank?
Mr. LORD. Yes, sir.
Mr. PECORA. Of which you were the president?
Mr. LORD. Yes, sir.
Mr. PECORA. Were you also the president of the securities affiliate?
Mr. LORD. I was not, sir.
Senator COTJZENS. Where did they get the money to
Mr. LORD (interposing). They had 5 million capital and they had
Group bank credit in New YorK and Chicago.
Senator COUZENS. Were they borrowing from New York and
Chicago at the time they put up this money?
STOCK EXCHANGE PRACTICES
4305
Mr. LORD. I don't recall, Senator. They were substantial borrowers in both New York and Chicago.
The CHAIRMAN. The committee will now take a recess until 2
o'clock.
(Accordingly, at 1 p.m., a recess was taken until 2 p.m. of the same
day.)
AFTER RECESS
(The subcommittee resumed at 2 p.m., on the expiration of the
noon recess.)
The CHAIRMAN. The subcommittee will resume. You may proceed, Mr. PECORA.
TESTIMONY OP ROBERT 0. LORD, PENOBSCOT BUILDING*
DETROIT, MICH.—Resumed
Mr. PECORA. Mr. Lord, I am not quite certain whether in your
testimony this forenoon you told the committee who eventually took
up the 1,601 shares of the stock of the Grand Rapids National Bank
that was referred to in connection with your correspondence with
Mr. Brewer on that subject.
Mr. LORD. Mr. Pecora, I told you in my testimony, I believe, that
I did not know who eventually took up tnat stock, but I was rather
under the impression that the Guardian Detroit Co. had to keep it»
May I say something, Mr. Pecora?
Mr. PEGORA. GO ahead.
Mr. LORD. With regard to our discussion this morning—and this
is rather interesting—as to the prognostications for business in 1031,
at the time of some of these dividends, here is a clipping from the
New York Times of March 8,1931, which gives the prognostications
of 13 services, and if I may, I will just read it. I t is very brief.
The Harvard Economic Society's prognostication was this:
The business depression is apparently close to if not actually at bottom.
The National City Bank of New York in their monthly paper says:
Business men no longer feel they are looking down a black hole, but that
they have taken the measure of the depression.
Cleveland Trust Co. (Colonel Ayres) says:
Present indications are that we are at or near the bottom of this depression.
Babson's Statistical Organization says:
Many think the rapid recovery in stock prices is sure sign clouds of 1900
have lifted. We do not agree.
Federal Reserve Bank at New York said:
A few important indicators of business activity showed signs of greater
activity.
Guaranty Trust Co., of New York, said:
Indications are that immediate future will witness continued readjustment.
The Irving Trust Co., New York, said:
Now certain that a number of basic industries have made heactway recently.
Brookmire Economic Service, Inc., said:
The major decline, has approximately readied bottom.
4308
STOCK EXCHANGE PRACTICES
Alexander Hamilton Institute said:
General business situation featured by moderately encouraging developments.
Van Strum Financial Service said:
Business recovery should continue after completion of seasonal upswing.
Investors Research Bureau, Inc., said:
Current reports reveal little more than usual seasonal fluctuations.
Wetsel Market Bureau, Inc., said:
Business shows signs of having turned the corner but recovery will be slow.
Silberling Business Service said:
It can hardly be said that there is any certain indication ot a final return
not subject to relapse.
Just a little indication of what anybody's prognostication
amounted to.
The CHAIRMAN. What is the date of that?
Mr. LORD. March 8, 1931. This is clipped from the New York
Times.
Mr. PECORA. Taking all those prognostications as a whole they did
not tend to build up much optimism, did they?
Mr. LORD. NO. It would vindicate from the trend of them, that
they thought that the depression had reached the bottom and that
the recovery, whatever it might be, would be slow. But that is
rather interesting.
Mr. PECORA. Which was no ground for optimism as expressed in
dividend declarations, was it?
Mr. LORD. Well, it depends on the diyidend declarations.
Mr. PECORA. YOU remember that yesterday I asked you some
questions as to whether or not the Comptroller of the Currency in
the year of either 1931 or 1932 had requested banks to be extremely
cautious and conservative about dividend declarations?
Mr. LORD. YOU asked that question this morning, Mr. Pecora.
Mr. PECORA. Yes; this morning. Now will you please look at the
document which I now show you, and which purports to be a photostatie reproduction of a letter addressed to Mr. Maxwell, the secretary of your Group, under date of September 17, 1931, by Mr. F. M.
Brandon, then the president of the City National Bank & Trust Co.
of Niles, Mich. Do you recognize it as a true and correct copy oi a
letter among the files of your Group that was received by Mr. Maxwell [handing same to Mr. Lord] ?
Mr. LORD (after examining same). I recognize Mr. Brandon's
signature. I have no doubt of it.
Mr. PECORA. I offer that in evidence.
The CHAIRMAN. It may be received in evidence and placed in the
record.
(Photostatic copy of memorandum to A. A. F. Maxwell from F. M,
Brandon, dated Sept. 17, 1931, was received in evidence and marked
" Committee Exhibit No, 23 of Dec. 20,1933.")
Mr. PECORA. The letter received in evidence as committee's exhibit
no. 23 reads as follows. I t is on the letterhead of the Guardian
Detroit Union Group, Inc., entitled:
STOCK EXCHANGE PRACTICES
4307
INTRA-GROTJF MEMORANDUM
To Mr. A. A. F. MAXWELL, Secretary Guardian Detroit Union Group, Inc.
From Mr. F. M. BRANDON, President City National Bank & Trust Company,
Niles, Mich.
Subject
Mr. LORD. Excuse me, Mr. Pecora, what was the date of that?
Mr. PECORA. September 17, 1931. [Continuing reading:]
DATE SEPTEMBER 17,
1931.
DEAR MR. MAXWELL: Your memorandum of July 16 concerning the dividend
requirements of units of the Guardian Detroit Union Group, Inc. is received.
The September meeting of our Board of Directors was held yesterday and
the matter of dividends was discussed and no action taken. This is in harmony with the request of the Comptroller of the Currency, that current profits
be used instead to take care of depreciation in the securities account.
If for any reason the management of the Group feel that different action
should be taken and will promtply advise us, we shall call a special meeting of
the Board of Directors for further consideration of the subject and will, therefore, appreciate hearing from you promptly.
Yours very truly,
(Signed)
F. M. BRANDON
President.
Mr. PECORA. DO you recall what response, if any, was made to this
letter from Mr. Brandon?
Mr. LORD. I do not.
Mr. PECORA. I now show
you another document purporting to be a
photostatic copy of a letter addressed to Mr. B. K. Patterson, the
vice president of the Guardian Detroit Union Group, Inc., by Mr.
Henry F. Quinn, national bank examiner, under date of September 19, 1931, and ask you if you recognize it to be a true and correct
copy of a letter received by Mr. Patterson and included in the files
of the Group.
Mr. LORD. I do not think I ever saw the letter before, nor Mr.
Quinn's signature. I do not recognize it, but I have no doubt of it.
Mr. PECORA. Well, Mr. Patterson is here.
Mr. LORD. I haven't any doubt of it.
Mr. PECORA. YOU do not have any doubt that it is a true and correct copy of such a letter received by Mr. Patterson?
Mr. LORD. NO, not the slightest.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. It may be received in evidence and placed in the
record.
(Photostatic copy of letter addressed to B. F. Patterson from
Henry F. Quinn, dated Sept. 1, 1931, was received in evidence and
marked " Committee Exhibit 24 of Dec. 20, 1933.")
Mr. PECORA. The letter has been received as Committee's Exhibit
No. 24, written on the letterhead of the City National Bank & Trust
Co., Niles, Mich. It reads as follows:
SEPTEMBER 19,
Mr. B. K. PATTERSON,
1931.
T
Vice President <Guwrdian Detroit Union Group^ Inc.,
Detroit, Mich.
DEAR MR. PATTERSON : I have completed an examination of the City National
Bank and Trust Company of Nilegs, Michigan today, and there exists a problem
in the bank which I believe you would be most interested in, before the report
is submitted to the Comptroller's office.
4308
STOCK EXCHANGE PRACTICES
I shall be in Detroit, Saturday, this coming week, and I have suggested to
Mr. Brandon that he, your own good self, and I, have a conference in your
office on that date, preferably right after noon.
Will you please advise me, as well as Mr. Brandon, if this suggestion meets
with your pleasure.
Yours very truly,
(Signed)
HENRY F. QUINN,
National Bank Examiner.
Mr. PECORA. I now show you another document purporting to be
a photostatic copy of a letter or Intra-Group Memorandum addressed to Mr. Brandon by Mr. Maxwell, the Secretary of the Group,
under date of September 24, 1931, which is apparently in reply to
Mr. Brandon's letter to Mr. Maxwell, which is of September 17,1931,
which has already been offered in evidence as committee's exhibit
no. 23. Will you look at this memorandum or letter to Mr. Brandon
and see if you redognize it as a true and correct copy of such a letter
or memorandum sent to Mr. Brandon? [Handing same to Mr.
Lord.]
Mr. LORD (after examining same). I do not recall having seen
the letter, but I assume it is a correct copy; yes.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. It may be received in evidence and placed in the
record.
(Photostatic copy of Intra-Group memorandum, to F. M. Brandon, President City National Bank & Trust Company, Niles, from
Mr. A. A. F. Maxwell, Secretary, Guardian Detroit Union Group,
Inc., dated Sept. 24, 1931, was received in evidence and marked
" Committee Exhibit No. 25 of Dec. 20, 1933.")
Mr. PECORA. This letter has been received in evidence as Committee's Exhibit No. 25 of this date, and reads as follows, written on
the letterhead of the Guardian Detroit Union Grroup, Inc.
[reading] :
Date 9/24/31.
To Mr. F. M. BBANDON,
President City National Bank & Trust Co., Niles.
From Mr. A. A. F. MAXWELL,
Secretary Guardian Detroit Union Group, Inc.
DEAE Mr. BRANDON: Your letter of September 17th has been received and
referred to Mr. Patterson.
Undoubtedly there will be adjustments to be made after the conference with
the National Bank Examiner, but Mr. Patterson feels that these charges should
be taken care of through the surplus account. Will you, therefore, arrange to
call a special meeting of your Board for the purpose of declaring the dividend
as outlined in our previous memorandum of July 16th.
With kind personal regards,
Cordially yours,
Secretary.
Mr. PECORA. I now show you what purports to be a photostatic
reproduction of a memorandum or letter addressed to Mr. Maxwell
in reply to the letter just read in evidence, by Mr. Brandon, under
date of September 28, 1931. Will you look at it and tell me if you
recognize it to be a true and correct copy of such a letter or memorandum among the files of the Group? [Handing same to Mr.
Lord.]
Mr. LORD (after examining same). I do.
STOCK EXCHANGE PRACTICES
4309
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted and placed in the record.
(Intra-Group memorandum dated Sept. 28, 1931, from F. M.
Brandon, President City National Bank & Trust Co., Niles, Mich.,
to A. A. F . Maxwell, secretary Guardian Detroit Union Group,
Inc., was received in evidence and marked " Committee Exhibit No.
26 of Dec. 20, 1933.")
Mr. PECORA. Committee's Exhibit No. 26 of this date, on the letterhead of Guardian Detroit Union Group, Inc., reads as follows:
To Mr. A. A. F. MAXWELL,
Secretary Guardian Detroit Union Group, Inc.
From Mr. F. M. BBANDON,
President City National Bank & Trust Co., Niles, Mich.
DEAR MB. MAXWELL: Your memorandum of September 24 with reference to
quarterly dividends at this bank is received, and wish to advise that the writer
explained the reason for our failure to pay September dividends to Mr. Patterson while in his office on September 26.
Yours very truly,
(Signed) F. M. BRANDON, President.
Mr. PECORA. Have you any knowledge or recollection of the ex-
planation given by Mr. Brandon to Mr. Patterson in Mr. Patterson's
office on September 26, 1931, which is referred to in this letter?
Mr. LORD. NO ; I have not.
Mr. PECORA. I now show you another document purporting to be
photostatic copy of a letter or memorandum addressed to Mr. Frank
M. Brandon by Mr. Maxwell, secretary of the Group, under date of
September 29,1931. Will you look at it and tell me if you recognize
it to be a true and correct copy of such memorandum as contained
among the files of the Group ? [Handing same to Mr. Lord.]
Mr. LORD (after examining same). I assume that is a correct copy.
Mr. PECORA. I offer that in evidence.
The CHAIRMAN. Let it be admitted and placed in the record.
[Photostatic copy of Intra-Group Memorandum dated September
29,1931, to Mr. Frank M. Brandon, President City National Bank &
Trust Co., Niles, from Mr. A. A. F. Maxwell, Secretary Guardian
Detroit Union Group, Inc., was received in evidence and marked
" Committee Exhibit No. 27 of December 20, 1933."]
Mr. PECORA. The letter marked " Committee Exhibit No. 27 " of
this date, which is on the letterhead of the Guardian Detroit Union
Group, Inc., reads as follows:
SEPTEMBER 29, 1931.
Mr. FEANK M. BBANDON,
President City National Bank d Trust Co.,
Niles, Michigan.
DEAR SIB: Your memorandum of September 28 is received, from which we
note that you have discussed the dividend matter with Mr. Patterson. We assume, however, that you are calling a special meeting of your board for the
purpose of declaring the regular dividend as originaUy requested.
A. A. F. MAXWELL, Secretary.
And on this letter is an inscription, in handwriting, reading:
No dividend paid this quarter.
Do you know in whose handwriting that inscription is?
Mr. LORD. May I look at it again?
Mr. PECORA. Certainly.
175541—34—-PT 9
8
4310
STOCK EXCHANGE PRACTICES
Mr. LORD (after looking at the letter). No; I do not recognize it.
They did not pav a dividend that quarter, did they?
Mr. PECORA. Apparently not. In fact I know they did not. But
doesn't it appear that despite the representations that were being
made currently by Mr. Branclon to the Group, the Group through
its officers and directors, was insisting currently that this dividend
be declared in accordance with the original suggestions or requirements of the Group as set forth in its letter to Mr. Brandon of
July 1931?
Mr. LORD. Mr. Pecora, I think it would appear from that correspondence that the matter of dividends is left to the discretion of
the separate boards. There was a suggestion made for the payment
of a dividend, and the board used its own judgment and did not
declare it.
Mr. PECORA. After the officers of the bank had indicated to the
Group that it should, not declare the dividend requested by the
Group, or suggested by the Group, because of the position taken by
the Comptroller of the Currency, doesn't it appear from this correspondence that the Group was persisting in the making of the
suggestion that the dividend be declared ?
Mr. LORD. Yes; but it does show that the board acted on its own
discretion, regardless of any suggestions made by the Group or its
officers.
Mr. PECORA. And it does also show that after the officers of the
bank had indicated their original judgment, which was against the
declaration of a dividend, as had been suggested by the Group, that
the Group persisted in asking the bank's board to call, then, a special meeting of its board in order to declare the dividend suggested
by the Group. Isn't that clear from this correspondence ?
Mr. LORD. I t would seem to me so; yes.
Mr. PECORA. All right. Now, Mr. Lord, I want to show you what
purports to be a photostatic copy of another memorandum, addressed to Mr. B. K. Patterson, executive vice president of the Detroit
Union Group, by Mr. F . M. Brandon, president of the City National
Bank & Trust Co. of Niles, Mich., under date of October 8, 1931.
Will you look at it and tell me if you recognize it to be a true and
correct copy of such memorandum in the files of the Group ?
Mr. LORD (after looking at the letter). That is Mr. Brandon's signature.
Mr. PECORA. Mr. Chairman, I offer it in evidence and ask that it
may be made a part of the record.
The CHAIRMAN. Let it be admitted, and the committee reporter
will make it a part of the record.
(A letter dated October 8,1931, from F. M. Brandon, President of
the City National Bank & Trust Co., of Niles, Mich., to B. K. Patterson, Executive Vice President the Detroit Union Group, was
marked " Committee Exhibit No. 28, Dec. 20, 1933 ", and will be
found immediately following where read by Mr. Pecora.)
Mr. PECORA. The letter received in evidence as Committee Exhibit
No. 28 of this date being on the letterhead of the Guardian Detroit
Union Group, Inc., and indicated as an inter-Group memorandum,
reads as follows:
STOCK EXCHANGE PKACTICES
4311
To Mr. B. K. Patterson, executive vice president, Guardian Detroit Union
Group, Inc.
From Mr. F. M. Brandon, President, City National Bank & Trust Co., Niles.
Subject Quarterly Dividend.
OCTOBER 8,
1931.
In compliance with your telephone request a special meeting of our Board
of Directors was held last evening to further consider the matter of quarterly
dividend. The directors are hesitant about declaring a dividend at this lime,
having been recently advised by Examiner Quinn that the same would be
illegal if made. However, they want to comply with the request of stockholders if the same can be done in a legal manner, and therefore requested
me to advise you of the situation, and to ask the management of The Group
to request the dividend by letter, and to indicate that The Group Company as
stockholders will take care of any. requirements of the Comptroller of the
Currency, without in any manner changing the capital and surplus account of
the bank.
I am assured by a majority of the Board of Directors that if this is done the
dividend will be promptly declared, and I hope to hear from you tomorrow.
Yours very truly,
F. M. BRANDON, President
Now, Mr. Lord, do you know what happened after the receipt of
this letter or memorandum from Mr. Brandon?
Mr. LORD. I do not.
Mr. PECORA. What was that answer?
Mr. LORD. I do not know. I do not recall it.
Mr. PEOORA. DO you know whether or not the
Group acted upon
the suggestion of Mr. Brandon?
Mr. LORD. In what manner ?
Mr. PECORA. AS the letter suggested?
Mr. LORD. About the letter?
M. PECORA. Yes; about requesting the declaration of a dividend
hj letter.
Mr. LORD. I do not.
Mr. PECORA. And furthermore
stating in its request for the declaration of such dividends that it, the Group, will take care of any
requirements of the Comptroller of the Currency, without in any
manner changing the capital and surplus account of the bank?
Mr. LORD. I do not recall it.
Mr. PECORA. Well, let me shown you by way, possibly, of refreshing your recollection on that subject, this paper which purports to be
a photostatic copy of a memorandum addressed to Mr. Brandon by
Mr. B. K. Patterson, under date of October 12, 1931. Will you look
at it and tell me if it is a true and correct copy of such memorandum
.sent to Mr. Brandon by Mr. Patterson?
Mr. LORD (after reading the memorandum). I assume it is.
The CHAIRMAN. YOU assume it is ?
Mr. LORD. Yes, sir.
Mr. PECORA. Mr. Chairman,
I offer it in evidence, and ask that it
:may be made a part of the record.
The CHAIRMAN. Let it be admitted, and the committee reporter
will make it a part of the record.
(The memorandum addressed to Mr. Brandon by B. K. Patterson,
under date of October 12,1931, was marked " Committee Exhibit No!
59, December 20, 1933", and will be found immediately following*
"where read by Mr. Pecora.)
4312
STOCK EXCHANGE PRACTICES
Mr. PECORA. The memorandum which has been received in evidence
and marked " Committee Exhibit No. 29 " as of this date, and being
on the letterhead of the Guardian Detroit Union Group, Inc., and an
intragroup memorandum, reads as follows:
To Mr. F. M. BEANDON,
President dtp National Bank & Trust Co., Niles, Mich.
From B. K. Patterson,
Executive vice president, Detroit Union Group, Inc.
OCTOBER 12, 1931.
Answering your letter of October 8th in regard to the matter of quarterly^
dividend: After giving further consideration to this matter it is believed
inadvisable to ask that the City National Bank & Trust Co. of Niles pay to the^
Guardian Group the dividend which was requested for the third quarter.
Does that letter, or memorandum, serve to refresh your recollection
as to the action taken by the Group in this matter after the receipt
of Mr. Brandon's letter of October 8, 1931?
Mr. LORD. Mr. Pecora, I do not believe that I attended a meeting
with Mr. Quinn. I do not recall that I ever knew him, or ever saw
him. Without knowing the details of that conference between MrBrandon, Mr. Patterson, and Mr. Quinn it is pretty difficult for me
to comment on your question, or to answer your question. I suppose
that when Mr. Patterson wrote that letter he had been convinced by
Mr. Brandon or by Mr. Quinn that the dividend should not be paid^.
and he therefore acquiesced in it.
Mr. PECORA. Well, now, let us see about that. The letter of Mr..
Quinn
Mr. LORD (interposing). No dividend was paid.
Mr. PECORA. The letter of Mr. Quinn suggesting a conference with
Mr. Brandon and Mr. Patterson was written on September 19, 1931,
as appears from the evidence here. Notwithstanding that fact on
September 24,1931, Mr. Maxwell, secretary of the Group, apparently
had written to Mr. Brandon, further suggesting the declaration of a.
dividend, as appears from Committee Exhibit No. 26. And on October 8, 1931, as appears from Committee Exhibit No. 28, Mr.
Brandon wrote to Mr. Patterson, in which he says:
In compliance with your telephone request, a special meeting of our Board
of Directors was held last evening to further consider the matter of a quarterly
dividend.
Then in this letter Mr. Brandon proceeds to state that the directors were hesitant about declaring the dividend because they
had been advised by Examiner Quinn that to do so would be illegal.
Mr. Brandon further advised Mr. Patterson in this communication,
that if the Group wanted his directors to declare this dividend
they probably would do so if the Group would request it in writing,
and if in that writing they would further say that the Group would
take care of any requirements of the Comptroller of the Currency.
So it would appear that even after such conference was held the
Group was still insisting upon, and advising and suggesting, that
a dividend be declared. Isn't that so ?
Mr. LORD. Not having attended the conference, or knowing the
gist of it, I cannot answer that question, because I do not know all
the facts.
Mr. PECORA. Well, Mr. Lord, isn't your recollection of those facts:
refreshed by this correspondence?
STOCK EXCHANGE PBACTIOES
4313
Mr. LORD. NO ; apparently not. I do know that in that same year,
at the end of the year, there was taken out of the Niles Bank, or
the first of 1932, a total of $148,491 of assets.
Mr. PECORA. Of doubtful assets of the Niles Bank?
Mr. LORD. Yes, sir. And I assume that was the result of the
conference that Mr. Patterson may have had with Mr. Quinn.
Mr. PECORA. And despite the fact that it was considered advisable
or necessary in January of 1932 for the Group to take out doubtful
assets from this Mies Bank to the amount you have mentioned, in
the fall of 1931 the Group was insisting upon a dividend declaration bejLng made, in September of 1931.
Mr. LORD. Until convinced that it was unwise.
Mr. PECORA. NOW, 9 days after the sending of Mr. Patterson's
memorandum to Mr. Brandon, which has just been read in evidence
as Committee Exhibit No. 29, it appears that a communication was
sent by Mr. John L. Proctor, Deputy Comptroller, Treasury Department, to the board of directors of the City National Bank &
Trust Co. of Niles, Mich., according to a photosatic copy thereof
which I have, which reads as follows:
TREASURY DEPARTMENT,
Washington, October 21, 1981.
BOARD OF DIRECTORS, CITY NATIONAL BANK & TRUST CO.,
Niles, Mich.
GENTLEMEN: A report of the examination of your bank completed September 19, a copy of which was furnished to you, shows that after allowing for the
appreciation in United States securities and disregarding the depreciation in
"bonds coming within the classification of any of the four highest ratings by a
disinterested and reliable concern engaged in the business of analyzing bonds
:and securities, losses of $14,476 on defaulted bonds, and the remaining bond
•depreciation of $105,927.71, consume the surplus fund, undivided profits, and
reserves, excluding $14,819.12, which the examiner states is specifically allotted
for taxes and interest, and impair the bank's capital to the extent of $34,638.27.
As the law contemplates that the capital of a national bank shall be kept
Intact at all times, immediate steps should be taken to restore the bank's capital,
which it is recommended be done from voluntary cash contributions on the part
•of directors and/or other shareholders.
Losses aggregating $68,458.90, summarized on page 11, should be charged off
or otherwise removed.
While the present conditions prevail in your bank it is not in a position to
pay any dividends.
There is enclosed a form to be executed and returned to this office as soon
as the bank's capital has been voluntarily restored.
It is incumbent upon you to recognize the unsatisfactory condition of the slow
and doubtful assets, aggregating more than $500,000, or approximately 50
percent of the total loans and discounts, and to be keenly alive to economical
conditions as they affect borrowers.
This large aggregate of criticized assets, with the potential losses thereon,
demand that matters be taken vigorously in hand and everything possible done
to effect their collection, reduction, and adequate securing.
Please advise of the action taken with respect to making good the existing
impairment of capital, and whether the losses referred to above have been
charged off or otherwise removed, as well as the action taken and the progress
made in liquidating or satisfactorily adjusting the criticized assets, forwarding
•copies of your communication to Chief Examiner A. P. Leyburn, no. 164 West
Jackson Boulevard, room 129, Chicago, 111., and to Examiner Henry F. Quinn.
post-office box 78, Grand Rapids, Mich.
Yours very truly,
JOHN L. PROCTOR, Deputy Comptroller.
4314
STOCK EXCHANGE PRACTICES
Now, Mr. Lord, after having heard that communication read, do
you recall whether or not its contents were ever brought to your
attention ?
Mr. LORD. I do not recall the details of the contents. I do know
that the impairment of capital was repaired, and I assume that all
other requirements of the Comptroller's office were carried out.
Mr. PECORA. When did you first learn that the capital of this Niles.
Bank, one ofyour Group units, had become as seriously impaired as
the Deputy Comptroller of the Currency says it was in this letter?
Mr. LORD. I do not recall, but I assume that that letter was written
and received by Mr. Brandon.
Mr. PECORA. YOU have been telling this committee consistently
since you began testifying here on the subject that the general procedure pursued by the Group in making suggestions to its unit banks
with regard to dividend declarations by them was that before suggesting such a thing the executive officers of unit banks would indicate, either by mail, telephone, or other conversation, what was the
condition of the unit banks.
Mr. LORD. Yes, sir.
Mr. PECORA. NOW, is that so or not?
Mr. LORD. I t is so.
Mr. PECORA. That is so ?
Mr. LORD. Yes, sir.
Mr. PECORA. Well, then, didn't Mr. Brandon,
sometime prior to the
time when the Group was suggesting that his bank declare a dividend, in September of 1931, indicate to you the true condition of his
bank, of its impairment ot capital and its consequent inability to*
declare a dividend?
Mr. LORD. I do not think that Mr. Brandon realized the condition
of his bank until
Mr. PECORA (interposing). H$ did not?
Mr. LORD. NO ; I do not think so.
Mr. PECORA. DO you mean to say that Mr. Brandon was the kind of
a bank executive tnat he did not realize, until it was brought to his
notice by the national bank examiner, what the real condition of hi&
bank was, with regard particularly to the serious impairment of
capital?
Mr. LORD. Mr. Pecora, later on
Mr. PECORA (interposing). Will you just answer that question?
Do you think that Mr. Brandon was that kind of bank executive?
Mr. LORD. I do.
Mr. PECORA. When did you first learn that he
Mr. LORD. After this examination.
Mr. PECORA. And not before ?
Mr. LORD. But let me say this
Mr. PECORA (interposing). Aiid not before?
Mr. LORD. There was a question in our minds
was that deficient?
about Mr. Brandon
for some time.
Mr. PECORA. Was he ever removed? I mean when that first came
to your attention ?
Mr. LORD. Not at first, but later.
Mr. PECORA. HOW long later was it?
STOCK EXCHANGE PRACTICES
4315
Mr. LORD. I cannot remember the date when he was removed, but
it was done by his own board of directors.
Mr. PECORA. And you don't know when it was ?
Mr. LORD. It was before the bank holiday.
Mr. PECORA. The bank holiday was declared in the early part of
this year.
Mr. LORD. Yes, sir.
Mr. PECORA. And this was back in 1931.
Mr. LORD. I do not know when he was removed.
But I will try to
find out for you.
Mr. PECORA. Mr. Patterson, back there in the room, just indicated
by a shake of his head that he was not removed.
Mr. LORD. NO ; he said he did not know the date.
Mr. PECORA. Oh, he did not know the date?
Mr. LORD. NO. And I do not recall the date of the removal.
Mr. PECORA. Can't you get it?
Mr. LORD. I would not know where to get it except from the bank's
records. Mr. Patterson thinks it was in April of 1932.
Mr. PECORA. On April of 1932, some 6 months after you learned of
his deficiencies?
Mr. LORD. I do not remember the date.
Mr. PfccoRA. The date of this was October of 1931.
Mr. LORD. All right. Sometime 6 months afterward; yes.
Mr. PEOORA. All right. Now, I want to direct your attention to a
matter concerning another one of your bank units, the Union State
Bank of Dearborn. In that connection I want to show you what
purports to be a photostatic copy of a letter addressed by you to
Mr. Warren J. Rachow, president of the Union State Bank, Dearborn, Mich., under date of March 4, 1930. Will you kindly look at
it and tell me if you recognize it to be a true and correct copy of such
letter?
Mr. LORD (after reading the letter). I think that is correct.
Mr. PECORA. Mr. Chairman, I offer the letter in evidence and ask
that it may be made a part of the record.
The CHAIRMAN. Let it be admitted, and the committee reporter
will make it a part of the record.
(A letter dated Mar. 4, 1930, to Warren J. Eachow, president,
Union State Bank, Dearborn, Mich., by R. O. Lord, was marked
"Committee Exhibit No. 30, Dec. 20, 1933", and will be found
immediately following, where read by Mr. Pecora.)
Mr. PECORA. The letter just received in evidence as Committee
Exhibit No. 30, of this date, reads as follows:
MARCH 4, 1930.
Mr. WAHBEN J. RACHOW,
President, Union State Bank,
Dearborn, Michigan.
DEAB MB. RAOHOW: TO provide the dividend requirements of the Guardian
Detroit Union Group, Inc., on the basis of an annual disbursement of $3.20 per
share, the dividend should be declared at the March meeting of your Board of
Directors. I would suggest, therefore, that it would be in order for your board
to declare a dividend of 1% percent for this quarter. This dividend should be
payable not later than March 27th to stockholders of record March 17th, and a
check to cover the dividend on the shares standing in the name of Guardian
Detroit Union Group, Inc., as well as the shares standing in the names of your
directors, should be in the hands of Mr. B. K. Patterson, Treasurer, Penobscot
Building, Detroit, on that date oir on the day following. Your proportionate share
4316
STOCK EXCHANGE PEACTICES
of the expenses of the Group Company, incurred on account of services rendered by that company, will be figured and a memorandum sent to you at a
later date.
Please be good enough to promptly confirm this arrangement and advise
me upon the declaration of your dividend.
Yery truly yours,
PRESIDENT.
And it is signed by yourself.
Mr. LORD. What is the date of that?
Mr. PECORA. March 4, 1930. It was the end of the first quarter of
the existence of the Group.
Mr. LORD. Yes, sir.
Mr. PECORA. DO you
recall what action was taken by the Union
State Bank of Dearborn in response to this letter of yours ?
Mr. LORD. I do not.
Mr. PECORA. Perhaps
your recollection might be refreshed by looking at this letter, or what purports to be a photostatic copy of a
letter, which I now show you, purporting to have been sent to you
l>y Mr. Rachow, president of the Union State Bank of Dearborn,
under date of March 7,1930. Will you kindly look at it and tell me
if you recognize it*to 'be a true and correct copy of such a letter
received by you about that time ?
Mr. LORD (after reading the letter). I recognize Mr. Rachow's
signature.
Mr. PECORA. Mr. Chairman, I offer it in evidence and ask that
it be made a part of the record.
The CHAIRMAN. Let the letter be admitted, and the committee
reporter will make it a part of the record.
(A letter dated Mar. 7, 1930, to R. O. Lord, written by Warren J.
Rachow, President of the Union State Bank, Dearborn, Mich., was
marked " Committee Exhibit No. 31, Dec. 20, 1933 ", and will be
found immediately following where read by Mr. Pecora.)
Mr. PECORA. The letter which has just been received in evidence as
Committee Exhibit No. 31, written on the letterhead of the Union
State Bank of Dearborn, Mich., dated March 7, 1930, reads as
follows:
MARCH 7,
1930.
Mr. ROBERT O. LOBJ>,
President, Guardian Detroit Union Group, Inc.,
Detroit, Michigan.
DEAR ME. LORD: Replying to your letter of March 4th, subject—Quarterly
dividend which should he paid by our bank not later than March 27th, to stockholders of record March 17th, 1930, and suggesting that we declare a dividend
of Ity per cent, desire to say.
At a regular meeting of our Board, held March 5th, this matter came up
for action. Our director, Mr. Frank W. Blair, stated that IY2 per cent would
not be enough, suggesting that it should be 3 per cent quarterly, placing us
upon a basis annually of 12 per cent. The suggestion was put in the form of
a motion which was duly supported and carried unanimously. We will, therefore, set up $6000.00 for this purpose and mail you our draft covering the
stock standing in the name of the Guardian Detroit Union Group, Inc., and
the shares standing in the name of our directors in the manner suggested
t)y you.
Very truly yours,
WABBBN J. RACHOW,
President.
Mr. PECORA. The Mr. Frank W. Blair referred to in this letter
was, at the time this letter was written, chairman of the board of
ithe Group, was he not?
STOCK EXCHANGE PRACTICES
4317
Mr. LORD. I believe he was.
Mr. PECORA. He was not an officer of the Union State Bank of
Dearborn, was he?
Mr. LORD. He was a director. I would not say he was not an
officer; I do not know.
Mr. PECORA. Mr. Frank W. Blair was vice president, according to
this letterhead.
Mr. LORD. Then he was.
Mr. PECORA. But according to the annual report of that bank for
the year 1930, he was not an officer?
Mr. LORD. Mr. Blair is here. Perhaps he knows when he resigned
as an officer.
Mr. PECORA. But he was a director?
Mr. LORD. Yes, sir.
Mr. PECORA. DO you
know any reason why this particular bank at
this time should have gone beyond your suggestion with respect to
the dividend it should declare and to have accepted rather the suggestion of one of its directors, Mr. Blair, who happened at the time
to be the chairman of the Group board?
Mr. LORD. I have not the slightest idea, Mr. Pecora. I was not
at the meeting. So far a,s I know, I was never told the reason for
that increase in the dividend. I assumed the bank could afford to
make the increase. I do not know.
Mr. PECORA. Would you further assume that Mr. Blair, as chairman of the Group board, had an influence on the board of this bank
that was enhanced because he was chairman of the Group?
Mr. LORD. I would not know that. I do not know what relationship Mr. Blair had with his fellow directors of the Union State Bank.
I assume they respected him or they would not have had him as a
director.
Mr. PECORA. DO you think they also respected his position as chairman of the Group board?
Mr. LORD. I have no doubt of it.
Mr. PECORA. Neither have I. Now, Mr. Lord, I want to show
you a typewritten statement purporting to represent the amounts of
dividends declared by different bank units of the Group to the
Group during the years 1929, 1930, 1931, and 1932, respectively.
Will you please look it over and tell us if it is a correct statement of
such dividends?
Mr. LORD. Mr. Pecora, I have no way of checking the accuracy of
this statement.
Mr. PECORA. DO you know Mr. Ubank?
Mr. LORD. Yes, sir.
Mr. PECORA. He is connected with the Group, is he not?
Mr. LORD. Yes.
Mr. PECORA. DO you recognize the initialing on the lower
righthand corner of that typewritten statement as the initials of Mr.
Ubank?
Mr. LORD. He is here; I can ask him.
Mr. PECORA. Will you show it to Mr. Ubank and ask him if heconfirms those figures ?
Mr. LORD (after conferring). He does.
Mr. PECORA. I offer it in evidence.
4318
STOCK EXCHANGE PRACTICES
The CHAIRMAN. Let it be admitted.
(Typewritten statement showing amounts of dividends declared by
various bank units of the Group during the years 1929, 1930, 1931,
rand 1932, respectively, was received in evidence, marked " Committee
Exhibit No. 32, Dec. 20, 1933.")
Mr. PECGRA. The exhibit which has been received in evidence as
'Committee's Exhibit No. 32 of this date shows that during the year
1929 certain of the unit banks of the Group paid to the Group dividends aggregating $886,104; that during the year 1930 such banks
paid to the Group dividends aggregating $5,000,866.60; that during
the year 1931 the unit banks, or some of them, paid in the aggregate to
the Group dividends amounting to $3,194,093.49; that during the calendar year 1932 unit banks paid dividends aggregating $663,000, making a total paid to the Group by the unit banks for all of the calendar
years 1930, 1931, and 1932, and for the last month or so of 1929,
dividends aggregating $9,744,064.09; and that during the year '1933
a dividend of $15,625 was paid to the Group by the Second National
Bank & Trust Co. of Saginaw, and that a dividend of $30,000 was
paid to the Group by the Highland Park State Bank, the total of
wOiich two amounts is $45,625, which should be added to the total
talready stated of $9,744,064.09.
I show you another typewritten statement entitled "Guardian
Detroit Union Group, Inc., Summary of Cash Dividends." Will you
look at it and tell me if the figures shown thereon correctly set forth
the cash dividends paid out by the Group for the periods of time
specified therein, which commence with the 20th of June 1929 ?
Mr. LORD. I assume it is correct. I recognize Mr. Ubank's signature on it.
Mr. PECORA. Mr. Ubank has confirmed the correctness of it, has
he not?
Mr. LORD. He has initialed it.
Mr- PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted.
(The typewritten statement referred to, entitled " Guardian Detroit Union Group, Inc., Summary of Cash Dividends ", was received
in evidence, marked " Committee Exhibit No. 33, Dec. 2051933.")
Mr. PECORA. The paper which has just been received in evidence
as exhibit 33 of this date shows total cash dividends paid by Guardian Detroit Union Group, Inc., beginning with June 20, 1929, and
ending on March 25,1932, the sums aggregating $9,293,639.90.
When was the last cash dividend declared by the Group ? It was
in March, 1932, was it not?
Mr. LORD. It was paid April 1, 1932.
Mr. PECORA. For the first quarter of 1932?
Mr. LORD. Yes.
Mr. PECORA. And that was the last cash dividend ?
Mr. LORD. A 25-cent dividend.
Mr. PECORA. Why were dividends discontinued after that time ?
Mr. LORD. Because it was felt wiser to conserve the resources
of
the institution.
Mr. PECORA. NOW I will ask you another question, Mr. Lord.
Who prepared the annual reports that were sent to the stockholders
of the Group ?
STOCK EXCHANGE PRACTICES
4319
Mr. LORD. I would say they were prepared by numerous people.
Mr. PECORA. Who were they?
Mr. LORD. The executive committee of the Group Co., the accounting department of the Group Co., principally.
Mr. PECORA. Will you mention the individuals who were especially active in the preparation of the annual reports ?
Mr. LORD. I do not think there was any particular individual, Mr.
Pecora. Myself, Mr. Kanzler, chairman of the board; Mr. Walsh,
while he was there; Mr. Huelsman who came as comptroller; Mr.
Patterson, while he was there, sat in on it. There were a number of
people, Mr. Pecora.
Mr. PECORA. When those annual reports were finally prepared and
issued, they were issued over your signature as president of the
Group, were they not?
Mr. LORD. On order of the board of directors or the executive committee, whatever it was.
Mr. PECORA. The last annual report, of course, was issued in the
early part of the year and covered the calendar year 1932?
Mr. LORD. There was no annual report issued for that year.
Mr. PECORA. There was not?
Mr. LORD. NO, sir.
Mr. PECORA. Was it
Mr. LORD. I think
ever proposed to issue one ?
it was being worked on, and then this loan
matter and the holiday came along and it never was published.
Mr. PECORA. Who was working on it ?
Mr. LORD. I would say the same general crowd, except Mr. Patterson. Mr. Huelsman and all of us, the executive committee, were
working on it.
Mr. PECORA. Did the work on the preparation of that report reach
a stage whete it was reduced to writing in any form ?
Mr.-LORD. I believe so; yes.
Mr. PECORA. I show you what purports to be a photostatic reproduction of such proposed report. Will you look at it and tell me if
you recognize it as such ?
Mr. LORD. This looks somewhat familiar in spots.
Mr. PECORA. DO you recognize the handwriting in the pencil interlineations^ that appear on the face of the document ?
Mr. LORD. I do not, Mr. Pecora.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted.
(Copy of proposed Annual Report of Guardian Detroit Union
Group, Inc., referred to, was received in evidence and marked " Committee Exhibit No. 34, Dec. 20, 1933 ", and will be found printed in
full at the end of today's transcript.)
Senator COTJZENS. When did Mr. Patterson leave your organization ?
Mr. LORD. He did not leave the organization until after the holiday and Mr. Huelsman took a more active part in the comptroller's
•end of the business. Mr. Patterson was doing more out-State work
in connection with the bank and their liquidation program.
The CHAIRMAN. HOW many of these unit banks had closed their
doors before the holiday?
Mr. LORD. None of them.
4320
STOCK EXCHANGE PRACTICES
The CHAIRMAN. They were all open in this Group until the
holiday?
Mr. LORD. They were all open until the holiday, every one of them.
Mr. PECORA. That holiday was declared last February, was it not?
Mr. LORD. In Michigan; yes, sir.
Mr. PECORA. I mean the one declared by the Governor of the
State.
The CHAIRMAN. I had reference to the holiday beginning March 5..
Mr. LORD. NO banks were allowed to reopen in Michigan prioi;
to that holiday, Senator Fletcher. You see, the Governor declared
a State holiday that continued up right through ^March 5 and
beyond.
The CHAIRMAN. That State holiday was declared in Februarv?
Mr. LORD. The 13th or 14th.
Senator COTJZENS. It became effective on the 14th.
The CHAIRMAN. 1933?
Mr. LORD. Yes, sir.
The CHAIRMAN. And no banks were open after that until when?
Mr. LORD. Until after March 10, when the President and the
Secretary of the Treasury licensed the banks.
Mr. PECORA. HOW many of these units were not permitted to
reopen after the Federal bank holiday had been declared ?
Mr. LORD. I may not be accurate, but I will give you the best
information I can. This, I think, is correct: The First National
Bank of Kalamazoo opened 100 percent after the national holiday j
the City National Bank & Trust Co., of Battle Creek; Second National Bank & Trust Co., of Saginaw; Highland Park State Bank,
of Highland Park; First National Bank, of Port Huron; Grand
Eapids Trust Co., Grand Kapids; Bank of Hamtramck; Guardian
Bank, of Royal Oak, and Guardian Bank, of Dearborn.
Mr. PECORA. Eleven banks ?
Mr. LORD. Yes.
Mr. PECORA. They were permitted to reopen?
Mr. LORD. Yes, sir; that is my recollection.
The CHAIRMAN. Some were State banks?
Mr. LORD. Yes, sir; there were five. No, Mr. Pecora; that was
not 11 banks; that is 9 banks.
The CHAIRMAN. Five of them were national ?
Mr. LORD. N O ; wait a minute. Five State institutions and four
national institutions in that list.
The CHAIRMAN. And they continued open?
Mr. LORD. Yes, sir.
Senator COUZENS. All of
Mr. LORD. The Highland
them?
Park State Bank and the Bank of Dearborn have been taken into the Manufacturers' National Bank, of
Detroit.
The CHAIRMAN. Those were the only ones opened after the
national holiday?
Mr. LORD. Yes, sir. Here are some that have since been reorganized, Senator Fletcher: Grand Eapids National, Union & People's
National, and the City National at Niles.
The CHAIRMAN. They have been reorganized since?
Mr. LORD. Yes, sir.
STOCK EXCHANGE PRACTICES
4321
The CHAIRMAN. And probably doing business or will do business?
Mr. LORD. I think they are doing, business now.
Mr. PECORA. Mr. Lord, I will question you tomorrow with regard
to that draft of the proposed report for the year 1932 that has been
marked in evidence as " Exhibit No. 34." Meanwhile I will pass on
to another subject. I show you what purports to be a photostatic
reproduction of a so-called " intra-Group memorandum " addressed
by you to the directors of the Guardian Detroit Bank under date of
January 21,1931, on the subject of favorable comment from Guardian " Rooters." Will you look at it and tell me if you recognize it
to be a correct copy oi such an intra-Group memorandum prepared
and submitted bv you to the board of directors of the Guardian
Detroit Bank?
Mr. LORD. It is.
Mr. PECORA. I t is?
Mr. LORD. I think so,
Mr. PECORA. I offer it
in evidence.
(Photostatic copy of Intra-Group memorandum addressed by R. O.
Lord to the directors of the Guardian Detroit Bank under date of
Jan. 21,1931, was received in evidence, marked " Committee Exhibit
No. 35, Dec. 20,1933.")
Mr. PECORA. The document that has been marked a Committee's
Exhibit No. 35 " in evidence,, is on the letterhead of the Guardian
Detroit Union Group, Inc., entitled "Intra-Group Memorandum"
to the directors of Guardian Detroit Bank, from Mr. Robert O. Lord,
president
Senator COTJZENS. Before you start reading that; Who were the
4i
Guardian Rooters " referred to in the memorandum ?
Mr. LORD. Other banks, the friends
Senator COTJZENS. There was no specific organization?
Mr. LORD. There is no organization of " Guardian Rooters"; no,
•sir.
Senator COTJZENS. That is what I mean.
Mr. LORD. NO, sir. We had a group, but not a " Rooters " organization.
Mr. PECORA [reading] :
On January 2, 1931, there appeared in the Detroit newspapers a brief news
item to the effect that the deposits of Guardian Detroit Bank had increased
by $9,500,000 during the past three months to a new peak of $124,096,976.65.
•Clippings of this news item were sent to all bankers with whom Guardian
maintains banking relationships—with the additional information that all of
the twenty-three banks and trust companies comprising Guardian Detroit
Union Group, Inc., showed on December 31, 1930, " Bills payable—NONE ".
Extracts from letters written by these bankers—commenting upon the above—
•are reproduced below as being of possible interest to you.
And then follow extracts from letters of executive officers of 59
banks or other corporations, and one from Mr. R. E. Reichert, commissioner of banking of the Michigan State Banking Department.
(Exhibit No. 35 will be found in full at the end of today's record.)
Mr. PECORA. I am not going to read at this time all of these comments that are embodied in this exhibit. Among them, however, is
one from the president of the National City Bank of New York, one
from a vice president of the Chase National Bank
Senator COTJZENS. Does it give the names of the officers of those
two famous banks ?
4322
STOCK EXCHANGE PRACTICES
Mr. PECORA. They are both very brief comments. I will read then*
in full [reading]:
NATIONAL OITT BANK OF NEW YORK, N.Y..
I appreciate your letter of January 2d. You have made a good showing.
GORDON RHNTSCHLEB, President.
THE CHASE NATIONAL BANK, NEW YORK CITY.
You have every reason to be proud of the Guardian Detroit Bank, as well a&
the Group.
RICHARD R. HUNTER, Vice-President.
You did not get any from Mr. Wiggin, did you?
Mr. LORD. I did not see it there, Mr. Pecora.
Senator COTJZENS. Or Mr. Mitchell?
Mr. LORD. Mr. Rentschler.
Senator CorfzENs. You did not hear from Mr. Mitchell?
Mr. LORD. NO, sir.
Mr. PECORA. One of
these comments in your Intra-Group memorandum marked " Committee's Exhibit No. 35 " is from the Vice
President of the Irving Trust Co. of New York, and is as follows
[reading]:
We congratulate your institution, and especially so for the liquidity indicated by your statement, that the several banks comprising your group werecompletely out of debt at the close of 1930. If all the banks of the country
pursued a similar policy there would be a far greater stability in banking
and less unsettlement during unusual periods.
Senator COUZENS. Was that a fact, Mr. Lord, that all your banks
were out of debt?
Mr. LORD. Certainly—except to the depositors.
Senator COUZENS. We will see about that later.
Mr. PECORA. I notice that one of these comments
The CHAIRMAN. What is the date of that?
Mr. PECORA. This is dated January 21, 1931.
I notice that one of these comments, from a Guardian rooter, is
from C. W. Banta, Vice President of the Bank of America, New
York, and reads as follows [reading] :
If I may be permitted to use a superlative, the showing of all the 23 banks*
and trust companies is little short of miraculous, considering all the uncertainties and disturbances of the day.
The concluding comment that appears in this exhibit is from Mr.
R. E. Reichert, commissioner of banking of the State of Michigan,,
and reading as follows [reading] :
I have your letter enclosing a newspaper clipping, and want to congratulate
you upon the condition of the institutions in your group. I am certainly
pleased to see you say that not any of the 23 banks and trust companies comprising your group owe the Federal Reserve Bank or any other bank a single
penny. It is certainly a very healthy condition, and a very comfortable one
to be in at the present time
(Signed) R. E. REICHERT, Commissioner.
Now, Mr. Lord, was it true that all the unit banks of the Group
had no bills payable ?
Mr. LORD. I assume it was if those were their published statements.
Mr. PECORA. Were they their published statements at the time you
prepared this Intra-Group memorandum which is dated January 21V
1931?
STOCK EXCHANGE PRACTICES
432&
Mr. LORD. I would have to look over the December 31, 1930, figures. Is that what I was referring to ?
Mr. PECORA. YOU did refer, in this Intra-Group memorandum, to.
that by saying [reading] :
All the 23 banks and trust companies comprising Guardian Detroit Union
Group, Inc., showed, on December 31, 1930, "bills payable, none."
Mr. LORD. I assume that is correct. I would have to check it absolutely.
Mr. PECORA. YOU prepared this memorandum, did you not ?
Mr. LORD. Yes.
Mr. PECORA. And had it issued ?
Mr. LORD. I assume it was correct
at the time, yes. I have no»
reason to believe it was not.
Mr. PECORA. DO you know now that not a single one of the 23
banks and trust companies that comprised your Group on December
31,1930, had any bills payable of any kind?
Mr. LORD. I would have to check the published statements of December 31,1930.
Senator COUZENS. Just a minute. Why do you say "published
statements " ?
Mr. LORD. Because each bank published its own statements.
Senator COUZENS. And you had no other information than that
which pertained to the published statements; is that correct?
Mr. LORD. What kind of information, Senator?
Senator COUZENS. AS to the bills payable?
Mr. LORD. We had weekly reports.
Senator COUZENS. SO, the only information you had when yott
prepared that memorandum was the published statements?
Mr. LORD. The memorandum was based upon the published statements.
Senator COUZENS. YOU had no other information, other than was
contained in the published statements, is that correct ?
Mr. LORD. I do not know what you mean by " other information."
Mr. PECORA. That is a simple term.
Mr. LORD. I had a lot of other information about all the banks.
Senator COUZENS. Among that lot of other information you had,
did you have any information to sustain your contention that there
were no bills payable in any of those 23 constituent units of yours?
You remember, now, Mr. Lord, and I want to remind you, that you
are under oath.
Mr. LORD. I realize that.
Senator COUZENS. I want to know whether you had any information outside of the published statements as to whether or not
any of these 23 units had bills payable.
Mr. PECORA. On December 31, 1930.
Senator COUZENS. Yes.
Mr. LORD. Senator, if that statement was made, it was made in
good faith on the basis of the information I had.
Senator COUZENS. Whether from published statements or intradepartment communications, or otherwise,-is that true?
Mr. LORD. I think so.
4324
STOCK EXCHANGE PRACTICES
Senator COUZENS. YOU do not answer that definitely. Are you
trusting to your memory?
Mr. LORD. Data like that are prepared in some other departments
frequently. I do not keep the books. You must rely, or I had to
rely, upon information given to me by employees in the organization
at all times. No man could cover the whole thing.
Senator COUZENS. DO you now believe that that statement was
true, in fact?
Mr. LORD. I think it was, or it would not have been stated.
Senator COUZENS. But subsequent information has not indicated to
you that that statement is true or untrue? I ask that question.
Mr. LORD. NO, sir.
Senator COUZENS. YOU have no subsequent
Mr. LORD. Not that would indicate that that
information?
statement made in
there is other than true.
Senator COUZENS. All right.
Mr. PECORA. I show you what purports to be a printed copy of the
Annual Report issued by the Guardian Detroit union Group, Inc.,
as of December 31, 1930. Will you look at it and tell me if you
identify it as a true and correct copy of the annual report that was
so issued by you as president of the Group ?
Mr. LORD. These statements, as shown in this report, would indicate
that there were no bills payable, unless you want to consider that the
Highland Park Trust Co. first-mortgage bonds outstanding are bills
payable.
Mr. PECORA. NO. I merely asked you to look at that printed document and tell us, if you can identify it as a true and correct copy of
the annual report tnat was issued by you, as of December 31, 1930.
Mr. LORD. I t is, sir.
Mr. PECORA. I offer
it in evidence, but in view of its voluminous
character I do not think it need be spread on the minutes.
The CHAIRMAN. Let it be admitted in evidence and filed.
(The document referred to, Annual Report Guardian Detroit
Union Group, Inc., Dec. 31, 1930, was received in evidence, marked
" Committee's) Exhibit No. 36", Dec. 20, 1933, and the same was
ordered filed.)
Mr. PECORA. I shall make reference to certain extracts from this
report from time to time. This report has been received in evidence
as Committee's Exhibit No. 36 of this date, and on page 10 thereof,
under the caption "Aggregate Resources and Liabilities of Banks
and Trust Companies Affiliated with Guardian Detroit Union Group,
Inc. as of December 31, 1930 " appears this item, under the caption
of " Liabilities: Bills payable, none." You notice that, do you not,
Mr. Lord, the next to the last item on that page ?
Mr. LORD. Yes, sir.
Mr. PECORA. NOW, Mr.
Lord will you tell this committee whether
or not there was a settled policy on the part of the group to have
its unit banks show no bills payable at any time in their statements
or reports?
Mr. LORD. I would say it was a settled policy of the banks to show
no bills payable, or to keep them at a minimum, at all times.
SLOCK EXCHANGE PRACTICES
4325
Mr. PECORA. Was that settled policy of a kind which enabled the
4init banks to make in their reports the statement of no bills payable at any time, because bills payable which were in existence were
.temporarily taken care of by some process or device?
Mr. LORD. May I ask you to repeat the question?
(The reporter read the pending question.)
Mr. LORD. Read it again, please.
(The reporter again read the pending question.)
Mr. LORD. Read it again. I t is not clear to me, at the end.
Mr. PECORA. I want it to be fully clear to you.
(The reporter again read the pending question.)
Mr. LORD. I would say it was the policy of the group that the
units should make a satisfactory snowing on the date of the
statements.
Mr. PECORA. Well, was that satisfactory showing designed to be
satisfactory despite the facts?
Mr. LORD. I would not think so.
Mr. PECORA. Can you tell this committee whether, at or about the
time when unit banks were about to be examined, either by the State
banking department or by the Comptroller of the Currency, or at or
about the time when they were expected to publish reports, they owed
bills, but by the adoption of some method or device or process, those
'bills payable were temporarily taken care of so that they would not
be shown upon an examination of the bank or in any published
Teport of condition.
Mr. LORD. Mr. Pecora, no bank knows when an examination is to
"be made, so that it would not be possible. For instance
Mr. PECORA. HOW about when banks were about to make
•statements ?
Mr. LORD. I think the effort was made at all times to make a good
statement.
Mr. PECORA. Won't you please answer my previous question, "Mr.
Lord, more specifically than you have?
Mr. LORD. The one that I asked to be repeated ?
Mr. PECORA. NO ; the one after that.
Mr. LORD. May I ask you to read that?
(The reporter read as requested.)
Mr. LORD. I have answered the first part of it.
Mr. PECORA. Yes; jou have answered the first part. Now answer
the second part relating to the publication of reports of condition
by the bank.
Mr. LORD. The question involves so many things. Read it and
leave out the first part.
Mr. PECORA. Let me phrase it again.
Mr. LORD. All right. Phrase it again. You have put two things
in there.
Mr. PECORA. I will make it as simple as I possibly can. From time
to time, Mr. Lord, your unit banks were required to publish reports
-of condition, were they not?
Mr. LORD. Yes, sir.
Mr. PECORA. At any
of those times did any of those unit banks
have bills payable which were taken care of temporarily in some f ash175541—34—PT 9
9
4326
STOCK EXCHANGE PRACTICES
ion so as to make it unnecessary to show those bills payable in
published reports of condition ?
Mr. LORD. Yes, sir.
Mr. PECORA. HOW was that done, Mr. Lord ?
Mr. LORD. I t was done usually by either the
Guardian Detroit
Bank buying some of their assets and supplying them with cash or
depositing funds in the form of CD's.
Mr. PECORA. Just enlighten us further about the allusion to
" CD's." Do you mean certificates of deposit?
Mr. LORD. Certificates of deposit.
Mr. PECORA. What was the reason for doing that ?
Mr. LORD. That the bank should make an excellent showing.
Mr. PECORA. In other words, was not this one of the reasons, to
enable the unit banks to make reports which would show no bills
payable, despite the fact that there were actually bills payable ?
Mr. LORD. Yes. May I interject something at this point ?
Mr. PECORA. Surely.
Mr. LORD. For a great many years the bankers in this country had
very foolishly adopted the idea that it was something to be ashamed
of for a bank to show borrowed money. In spite of
Mr. PECORA. Mr. Lord, are you not undertaking entirely too much
to speak for all the bankers of this country ?
Mr. LORD. Just a minute, please, Mr. Pecora. Let me finish,,
please.
Mr. PECORA. I do not want the record encumbered with your observations as to what all the bankers of this country thought or did,
because I do not think you or any other individual is competent to
assert that.
Mr. LORD. All right. Then, might I say that, generally speaking
Senator COTJZENS. That is too wide a field.
Mr. LORD. The public had been educated to a point where to have
a bank show bills payable was some criticism of the bank.
Mr. PECORA. Who was the educator in that respect?
Mr. LORD. The bankers themselves, and I blame them for it.
Mr. PECORA. Were you one of those bankers ?
Mr. LORD. Probably, long before I came to Detroit.
Mr. PECORA. HOW universal wa^s that practice ?
Mr. LORD. I would say fairly universal. That is, during the past
3 years, with the public fear and distrust, that complex that the
bankers had was accentuated. On top of that, we had the publicity
clause in the E.F.C. law, requiring or permitting the R.F.C. to
publish the statement of its loans.
Senator COUZENS. Please make that statement over again.
Mr. LORD. The R.F.C. required the publication of R.F.C. loans.
Isn't that correct, under the law ?
Senator COUZENS. When?
Mr. LORD. La>st summer.
Senator COUZENS. But that has nothing to do with these other
statements.
Mr. LORD. I am just showing the whole picture.
Senator COUZENS. Just leave out irrelevant and immaterial matters in discussing these other matters, because the E.F.C. publicity
STOCK EXCHANGE PRACTICES
4327
of bank loans did not occur until after these events we are talking
about.
Mr. LORD. All .right. Eliminate that. The complex still remained in the minds of the public that it was a criticism of the bank
to show bank loans. With the public fear and distrust, and the complex of panic, it was necessary that every bank, or at least most banks
considered it necessary, to make the best showing they possibly could
at the time of publication of statements, for their own and their
depositors' protection.
The CHAIRMAN. They would do that, you mean to say, by borrowing money from somebody ?
Mr. LORD. Or securing deposits that would eliminate their
borrowed money.
The CHAIRMAN. And then, after that was all over, they would
get back to the
Mr. LORD. They might.
Mr. PECORA. They did in the case of your unit banks, did they
not?
Mr. LORD. In some cases; yes.
Mr. PECORA. Have you finished your answer.
Mr. LORD. I think I have.
Senator COTTZENS. Before you go on, when you had these bills
payable, were they secured?
Mr. LORD. Always.
Senator COTJZENS. SO, in effect, that security still remained with
bills payable, although your statement, in itself, showed no bills
payable.
Mr. LORD. It did not.
Senator COTJZENS. YOU withdrew the security?
Mr. LORD. We had no claim on the security
when we had a
deposit in the bank.
Senator COTJZENS. But you had the security.
Mr. LORD. It might have been in our possession, but we had no
claim on it, any more than if I were borrowing money and paid my
note, and left the collateral with the bank.
Senator COUZENS. I think we will show, in a few days, that it
was very necessary to have the collateral, which would not have been
available for depositors' claims.
Mr. LORD. I do not know what cases you are talking about, Senator Couzens. I cannot answer that question.
Mr. PECORA. Mr. Lord, if, as you have just told us, it was a rather
universal practice among bank executives to temporarily take care of
bills payable in order that they might show in their published reports that they had no bills payable, whereas in truth and in fact
they did have, why did you, in the information that you caused to
be sent out in January 1931, to different bankers with whom the
Guardian institutions maintained banking relationships, include the
specific information—and I am now quoting from your memorandum, Committee's Exhibit No. 35—that all the 23' banks and trust
companies comprising Guardian Detroit Union Group, Inc., showed,
on December 31,1930, "bills payable, none ", and you had the " hone *'
4328
STOCK EXCHANGE PRACTICES
written out in capital letters? If that was the universal custom,
bankers receiving that information would take it as a matter of
course, would they not ?
Mr. LORD. I do not know how they would take it.
Mr. PECORA. Isn't it normal to expect that that is what they would
have done?
Mr. LORD. I suppose so; yes, sir.
Mr. PECORA. But instead, apparently a lot of these bankers thought
that you had performed a miracle in making statements in behalf of
your 23 banks that showed that they had no bills payable at all,
because one of these banking officers, one of the Guardian " rooters ",
you will remember, according to Exhibit No. 35, said: " If I may be
permitted to use a superlative, the showing of all the 23 banks and
trust companies is little short of miraculous." Apparently that bank
officer was unaware of the legerdemain by which this miracle was
performed. Isn't that so?
Mr. LORD. Mr. Pecora, wasn't my statement to the effect that the
banks throughout the county endeavored to make the best showing
they could?
Mr. PECORA. NO ; your statement, as I recall it, was far more specific than that. Your statement was that the banks had educated
the public into a fear complex respecting banks that owed bills.
Mr. LORD. I don't think it was quite as strong as that.
Mr. PECORA. Well, if it was not quite as strong as that, that is the
way I understood it. Didn't you intend it to be that strong ?
Mr. LORD. I said the bankers had very foolishly educated the
public on the question of the criticism of the banks when they
showed borrowed money, as I recall it.
Senator COTJZENS. And so as to overcome that you created a device
to hide it ?
Mr. LORD. I would not call it a device, Senator.
Senator COUZENS. Well, I think that the record shows, Mr. Lord,
clearly it was a device, because you yourself testified a while ago,
without going into specific cases, that you made every effort to avoid
showing bills payable.
Mr. LORD. We did,
Senator COTJZENS.
sir.
But you did not pay up your bills payable to
avoid the showing, because you say yourself that there were occasions
where there were bills payable that were bills payable shortly after
reinstatement ?
Mr. LORD. I think there probably are, sir.
Senator COUZENS. Yes.
Mr. LORD. Let me say this in that connection, in connection with
the Guardian Detroit Bank, as in the case of many large banks: I t
found itself with a surplus fund beginning with the 15th of December until after the first of the year. Is there any reason—there
certainly is none that I know of—why those funds, instead of being
sent to Wall Street or to Chicago, should not be placed in our own
institution?
Senator COUZENS. Are you asking me a question ?
Mr. LORD. I am asking that as a question.
STOCK EXCHANGE PEACTICES
4329
Senator COUZENS. But the truth of the fact is you did not have
any surplus funds. These were not actual transfers because they
were canceled in 2 or 3 days.
Mr. LORD. They must have been actual funds, Senator Couzens.
There was no other wajr of doing it.
Mr. PECORA. I will in detail by documentary proof, Mr. Lord,
show how it was done.
Senator COUZENS. Yes; perhaps I am running ahead of the story.
Mr. PECORA. Yes. But while we are on this phase of the story let
me read from your intragroup memorandum, marked " Exhibit No.
35 ", on the subject of " favorable comment from Guardian rooters "
this " root " from Ben Mills, president of the Liberty National Bank,
Oklahoma City, Okla.:
The newspaper clipping is indeed interesting, taking into consideration the
sentiment that obtains in other parts of the country. As is always the case, it
depends upon the management.
Mr. Mills was quite observanti wasn't he ? He said it all depends
on the management.
Mr. LORD. I would not know what he meant by that.
Mr. PECORA. Well, you assumed that he was making a very favorable comment?
Mr. LORD. I would think so; yes.
Mr. PECORA. On the newspaper clipping that you sent out to all
these bankers and which purported to show that on December 31,
1930, not one of the 23 banks that were units of the group had a
single bill payable?
Mr. LORD. I would assume so.
Mr. PECORA. He was crediting the management with that showing,
wasn't he?
Mr. LORD. I would assume so.
Mr. PECORA. DO you suppose Mr. Mills, when he bestowed this
praise, had in mind this " universal practice " that you have referred to?
Mr. LORD. I don't know what he had in mind.
Mr. PECORA. Well, now, apparently the banking commissioner of
the State of Michigan was unaware of that universal banking practice, because he seems to have been quite impressed by that portion
of the information that you sent to him with respect to " none of the
unit banks in your group having any bills payable on December 31,
1930 ", and that appears from his comment to you reading as follows,
reading it from Exhibit No. 35:
I have your letter enclosing a newspaper clipping. Want to congratulate
you upon the condition of the institutions in your Group. I am certainly
pleased to hear you say that not any of the 23 banks and trust companies
comprising your group owe the Federal Reserve Bank or any other bank
a single penny. It is certainly a very healthy condition and a ven^ comfortable
one to be in at the present time.
So that apparently your banking commissioner was unaware of
this universal custom?
Mr,. LORD. He must have been aware of everything that went on,
because he had access to all the State banks.
4330
STOCK EXCHANGE PRACTICES
Mr. PECORA. Well, but you would infer from this favorable comment from him that it was the usual thing for banks to have no bills
payable ?
Mr. LORD. I would not infer that from it; no.
Mr. PECORA. YOU would infer quite the contrary, wouldn't you?
Mr. LORD. I would think so.
Mr. PECORA. SO that Mr. Reichert was not aware of this universal
custom apparently?
Mr. LORD. Of showing no bills payable ?
Mr. PECORA. Yes.
Mr. LORD. I think he must have been aware of that; yes.
Mr. PECORA. Why was he complimenting you specifically upon
the fact that your banks showed not a single bill payable, if he knew
it was the universal custom?
Mr. LORD. Let me ask what you mean by the " universal custom "—
of showing no bills payable?
Mr. PECORA. Exactly what you meant by it. I am using your
language.
Mr. LORD. Of showing no bills payable?
Mr.
PECORA. Yes.
Mr. LORD. I think he meant it in a complimentary way, of the
showing of the banks.
Mr. PECORA. He thought it was an unusual showing, did he not?
Mr. LORD. Yes; I think he must have.
Mr. PECORA. What is that?
Mr. LORD. I would gather so from his letter.
Mr. PECORA. It would not be an unusual showing in his opinion
if he knew that such a showing was simply due to universal custom
and not to the fact ? Isn't that logical ?
Mr. LORD. I would think so; yes.
Mr. PECORA. That is logical, isn't it?
Mr. LORD. Sounds logical.
Mr. PECORA. NOW, Mr. Chairman, it is 5 minutes to 4. The
evidence I have I want to bring out by this witness I think can be
reserved until tomorrow morning.
The CHAIRMAN. We will take a recess now until 10:30 tomorrow
morning.
(Accordingly, at 3: 55 p.m., the committee adjourned until 10: 30
a.m. of the fbllowing day.)
4331
STOCK EXCHANGE PEACTICES
COMMITTEE EXHIBIT NO. 32—DECEMBEB 20,
1933
Dividends
1930
1929
1931
1932
Total paid
to Group
Company
Guardian National Bank of Com$284,979.00 $1,761,782.00 $1,625,000.00 $350,000.00 $4,021,761.00
merce
923,032.50
500,000.00 50,000.00 1,623,032 50
Union Guardian Trust C o m p a n y — 160,000.00
280,000.00
737,500.00
240,000.00 105,000.00
Highland Park State B a n k . —
112,500.00
24,000.00
63,750.00
15,000.00
Highland Park Trust Company
24,760.00
319,796.00
359,796.00
40,000.00
Union Ind. Tr. & Svgs* Bank, Flint
99,350.00
224,187.50
99,837.60 25,000.00
Grand Rapids National Bank
59,860.00
59,860.00
Grand Rapids Trust Company
Union & Peoples Nat'l Bank,
147,100.00
173,000.00
20,000.00
364,475.00
Jackson
24,376.00
Second Natl. Bank & Trust Co.,
426,000.00
225,000.00
165,000.00 35,000.00
Saginaw
First Natl Trust & Svgs. Bank, Pt.
199,380.00
101,380.00
12,000.00
65,000.00
TTuron
21,000.00
145,000.00
90,000.00 50,000.00
285,000.00
Capital National Bank, Lansing
First Natl Bank & Trust Co.,
157,552.50
59,052.50
88,500.00 10,000.00
Kalamazoo
•City Natl Bank & Trust Co., Battle
93,379.00
68,956.80
24,422.20
Crk
73,246.30
41,748.80
25,997.50
2,500.00
Guardian Bank of Dearborn
3,000.00
37,230.00
i9,730.00
15,000.00
2,500.00
Michigan Industrial Bank, Detroit .
12,600.00
12,600.00
T h e National Bank of Ionia
18,750.00
15,000.00
3,750.00
City Natl Bank & Trust Co., Niles
4,000.00
4,000.00
Guardian Bank of Trenton __
v
6,300.00
6,300.00
-Guardian Bank of Grosse Pte
Bank of Hamtramck
__ _
485,000.00
750,500.00
Guardian Detroit Company
265,600.00
125,000.00
125,000.00
Keane, Higbie & Company
70,340.00
90,336.29
19,996.29
Union Joint Stock Land Bank
848.00
848.00
Blanchard State Bank
1,400.00
3,990.00
2,590.00
Clinton Savings Bank
2,400.00
2,400.00
Thompson Savings TRfvnfr
525.00
525.00
Remus State Savings Bank
425.00
425.00
State Bank of Six Lakes
600.00
600.00
State Savings Bank, Stanton
640.00
640.00
State Bank of Vestaburg
__ ._ _
2,000.00
Guardian Safe Deposit Company
1,000.00
1,000.00
New Union Building Company
Guardian Detroit Union Group, Inc.
$886,104.00 $6,000,866.60 $3,194,093.49 $663,000.00
Second Nat. Bank & Trust Co., Saginaw
Highland Park State B a n k . . . .
-
_
_
.._
$9,744,064.09
1933
$15,626.00
30,000.00
45,625.00
COMMITTEE EXHIBIT NO. 33, DECEMBER 20,
1933
Guardian Detroit Union Group, Inc., summary of cash dividends
Div. No.
1
2
3
_
4 .
5
6
7
8
9.1
10
11— —
12
.
.
Record
Date
Date
Paid
Regular
6-20-29
9-20-29
12-10-29
3-17-30
6-16-30
9-26-30
12-22-30
3-23-31
6-22-31
9-26-31
12-28-31
3-26-32
7-1-29
10-1-29
12-31-29
3-31-30
6-30-30
9-30-30
1-2-31
4-1-31
7-1-31
10-1-31
1-2-32
4-1-32
500
500
500
500
500
500
500
500
500
500
500
250
Spe- Total
cial
260
250
260
300
300
390
300
750
750
750
800
800
800
800
500
500
500
500
250
Total
Shares
Amount
Paid
Total for
Year
312,500 $234,375.00
394,500
295,875.00
474,472
355,854.00 $886,104.00
1,537,451% 1,229,961.40
1,542,975% 1,234,380.60
1,543,181 1,234,544.80
1,543,262 1,234,609.60 4,933,496.40
1,543,766
771,883.00
1,544,078
772,039.00
1,544,081
772,040.50
1,644,110
772,055.00 3,088,017.50
1,555,088
386,022.00
386,022.00
9,293,639.90
4332
STOCK EXCHANGE PRACTICES
COMMITTEE EXHIBIT NO. 34—DECEMBER 20,
1933
To the Stockholders, Guardian Detroit Union Group, Inc.
The liquidity of our banking institutions has continued to improve, notwithstanding the conditions existing in the year 1932. The cash position of our
banks and trust companies on December 31, 1932 totalled $100,079,745.74 inCash and U. S. Government Securities against total deposit liabilities of
$290,075,462.10. While bettering their liquid position, our banks have at all
times continued to render constructive, helpful service to customers and have
played an important part in encouraging industry to maintain employment and
in rendering distinct assistance and cooperation to their respective communities.
The pursuance of this sound policy of looking first to the stability and
liquidity of our banks and trust companies necessarily affected our earning
power—for liquidity can be maintained only at the expense of profits. For the
year 1932, operating earnings of the banks and trust companies in the Group,
after all expenses of operation, taxes, depreciation on banking houses and
equipment, and losses on securities sold, but before Reserves, were $2,619,443.05.
On the same basis and for the same period, the consolidated net operating
earnings of the Group Company, banks, trust companies and all other affiliated
companies, amounted to $1,316,952.52.
Dividends paid during the year amounted to $375,134.00. Conservative
policies made advisable the discontinuance of dividends during the second
quarter of 1932. The remaining earnings of $941,818.52 together with recoveries of $1,131,005.93 from items charged off in previous years, plus sums taken*
from capital funds in an amount of $8,966,932.17, totalling $10,939,756.62, were
transferred to Reserves.
Computed on the basis of the aggregate Capital, Surplus and Undivided
Profits of the unit banks and trust companies, as reflected by their published
statements of December 31, 1932, plus the net worth of the other affiliated
companies at market prices of securities on December 31, 1932, the book value
of the Group stock amounts to $17.04 per share. This figure does not include
total Reserves remaining in the banks and trust companies exceeding $6,700,000,
nor does it include a Reserve of $5,000,000 on the books of the Group Company
for contingencies not determinable at this time, but which your Management
has deemed it prudent to create, in view of the present business situation.
The policy of liquidating securities affiliates which was initiated in 1931 has
been continued during 1932 in an orderly manner. During 1932, a difficult
period for liquidation, securities carried on the books at $1,712,821.68 were sold
with a resultant net loss of only $42,201.91. This liquidation was confined to
sales of the least desirable holdings. On December 31, 1932, the aggregate
market value of securities owned by these companies was $5,688,797.10.
Drastic economies of operation were continued during the year with satisfactory results. In spite of the fact that total operating income of banks and
trust companies decreased 18.32%, the controllable operating expenses (i.e.,
other than interest on deposits) were reduced 25.41%.
To effect further operating economies, the Grosse Pointe unit, the Guardian*
Bank of Grosse Pointe, was merged with the Guardian National Bank of
Commerce on December 31, 1932.
The banking units of the Guardian Detroit Unit Group, Inc., are located in
sixteen (16) communities in the State of Michigan. In a large majority of
these communities, the Guardian units are first in size as measured by deposits..
In four communities they are second in size. In only one of the smaller communities does our unit rank below second place.*
The table on page — presents the aggregate deposits in the communities
served and the amount of aggregate deposits held by Guardian units in these
communities. It is interesting to note from this table that in three communities
the Guardian unit is now the only banking institution.
Officers and Directors of units of the Group as of, January 12, 1933, owned
over 400,000 shares of group stock, or more than 26% of the total of 1,544,844
shares outstanding. 1,435,978 shares, or 93%, are owned by residents of the
State of Michigan. There was a substantial increase in the number of shareholders during the last year. There are now 9,837 shareholders compared with
8,945 on December 31, 1931. Ownership of large holdings of stock remained
practically unchanged during the year.
Notwithstanding the exceptionally trying times and their effect upon our
banking institutions during the year, our unit banks are entering the new
STOCK EXCHANGE PRACTICES
4333
year prepared to furnish better and more efficient banking service to the
communities which they serve.
Perhaps never in the history of banking has more been demanded of Directors, Officers and Staff, than in the past year. It has been an inspiration to
note the unselfishness with which our organization has faced its daily problems.
We wish to take this occasion to express to them our appreciation for their
zeal, loyalty and cooperation which has been shown.
We also take this opportunity to thank our shareholders for their splendid
support during the year 1932, which has resulted in an increased amount of
business being directed to units of the Group. Continuance of this confidence
during 1933 will stimulate the operating staff to even greater endeavors in the
interest of the Stockholders.
The preeminence of the Guardian Detroit Union Group, Inc. as a vital factor
in the economic and financial life of Michigan becomes impressive when one
considers the outstanding men representing its affiliated institutions as Directors. With these contacts, any economic improvement or further development
•of Michigan's industries will be directly reflected within our own institution.
Respectfully Submitted.
ERNEST KANZLER,
Chairmm of the Board.
ROBERT O. LORD,
President.
COMMITTEE EXHIBIT NO. 35—DECEMBER 20,
1933
GUARDIAN DETROIT UNION GBOUP, INCORPORATED
INTRA-GROUP MEMORANDUM
Date JAN. 21, 1931
To The Directors of Guardian Detroit Bank
From Mr. Robert O. Lord, President
Subject Favorable comment from Guardian " Rooters "
On January 2, 1931, there appeared in the Detroit newspapers a brief news
item to the effect that the deposits of Guardian Detroit Bank had increased
t>y $9,500,000 during the past three months to a new peak of $124,096,976.65.
-Clippings of this news item Were sent to all bankers with whom Guardian
maintains banking relationships—with the additional information that all of the
twenty-three banks and trust companies comprising Guardian Detroit Union
Group, Inc., showed on December 31, 1930, "Bills Payable—None".
Extracts from letters written by these bankers—commenting upon the
above—are reproduced below ^s being of possible interest to you.
[National City Bank of New York, N.Y.]
I appreciate your letter of January 2nd. You have made a good showing.—
Oordon Rentschler, President.
[Bankers Trust Company, New York City]
There isn't any good luck which you and the rest of your crowd could have
that I wouldn't rejoice in.—Seward Prosser, Chairman.
[The Chase National Bank, New York City]
You have every reason to be proud of the Guardian Detroit Bank, as well
:as the Group.—Richard R. Hunter, Vice Pres.
[The First National Bank, Chicago]
You and your associates are to be congratulated on the excellent condition
of the entire group of banks.—Melvin A. Traylor, President.
[Continental Illinois Bank and Trust Company, Chicago]
The substantial increase in deposits is indeed an item in which you are fully
iustified in taking a great deal of pride.—J. R. Washburn, Vice Pres.
4334
STOCK EXCHANGE PEACTICES
[Harris Trust & Savings Bank, Chicago]
It is a record of accomplishment of which you may well be proud and I hope
the year 1931 will be a banner year for you all.—C. G. Fisher, Vice President.
[The Union Trust Company of Pittsburgh]
You are great bankers up there.—H. C. McBldowney, President
[The Bank of America, New York]
Congratulations! Hope you can keep it up.—Edward C. Delafield, Pres.
[Chemical Bank & Trust Company, New York]
I am pleased to know that your institution is in such liquid position and
want you to know that you have our every good wish for continued success.—
Percy H. Johnson, President
[Mellon National Bank, Pittsburgh]
I wish to take this opportunity to congratulate you on the splendid showing
during the past year.—Richard K. Mellon, Vice Pres.
[The First National Bank of Boston]
Congratulations on the increase in your deposits. I hope you are able to
make a little money as well.—Charles F. Mills, Vice Pres.
[The National Shawmut Bank of Boston]
Let me express my congratulations and those of my associates here on the
result that has been accomplished, and the hope that at the end of 1931 your
deposits will be higher and your profit and loss account all that you desire.—
W. F. Augustine, Vice Pres.
[Foreman-State National Bank, Chicago]
Heartiest congratulations!—Walter W. Head, President
[Bankers Trust Company, New York]
I don't want to miss the opportunity to congratulate you on the fine liquid
showing which it makes. More power to you and yours.—Frederick S. Bale,
Vice Pres.
[Irving Trust Company, New York]
We congratulate your institution, and especially so for the liquidity indicated
by your statement that the several banks comprising your Group were completely out of debt at the close of 1930. If all the banks of the country
pursued a similar policy, there would be a far greater stability in banking and
less unsettlement during unusual periods.—William Feick, Vice Pres.
[The Union Trust Company, Cleveland]
I am pleased to know that you showed such,a nice increase over the date
of the last call. People are just so touchy at the present time and there are
so many rumors as to all of the banks in the country that every banker is
pleased! to show increased deposits and also an increase in cash position.—
J. R. Kraus, Vice Pres.
[Canal Bank & Trust Company, New Orleans]
The growth of your wonderful institution is simply marvelous, and commented on very much by the bankers and business men throughout the south.—
William P. O'Neal, Vice Pres.
[Bankers Trust Company, New York City]
I am very much pleased to learn that the Guardian Detroit Bank is going
ahead
in such a gratifying way.—F. W. Shibley, Vice Pres.
STOCK EXCHANGE PRACTICES
4335
[Bank of New York and Trust Company, New York]
Thank you for calling my attention to the handsome increase in deposits of
your good bank. Glad to hear of it, and hope that your progress continues
uninterruptedly. You have our best wishes, as usual.—L. F. Kiesewetter, Vice
Pres.
[The Bank of America, New York]
If I may be permitted to use a superlative, the showing of all the twentythree banks and trust companies is little short of miraculous, considering all
the uncertainties and disturbances of the day.—Clare Walker Banta, Vice Pres.
[Trans-America Corporation, New York City]
I have reason to feel proud of the situation described in the clipping from
the Free Press of January 2. More power to you.—Ralph Hayes, Vice Pr.
[The New York Trust Company, New York]
I shall take pleasure in passing this information around to my associates,
all of which will be helpful in permitting us to assist in creating the atmosphere about your bank which it deserves.—J. Murray Mitchell, Vice Pres.
[Bank of Manhattan Trust Company, New York]
I have read your letter and the clipping with a great deal of interest and
want to congratulate you on the accomplishment of the Guardian Detroit Union
Group, Inc.—J. Stewart Baker, President.
[Security-First National Bank of Los Angeles]
I congratulate your fine institution and trust that the good work may con
tinue.—R. B. Hardacre, Vice Pres.
[First National Bank of Minneapolis, Minn]
Congratulations on the fine improvement in the Group.—L. E. Wakefield,
President.
[The Anglo & London Paris National Bank, San Francisco]
You and your associates are to be congratulated on the splendid showing
made.—H. Fleishhacker, President.
[Bank of Manhattan Trust Company, New York]
The facts which they mention are highly creditable to your bank. I congratulate you.—Thomas W. Bowers, Vice Pres.
[Monongahela National Bank of Pittsburgh]
An institution of the sort of yours is entitled to this patronage and I hope as
time goes on that your good ship will take on additional cargo.—George E.
Benson, President
[Citizens National Trust & Savings Bank, Los Angeles]
You are to be congratulated on the splendid showing made in your December
31st statement, quite aside from the small part we played in it.—H. D. Ivey,
President
[Union Trust Company, Washington, D.C.]
What a wonderful record the Guardian Bank has made!—Geo. E. Fleming,
V.P.
[The Citizens and Southern National Bank, Atlanta, 6a.]
It is a splendid thing for two fine banks like yours and ours to do business
with each other.—Alva G. Maxwell, Vice Pres.
4336
STOCK EXCHANGE PRACTICES
[Franklin Trust Company of Philadelphia]
This is a mighty fine showing and I heartily congratulate you and your
associates.—C. Addison Harris, Jr., Pres.
[Citizens Union National Bank, Louisville, Ky.]
You have every reason to feel proud of your accomplishment. It is not at
all surprising to me that you have gained in business whereas the general
movement has been downward.—John It. Downing, President
[The Union & New Haven Trust Company, New Haven, Conn.]
Whether conditions are good or bad you seem to keep on growing.—Ned
Gaillard, Vice Pres.
[Springfield Chapin National Bank & Trust Co., Springfield, Mass.]
I heartily congratulate you on such a splendid showing in these troublesome
times. It would seem definitely to indicate the confidence of your people in
the Guardian Detroit Union Group.—W. V. Camp, President
[Bankers Trust Company, Little Rock, Ark.]
Certainly in the times which we have had, you must feel very proud of the
increased business of your bank, together with the liquid position which it
enjoys.—F. W. Niemeyer, President
[Commonwealth Trust Company, Harrisburg, Penn.]
You have just pride in the impressive gain which your Bank has shown in
its business during the last year. I hope that the close of 1931 will show a
still higher achievement.—W. M. Ogelsby, President
[The First National Bank of Houston]
I think, circumstances considered, that this is a remarkable showing, please
accept my congratulations.—F. M. Law, President
[Frost National Bank, San Antonio, Texas.]
What you have done is most remarkable and you are to be congratulated.—
J. H. Frost, President.
[The Merchants Bank & Trust Company, Jackson, Miss.]
I want to congratulate you upon the wonderful showing of your banks and
the conditions that prevail around Detroit generally. I was in Detroit in
December 1929 and it was about the bluest place that I found. In December
1930 it was just the reverse, it being the brightest spot on my recent trip.—
J. M. Hartfield, President.
[The First National Bank & Trust Company of Fargo, N. Dak.]
You are surely building up a tremendous business. The figures representing
your deposits are astounding and almost beyond the comprehension of us
fellows out here in the sticks. More power to you all!—F. A. Irish, Vice Pres.
[The Liberty National Bank, Oklahoma City, Okla.]
The newspaper clipping is indeed interesting, taking into consideration the
sentiment that obtains in other parts of the country. As is always the case, it
depends upon the management.—Ben Mills, President.
[State-Planters Bank & Trust Company, Richmond, Va.]
In these days when most banks are satisfied to have their deposits show a
very little increase, or even to remain stagnant, it is indeed most gratifying to
hear of such a splendid growth.—Julien H. Hill, President.
STOCK EXCHANGE PRACTICES
4337
[Spokane and Eastern Trust Company, Spokane, Wash.]
This is certainly going some, and we extend our hearty congratulations.—
R. L. Rutter, President.
*
*
*
*
*
*
*
Similar comment from large commercial customers appear below:
[The Pennsylvania Railroad Company, Philadelphia, Penna.]
Thanks for your favor of the 2nd instant with its comforting and interesting
information. May the Guardian continue to prosper and may the Pennsylvania
be in a position to contribute to a greater extent to that success.—George H.
Pabst,. Jr., Treasurer.
[Armour and Company, Chicago]
I thank you for sending me a copy of your statement as of December 31st,
and I congratulate you and your associates on your exceedingly liquid condition. It certainly must be gratifying to you to be able to make a statement
without any " Bills Payable ", particularly at this time when practically every
bank statement we look at shows such an item among the bank's liabilities.—
Philip L. Reed, Treasurer.
[The Kingston Products Corporation, Indiana]
The statement of the Guardian Detroit Bank as of December 31, 1980, is
indicative of such splendid condition that you are entitled to the highest compliment. The liquidity of your institution, as indicated by your statement,
compares most favorably with that of the finest banking institutions in the
country.—J. P. Johnson, President.
[Chrysler Corporation, Detroit]
You certainly put out a very respectable statement on December 31, 1930,
and both you and Detroit are to be congratulated on the showing you make.
With over $47,000,000 in cash and United States bond and certificates on
hand, you could take almost any kind of a licking on the chin and come back
for more.—B. E. Hutchinson, Vice Pres.
[The Cudahy Packing Co. Chicago]
It certainly is like a ray of sunshine to look over a bank statement in as
liquid a position as your bank.—J. E. Wagner, Treas.
[John Hancock Life Insurance-Co. Boston, Mass.]
We are glad to be allied with so strong an institution and I hope that we
shall continue to be a worthwhile client.—Walton L. Crocker, President.
[The American Brass Company, Waterbury, Conn.]
We congratulate you and your Directors in being able to make" such a
satisfactory statement, and hope that the coming year will prove to be a very
profitable one for your bank.—John A. Coe, President.
[Merrimack Manufacturing Company, Boston]
We wish we could have contributed more to your business during the past
year, but our Detroit customers did not appear to have been in a way of
giving us much to do. We hope for better success with them in 1931. Meanwhile, we wish to congratulate you on your success, which we feel sure will
continue to grow with the future as it has in the past.—Ward Thoron,.
Treasurer.
[General Motors Corporation, Detroit]
The splendid ratios and liquid position reflected in this statement are in
keeping with your policies, but they are remarkably fine under present conditions.—M. L. Prentis, Treasurer.
4338
STOCK EXCHANGE PRACTICES
[Theodore Gary and Company. Chicago]
I congratulate you on the wonderful work you and your associates have
done in building up so fine an institution in so short a time.—E. C. Blomeuer,
Ex. Vice Pres.
[The Newton Steel Company. Youngstown, Ohio]
Our account with you has not been as large as we would like to have it,
still it is our hope that in the future we can bring it up considerable, especially
as the automobile industry picks up and we are in position to get our Michigan
plant under good operations.—E. F. Clark, President.
[Distaphone Sales Corporation, New York City]
Hearty congratulations on the position of the Guardian Detroit Bank, in
view of the present day's business situation which has perhaps hit Detroit
and environs harder than most any other point. I think the standing of your
Bank is astonishingly good.—L. C. Stowell, President.
[The Murray Corporation, Detroit]
Allow me to congratulate you on the excellent condition of your bank. May
we hope that our pleasant relations in the past will continue indefinitely in
the future.—C. David Widman, Sec. & Treas.
[The Chicago and Alton Railroad Company, Chicago]
1 hope this splendid business condition will remain with you and that you
will even grow larger and stronger until yours shall be among the very leaders
of the central western banking institutions, all for which you have my sincere
hopes and good wishes.—William G. Bierd, Receiver
[Bethlehem Steel Company, Bethlehem, Penna.]
The newspaper clipping you attached to your letter, as well as your P.S., is
very interesting and you and your associates can feel justly proud that, under
present conditions, you are in the position of showing no Bills Payable on the
December 31st statement not alone for your Bank but for your associated
banks.—J. P. Bender, Treasurer
and, lastly, from our own Commissioner of Banking:
[Michigan State Banking Department, Lansing]
I have your letter enclosing a newspaper clipping and want to congratulate
you upon the condition of the institutions in your group. I am certainly
pleased to hear you say that not any of the twenty-three banks and trust
companies comprising your group owe the Federal Reserve Bank or any other
bank a single penny. It is certainly a very healthy condition and a very
comfortable one to be in at the present time.—R. E. Reichert, Commissioner
STOCK EXCHANGE PKACTICES
THURSDAY, DECEMBER 2 1 , 1933
UNITED STATES SENATE,
SUBCOMMITTEE or THE COMMITTEE
ON BANKING AND CURRENCY,
Washington, D.C.
The subcommittee met at 10:30 a.m., pursuant to adjournment on
wsterday in Room No. 301 of tlie Senate Office Building, Senator
L)uncan U. Fletcher presiding.
Present: Senators Fletcher (chairman), Gore (substitute for
Barkley), Adams (proxy for Costigan), Norbeck, Townsend, and
Couzens.
Present also: Ferdinand Pecora, counsel to the committee; Julius
Silver and David Saperstein, associate counsel to the committee;
and Frank J. Meehan, chief statistician to the committee.
The CHAIRMAN. The subcommittee will come to order, please.
You may proceed, Mr. Pecora.
TESTIMONY OF BOBEET 0. I0BD, DETB0IT, MICH.—Resumed
Mr.
Mr.
PECORA. Mr. Lord
LORD. Mr. Pecora, may
Mr. PECORA. Yes.
Mr. LORD. I should like to
I speak for a moment?
correct an error in my testimony of
yesterday afternoon. You asked me this question
Mr. PECORA (interposing). What page of the transcript are you
reading from ?
Mr. LORD. Page 270.
Mr. PECORA. AH right.
Mr. LORD. YOU asked me this question:
Mr. PECORA. In other words, was not this one of the reasons, to enable the
unit banks to make reports which would show no bills payable, despite the fact
that there were actually bills payable?
And my answer was " Yes." That answer is incorrect. My answer
is unqualifiedly no. To the best of my knowledge and belief, based
upon official statements furnished to me of the group banks, which
statements I had no doubt about, there were no bills payable on
December 31, 1930.
Mr. PECORA. The answer as it appears in the stenographic transcript is the answer you made, though,.isn't it?
Mr. LORD. That is the answer I made.
Mr. PECORA. YOU are not impeaching the accuracy of the stenographic transcript, are you ?
Mr. LORD. I am not impeaching the answer in the transcript, but
I did not understand your question fully, and now desire to correct
the error in my testimony.
4339
4340
STOCK EXCHANGE PRACTICES
Mr. PECOKA. NOW, SO long as you have corrected that answer, or
rather have changed it
Mr. LOED. Corrected it.
Mr. PECORA. What was that?
Mr. LORD. Corrected it.
Mr. PECORA. YOU are not correcting the answer as it appears in
the stenographic transcript. The answer shown there is the one
you gave, as I understand your testimony here now. You are
changing it, aren't you?
Mr. LORD. My answer is changed; yes. I am correcting my testimony.
Mr. PECORA. YOU mean that you are changing your testimony.
There is a difference between the two words "correcting" and
" changing."
Mr. LORD. Well, I gave an incorrect answer, not understanding
the question. I desire now to give the correct answer.
Senator COUZENS. Let us have the question repeated so we may
understand how intelligent the witness is in understanding questions
propounded to him.
Mr. PECORA. The question appears on page 270 of the stenographic transcript of yesterday's session, as follows:
In other words, was not this one of the reasons, to enable the unit banksto make reports which would show no bills payable, despite the fact that
there were actually bills payable?
And then the answer to that question given by Mr. Lord on yesterday was "Yes." And he continued with "Might I interject something at this point? "
Now that is what we have before us.
Mr. LORD. And I want ,to change that answer of " yes " to one
of "no."
Mr. PECORA. YOU want to change that answer so that it will be
"no."
Mr. LORD. I want to answer it now correctly, " no."
Mr. PECORA. NOW, Mr. Lord, did you examine this stenographic
transcript since you testified before the subcommittee on yesterday?
Mr. LORD. A S I left the stand yesterday afternoon one of my associates asked me why I had answered that question incorrectly. I
stated to him that I did not answer it incorrectly if I understood the
question. There was some discussion about it, and then I sent for
the transcript and saw that I had answered the question incorrectly.
Mr. PECORA. Well, did you read all the testimony you gave on yesterday on this point?
Mr. LORD. Merely on this particular point.
Mr. PECORA. For instance, did you read the testimony you gave
on this point as it appears on page 269 of the stenographic transcript?
Mr. LORD. I read page 269, yes. To what are you now referring ?
Mr. PECORA. The testimony that I have in mind appears on page
269 of the stenographic transcript as follows:
Question. At any of those times did any of those unit banks have bills payable which were taken care of temporarily in some fashion so as to make it
unnecessary to show those bills payable in published reports of condition?
STOCK EXCHANGE PRACTICES
4341
And the answer was:
Answer. Yes, sir.
Question. How was that done, Mr. Lord?
Answer. It was done usually by either the Guardian Detroit Bank buying
some of their assets and supplying them with cash, or depositing funds in the
form of C.D.'s.
Mr. LORD. I might add to that, that the Guardian Detroit Bank
carried accounts in some of the units; in additions to C.D.'s, it was
carried in the form of a regular checking account.
Mr. PECORA. Have you any desire, to change any of the testimony
that you gave on yesterday as it now appears on page 269 of the
stenographic transcript?
Mr. LORD. None except the addition that in some cases it was not
in the form of C.D.'s but in the form of a regular account on the
books of the bank.
Senator ADAMS. DO I understand, Mr. Lord—and I was not here
yesterday when this testimony was given—that the Group organization, or an organization of some kind, had loaned money to the
local bank, evidenced by a bill payable, and that they substituted
for the bill payable a CD., took a C D . in place of it?
Mr. LORD. They deposited funds to the credit of th© local bank,
and that bank used those funds to pay its bills payable.
Senator ADAMS. There was no exchange, then, of the bill payable
itself for a CD.?
Mr. LORD. NO. I would say they were two separate transactions.
Mr. PECORA. That was invariably done at about the times when
banks expected a call from the Comptroller of the Currency for
condition statements, wasn't it?
Mr. LORD; I would not say invariably. From time to time we,
throughout the year, carried funds in some of the out-State banks.
Some of those funds remained there for many months. I would
say it was the exception rather than the rule.
Mr. PECORA. What did you say?
Mr. LORD. I would say that the placing of funds for the purpose
of local banks liquidating their bills payable was the exception rather
than the rule.
Mr. PECORA. Well, now, on yesterday afternoon you gave considerable testimony tending to create the impression, or at least it did
in my mind, that this was the universal custom among banks. Do
you recall that testimony? You gave considerable testimony along
that line yesterday.
Mr. LORD. My recollection is that when I spoke of—or you used
the words " universal custom." I used, as I recall, different words,
to the effect that it was the desire and the effort of banks to clean
up their bills payable on or about the statement date period.
Mr. PECORA. They cleaned them up by making bona fide payments
of the bills payable ?
Mr. LORD, I es, sir.
Mr. PECORA. In all instances?
Mr. LORD. I think so. I would say bona fide if they had the funds
with which to pay them, on deposit.
Mr. PECORA. YOU are quite sure of that, are you ?
Mr. LORD. I would say so.
175541—34—PT 9
10
4342
STOCK EXCHANGE PRACTICES
Mr. PECORA. In all those instances those bills payable were actually
paid?
Mr. LORD. SO far as I know, Mr. Pecora.
Mr. PECORA. YOU sought to keep yourself currently informed as
to what was going on in the unit banks, did you ?
Mr. LORD. Yes. But I had nothing to do with the mechanics of
the bookkeeping and the making of entries.
Mr. PECORA. Who had to do with those mechanics, principally?
Mr. LORD. I would say the teller handling
Mr. PECORA (interrupting). I mean in behalf of the group.
Mr. LORD. I do not understand your question, because it was not a
deposit on the group's books.
Mr. PECORA. Wasn't it the group's policy to have those unit banks
show no bills payable ?
Mr. LORD. SO far as possible; yes, sir.
Mr. PECORA. And who handled the mechanics by which that was
made possible ?
Mr. LORD. I would say that was handled by several different officers,
who handled the accounts of banks and bankers.
Mr. PECORA. Cannot you give us the names of the individuals who
handled the mechanics of that thing ?
Mr. LORD. At one period in the bank's history Colonel Walsh
handled banks and bankers. At a later date Mr. D. F. Valley did it.
Mr. PECORA. What was Colonel Walsh's position or office in the
group when he handled those mechanics ?
Mr. LORD. His office in the group was that of executive vice president. And the bank at one period—well, he was the executive vice
president of the bank at one period, and at a later date he was vice
president, when he was giving the most of his time to the group.
Mr. PECORA. What was Mr. Valley's office or position in the group
when he handled the mechanics?
Mr. LORD. He was not an officer of the group. Mr. Valley was
vice president of the bank.
Mr. PECORA. Of which bank?
Mr. LORD. Of the Guardian National Bank of Commerce.
Mr. PECORA. AS vice president of the Guardian National Bank
did he direct or handle mechanics which enabled all the other unit
banks in the group to avoid reporting bills payable ?
Mr. LORD. He might have so far as it related to deposits of the
Guardian National Bank of Commerce in any of those units.
Mr. PECORA. Can you describe to the subcommittee the details of
those mechanics?
Mr. LORD. If you could cite some instance I could probably describe it better.
Mr. PECORA. Describe the general mechanics, the details of that
matter.
Mr. LORD. All the unit banks carried correspondent accounts in
Detroit with the Guardian National Bank of Commerce. The Guardian National Bank of Commerce frequently and at different times
during the year carried accounts with the other banks or carried
C. D.'s with the other banks. A credit would be placed upon our
books for the account of the out-State bank, or the out-State bank
would show or would use for a deposit a certificate of deposit. That
gave that bank the funds with which to liquidate bills payable.
STOCK EXCHANGE PRACTICES
4343
Senator ADAMS. Mr. Lord, were bills payable due to the Guardian
Bank in Detroit? What I mean is, if any of those out-state banks
had occasion to borrow money did they invariably borrow it from
the parent bank?
Mr. LORD. In some cases they borrowed it from the parent bank,
and in some cases they borrowed it from the Federal Reserve bank.
Later on in some cases they borrowed from the R.F.C.
Senator ADAMS. And in each of those cases a bill payable would
be secured by collateral?
Mr. LORD. Yes, sir. We never loaned to any unit bank without
collateral, to my knowledge.
Senator ADAMS. Did you exact collateral when you made a deposit?
Mr. LORD. NO. sir; we did not
Senator ADAMS (continuing).
Which was used to pay a bill
payable ?
Mr. LORD. Not to my knowledge.
Senator ADAMS. The fact of the matter would be that the unit
bank got back its collateral ?
Mr. LORD. Yes, or if it was held in safe-keeping for their account
it was done with no claim that we had on it.
The CHAIRMAN. The statement of a unit bank would show bills
receivable as well as bills payable, in the proper course, wouldn't it?
Mr. LORD. If a unit bank would borrow from the Gruardian National Bank of Commerce the unit bank would show bills payable
and the Guardian National Bank of Commerce would show that
as bills receivable in its loans and discounts.
The CHAIRMAN. Yes; but the statement of the unit bank, the
form of the statement is such, that it would show bills payable?
Mr. LORD. If they owed money it would certainly show bills
payable.
The CHAIRMAN. Well, I am speaking now about the form.
Mr. LORD. Yes, sir.
The CHAIRMAN. And it also would show bills receivable.
Mr. LORD. Why?
The CHAIRMAN. The form would show that, wouldn't it ?
In the
statement of the bank they would have to give bills receivable and
the cash owed to their other banks.
Mr. LORD. I t would show cash as to
The CHAIRMAN (interposing). I mean it would show in their
statement.
Mr. LORD. I do not. understand your question, Senator Fletcher.
The CHAIRMAN. A bank makes a statement showing bills payable.
In that same statement it should show bills receivable, amounts due
from other banks.
Mr. LORD. Yes; indeed it would, if there were any.
The CHAIRMAN. If there were any, of course.
Mr. LORD. Yes.
The CHAIRMAN. NOW,
if a unit bank had on deposit with you certain funds with which it intended to pay bills payable and all that
sort of thing, their statement would show that that amount of money
was due it, under the head of bills payable, or cash due from other
banks, or whatever heading they put it under.
Mr LORD. Yes, if I understand your question.
4344
STOCK EXCHANGE PRACTICES
The CHAIRMAN. SO that if a bank statement showed bills payable
and also showed an amount of bills receivable, one would offest
the other, and what harm could come to the bank that showed bills.
payable and also bills receivable? And if it showed no bills payable
the amount receivable would have to be less than it would show
otherwise.
Mr. LORD. Your question is not quite clear to me, Senator Fletcher.
The CHAIRMAN. In other words, a bank has certain bills payable
that you do not want to appear on their statement. At the same
time there were bills payable the bank had with you on deposit a
sufficient amount to cover its bills payable. Is that it ?
Mr. LORD. Yes; and they charge that deposit and pay their bills
payable, if I understand your question.
Senator ADAMS. May I just follow my question one step further,
Mr. Lord?
Mr. LORD. Yes, Senator Adams.
Senator ADAMS. The process that you outline was that there was a
bill payable from one of the unit banks. The parent bank made a
deposit with the
Mr. LORD (interposing). With one of the
Senator ADAMS (continuing). With the unit bank?
Mr. LORD. That is correct.
Senator ADAMS. And that deposit did what?
Mr. LORD. Provided, then, funds with which to liquidate bills
payable.
Senator ADAMS. The collateral was then released. What was done
with the bill payable? Was it subsequently restored?
Mr. LORD. It might have been, and it might have been a few days
later or a few months later, depending upon the cash resources of
the bank. It may have needed money for other purposes.
Senator ADAMS. Here was a deposit with a unit bank by the parent
bank. The effect of that was that the parent bank secured the payment of its deposit account by a bill payable secured by collateral.
That is a rather preferential transaction when you reach that point,
isn't it?
Mr. LORD. I wouldn't think so, because that unit bank had the
right to borrow its funds elsewhere and take care of the withdrawal
of that deposit. They did not have to borrow from the parent
bank. They could borrow from the Federal Reserve Bank or any
place else they wanted.
Senator ADAMS. If the parent bank has a deposit with a unit
bank, and the parent bank wants to withdraw its deposit, and the
unit bank gives them collateral which is perfectly good and a bill
payable, they have rather improved their position as compared with
other depositors, haven't they?
Mr. LORD. NO. They occupy the same position as any other depositor.
Senator ADAMS. No; they thereby become a secured depositor.
Mr. LORD. NO. Supposing the Guardian National Bank of Commerce had an account, say; of $250,000 in a unit bank, and those
funds had been used to liquidate all or a portion of bills
Senator ADAMS (interposing). But the deposit stands on the books.
STOCK EXCHANGE PRACTICES
4345
Mr. LORD (continuing). And supposing that bank had an account
from somebody else and they wanted to withdraw their money. The
Guardian National Bank stood in the same position. The mere
fact that they were willing to reloan to that unit bank funds with
which to provide for the pay ment of that deposit, puts the Guardian
National Bank of Commerce in the same position as a depositor, as
every other depositor. They had no claim on the deposit when
they had no
Senator ADAMS (interposing). But when they make a bank deposit they are given collateral in place of an unsecured claim that
the ordinary depositor holds.
Mr. LORD. It may be that the bank had the money with which to
pay. If they did not have the funds they might have to come to
the Guardian National Bank of Commerce and say: We need $200,000 or $250,000. Will you loan it to us on collateral. Those are two
entirely separate and distinct transactions.
Senator ADAMS. But in doing that it was avoiding any hazard.
Mr. LORD. NO. If the bank had closed they would occupy the
same position as any other depositor would. The mere fact that
they might hold for safe-keeping any collateral on a prior loan did
not change that situation.
Senator ADAMS. If a deposit is made, and it has been applied to
bills payable, then when the parent bank wants to withdraw its deposit it gets from the unit bank a note in payment of the deposit
and gets collateral to secure such note.
Mr. LORD. If the unit bank requires a loan to pay that deposit.
Senator ADAMS. Well, ive are assuming there will be no note unless
they require it. But the mere fact that they require it would indicate preferential treatment in the case of the parent bank, wouldn't
it?
Mr. LORD. I do not consider that there was any preferential
treatment.
Senator COUZENS. Let me use this illustration: Assuming a unit
bank borrowed $250,000 from you and gave you a note and security.
Later on you wanted that unit bank to be relieved of showing bills
payable. So you put $250,000 on deposit in the unit bank and cancel
the note and take the security out of your bank? or hold it for safe
keeping. In what respect is your Guardian National Bank of Commerce any better off by that procedure than by holding the security
with the note ?
Mr. LORD. It made no difference to the Guardian National Bank of
Commerce.
Senator COUZENS. If you are willing to deposit $250,000 in a unit
bank so that they may avoid showing bills payable, why couldn't you
have done that in the first instance instead of taking a note with
security ?
Mr. LORD. I think we did it in many cases. I think you will find
that
Senator COUZENS (interposing). I am not going into many cases.
1 am talking about the kind of loans you have been discussing. You
said a unit bank might borrow $250,000 from you and put up security.
In that case it was a bill payable and you were secured.
Mr. LORD. Yes, sir.
4346
STOCK EXCHANGE PRACTICES
Senator COUZENS. Against an ordinary depositor.
Mr. LORD. Yes, sir.
Senator COUZENS. And later on you deposit $250,000
in that unit
bank, on a CD., for example. And they used that $250,000 to
cancel the note that you had.
Mr. LORD. Yes, sir.
Senator COUZENS. And
you surrendered the collateral. Why did
you not do that in the first instance instead of taking a note as
collateral ?
Mr. LORD. We might not have had at that time surplus funds with
which to do it.
Senator COUZENS. But you did not need security then, that being
so, did you? But you did take security from your unit bank.
Mr. LORD. We took security always when we made a bank a loan.
Senator COUZENS. What is the difference between making them a
loan and depositing $250,000, except that you prefer yourself?
Mr. LORD. Well, that would apply to any bank making loans to
other banks.
Senator COUZENS. I understand that that is so, but I am not
asking you questions on that point. I am talking about your relations with your own units. You demand a note and security in one
case, and in another case you put your money in a unit bank and
stand the same chance as any other depositor.
Mr. LORD. That is true.
Mr. PECORA. Mr. Lord, it was the rule for the Comptroller of the
Currency three times a year at least to call on banks for a report
of their condition as of a prescribed date, was it not?
Mr. LORD. I believe so, sir.
Mr. PECORA. And at about what times or periods during the year
would those three times occur?
Mr. LORD. I think I mi^ht say it is usually four times a year.
Mr. PECORA. But three times is required at least?
Mr. LORD. I believe so.
Mr. QPECORA. At about what time do those calls come ?
Mr. LORD. Usually sometime about the 1st of March or the latter
part of April; and then between the 1st of June and along some
time in July; and always, if my recollection is correct, the last day
of the year.
Mr. PECORA. That is by December 31 ?
Mr. LORD. Or December 30; depending on whether the 31st is a
business day.
Mr. PECORA. And sometimes where a fourth call for a statement
of condition was made it would occur around in September, wouldn't
it?
Mr. LORD. Yes, sir.
Mr. PECORA. SO that
bank executives could fairly approximate the
time when they would be called upon for a statement of condition?
Mr. LORD. Well, they could know within a period of from 30 to
45 days. But I have known cases where bank calls would run, I
believe, over 30 days of the ordinary time.
Mr. PECORA. Well, was- it the settled policy of the group to so
adjust things among the various unit banks in the group that when
those calls came from the Comptroller of the Currency for a state
STOCK EXCHANGE PRACTICES
4347
ment of financial condition, as of a date given by the Comptroller,
bills payable would have been so taken care of, in the fashion that
you have described, as to make it unnecessary for those unit banks
to show, in their reports in answer to the call, any bills payable?
Mr. LORD. Mr. Pecora, it was the policy to have as small an amount
of bills payable at all times as possible. And it was the policy to
make as good a showing as we properly could at the time of statement dates. Does that answer your question ?
Mr. PECORA. In part. Did you especially strive to create a situation by reason of any policy adopted by the group and its unit
banks, to avoid showing any bills payable on any of those reports?
Mr. LORD. Wherever it could be properly done; yes, sir.
Mr. PECORA. Take, for instance, where one of the unit banks, like
the National Bank of Ionia, owed some money to the parent bank,
which is the Guardian National Bank of Commerce, and the time
came around when it was reasonably to be expected that a call would
be issued by the Comptroller of the Currency for a statement of
financial condition, we will say as of September 15, in any one year:
As a rule what were the mechanics employed to enable the National
Bank of Ionia to avoid showing among its bills payable in the report
a bill that it owed the parent bank?
Mr. LORD. Mr. Pecora, I do not recall the specific method of handling the National Bank of Ionia.
Mr. PECORA. Well, I am merely using that bank as an example.
Mr. LORD. My recollection is that in the case of the National Bank
of Ionia the Guardian National Bank of Commerce, or the Group
Co., and I do not recall which, carried a deposit with that bank for
a great many months to help it out during the period directly after
the failure of the competing bank in that town. But I have not
the figures in front of me and so cannot answer your question
specifically.
Mr. PECORA. I am simply asking you to take a supposititious case
and describe to the committee the mechanics.
Mr. LORD. I cannot take that case, because I do not know how it
was handled. I do know that there was a deposit carried with
Ionia for a great many months.
Mr. PECORA. Will you be good enough to look at this document
which I show you, which purports to be a photostatic reproduction
of a letter addressed to Mr. Alexander Robertson, vice president of
the National Bank of Ionia, Mich., dated September 17, 1931, purporting to be signed by Mr. James L. Walsh, executive vice president of the group ? Look at it and tell me if you recognize it to be
a true and correct copy of such a letter sent by Colonel Walsh to
Mr. Robertson.
Mr. LORD. I never saw it before, but I have no question as to its
being a correct copy.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted.
(The document referred to, letter, Sept. 17,1931, Walsh to Robertson, was received in evidence, marked "Committee's Exhibit No.
37 ", Dec. 21, 1933, and the same was subsequently read into the
record by Mr. Pecora.)
4348
STOCK EXCHANGE PRACTICES
Mr. PECORA. The letter has been marked " Committee's Exhibit
No. 37, in evidence ", and reads as follows. I t is on the letterhead
of the Guardian Detroit Bank, dated September 17, 1931 [reading] :
Mr. ALEXANDER ROBERTSON,
Vice President, National Barih of Ionia,
Ionia, Mich.
DEAR ALEX: From now until after next call date will you please wire me
promptly each morning giving me your deposits in thousands of dollars, and
also your bills payable in thousands of dollars. I think there will be no need
to mention either the word " deposit" or " bills payable " in the message, but
merely use two sets of figures, with the word " stop " between, as follows:
"James L. Walsh, vice president, Guardian Detroit Bank, Detroit, Mich.
37,770,000. Stop. $100,000. Alexander Robertson."
Please do not fail to wire me just as early in the morning as possible, and
certainly not later than 10 a.m. Even if you do not need any additional deposits
to offset bills payable, it is extremely important that I be informed accordingly,
as I may be holding up several other moves awaiting to hear from you.
Cordially yours.
Signed by Mr. Walsh.
Does the reading of that letter, Mr. Lord, serve to refresh your
recollection in any way concerning the precise mechanics or means
that were employed to offset bills payable by deposits so that it would
not be necessary for a unit bank that had bills payable in favor of
the parent bank to report the bills payable ?
Mr. LORD. Mr. Pecora, let us not use the words " parent bank'
because the Guardian Detroit Bank occupied the same position as any
unit bank.
Mr. PECORA. Then eliminate that characterization " parent bank."
Say any other bank in the group.
Mr. LORD. That does not change in any way my recollection, as 1
described to you, how these deposits and payment of bills payable
were made before. I never saw the letter before, and never had
anything to do with the transaction, so that it does not in any way
enlighten me.
Mr. PECORA. Did you know that it was the practice for Colonel
Walsh, who, as you said before, was one of the officers of the group
who handled the mechanics of this thing, to send out letters in the
form of the one I have just read to you ?
Mr. LORD. I did not,
sir.
Mr. PECORA. Then does not this letter serve to enlighten you in any
way concerning the methods that were employed to offset bills
payable by unit banks ?
Mr. LORD. NO.
Mr. PECORA. YOU
Mr. LORD. N O ; it
mean that this letter is meaningless to you ?
is not meaningless. I t serves to show me how
Colonel Walsh was keeping in constant touch with the Ionia Bank,
to know what its condition was each day as to deposits and bills
payable.
Mr. PECORA. He was not doing that each day throughout the year,
was he?
Mr. LORD. Apparently not, from that letter.
Mr. PECORA. From this letter, he was apparently doing that at
about the period when it was to be expected that a call would be
made for a report of condition by the Comptroller of the Currency.
Mr. LORD. I would assume so, from the wording of the letter.
STOCK EXCHANGE PRACTICES
4349
Mr. PECORA. And it was done specifically to enable those things
to be done which were necessary for the unit bank to offset its bills
payable.
Mr. LORD. TO clean up its bills payable.
Mr. PECORA. SO that it would not have to show bills payable in
any report of condition made pursuant to a call from the Comptroller.
Mr. LORD. SO that it would not have any bills payable at the time
of the report.
Senator ADAMS. The depositor in the unit bank, assuming the unit
bank was not in good condition, would be better off in a situation
where a deposit was made than where they had the bills payable
secured by collateral, would he not ?
Mr. LORD. Oh, yes; because the depositors would all be general
creditors rather than loan creditors with specific collateral.
Senator ADAMS. The disadvantage of that transaction was with
the bank making the deposit in substitution for the bill payable.
Mr. LORD. I would say so, Senator.
Mr. PECORA. I show you what purports to be a photostatic copy of
another letter, addressed by Mr. Walsh to Mr. Frank M. Brandon,
president of the City National Bank & Trust Company of Mies.
Mich., also dated September 17, 1931. Look, at it and tell me it
you recognize it as a true and correct copy of such letter.
Mr. LORD. I never saw the letter, but I assume it is a correct copy,
and will accept it as such.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted.
(The document referred to, letter, Sept. 17, 1931, Walsh to Brandon, was received in evidence, marked " Committee's Exhibit No.
38", Dec. 21, 1933, and the same was subsequently read into the
record by Mr. Eecora.)
Mr. PECORA. The letter just received in evidence as Committee's
Exhibit No. 38, of this date, is written on the letterhead of the Guardian Detroit Bank, and is dated September 17,1931. I t is addressed
to Mr. Frank M. Brandon, president of the City National Bank &
Trust Co. of Niles, Mich., and reads as follows [reading] :
DEAR FBANK: From now until after next caU date will you please wire me
promptly each morning, giving me your deposits in thousands of dollars and
also your bills payable in thousands of dollars. I think there will be no need
to mention either the word " deposits " or " bills payable " in the message, but
merely use two sets of figures with the word " stop " between, as follows:
"James L. Walsh, vice president, Guardian Detroit Bank, Detroit, Mich.
$7,770,000. Stop. $100,000. Alexander Robertson."
Please do not fail to wire me just as early in the morning as possible, and
certainly not later than 10 a.m. Even if you do not need any additional
deposits to offset bills payable, it is extremely important that I be informed
accordingly,, as I may be holding up several other moves awaiting to hear from
you.
Cordially yours.
I observe that the phraseology of this letter is identical with the
phraseology of the letter just offered in evidence prior to this one,
Exhibit No. 37, with the exception that Exhibit No. 37 is addressed to
Mr. Eobertson, of the Ionia bank, and this one is addressed to Mr.
Brandon, of the City National Bank & Trust Co. of Niles. That
indicates that a sort of form letter was used as part of the mechanics
in this process, does it not?
4350
STOCK EXCHANGE PRACTICES
Mr. LORD. I would not say that two similar letters would indicate
a form letter, Mr. Pecora. I would say that those two situations were
evidently handled in the same manner.
Mr. PECORA. YOU recall the first day you testified here, I showed
you several different letters addressed by you to the executive heads
of different unit banks with regard to dividend declarations by the
unit banks, and those letters were all in the same phraseology, and
you declined to acknowledge that in that case any particular form
of letter was used. Do you think that in this case here the use of
the identical language in these two letters was also an accident,
as you called it the other day ?
Mr. LORD. N O ; I do not. I think in those two cases they used
similar letters. If you care to call it a form letter I have no objection.
Mr. PECORA. DO you object to calling it a form letter?
Mr. LORD. NO ; I do not have any objection.
Mr. PECORA. I understood that you did.
Mr. LORD. NO.
Mr. PECORA. I S
it not apparent to you, from the phraseology of
these letters, Exhibits Nos. 37 and 38, that these letters were resorted
to for a specific purpose ?
Mr. LORD. For the purpose of keeping in cl'ose contact with the
bank, to know from day to day, at that period, what the condition
of the bank's deposits and bills payable was.
Mr. PECORA. And that information was sought by Colonel Walsh
from the executive heads of unit banks for a period of time terminating in each instance after the next call date.
Mr. LORD. From those two unit banks; yes, sir.
Mr. PECORA. YOU know that that was the general procedure followed with all the unit banks.
Mr. LORD. I do not,
sir.
Mr. PECORA. DO you mean that?
Mr. LORD. I do.
Mr. PECORA. Why
do you think it was desired to have the unit
banks wire Colonel Walsh each morning until after the next call
date, as early as possible, and certainly not later than 10 a.m., a
statement of the deposits of the unit bank and the bills payable of
the unit bank?
Mr. LORD. I do not know, sir.
Mr. PECORA. YOU do not know?
Mr. LORD. I do not know why he wanted it every day.
Mr. PECORA. AH this is new to you, apparently.
Mr. LORD. I never sa^r those letters before.
Mr. PECORA. I say, this whole scheme is new to you—those mechanics.
Mr. LORD. Those mechanise are new to me.
Mr. PECORA. YOU never heard of them before?
Mr. LORD. NO, sir.
Mr. PECORA. Who
assigned Colonel Walsh to handle this part of
the mechanics?
Mr. LORD. Mr. Pecora, I assume it came in a general discussion at
board meeting, as to the division of duties. I do not recall exactly
how the assignment was made.
STOCK EXCHANGE PRACTICES
4351
Mr. PECORA. YOU were the president of the Guardian Detroit Bank
at the time these letters were written.
Mr. LORD. I was.
Mr. PECORA. YOU
were also president of the group at the same
time.
Mr. LORD. I was; yes,
sir.
Mr. PECORA. Colonel Walsh was executive vice president of the
Guardian Detroit Bank at the time these letters were written.
Mr. LORD. Yes, sir.
Mr. PECORA. Also an officer
Mr. LORD. Yes, sir.
Mr. PECORA. YOU were the
of the group.
operating head of both the Guardian
Detroit Bank and of the group, were you not?
Mr. LORD. Yes,
sir.
Mr. PECORA. Can you. not tell the committee who assigned important duties to different men in your bank and in your group ?
Mr. LORD. The duties of the officers are covered, in a measure, by
the bylaws of the institution.
Mr. PECORA. We know that. We know what the general duties
&re. You will not find anything in the bylaws that authorized
Colonel Walsh to do this particular work, will you ?
Mr. LORD. NO, sir.
Mr. PECORA. Tell us who assigned him to this particular work.
Mr. LORD. I do not know whether it was I or the board. I do
not recollect. It may have been by my recommendation.
Mr. PECORA. Why do you think Colonel Walsh, in these letters,
requested the heads of the unit banks to whom these letters were
addressed, as follows [reading] :
Even if you do not need any additional deposits to offset bills payable, it is
extremely important that I be informed accordingly, as I may 6e holding up
several other moves awaiting to hear from you.
Mr. LORD. I have no idea. I do not know what he is talking about
when he says " other moves " unless it is similar situations.
Mr. PECORA. Unless it is similar situations in what respect?
Mr. LORD: Taking a bank out of the bills payable.
Mr. PECORA. In other words, he wanted this information from all
the unit banks, even though any unit bank did not have any bills
payable, or required no deposits with which to offset bills payable,
so that he would know how to allocate funds from the parent bank to
take care of the bills payable of their unit banks.
Mr. LORD. Let us not use the words " parent bank ", because they
were entirely separate corporations, occupying the same relative
position.
Mr. PECORA. All right. I will modify the question by referring
to the creditor bank instead of the parent bank.
Mr. LORD. I do not even know that those banks owed the Guardian
National Bank of Commerce money. They may have owed it to
another bank. They may have owed it to the Federal Reserve bank.
They may have borrowed it somewhere else.
Mr. PECORA. I do not think that answers my question.
Mr. LORD. Will you repeat the question, please ?
4352
STOCK EXCHANGE PRACTICES
Mr. PECORA. YOU notice that in these letters, exhibits 37 and 38,.
Colonel Walsh makes the following statement in each of those two
letters [reading] :
Even if you do not need any additional deposits to offset bills payable, it is
extremely important that I be informed accordingly, as I may be holding up
several other moves awaiting to hear from you.
What do you suppose he meant by that?
Mr. LORD. I think I answered that question, did I not ?
Mr. PECORA. Will you answer it again? I did not understand itMr. LORD. I assume that there may have been other situations
where he wanted the banks to be out of bills payable. I do not
know how many letters he sent out to the units of that tenor at that
time. You have shown me 2 out of 23 banks and trust companies.
I do not know whether he did it to all of them. There is no way I
have of knowing. This is the first time, to my recollection, I have
ever seen those letters.
Mr. PECORA. Will you be good enough to look at this document that
I now show you, which purports to be a photostatic copy of a letter
addressed to Colonel Walsh by Mr. Brandon, president of the City
National Bank & Trust Co. of Niles, dated September 16, 1931, and
tell us if it is a true and correct copy of such a letter sent by Brandon
to Walsh?
Mr. LORD. I accept it as a true copy.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted.
(The document referred to, letter, Sept. 16, 1931, Brandon to
Walsh, was received in evidence, marked " Committee's Exhibit No.
39 ", Dec. 21, 1933, and the same Was subsequently read into the
record by Mr. Pecora.)
Mr. PECORA. The letter has been marked in evidence as committee's
exhibit no. 39 of this date. I t is written on the letterhead of the
Guardian Detroit Union Group, Inc., entitled " Intra-Group Memorandum ", dated September 16, 1931, to Mr. James L. Washy
Executive Vice President, Guardian Detroit Bank, from Mr. F . M.
Brandon, President City National Bank & Trust Co., Niles
[reading] :
Personal.
DEAB COLONEL: Confirming our telephone conversation today, we have borrowed $50,000 of the Federal Reserve bank on Government securities and
believe we will need possibly another $50,000, and knowing your desire to avoid,
if possible, bills payable, it occurred to us that you might arrange a deposit
which would automatically eliminate bills payable at this time, when we are
all looking for a call to report from the Comptroller.
This loan is in no sense occasioned by a local loan demand, but is only because
of a very decided decline in time deposits, which you know we have faced since
June 15 this year, and I shall depend upon your cooperation in arranging for
funds in the best way you think desirable at this time.
Yours very truly,
F. M. BRANDON.
Is this letter enlightening to you, Mr. Lord, concerning the details
of the mechanics employed to offset bills payable of unit banks to
some other bank in the group which was a creditor bank?
Mr. LORD. On that particular transaction it is enlightening. Apparently that bank was borrowing from the Federal Reserve bank,
not from the Guardian National Bank of Commerce. They speak oi
STOCK EXCHANGE PRACTICES
4353
borrowing $50,000 on Government securities from the Federal
Reserve bank.
Mr. PECORA. The letter says just a little bit more than that, does
it not?
Mr. LORD. I t says he might need $50,000 more.
Mr. PECORA. I t says:
We believe we will need possibly another $50,000, and knowing your desire
to avoid, if possible, bills payable, it occurred to us that you might arrange a
deposit which would automatically eliminate bills payable at this time, when
we are all looking for a call to report from the Comptroller.
Mr. LORD. That is perfectly clear.
Mr. PECORA. And clearly informs you to the effect, in substance,
that these deposits were sought by debtor banks in the group from
other banks in the group at about the time when they were expecting
a call to report from the Comptroller, in order to enable the debtor
banks to avoid the necessity for reporting bills payable.
Mr. LORD. In order to enable that debtor bank; yes.
Mr. PECORA. DO you think this was an exceptional case, Mr. Lord,
or is it typical of the policy that was pursued by the group and its
unit banks?
Mr. LORD. I do not know how many transactions of that character
took place at that time. I have no information.
Senator COTJZENS. Was that policy adopted wherever it was
thought to be necessary?
Mr. LORD. Senator, I have testified it was the desire and effort of
every unit bank to get out of debt, and to get out of debt at that time
as well as throughout the year, wherever they could. I cannot say
very much more than that.
Senator COTTZEN. SO it was the policy
Mr. LORD. I t was the policy to keep our bills payable at the
minimum at all times.
Senator COUZENS. Even though you had to transfer deposits from
one bank to another.
Senator ADAMS. The Federal Reserve bank was created largely
for the purpose of making loans to banks, was it not ?
Mr. LORD. Yes, sir.
Senator ADAMS. Why
should there be such a reluctance on the part
of the bank to show that it was participating in the actual functions
for which the Federal Reserve bank was created ?
Mr. LORD. Senator Adams, the public did not care whether you
were borrowing from the Federal Reserve bank, or where you were
borrowing at that time. Any bank borrowing made a bad impression on the public mind.
Senator ADAMS. But the borrowing did not increase the liabilities
of the bank, did it, if it used the money to pay deposits ?
Mr. LORD. Not a bit. The liabilities of the bank were either in
borrowed money or to a depositor. I might say, in connection with
that Niles situation, that it was a very critical situation, because, if
my recollection is correct, at or about that time there were several
bank failures in South Bend. The result was that Mies, which is
only a short distance from South Bend, suffered very considerably
in loss of deposits, and Mr. Brandon speaks in his letter of the need
for borrowing because of the decline in their time deposits.
4354
STOCK EXCHANGE PRACTICES
Senator ADAMS. Mr. Lord, have not the banks had a good deal
to do with creating the public feeling about loans ?
Mr. LORD. I think they have.
Senator ADAMS. Here was the Federal Reserve, created to make the
assets of the country liquid and available, the Federal Reserve furnishing currency, taking in their good loans of eligible paper, in
order that the bank might accommodate its people. The bank that
really accommodated its community would go to the Federal Reserve
to get some additional accommodations to help the community. Why
should the banks both avoid doing that and avoid having the thing
made public?
Mr. LORD. Senator Adams, in normal times the public would not
have thought anything about a bank's borrowings. Those were not
normal times, nor have we had normal times for the past 3 or 4
years. The banks, as I testified yesterday, brought that on themselves, in my opinion, by showing pride in attempting to keep out
of bills payable, and being proud of it when they were out of bills
payable. The Federal Reserve bank, as you say, was created for
the very purpose of aiding the banks, and I blame the bankers,
myself included, for the education of the public along that line.
Senator ADAMS. YOU remember in 1920 and 1921 tremendous loans
were made by the Federal Reserve, greater than had ever been made
before.
Mr. LORD. I do. I was in the banking business in Chicago at
that time, and it was a pride to show borrowings from the Federal
Reserve at that time, to help the war, or help the depression after
the war. I blame the bankers for that, myself included.
The CHAIRMAN. Here was a bank that had reported that it had
borrowed $50,000 from the Federal Reserve.
Mr. LORD. Yes, sir.
The CHAIRMAN. Should not that be listed as bills payable?
Mr. LORD. If they owed it at the time of the statement; yes, sir.
The CHAIRMAN. HOW did you expect to cancel that, by arrang-
ing a deposit to the credit of this bank with you, to the amount of
$50,000?
Mr. LORD. Correct, depositing with that bank $50,000, giving them
the funds with which to pay those bills payable, whether they were
at the Federal Reserve bank or elsewhere.
The CHAIRMAN. That is what he calls automatic settlement ?
Mr. LORD. That is what he speaks of as automatic. It is not automatic. I t takes a separate transaction.
The CHAIRMAN. The bills would not be paid at all, would they?
It was just a bookkeeping proposition.
Mr. LORD. NO, sir. The bills would be paid.
The CHAIRMAN. YOU would pay the Federal Reserve bank $50,000?
Mr. LORD. Yes, sir.
The CHAIRMAN. And they would owe it to you instead?
Mr. LORD. They would not owe it to us, except as a depositor.
Mr. PECORA. That is virtually owing it to you, is it not?
Mr. LORD. Certainly. A bank is a debtor to all its depositors.
Mr. PECORA. Then, in its report, in response to the Comptroller's
call for a report, that loan, or rather that indebtedness, would not
STOCK EXCHANGE PRACTICES
4355
appear in the debtor bank's report of condition as a bill payable,
would it ?
Mr. LORD. N O ; but it would appear in the debtor bank's, or in
that bank's obligation to its depositors.
Mr. PECORA. Which is something entirely different from its appearance as a bill payable, is it not?
Mr. LORD. Yes; it is different.
Mr. PECORA. This whole thing was simply done to enable the unit
banks, in making out their reports of condition pursuant to the call
of the Comptroller of the Currency, to avoid reporting to the Comptroller that they actually owed bills payable, was it not ?
Mr. LORD. It was done in order to pay off the bills payable.
Mr. PECORA. Were the bills payable entirely liquidated, and the
debtor bank entirely freed of the obligation ?
Mr. LORD. SO far as I know they were, sir.
Mr. PECORA. Was not another obligation substituted for the original obligation ?
Mr. LORD. The obligation to a depositor; yes.
Mr. PECORA. Yes. But that obligation so substituted was of a
character that made it unnecessary to report it or make it appear
as a bill payable, was it not?
Mr. LORD. I t was unnecessary to report bills payable when there
were no bills payable.
Senator COUZENS. What were your relations with the Federal
Reserve Bank? Did they examine your banks?
Mr. LORD. Senator Couzens, my recollection is that the Federal
Reserve in Detroit accepted the national and the State reports,
depending upon whether it was a national or State institution.
Senator COUZENS. I t did not send in separate examiners?
Mr. LORD. Not so far as I know. Mr. Patterson might be able to
enlighten you on that.
Senator COUZENS. Who is the head of the Federal Reserve at
Chicago now?
Mr. LORD. They have just had a new appointment, Senator. I
saw it in the paper today. I have forgotten his name—some man
fom Iowa. Governor McDougal has been.
Senator COUZENS. What was Mr. Steven's activity with the Federal
Reserve at Chicago?
Mr. LORD. He is a director of the Federal Reserve, representing
the Washington end in Chicago.
Senator COUZENS. He is there now ?
Mr. LORD. Yes, sir.
Senator COUZENS. Mr. Chairman,
I would like to have Mr. Stevens,
of the Federal Reserve Bank of Chicago, subpoenaed before the
committee.
Mr. PECORA. What is his full name?
Mr. LORD. Eugene W. Stevens. Senator Couzens, may I comment ?
I do not think Eugene Stevens would know as much detail of the
banks in the district as Governor McDougal or his assistant, Mr.
McKay. He might.
Senator COUZENS. IS Governor McDougal still there?
Mr. LORD. He has been on leave of absence.
Senator COUZENS. Has he not been ill for quite some time ?
4356
STOCK EXCHANGE PRACTICES
Mr. LORD. He has been quite ill and a new appointment was announced in the paper today.
Senator COTJZENS. Mr. Stevens was present the night the famous
closing order was issued, was he not?
Mr. LORD. If my recollection is correct he was there at or about
that time.
Senator COUZEETS. A S I understand it he participated in the negotiations that closed all the banks in Michigan on the night of February 13.
Mr. LORD. I think so.
Mr. PECORA. I show you what purports to be a photostatic reproduction of a letter, or so-called intra-group memorandum, addressed
to Mr. James L. Walsh by Mr. Alexander Kobertson, vice president
of the National Bank of Ionia, Mich., dated September 19, 1931, and
which is in answer to the letter of Colonel Walsh to Mr. Robertson
of September 13^ 1931, which was offered in evidence here a few
minutes ago. Will you look at this photostatic copy and tell me if
it is a true and correct copy of such a letter ?
Mr. LORD. Yes; I think it is.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted.
(The document referred to, letter, Sept. 19, 1931, Robertson to
Walsh, was received in evidence, marked " Committee Exhibit No.
40 ", Dec. 21, 1933, and the same was subsequently read into the
record by Mr. Pecora.)
Mr. PECORA. The letter has been marked Committee's Exhibit No.
40 in evidence, and reads as follows. It is on the letterhead of the
Guardian Detroit Union Group, Inc., dated September 19, 1931
[reading]:
DEAR COLONEL. Your, letter of September 17 requesting daily wires as to our
deposits and bills payable was received. The only bills payable we have are
the amounts advanced on certificates of deposit by the Guardian Bank, which
at present is $400,000, so I think there is no need to mention this in our wires.
If there is you can advise me.
Very truly yours,
NATIONAL BANK OF IONIA,
(Signed) ALEXANDER ROBERTSON,
Viee President.
Does this letter enlighten you concerning the purposes for which
these certificates of deposit were used, to offset bills payable ?
Mr. LORD. That letter enlightens me to the extent of saying that
the Guardian National Bank of Commerce had $400,000 on deposit
with the National Bank of Ionia.
Mr. PECORA. I S it not a fact that Mr. Eobertson himself, in words,
calls that a bill payable ?
Mr. LORD. He does.
Mr. PECORA. SO that he was not deceived in any way by the situation, was he ?
Mr. LORD. That may not have been, the fact, however.
Mr. PECORA. He regarded a certificate of deposit in the same light
as a bill payable.
Mr. LORD. I do not know whether he did or not.
Mr. PECORA. Does not his letter indicate that ?
Mr. LORD. It would indicate that; yes.
STOCK EXCHANGE PRACTICES
4357
Senator COTJZENS. SO, in effect, this banker thought that $400,000
was substantially a bill payable.
Mr. LORD. It probably was a case where he wanted to liquidate that
deposit of $400,000, and in his own mind he considered it as an advance by the Guardian National Bank of Commerce in the form of a
deposit which he ultimately wanted to get rid of through liquidation.
Senator COTTZENS. I S it customary for banks to liquidate their deposits without a demand of the depositor? Does a bank go to a
depositor and ask him to take his money out?
Mr. LORD. It has been done.
Senator COTJZENS. That is a rare instance.
Mr. LORD. If it is too large a deposit in 1 month; yes.
Senator COUZENS. It is a rare incident, is it not ?
Mr. LORD. Yes; I would say so, for a substantial-sized bank.
Mr. PECORA. NOW, Mr. Lord, let us have before us the letter of
Colonel Walsh to Mr. Robertson, dated September 17, 1931, marked
" Committee's Exhibit 37 ", to which this letter, Exhibit No. 40,. is
specifically the reply. You observe that in Colonel Walsh's letter
of September 17, 1931, to Mr. Robertson he specifically asks Mr.
Robertson as follows [reading] :
Prom now until after next call date, will you please wire me propmptly each
morning giving me your deposits in thousands of dollars and also your bills
payable in thousands of dollars.
This letter of Mr. Robertson, in answer to that letter of September
17 from Colonel Walsh, says [reading] :
DEAR COLONEL: Your letter of September 17 requesting daily wires as to our
deposits and bills payable was received. The only bills payable we have are
the amounts advanced on certificates of deposits by the Guardian Bank, which
at present is $400,000, so I think there is no need to mention this in our wires.
It is not apparent to you, from this correspondence, what the purpose of it all was ?
Mr. LORD. Of that deposit ?
Mr. PECORA. Of this whole policy.
Mr. LORD. Mr. Pecora, I have told you the purpose of the policy,
namely, to get the banks out of bills payable.
Mr. PECORA. Wasn't that done for the purpose of enabling the
banks in their reports submitted in response to calls to create a
better appearance than they actually had?
Mr. LORD. I would say to put them in a stronger financial position.
Mr. PECORA. Were they actually put in a stronger financial
position?
Mr. LORD. They had the deposits.
Mr. PECORA. Were they actually put in a stronger financial
position?
Mr. LORD. I would think so.
Mr. PECORA. They owed $400,000 under the certificate of deposit?
Mr. LORD. TO a depositor; yes.
Mr. PECORA. Does that put the bank in a stronger position than
if they owed the $400,000 as a bill payable ?
Mr. LORD. It does not make their liabilities any less, no; but I
consider that it puts & bank in a stronger position to have its liabilities in the form of deposits rather than bills payable. Certainly
the public thought so.
175541—34—PT 9
11
4358
STOCK EXCHANGE PRACTICES
Mr. PECORA. HOW do you know the public thought so? What
evidence have you that the public thought so?
Mr. LORD. Mr. Pecora, through this whole history of the last 3
years you know and I know the result on the public of a bank
showing bills payable.
Mr. PECORA. I don't know anything about it, Mr. Lord.
Mr. LORD. I do.
Mr. PECORA. All
right. Apparently the public felt no differently
then from the way the bankers felt, judging by the congratulatory
letters and telegrams that you received from different bankers all
over the country in answer to your communication to them showing
that all of the unit banks of the Group on December 31,1930, had no
bills payable?
Mr. LORD. I did not ask the public.
Senator ADAMS. Mr. Lord, was this $400,000 certificate of deposit
secured by any collateral?
Mr. LORD. Not that I know of. I don't know the details, Senator.
That transaction did not come under my direct operations, and I
don't know.
Senator ADAMS. YOU do not know whether or not they were
demand GD.'s or had a definite period ?
Mr. LORD. I assume they were demand C.D.'s, although I don't
know.
Mr. PECORA. I show you another letter, or rather, what purports to
be a photostatic copy of a letter, addressed to Mr. Walsh by Mr.
H. S. Reynolds, president of the Union and Peoples National Bank
of Jackson. Will you look at it and tell me if you recognize it to be
a true and correct copy of such a letter?
Mr. LORD. I recognize Mr. Reynolds' signature.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted and incorporated in the record.
(Letter dated Sept. 18, 1931, from H. S. Reynolds to James L.
Walsh was designated " Committee Exhibit No. 41, Dec. 21, 1933 ",
and the same appears immediately following where read by Mr.
Pecora.)
Mr. PECORA. The letter that has been marked " Committee's Exhibit No. 4 1 " in evidence is written on the letterhead of the Guardian Detroit Union Group, Inc., entitled "Intra-Group Memorandum", dated September 18, 1931, addressed to James L. Walsh,
executive vice president, Guardian Detroit Bank, Detroit, from
H. S. Reynolds, president, Union & Peoples National Bank of Jackson [reading] :
DBAB J I M : We will be very glad to wire you daily regarding our deposits
and loans. I have been hoping to hear from you every day about a deposit.
I think it is very important that we do not show any bills payable and that
our deposits are increased between now and the time of the call. I have been
hoping every day to get some outside money, and I sincerely trust that you
will do something for us in the next 3 or 4 days.
Yours very truly,
(Signed) H. S. REYNOLDS.
Does this letter, Mr. Lord, enlighten you concerning any other
practice or policy of the bank and its unit banks ?
Mr. LORD. Any other policy?
Mr. PECORA. Yes.
STOCK EXCHANGE PRACTICES
4359
Mr. LOED. To this extent, that unit banks frequently called upon
Colonel Walsh arid others in the Guardian National Bank of Commerce, Guardian Detroit Bank, to aid them in securing deposits of
outsiders.
v
The CHAIRMAN. Doesn't it in effect call on Colonel Walsh to send
up some money himself ?
Mr. LORD. That would be the implication of the letter.
Mr. PECORA. That is the implication, that he was looking to
Colonel Wash, who is executive vice president of the Guardian
Detroit Bank, to furnish such deposits, so as to enable this unit bank
to make a showing of increased deposits between the date of this
letter and the time of the next call for report from the Comptroller %
Mr. LORD. TO enable that bank to liquidate its bills payable. Isn't
that what he says ?
Mr. PECORA. NO ; it does not say that. That is why I asked you if
it didn't enlighten you as to some other policy.
Mr. LORD. Will you read the letter?
Mr. PECORA. All right.
DEAR JIM : We will be very glad to wire you daily regarding our deposits and
loans. I have been hoping to hear from you every day about a deposit. I think
it is very important that we do not show any bills payable and that our deposits
are increased between now and the time of the call. I have been hoping every
day to get some outside money, and I sincerely trust that you will do something
for us in the next 3 or 4 days.
Mr. LORD. Mr. Pecora, the only way that bank could pay its bills
payable was through increased deposits.
Senator COUZENS. Couldn't it also pay its bills payable by collecting its debts?
Mr. LORD. Yes; over a period, Senator Couzens.
Senator COUZENS. Certainly that is not the only way that you can
pay your bills payable, by borrowing money.
Mr. PEOORA. Doesn't tnis letter suggest to you that another settled
policy of the Group and its unit banks was to do that which would
serve to show an increase in deposits ?
Mr. LORD. I don't think so. I think the purpose of Mr. Reynolds
was the liquidation of these bills payable.
Mr. PECORA. There is not any mention of liquidating bills payable
in this letter, is there?
Mr. LORD. SO we will not show or have any bills payable.
Mr. PECORA. I t says:
I have been hoping to hear from you every day about a deposit. I think it is
very important that we do not show any bills payable and that our deposits are
increased between now and the time of the call.
There were two purposes he had in mind, two objectives: One, to
take care by certain methods of bills payable, and secondly, to increase the deposits between the date of this letter and the time of the
next call?
Mr. LORD. Mr. Pecora, every bank was striving to increase its
deposits in the face of the constant seepage of deposits. There is
nothing wrong about that, trying to increase your deposits. We were
going after new business lor ourselves and for our unit banks
constantly.
Mr. PECORA. We know that all banks try to increase their deposits
as much as possible.
4360
STOCK EXCHANGE PRACTICES
Mr. LORD. Certainly.
Mr. PECORA. But in this particular instance I am discussing with
you whether or not it was the policy of the group and its unit banks
to do something which would enable the unit banks from time to
time and when considered strategically important to do so, to show
increases in their deposits.
Mr. LORD. Mr. Pecora, the unit banks were struggling and striving
every day of the year to increase their deposits. I t was not particularly at statement date, although Mr. Kenolds mentioned it. But
we were fighting all the time to increase deposits.
Mr. PECORA. But this particular letter
Mr. LORD (interposing). He calls attention to it at statement timet
yes; but we had an organization known as the business development
department.
Mr. PECORA. I know, but now, Mr. Lord, in case of this group of
unit banks, because of the existence of the group and the affiliation
among the various unit banks in the group, it was easily possible for
a. unit bank that desired, for any particular reason, at any call date
a good showing, by way of increase of deposits, to make such a showing through the mere expedient of getting one of the other banks in
the group to make a deposit?
Mr. LORD. I t is possible; yes.
Senator COTJZENS. Well, now^ you referred a while ago to " new
business." You would not call that new business, would you?
Mr. LORD. NO ; but I was referring to the outside money, Senator.
Senator COTJZENS. Yes. But the evidence is quite clear that there
was a swapping of deposits that was quite extensively engaged in,
so as to build up a fictitious amount of money in the individual units
of the bank, and undoubtedly that would have been the effect had the
Guardian Bank given the Jackson bank a deposit, because giving
them a deposit would not have diminished the deposits in the Detroit
bank but would have augmented the deposits in the Jackson bank.
Mr. LORD. AS I recall the Jackson situation, we carried a substantial account in Jackson for many months, just how long I don't
know.
Mr. PECORA. Wasn't it the settled policy of the Group to do that
which would enable unit banks from time to time and whenever considered strategically important and necessary for them so to do, to
have one or more of the banks in the Group to make deposits with another unit bank in the Group, so as to enable that other unit bank
in the Group to make a good snowing by way of increase of deposits ?
Mr. LORD. NO, sir.
Mr. PECORA. What?
Mr. LORD. NO, sir.
Mr. PECORA. That was not the policy of the bank?
Mr. LORD. NO, sir. The purpose of those deposits was
to liquidate
the bills payable.
Mr. PECORA. Well, would you say that as a result of the way by
which bills payable were offset by deposits one of the effects created
by the method was to enable the debtor bank not only to show no
bills payable but to show an increase of deposits?
Mr. LORD. That was the effect; yes. That was not the purpose.
The purpose was to liquidate the bills payable.
STOCK EXCHANGE PRACTICES
4361
Mr. PECORA. YOU do not think that that was the only purpose
Mr. LORD (interposing). Absolutely.
Mr. PECORA (continuing). That Mr. Reynolds had in mind when
he wrote this letter marked " Committee's Exhibit No. 4 1 " ?
Mr. LORD. I do not know what he had in mind except from what
he says in the letter.
Mr. PECORA. Well, from what he says in the letter you do not
think that?
Mr. LORD. He wanted increased deposits.
Mr. PECORA. NOW, you remember that we put in evidence yesterday while you were testifying copy of the Intra-Group Memorandum that you addressed to the board of directors ?
Mr. LORD. I do.
Mr. PECORA. Showing
that as of December 31, 1930, the deposits
had increased by 7y2 million dollars during the preceding 3 months
and that there were no bills payable shown by any of the unit banks
in the group; you recall that exhibit?
Mr. LORD. Yes, sir. I don't remember the 7% million figure. I
guess it must be correct.
Mr. PECORA. Will you be good enough to look at this document
which I now show you and which purports to be a photostatic copy
of a letter addressed by Mr. Walsh to Herbert S. Reynolds, president of the Union & Peoples National Bank of Jackson, dated
December 31, 1930, and tell us if you recognize it to be a true and
correct copy of such a letter?
Mr. LORD (after examining document). I never saw the letter,
I assume it is correct.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted and embodied in the record.
(Letter dated Dec. 31, 1930, from James L. Walsh to Herbert
S. Reynolds was designated " Committee Exhibit No. 42, Dec. 21,
1933 ", and the same appears immediately followiiig where read by
Mr. Pecora.)
Mr. PECORA. The letter is marked " Committee's Exhibit No. 42 "
in evidence, written on the letterhead of the Guardian Detroit Bank,
addressed to Mr. Herbert S. Reynolds, President, Union & Peoples
National Bank of Jackson, dated December 31, 1930 [reading] :
DEAB HERB. It begins to look as if none of the banks or trust companies in
the Group will be borrowing at the close of business December 31, 1930. Some
of the banks have made a point of showing biUs payable none—
the word " none " being written out in capitals—
in order to emphasize this particular point. In Guardian Detroit Bank we
are going to set up our statement with the word " none "—
in capital letters—
instead of 0.00. I am passing along this information to you for what it may
be worth.
Please send me at least one half a dozen of your printed statements as
soon as they are ready, because I have some time deposits under negotiation
concerning which I' will get in touch with you as they develop.
May I not take advantage of this opportunity to thank you for the contribution you have made to the work of the operating committee, to the cooperation you have extended to me personally during the past year, and to
wish for you a happy and prosperous New Year.
Cordially yours,
4362
STOCK EXCHANGE PEACTICES
Signed by Mr. James L. Walsh, who is chairman of the operating
committee of the Guardian Detroit Union Group, Inc.
Now, will you tell the committee, Mr. Lord, what you think
Colonel Walsh had in mind when he made the request to Mr.
Reynolds in this letter for half a dozen of the printed statements in
Mr. Reynolds' bank " because "—quoting from the letter
I have some time deposits under negotiation concerning which I will get in
touch with you as they develop.
Mr. LOBD. I assume Mr. Walsh meant just what he said.
Mr. PECORA. Well, what? What was it?
Mr. LORD. I assume that some of the corporations with which the
Guardian or some of our units were doing business Mr. Walsh was
negotiating with to deposit funds in Mr. Reynolds' bank on time,
outside money entirely.
Mr. PECORA. SO that Mr. Walsh could place these time deposits in
such of the unit banks as would best be served thereby ?
Mr. LORD. SO that the corporations could place them in those
unit banks.
Mr. PECORA. Yes. Then it was within the province and power,
because of this group system, for officers of the group to distribute
deposits among the various banks that were units of the Group in
such manner as would be most helpful to the individual units that
belonged to the Group ?
Mr. LORD. NO, sir; it was not within their power. The corporations or individuals, whoever made the deposits, placed them wherever they chose. I t may have been the desire of Colonel Walsh to
get some corporation to make a deposit in Mr. Reynolds' bank, but
the officers of our bank had no power to do that for one minute.
Mr. PECORA. Well, whether they had the power or not, was not
the situation, due to the existence of this group system of banking,
one that would enable the executive officers of the group to influence
deposits in such of the unit banks as might be considered most
advisable in the interest of the group ?
Mr. LORD. The officers of the group, Mr. Pecora, may have solicited
from this unit or that unit a deposit from this person or that corporation, but they had no control over where the corporation would
put their funds in any way.
Mr. PECORA. Let me show you this document, which purports to
be a photostatic reproduction of a letter or Intra-Group Memorandum addressed to Mr. Walsh bj Mr. Brandon, president of the City
National Bank & Trust Co. of Niles, dated January 5,1931. Will you
look at that and tell me if it is a true and correct copy of such a
letter?
Mr. LORD. I recognize Mr. Brandon's signature.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted and incorporated in the record.
(Letter dated Jan. 5, 1931, from F. M. Brandon to James L.
Walsh was designated " Committee Exhibit No. 43, Dec. 21, 1933 ",
and the same appears immediately following where read by Mr.
Pecora.)
Mr. PECORA. The letter that has been received and marked " Exhibit No. 43 " reads as follows [reading] :
STOCK EXCHANGE PRACTICES
4363
DEAR COLONEL: Your letter of the 3d with reference to the next meeting of
the operating committee at Flint is received, and it will be satisfactory to me
to meet on Thursday the 22d instead of Friday the 23d.
Permit me to congratulate you on the splendid showing made by the Detroit
units of the Group, as reflected in the growth of deposits, and it is also
especially gratifying to me that all of the units of the Group were able to
show' bills payable none. No doubt the consolidated accounts in Chicago
were a very helpful factor in showing this increase in Detroit, and we are glad
to have had the opportunity of cooperating with you in bringing this about.
Very truly yours,
(Signed) F. M. BRANDON.
Senator COUZENS. What did he mean in there by the " consolidated
reports in Chicago " ?
Mr. LORD. " Consolidated accounts."
Senator COUZENS. Oh, " accounts." What accounts were consolidated?
Mr. LORD. Senator Couzens, I haven't all the details of that in
mind, but at one time there was an arrangement under which, instead
of, we will say, the Grand Eapids National and Ionia and Jackson
or some group of banks each carrying a separate correspondent
account, they combined it into one account, which made it more
valuable to the Chicago bank, and they all had the privilege of drawing from their account, from that one account. I think that is the
way it was handled. On their books they carried whatever balances
they had, just as though they had their separate accounts.
Senator COUZENS. Under what name was it carried in the Chicago banks?
Mr. LORD. Well, I suppose it was carried under the three names
or whatever they were, so that each bank could draw against it.
Senator COUZENS. Yes; but you said it was consolidated accounts.
How many were consolidated?
Mr. LORD. I suppose that is what he meant. Senator, you will
have to ask somebody else who knows more of the details about it.
Senator COUZENS. Colonel Walsh will know more about it.
Senator ADAMS. What is the advantage of that?
Mr. LORD. I t made a better account for the Chicago bank. Instead of having a dozen accounts of ten or : fifteen thousand in
balances, they combined a lot of detail in one account, and it was
thrown into one account, and it made a better account for them.
That was the theory of it.
Senator COUZENS. Why was it abandoned?
Mr. LORD. I don't recall. I t was an operating committee matter.
Senator ADAMS. Mr. Lord, in the operation of these unit banks
was there any disposition or effort to have a bank in B with a deposit in C and C in D ?
Mr. LORD. Oh, absolutely no.
Senator ADAMS. There was no pyramiding of deposits?
Mr. LORD. NO, Senator; every bank in our group nad of necessity
to carry a Detroit correspondent.
Senator ADAMS. The bank in Lansing did not carry one in
Jackson?
Mr. LORD. Oh, no; there was no effort to do that. I think if the
record were taken out showing what you might call the interbank
deposits, it was a very modest figure.
4364
STOCK EXCHANGE PRACTICES
Senator COUZENS. I am glad you asked that question, Senator
Adams, because I think the results are so different.
Mr. LORD. Well, I haven't the figures, Senator Couzens, but I
question that it would show any substantial amount.
Senator COTXZENS. Would you consider 18. millions a substantial
amount?
Mr. LORD. NO ; not with deposits of 400 million, Senator.
Senator COTJZENS. I t might be a substantial amount to a small unit
with a few millions of deposits, might it not?
Mr. LORD. Yes; but there were 23 banks and trust companies. I do
not know the figures, but I doubt whether it averaged 18 million.
There may have been periods, due to the fluctuation of business,
where it went up and down.
Senator ADAMS. In the conduct of your system did the Guardian
Bank act as a general depositary in Detroit of the other 22 members
of the system?
Mr. LORD. Yes, sir.
Senator ADAMS. What
would be the situation where you were
taking out a bill payable? Say the Niles bank had its reserves
carried with the Guardian Bank and the Guardian Bank
Mr. LORD (interposing). Senator Adams, the Mies bank, being a
national bank, had to carry its reserves in the Federal Reserve bank.
Senator ADAMS. I t did not carry all of them.
Mr. LORD. I t might have had some excess, yes.
Senator ADAMS. Was there such a condition that the Niles bank
had on deposit in the Guardian Bank a certain amount, and then
the Guardian Bank, in order to help them meet the bills payable,
would make a separate deposit; that is, each would pass on the
independent deposits rather than offsetting?
Mr. LORD. Well, of course, in case of trouble the deposits would
offset, in case of trouble. But they are entirely separate transactions.
Senator ADAMS. They might have been carried as separate deposits so that they were actually susceptible of offsetting, but the
offsetting was not done?
Mr. LORD. Yes, that is correct.
Mr. PECORA. Mr. Lord, will you look at this document which I
now show you and which purports to be a photostatic copy of a
letter addressed by Mr. Walsh to Mr. Frank M. Brandon, president
of the City National Bank & Trust Co. of Mies, dated January 6,
1931, and tell me if you recognize it as a true and correct copy oi
such a letter?
Mr. LORD (after examining document). I recognize Colonel
Walsh's initials on that.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted and entered in the record.
(Letter dated Jan. 6, 1931, from James L. Walsh to Frank M.
Brandon was designated " Committee Exhibit No. 44, Dec. 21,1933 ",
and appears immediately following where read by Mr. Pecora.)
Mr. PECORA. The letter marked Committee's Exhibit No. 44 " in
evidence, reads as follows; it is on the letterhead of the Guardian
Detroit Bank,- addressed to Mr. Frank M. Brandon, president of the
City National Bank & Trust Co., Niles [reading] :
DEAE FEANK : This is just a brief note to congratulate you on# being able to
show the item "Bills payable—none" in your statement of condition as of
STOCK EXCHANGE PBACTICES
4365
December 31, 1930. I was also pleased to note the change you made in the
set-up of your statement by eliminating the item in "Trust Assets.*' I, too,
feel that this is a step toward bringing the statements of all of the group banks
into harmony.
Your personal remarks are greatly appreciated, and I, too, am looking forward
to a very pleasant association with you in the year 1931.
Cordially yours,
Signed J. L. W.
Those were Mr. Walsh's initials, were they not?
Mr. LORD. Yes, sir.
Mr. PECORA. NOW, what
do you understand by the reference in
this letter to an elimination in the statement ox condition of Mr.
'Brandon's bank of the item in " Trust assets "?
Mr. LORD. Mr. Pecora, that is a technical matter. Some banks, as
a matter of form, will carry off-setting items on each side of their
statement, of bonds in safe Keeping or trust assets, on the asset side,
off setting the liability side. It meant absolutely nothing. It merely
distorted the bank's statement of its own resources and liabilities.
Now it is a technical matter that probably Colonel Walteh can explain. I t is a detail that I would not follow myself, but that is my
understanding. There are a great many State banks that used to
carry bonds in safe keeping that might run up to several hundred
thousand dollars, and that might swell their statement, giving it the
appearance of a bigger institution than it actually was.
Senator ADAMS. I t had no effect on the net wbrth of the bank?
Mr. LORD. Absolutely no effect.
Senator ADAMS. Merely on the aggregate or totals on the two
sides?
Mr. LORD. Yes, sir.
Senator COUZENS. Yes;
but wasn't it quite an ordinary discussion
to talk about your totals?
Mr. LORD. Not distorted that way, Senator.
Mr. PECORA. Didn't it show a larger amount of total resources for
that year ?
Mr. LORD. Than we wanted to show, and that is why it was taken
out; because it gave to my mind a somewhat false impression of the
totals of the bank.
Mr. PECORA. Exaggerated impression?
Mr. LORD. Yes; I think it did.
Senator ADAMS. Banks have used that term " resources " and used
that total sometimes as if it meant something?
Mr. LORD. Yes; and it really meant nothing, because they were
offsetting items on both the asset and liability side.
Mr. PECORA. I show you what purports to be a photostatic reproduction of a telegram sent to Mr. Herbert E. Wilkin, executive vice
president Union Industrial Trust & Savings Bank, Flint, Mich., by
James L. Walsh under date of December 30, 1930. Will you look
at it and tell me if you are familiar with the transaction to which
that relates ?
Mr. LORD. I know nothing about it at all. Never saw the telegram.
Mr. PECORA. I show you now another photostatic reproduction of
what purports to be an intra-Group memorandum letter addressed
to Mr. Wilkin by Mr. Walsh under date of December 31,1930. Will
you look at it and tell me if you recognize it as being a true and
correct copy of such a Group memorandum or letter ?
4366
STOCK EXCHANGE PRACTICES
Mr. LORD (after examining document). I recognize Colonel
Walsh's signature.
Mr. PECORA. I offer it in evidence.
Mr. LORD. DO you want both of them?
Mr. PECORA. Both the telegram and the letter.
Mr. LORD. I don't know anything about the telegram. There is no
way of identifying it. I assume it is all right.
The CHAIRMAN. Let them be admitted and entered on the record.
(Photostat of telegram dated Dec. 30,1930, from James L. Walsh
to Herbert E. Wilkin was designated " Committee Exhibit No. 45,
Dec. 21, 1933," and appears immediately following where read by
Mr. Pecora.)
(Intra-group memorandum dated Dec. 31, 1930, from James L.
Walsh to H. E. Wilkin was designated " Committee Exhibit No. 46.
Dec. 21, 1933," and appears immediately following where read by
Mr. Pecora.)
Mr. PECORA. The telegram marked "Exhibit No. 4 5 " reads as
follows [reading]:
DECEMBER 30,
1930.
HERBERT B. WILKIN,
Executive Vice President, Union Industrial Trust & Savmgs Bank,
Flint, Miph.
Wire meVearly Wednesday morning your total bills payable, if any, and will
endeavor to secure deposit for you to offset.
JAMES L. WALSH.
The letter marked in evidence as "Committee Exhibit No. 4 6 "
is on the letterhead of the Guardian Detroit Union Group, Inc.,
entitled "Intragroup Memorandum", dated December 31, 1930,
addressed to Mr. H. K. Wilkin, executive vice president and cashier,
Union Industrial Trust & Sayings Bank, Flint, from Mr. James L.
Walsh, vice president, Guardian Detroit Bank. I t reads as follows
[reading]:
DEAR HERB: Agreeable with our telephone conversations today, we have
credited your account $1,800,000, representing your certificate of deposit for
$1,200,000 received by messenger and a transfer of $600,000 received through
the Federal Reserve bank.
In accordance with your instructions we have charged your account with your
notes to the Guardian Detroit Bank aggregating $1,800,000, plus accrued interest
to date amounting to $155.55. We are enclosing duplicate deposit ticket in
acknowledgment of above credit, debit advice, and your canceled notes.
You will be gratified to know that none of the units of the Guardian Detroit
Union Group will show,one dollar of biUs payable in their annual statements to
be published shortly.
With best wishes for a happy and prosperous new year, I am,
Cordially yours,
JAMES L. WALSH.
Mr. PECORA. What does this letter indicate to you as the transaction
alluded to therein?
Mr. LORD. Aside from the letter, I know nothing about the transaction. The letter would indicate that the deposit was $1,200,000
made by the Guardian Bank with the Flint Bank; that the proceeds
of that deposit were transferred, or $600,000 of the Flint Bank's
funds, making a total of $1,800,000 which was used in liquidation of
the note of that bank to the Guardian Detroit Bank.
Mr. PECORA. Was the note actually paid?
STOCK EXCHANGE PRACTICES
4367
Mr. LORD. I assume it was.
Mr. PECORA. Or whs it a mere bookkeeping transaction?
Mr. LORD. I assume it was paid and canceled.
Mr. PECORA. And the obligation represented by the note was passed
on to the obligation represented by the depositor?
Mr. LORD. Well, in part.
Mr. PECORA. Was the note referred to in this letter, exhibit 46,
reinstated after the 1st of January 1931?
Mr. LORD. Mr. Pecora, I know nothing about it. I have ho details
of the note at all.
Mr. PECORA. Was there a committee known as the " Public Relations Committee ", either of the Guardian Detroit Bank or of the
group?
Mr. LORD. I have a vague recollection of such a committee.
Mr. PECORA. What were the functions of that committee?
Mr. LORD. I suppose, just what the name implies.
Mr. PECORA. Well?
Mr. LORD. Public relations.
Mr. PECORA. Well, elaborate on that a little, will you?
Mr. LORD. I would say it would handle advertising, publicity of
all characters, contacts with the public—whatever comes within the
scope, of -public relations.
Mr. PECORA. I have before me what purports to be a photostatic
reproduction of the minutes of a meeting of this public
relations
committee held on June 25, 1931, in the directors5 room of the
Guardian Detroit Bank, and which reads as follows
Mr. LORD. What was the date? Excuse me.
Mr. PECORA. June 25, 1931. [Reading:]
Ernest Kanzler presided as chairman. Present: Messrs. Berry, Kanzler,
Keane, and Snow. By invitation: Messrs. Scrymgeour, Winningham, and
Paterson.
(1) The minutes of the meeting held May 22, 1931, were read and discussed
-AS follows: The matter of appointing a publicity man in each unit who would
be responsible for gathering current news items and either getting them in the
local papers or sending them on to Mr. Ernest Kanzler was discussed. Mr.
Scrymgeour stated that he had prepared a letter and submitted it to Mr. Walsh,
which Mr. Walsh now has. The chairman will take this up with Mr. Walsh
direct.
(2) In regard to the posters to be used on the Fort Street side of the Guardian
Detroit Bank Savings department in the Penobscot Building, Mr. Berry reported that he had taken the matter up with Mr. Walsh, but due to Doctor
Murphy being out of town, nothing definite had been arrived at as yet.
This is what I particularly want to call your attention to, Mr.
Lord [reading] :
(a) A discussion followed of the Consolidated Group statement, which is to
be printed in poster form 3 or 4 days after the unit statements are available.
It was finally decided that this consolidated statement would be printed in the
standard form rather than in the understandable form, as it had been originally
set up. It was felt that the understandable form was devised at a time when
conditions warranted such a statement, whereas the situation is now entirely
different, and it will be much better to use the same type of statement for the
newspapers, for printed statements, and for posters.
What was the difference between the so-called standard form of
report and the understandable form?
Mt. LORD. Mr. Pecora, I do not know anything about it. I do not
know what they were talking about. I was not at the meeting and
4368
STOCK EXCHANGE PRACTICES
do not know what the discussion was; and I do not know of any
statement that was published that is not in understandable form. I t
is all Greek to me. I never saw the thing before.
Mr. PECORA. What was the standard form ? Let us see how much
Greek there was to it.
Mr. LORD. I do not know what they are referring to.
Mr. PECORA. They were referring to the issuance of the Consolidated Group statement, were they not?
Mr. LORD. Yes.
Mr. PECORA. DO you know what that was?
Mr. LORD. I assume it is what appeared in the annual report.
Mr. PECORA. The consolidated group statement was a statement
showing the condition of all of the unit banks in the group, in consolidated form?
Mr. LORD. Yes,
sir.
Mr. PECORA. Aiid in that consolidated group statement it was necessary to show various items of assets and items of liability?
Mr. LORD. Yes, sir.
Mr. PECORA. There was
a so-called standard form of such a statement, was there not?
Mr. LORD. I do not know what he was talking about when he says
* standard " or " understandable." I have not the slightest idea.
Senator COTJZENS. That was not the question that Mr. Pecora asked.
He asked whether or not there was a, standard form. I think he
was not referring to this particular things but was there a standard
form?
Mr. LORD. AS I understand the words " standard form ", it is the
statement which appeared in the annual report. I do not know of
any other form.
Mr. PECORA. Did you ever hear of another form called or designated as an understandable form as distinguished from the standard
form?
Mr. LORD. I do not know what he was referring to, unless he is
referring to a detailed statement such as that of the Continental
Bank of New York, or the Corn Exchange Bank. Under each item
it would have in words of one syllable just what it owed to the depositors, and under capital stock it would show what the stockholders
had in it. Unless he means that, I do not know what he was talking
about.
Mr. PECORA. YOU were the executive officer of both the Group and
of the largest bank in the Group, were you not, at this time, in June
1931?
Mr. LORD. Yes.
Mr. PECORA. And
as the executive officer of the Group it was part
of your duty to get up or to assist in the preparation of a statement
showing the condition of the Group and its units, was it not?
Mr. LORD. I t was part of my duty to look at the statement and see
that it was satisfactory; yes. But to get it up, no.
Mr. PECORA. In order to see that it was satisfactory you had to
know what the report contained?
Mr. LORD. Yes.
Mr. PECORA. And
that would lead to a consideration by you of the
form of the report, would it not?
STOCK EXCHANGE PBAOTICES
4369
Mr. LORD. I would $ay so; yes.
Mr. PECORA. YOU were interested as the executive head of the
Group in anything that was put out in behalf of the Group to enlighten the public with respect to the position of the Group and of
the unit banks, were you not ?
Mr. LORD. Yes, I was, naturally.
Mr. PECORA. And you knew that this public relations committee
was functioning for the precise purpose or the specific purpose of
keeping the public informed, among other things, concerning the
activities, the condition, the progress of the Group and its unit banks?
Mr. LORD. Yes.
Mr. PECORA. That was not an unimportant
Mr. LORD. NO.
Mr. PECORA. It is important to any bank to
detail, was it?
maintain friendly relations with the public, is it not?
Mr. LORD. Indeed it is.
Mr. PECORA. And to impress upon the public any facts that would
tend to reflect the sound condition of the bank?
Mr. LORD. Correct, sir. Mr. Kanzler tells me that the so-called
" understandable form " is the formal statement that you may not
recall or that you may recall having seen gotten out by the Corn
Exchange Bank.
Mr. PECORA. Published generally in theater programs and newspapers, and one that employs verbiage which is not technical?
Mr. LORD. Not technical. It was at that time certainly quite an
unusual form used by banks.
Mr. PECORA. It was called an understandable form because it was
considered that the lay public, unfamiliar with the technique of banking, would be able to understand a report in that form better than it
could understand the standard form of report. Is not that so?
Mr. LORD. Yes. Part of the lay public—I mean, the man on the
street. It said in words of one syllable what each item meant, so
that you might say a child of 12 could understand it. I t was quite the
unusual form used by banks.
Mr. PECORA. It is a commendable form where it is sought to inform
the public accurately and understanding^?
Mr. LORD. I think it is.
Mr. PECORA. DO you know the reason why in June 1931, it was
considered inadvisable to issue a report or statement in behalf of the
Group not in its understandable form, or the form that the public
would more easily understand and appreciate the significance of, but
in the standard form which was not quite so capable of being understood by the public?
Mr. LORD. Mr. Pecora, I cannot answer that question. My assumption would be that the reason they preferred to use the standard form
was that no other bank in Detroit used the so-called understandable
form, nor had we in any of our banks or in any of our Group statements ever used it, and it meant a change from the ordinary form.
Mr. PECORA. Had not the Group at any time issued a report in the
so-called understandable form?
Mr. LORD. Not to my knowledge.
Mr. PECORA. Had it published anything embodying a statement of
the condition in the so-called understandable form ?
4370
STOCK EXCHANGE PEACTIOES
Mr. LORD. Not to my recollection, Mr. Pecora.
Mr. PECORA. Had it ever considered doing so ?
Mr. LORD. I think it considered it at that time, apparently, from
that memorandum.
Mr. PECORA. I am going to read something further from that
memorandum to you
Senator COTTZENS. While you are on that—this section 3 of the
memorandum says that it was felt that the understandable form was
devised at a time when conditions warranted such a statement.
When was that understandable fornrfiitet devised?
Mr. LORD. I have no idea, Senator. I think that about that time
the Corn Exchange Bank started to use it in New York, but so far
as I know it was the only New York bank that was using it.
Mr. PECORA. They used it, according to my recollection, long prior
to 1931.
Senator COXJZEKS. That is true; and I know of no other bank that
did use it, as a matter of fact.
Mr. LORD. I do not know when they started it.
The CHAIRMAN. What does he mean when he refers to conditions—
certain conditions that would not warrant it ?
Mr. LORD. I suppose, the disturbed conditions existent in Detroit
at that time. I t was just after the Detroit bank took over the American State Bank. They took it over in the spring of 1931. I believe
that memorandum was written in June 1931 ?
Mr. PECORA. The meeting was held on June 25, 1931.
Mr. LORD. Yes. I suppose that is what they were referring to.
Mr. PECORA. Let me read further from these minutes of the meeting of the Public Relations Committee held on June 25, 1931
[reading] :
The posters will have the same heading as was shown on the understandable
form. The consolidated statement is to be published in the newspapers as soon
as it is ready, which will be 3 or 4 days after the regular statements are
published and will appear in the following papers: Detroit papers, Chicago
Journal of Commerce, a New York daily paper, and perhaps the WaU Street
Journal, as well as the various local papers in the State where units are located.
Mr. Walsh is to handle this.
It was thought particularly wise at this time to stress the names of the
various units, together with the cities in which they are located, so that the
public will know exactly what banks are in our group in the various cities.'
At a later date, it may be advisable to use the understandable consolidated
statement form, and it was decided to hold it in reserve for the time })eing.
Mr. Paterson brought out the point of using the phrase "total resources in
excess of $500,000,000", and it was decided to leave this off for the time
being, inasmuch as we do not have much leeway with respect to this figure.
Later on, if we find there is a wider margin, this phrase can be used.
Tje consolidated statement in the standard form will be made available for
poster frames to be used at all branches and units, and a reprint of this
poster will be made for distribution to units for passing out by their tellers and
officers to customers. In this connection, Mr. Scrymgeour stated that an
explanatory letter had been prepared by him, which was now in Mr. Walsh's
hands for his approval, and which would educate the tellers and junior
officers in the handling of passing out the consolidated statement.
(4) Mr. Covington stated that a bank call was received by the National
Bank of Commerce at 2 o'clock in the afternoon and the same night the statement was published in the papers, and the printed statement was available
the next afternoon and was mailed out to important commercial and savings
customers that night. Many of the units are not as prompt in the publishing
of their statements and Mr. Berry was delegated to write each unit, by special
delivery, not later than tomorrow, that they should have their statements
STOCK EXCHANGE PBACTICES
4371
published within 24 hours after the call is received and that the printed
statements should be available for mailing out to important savings and
commercial customers the following night.
I will omit the reading of paragraph 5 because it is relatively
unimportant. (Continuing reading:)
(6) A discussion followed regarding the strength of group banking as contrasted to individual banks, and it was suggested that we should take
advantage of this as much as possible in a subtle way, ^pointing out that very
few, if any, group banks had failed and were ranked with our ^strongest
institutions, whereas: individualsbariks^ have been dropping by the wayside in
small towns throughout the country. This is especially true in the lower
Michigan district, where within the past month bank failures occurred in
Pontiac, Birmingham, Royal Oak and other small towns.
(7) Mr. Covington reported that at a meeting of the clearing house on
bank advertising, it was decided that nothing would be done at this time.
It seems that the Detroit bankers group have been anxious to do some
advertising on account of the difficulties they have encountered recently.
(8) Mr. Scrymgeour reported that the marketing plan lias received enthusiastic reception and that Fortune Magazine as well as several others are asking
for stories.
What was the marketing plan referred to ?
Mr. LORD. Mr. Pecora, I think Colonel Walsh could answer that.
I t came within his scope. I could not give you the details of it.
Mr. PECORA. Can you give us some enlightenment on it?
Mr. LORD. My recollection is that he showed a series of charts
which had been prepared either by him or for him showing the
various products and the percentage of products in different districts. It was a plan designed to help our own customers in the development of their business. I have not the details of that, but that
was the general purpose of it.
Senator COTJZENS. DO you know what this memorandum means
when it says
The posters will have the same heading as was shown on the understandable
form?
Mr. LORD. I do not know what that meant, because I do not recall
either form.
Mr. PECORA. NOW I want to read to you from committee's exhibit
no. 36, received in evidence yesterday, which consists of the printed
annual report of the Guardian Detroit Union Group for the year
ending December 31,1930. At page 9 of that printed report appears
the following statement—and this report is signed by you
Mr. LORD. Signed by Mr. Blair or by me!
Mr. PECORA. Signed by you as president and by Mr. Blair as
chairman of the board. I am reading from page 9 thereof. [Reading]:
Under the requirements of the national and State banking laws at least two
examinations of the banks and trust companies are made each year by the
national or State bank examiners and by the directors of the respective institutions. In addition, the group company has a well-organized and highly efficient examining department headed by B. K. Paterson, vice president of the
group company, formerly chief national bank examiner of the Seventh Federal
Reserve District. This examining organization, entirely independent of any
unit, responsible only to the group company, makes two thorough and complete
examinations each year of all units of the group. Their reports, which are
gone over in detail not only with the directors of the respective units but also
with the group company management, indicate a thoroughly satisfactory
condition of all banks and trust companies in the group.
4372
STOCK EXCHANGE PRACTICES
Senator COUZENS. Were those annual reports put in the mail?
Mr. LORD. In 1930?
Senator COUZENS. Yes.
Mr. LORD. Yes; I should think so.
Mr. PECORA. NOW, as bearing upon the testimony you have given
regarding the use of certificates of deposit to offset bills payable, let
me read to you what purports to be a photostatic copy of a letter
addressed by Mr. Bert K. Paterson, under date of January 2, 1931,
to Mr. John L. Proctor, Deputy Controller of the Currency, Washington, D.C. [reading]:
DEAR JOHN: The question has been raised here as to the proper method in
which to report in public statements! and reports of condition certificates of
deposits of other banks held by the Guardian Detroit Bank. As an example
of what I mean, on December 31 the Guardian Detroit Bank held an aggregate
of $2,000,000 represented by certificates of deposit in other banks. Query:
Should the Guardian Detroit Bank report these certificates as receivables or
as cash due from banks in the proper segregation of the latter? The question
has also been raised whether or not the certificates are drawn on demand or
with a specific due date. If that were done, would it in your opinion have any
bearing on the above subject? It runs in my mind that there has- been a pretty
well defined position taken by the Comptroller's Office in the past that such
certificates of deposit should be reported as receivable. At least, before I left
the Government service that was the way I personally held whenever the subject was discussed. Further, in substantiation of my position, I also held that
the issuing bank must necessarily show the liability as borrowed money. Briefly,
it is an answer to the old query of " When is a CD. not a C.D.?" When it is
borrowed money.
I would appreciate it if you would not take this up in an official way, treating
it as a personal matter, but draw on the Department's position in formulating
your reply.
With kind personal regards, I am,
Sincerely.
I will also read to you what purports to be a photostatic copy of a
letter sent by Mr. Proctor in reply to this letter of Mr. Paterson, as
follows [reading]:
JOHN L. PROCTOR,
THE TREASURY,
Washington, January 5, 1981.
Mr. B. K. PATERSON,
Care of Guardian Detroit Union Group,
Detroit, Mich.
DEAR BERT: I have your letter of January 2 with query as to the proper
method in which to report certificates of deposit of other banks held by the
Guardian Detroit Bank. The position taken by the Controller's Office is that
time certificates of deposit of other banks held by a national bank should
be treated as bills receivable, and demand certificates should be treated as due
from banks, in the same manner as open accounts with banks are treated.
As to whether or not the issuing bank should show the liability as borrowed
money would depend upon the circumstances in each case; but my personal
opinion is that if the issuing bank requested an advance of funds against a
certificate of deposit, it would be borrowed money. I have known of cases
where a bank issued certificates of deposit at the request of the payee that
made the deposit in order to place its funds out at larger rates of interest.
Trusting this will give you the information you desire, and with kind
personal regards, I am,
Sincerely,
JOHN L. PROCTOR.
Was this correspondence ever brought to your notice?
Mr. LORD. I do not recall it, Mr. Pecora.
Mr. PECORA. Was the information contained therein ever brought
to your notice by Mr. Paterson?
STOCK EXCHANGE PEACTICES
4373
Mr. LORD. I do not recall it.
Mr. PECORA, Did the group or any of the unit banks follow the
advices contained in Mr. Proctor's letter to Mr. Paterson that I have
just read to you?
Mr. LORD. I do not know, sir.
Mr. PECORA. YOU do not know?
Mr. LORD. I assume they did. I do not know. I have not the
details as to the transaction.
Mr. PECORA. DO you know whether or not newspaper copy was
furnished to newspapers by the Group or any of its unit banks?
Mr. LORD. Yes; I think it was.
Mr. PECORA. Were they published as news items instead of as
advertising items?
Mr. LORD. I do not know how they were handled. That went
through Mr. Scrymgeour.
Mr. PECORA. I show you what purports to be a photostatic copy of
an intragroup memorandum dated January 8, 1931, addressed by
Mr. Frank M. Brandon, who was president of the City National
Bank & Trust Co. of Mies, to Mr. James L. Walsh. Will you look at
it and tell me if you recognize it as being a true and correct copy of
such a memorandum?
Mr. LORD. That is Mr. Brandon's signature.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted.
(Photostatic copy of Intra-group memorandum dated Jan. 8,1931,
from F. M. Brandon to James L. Walsh, was received in evidence,
marked " Committee Exhibit No. 47, Dec. 21, 1933.")
Mr. PECORA. This memorandum has been received in evidence
and marked " Committee's Exhibit No. 47." I t is on the letterhead
of the Guardian Detroit Union Group, Inc., and reads as follows.
(Reading:)
COMMITTEE EXHIBIT NO. 47
GUARDIAN DETROIT UNION GROUP, INC., INTRAGROUP MEMORANDUM
JANUARY 8, 1931.
To Mr. James L. Walsh, vice president Guardian Detroit Union Group, Inc.
From Mr. F. M. Brandon, President City National Bank & Trust Co., Niles,
Mich.
DEAR COLONEL : Your letter of January 6 enclosing copy of a suggested newspaper article is received and the copy was delivered to the local editor. However, the fact that we had a slight decrease in commercial deposits between
the September 24 and December 31 call necessitated some change so that the
article was finally prepared and at the suggestion of the editor was published
as an interview with the writer in order to divest the item from the appearance
of advertising, and we are enclosing herewith a copy of the clipping.
Yours very truly,
F. M. BRANDON, President.
What appeared as a news item was really advertising matter, was
it not?
Mr. LORD. I never saw the article.
Mr. PECORA. Have you any doubt of the fact from this letter?
Mr. LORD. Yes; I have.
Mr. PECORA. What creates that doubt?
175541—34
4374
STOCK EXCHANGE PRACTICES
Mr. LORD. The fact that the editor wanted it as an interview. I
suppose it was a gossipy article. I don't know what was in it. I
cannot answer your question without knowing what was in it.
Mr. PECORA. The statement is contained in Mr. Brandon's letter
to Colonel Walsh, which I have just read to you—
However, the fact that we had a slight decrease in commercial deposits between the September 24 and December 31 call necessitated some change so that
the article was finally prepared.
And.so forth.
Bo you know what kind of a change was made?
Mr. LORD. I do not know a thing about the article. I never
saw it.
Mr. PECORA. Was the change, in your opinion, designed to cloud
or obscure the fact of the decrease in deposits between the two dates
mentioned?
Mr. LORD. I would not think so, from that.
Mr. PECORA. I will ask Colonel Walsh about that when I call him
to the stand.
Now, in the published reports the unit banks of course showed
whatever Government bonds they had in their portfolios at the time
they were making the reports ?
Mr. LORD. Always; yes.
Mr. PECORA. Did the reports also show whether or not any of
tho^e Government bonds were pledged?
Mr. LORD. I think the so-called "legal" published reports that
every bank that I know of publishes in addition to their condensed
statement, always show the bonds pledged as security for postal
savings. It was not, however, customary for banks to show any
segregation of their Government or municipal bonds as security for
either Government or municipal deposits.
Mr. PECORA. AS a rule such bonds were pledged by banks as
security for Government or municipal or State deposits?
Mr. LORD. Not as a rule.
Mr. PECORA. Such deposits were required to be protected by a
pledge of security?
Mr. LORD. In the case of Postal Savings it was required by law,
as I recall it, that they must be secured by the deposit of Government? or selected municipal bonds.
Mr. PECORA. In the case of deposits of public funds, were not
such deposits usually covered by pledges of Government securities?
Mr. LORD. NO, sir; they were not.
Senator COUZENS. Did you secure any other deposits besides those
of the Government's?
Mr. LORD. I think in some cases, in the units, in the local municipality, they pledged municipal or other securities.
Senator COUZENS. I meant, governmental agencies or their subdivisions. Do you secure in any manner a private deposit?
Mr. LORD. Not to my knowledge, sir.
Mr. PECORA. Was it customary from time to time for any of the
Group banks to request a depositor or customer to make a temporary
4eposit in order to enable the bank to show an increase in deposits
for a certain date or on a certain date?
Mr. LORD. I could not say definitely on that, because I do not
know. I think, answering your question in another way, it may
STOCK EXCHANGE PRACTICES
4375
have happened frequently that in the solicitation of deposits certain
•deposits were secured which it was known at the time would only
be in for a limited period.
The CHAIRMAN. The subcommittee will now take a recess until
2 o'clock.
(Whereupon, at 1 p.m., a recess was taken until 2 p.m., Thursday.
Dec. 21, 1933.)
AFTER RECESS
(The subcommittee resumied at 2 p.m. on the expiration of the
recess.)
The CHAIRMAN. The subcommittee will come to order. You may
proceed, Mr. Pecora.
TESTIMONY OF ROBERT 0. LORD, DETROIT, MICH.—Resumed
Mr. PECORA. Will the committee reporter read the last question
and answer of the morning session?
The committee reporter (Mr. Hart). The last question and answer of thfc morning session were as follows:
Mr. PEOOBA. Mr. Lord, was it customary from time to time for any of the
Oroup banks to request a depositor or customer to make a temporary deposit
in order to enable the bank to show an increase in deposits for a certain date
or on a certain date?
Mr. Lorn I could not say definitely on that, Mr, Pecora, because I don't
know. I think, answering your question in another way, it may have happened
frequently that in the solicitation of deposits certain deposits were secured
which it was known at the time would only be in for a limited period.
Mr. PECORA. What was specifically the purpose of obtaining such
deposits, if it was known in advance that they would be available for
only a short period?
Mr. LORD. For the benefit of the earnings of the institution, to increase the deposits generally.
Mr. PECORA. YOU mean for the purpose of enabling the institutions
to put out a public statement
Mr. LORD. Not necessarily, because it was done all through the
year. We took temporary deposits in the middle of the year, or any
other time. In other words, there was enough rotation of temporary
money to keep your deposit situation in shape.
Mr. PECORA. I t was considered desirable at various periods of the
year—say, for instance, the periods when calls would be expected
from the Comptroller of the Currency for condition reports—to build
up the deposits of the banks.
Mr. LORD. Yes.
Mr. PECORA. Even
though they were built up only for those tem-
porary periods.
Mr. LORD. Yes.
Mr. PECORA. And
that was done to enable the banks in their reports
made in response to the call, to show a better condition on the surface
than they actually enjoyed.
Mr. LORD. I would not say that, Mr. Pecora, a better condition
than they enjoyed, because they did enjoy that condition. I t is a
better condition than a low point in the deposits.
Mr. PECORA. That is what I mean.
4376
STOCK EXCHANGE PRACTICES
Mr. LORD. But the condition was a true condition whether the
deposits be temporary or permanent.
Mr. PECORA. I t was a true condition insofar as it existed pn tfr$
date for which it was reported. But it was known to the officers,,
when special deposits were procued for these temporary periods, that
that condition was not going to be the condition within a few days
after the reports were made for the given date.
Mr. LORD. It might have been known as regards that particular
deposit, but there may have been other deposits coming in to take itsplace,
Mr. PECORA. I think you testified in substance that in those instances where resort was had to a so-called " CD.", or certificate of
deposit in order to enable a unit bank .to offset a bill payable, that
the deposit was actually made.
Mr. LORD. SO far as 1 know, it was.
Mr. PECORA. YOU were the president of the Gurdian Detroit Bank
on December 31,1931, were you not?
Mr. LORD. I was.
Mr. PECORA. I show
you what purports to be a certificate of deposit dated December 31, or rather a photostatic copy of a certificate
of deposit, dated December 31, 1931. Will you kindly look at it and
tell me if you recognize it to be a true and correct copy of suck
certificate of deposit as was used ?
Mr. LORD. I assume it was. I never saw this before.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted.
(The document referred to, copy of certificate of deposit, Dec. 31>
1931, was received in evidence, marked " Committee Exnibit No.
48 ", Dec. 21, 1933, and the same was later read into the record by
Mr. Pecora.)
Mr. PECORA. The exhibit received in evidence and marked " Committee's Exhibit No. 48 ", of this date reads as follows [reading] :
MAIN OFFICE, UNION INDUSTRIAL BANK,
Flint, Mteh.
December 31, 1931. Serial no. 53. Guardian Detroit Bank, Detroit, Mien.,,
has deposited in this bank (Union Industrial) $600,000 payable to the order of
themselves upon the return of this certificate properly endorsed.
(Signed)
EDWABD HOLMES,
Assistant Cashier.
On the back thereof appears this endorsement in handwriting
[reading]:
This CD. withdrawn January 2, 1932, and we credit Guardian Detroit Bank.
What does this indicate, Mr. Lord?
Mr. LORD. I t indicates that the certificate was withdrawn, the funds
withdrawn, on January 2.
Mr. PECORA. Why were they so withdrawn?
Mr. LORD. I do not know. Probably the Guardian Detroit Bank
needed the money, or had use for it.
Mr. PECORA. I S this one of those occasions where a certificate of
deposit was issued to offset bills payable on the books of the Union
Industrial Bank?
Mr. LORD. It would seem so.
STOCK EXCHANGE PRACTICES
4377
Mr. PECORA. The Union Industrial Bank carried an account with
the Guardian Detroit Bank, did it not, at that time?
Mr. LORD. SO far as I know; yes.
Mr. PECORA. I show you what purport to be photostatic reproductions of certain ledger sheets of the Guardian Detroit Bank with
relation to the account with the Union Industrial Trust & Savings
Bank of Flint, Mich., including the date of this certificate of deposit
which has been received in evidence as Committee's exhibit no. 48.
Will you look at it and see if you can identify those photostatic
reproductions as true and correct copies of the ledger accounts of the
hank?
Mr. LORD. I could not identify it, except that it has the Guardian
Detroit Bank insignia on the top of it. I assume it is correct. I
have no reason to question it.
Mr. PECORA. I offer those sheets in evidence.
The CHAIRMAN. Let them be admitted.
(The document referred to, photostatic copies of ledger sheets of
the account of the Union Industrial Trust & Savings Bank, Flint,
Mich., on the books of the Guardian Detroit Bank, were received in
•evidence and marked " Committee's Exhibit No. 49 ", Dec. 21, 1933,
and portions thereof were subsequently read into the record by Mr*
Pecora.)
Mr. PECORA. The photostatic copies of these ledger sheets of the
uccount of the Union Industrial Trust & Savings Bank of Flint,
Mich., on the books of the Guardian Detroit Bank contain absolutely
no entry respecting this certificate of deposit represented by committee Exhibit No. 48, do they?
Mr. LOED. A certificate of deposit issued by the Union Industrial
Trust & Savings Bank would not show on this ledger sheet.
Mr. PECORA. Why not?
Mr. LORD. Why should it? That is a separate piece of paper. That
is not a credit on the books on the account so far as I know.
Mr. PECORA. Why shouldn't it be?
Mr. LORD. I do not know what happened to the proceeds of that
certificate.
Mr. PECORA. What does this certificate of deposit indicate?
Mr. LORD. I t indicates that the Guardian Detroit Bank had on
deposit in the Union Industrial Trust & Savings Bank $600,000.
Mr. PECORA. Yes. Would not that appear in the ledger account
•carried on the books of the Guardian Detroit Bank ?
Mr. LORD. Frankly, I do not know. I am not a bookkeeper. I do
not know how a bank would carry its certificates, whether they are
carried on a ledger sheet where the regular balances are carried, or
carried in some other way. That is beyond my activities in the bank,
and I do not know how it would be carried.
Senator COUZENS. Who, in your organization, would know, Mr.
Lord?
Mr. LORD. I do not know who the bookkeepers were.
Senator COTJZENS. Would the knowledge be confined to a bookkeeper, or would not some officer know whether the bookkeeper
was doing his duty ?
Mr. LORD. I suppose some technical officer would know it.
4378
STOCK EXCHANGE PRACTICES
Senator COUZENS. Would you know what technical officer would
know it?
Mr. LORD. I suppose Mr. Burns would know it. He had charge
of the operations 01 the bank.
Senator COUZENS. What was his title?
Mr. LORD. His title was cashier.
Senator ADAMS. Senator, in a country bank an officer knows alL
those things.
Mr. LORD. Yes; because he does all the work.
Senator ADAMS. Even when he does not.
Mr. PECORA. I show you what purports to be a photostatic reproduction of a report of conditions of the Union Industrial Trust &
Savings Bank of Flint, Mich., as of the close of business on December 31, 1931, which corresponds to the date of the certificate of
deposit which has been marked in evidence as " Committee's Exhibit No. 48." Will you look at this photostatic copy of that report
and tell us if you recognize it to be a true and correct copy of the
report of condition made by the bank as of December 31,1931 ?
Mr. LORD. Mr. Pecora I have no way of identifying it. I can*
identify Mr. Wilkins 'signature on here, but I never saw the report
before.
Mr. PECORA. Have you any doubt that it is a true and correct
copy of the report?
Mr. LORD. I would not question your word on it.
Mr. PECORA. Subject to any correction or confirmation you want:
to make on that, I offer that in evidence.
The CHAIRMAN. Let it be admitted.
(The document referred to, report of condition, Union Industrial
Trust & Savings Bank, Flint, Mich., Dec. 31, 1931, was received
in evidence, marked " Committee Exhibit No. 50 ", Dec. 21, 1933r
and is not reproduced here for the reasons given below.)
Mr. PECORA. On account of the voluminous character of the exhibit I do not think it is necessary to spread it in full on the minutes,
but I do want to read into the record the following item appearing
under schedule H, entitled " Bills Payable and Rediscounts ", item'
No. 2 in that schedule [reading] :
Certificates of deposit issued to other banks and trust companies for money
borrowed: None.
Now, Mr. Lord, would not that seem to be an incorrect statement, in view of the issuance of this certificate of deposit that has
been marked " Committee's Exhibit No. 48 "?
Mr. LORD. I t would, sir.
Mr. PECORA. This report appears to be signed by Mr. H. R. Wilkins, and was sworn to by him on January 8, 1932. What was
originally known as the Guardian Detroit Bank, of which you were
president, eventually became, by merger or consolidation with the
National Bank of Commerce, the Guardian National Bank of
Commerce.
Mr. LORD. That is correct.
Mr. PECORA. And you continued as president of the bank under
that designation or name.
Mr. LORD. I
did.
STOCK EXCHANGE PRACTICES
4379
Mr. PECORA. I have before me what purports to be a photostatic
copy of the report of the condition of the Guardian National Bank
of Commerce of Detroit, made to the Comptroller of the Currency
as of November 9, 1932. That was the last examination that was
made of that bank prior to the holiday, was it not?
Mr. LORD. I think it was, Mr. Pecora.
Mr. PECORA. I t appears therefrom that as of November 9, 1932,
the bank had United States bonds pledged to an amount of $11,021,144.25, and United States bonds unpledged to the amount of
$3,596,145. Would that accord generally with your recollection of
the fact, Mr. Lord?
Mr. LORD. I would think so, Mr. Pecora. I would not have the
definite figures in my mind.
Mr. PECORA. That would indicate that on November 9, 1932, approximately 75 percent of the United States Government's securities
owned by the bank were pledged, would it not?
Mr. LORD. I would say so; yes, sir.
Mr. PECORA. In the report that was issued in behalf of that bank
as of December 31, 1932, was the pledging of those United States
Government bonds shown?
Mr. LORD. NO, sir. I say " no ", in the condensed report. In the
legal report, I assume it was.
Mr. PECORA. When you say it was not shown in the condensed
report, what do you mean by the condensed report?
Mr. LORD. I mean the newspaper ad that the bank pays for when
it publishes its report.
Mr. PECORA. That is the report that was advertised for public
information.
Mr. LORD. They were both advertised for public information.
There were two forms that all banks used, one a condensed report,
and the other a report required, as I understand it, under the rulings
or law, which goes into detail as to certain items that are not segregated in the condensed report of any bank.
Mr. PECORA. The condensed report showed the ownership of these
Government securities by the bank, as though they were unpledged.
Mr. LORD. NO ; I would not say that. It showed that those bonds
were among the assets of the bank.
Mr. PECORA. And no mention was made of the fact that they were
pledged to the extent of about 75 percent thereof ?
Mr. LORD. NO mention made of it.
Mr. PECORA. Does not that operate to give an inaccurate picture
to one reading that condensed report?
Mr. LORD. I think it does, but it is the customary form of publication by banks of their condensed statements, Mr. Pecora. I think
it is a mistake that banks should have published their statements in
that way.
Mr. PECORA. DO you know what prompted the bank to do that ?
Mr. LORD. I suppose many years of custom with many of the
banks.
Senator COUZENS. I see that the banks have changed that in some
respects.
r. LORD. They have; and I think it is a very good thing, Senator.
4380
STOCK EXCHANGE PRACTICES
Mr. PECORA. From time to time customers of the Guardian Detroit
Bank, subsequently called the Guardian National Bank of Commerce,
turned over to the bank securities belonging to such customers, and
they were turned over to the bank for safekeeping purposes, for the
account of the customers, were they not?
Mr. LORD. That is customary. I have no details as to whether we
actually had some at any given period. That is customary in any
bank.
Mr. PECORA. What was the custom followed by the bank with
respect to whether or not it included in its reports to the public the
value of those securities as among its resources ?
Mr. LORD. Held in safe-keeping?
Mr. PECORA. Held in safe-keeping.
Mr. LORD. I do not think they were ever included, Mr. Pecora.
Certainly they should not have been.
Mr. PECORA. I show you what purports to be a printed copy of the
annual report for 1929 issued by the Guardian Detroit Union Group,
Inc., over your signature as its president. Will you look at it and
tell me if you recognize it to be a true and correct copy of such annual
report so issued?
Mr. LORD. Yes; I would say so.
Mr. PECORA. I ask that it be marked in evidence, but not spread on
the minutes because of its voluminous size.
The CHAIRMAN. Let that be done.
(The document referred to, Annual Report, 1929, Guardian Detroit
Union Group, Inc., was received in evidence, marked " Committee
Exhibit No. 5 1 " , Dec. 21, 1933, and the same is not reproduced
here for the reasons stated above.)
Mr. PECORA. I want to call your attention to page 9 of this printed
report which has been marked in evidence as " Committee's Exhibit
No. 5 1 " , under the caption Aggregate Resources and Liabilities of
Banks and Trust Companies Affiliated with Guardian Detroit Union
Group, Inc., as of Dec. 31,1929. Do you see, on the asset side, under
the caption Resources an item reading: " Customers' securities, safe
keeping, $12,594,330.16 ", and an offsetting item on the right-hand
sidej under the caption of Liabilities reading the same way ?
Mr. LORD. Yes, sir.
Mr. PECORA. Did you know that that was there?
Mr. LORD. Well, I did not recall that it was; no.
Mr. PECORA. DO you know why this statement
of aggregate resources of unit banlcs, as a consolidated statement, showed that item ?
Mr. LORD. I suppose because that consolidated statement was made
up by adding the items of the various separate unit banks. That
item is along the lines of just what I was speaking about this morning in connection with the Niles bank, where they took out of each
side the trust assets. In other words, some of the banks in the group,
as I recall it, following an old fashioned custom, had included in their
statements the safe keeping bonds, which, when you include them in
the total resource figures, unduly inflate the totals.
Mr. PECORA. I t builds up the picture of the bank's size.
Mr. LORD. I t builds up the picture, and I assume it is in that
particular statement, because that statement was made up by adding
all the separate statements. I know of no other reason why it should
STOCK EXCHANGE PEACTIOES
4381
have been in there, and personally I do not think it means anything
in the statement and should be left out of all statements.
Mr. P^ECORA. Was it not put in this statement, and in the various
statements of the unit banks, in order to build up the picture of the
bank's size?
Mr. LORD. I do not think so.
Mr. PECORA. What other purpose could it serve than that ?
Mr. LORD. Mr. Pecora, it certainly was not put into that statement
for that purpose. Whether it was put into the separate unit statements in their published statements for that purpose, that is something I do not know, because they prepared those separate unit
statements and sent them in, and I had nothing to do with that.
Mr. PECORA. If they sent them in to your group, they were sent in
for the information of the officers of the group.
Mr. LORD. Yes; but they were prepared by t h e - —
Mr. PECORA. YOU had an opportunity of correcting that practice if
you thought it was a wrong practice.
Mr. LORD. I think that was corrected in later years.
Mr. PECORA. In the case of the unit banks ?
Mr. LORD. I believe it was. Maybe I am mistaken.
Mr. PECORA. I think you are.
Mr. LORD. Then I am mistaken. Personally 1 never liked it in a
statement.
Mr. PECORA. I have before me committee's exhibit no. 36, which
is the printed annual report of the Group for the year 1930, and it
shows separately for each of the unit banks, a statement of condition
at the close of ousiness December 31, 1930. I observe that this item
of customer's bonds held for safe keeping appears in the annual statement for 1930 of the Union Industrial Trust & Savings Bank of
Flint; in the statement of the Grand Rapids Trust Co. of Grand
Rapids; in the statement of the First National Trust and Savings
Bank of Port Huron; and in the statement of the Trenton State
Bank, Trenton, Mich. I understand that practice was continued in
several of the unit banks thereafter.
Mr. LORD. Mr. Pecora, if we had wanted to build up the total resources by including that, we would have done it with every bank
that had any safe-keeping bonds. The mere fact that it appeared in
some was probably because it was their custom to publish their statements with those items in there, on both sides of the balance sheet.
Mr. PECORA. Under date of May 5, 1931, it appears that a letter
was written to you by Mr. E. R. Morton, vice president of the City
National Bank and Trust Co. of Battle Creek, one of your unit banks,
a photostatic copy of which I now show you. Will you look at it
and tell me if you can identify it as a true and correct copy of such
a letter?
Mr. LORD. Yes.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted.
(The document referred to, letter, May 5, 1931, Morton to Lord,
was received in evidence, marked "Committee's Exhibit No. 52",
Dec. 21, 1933, and the same was subsequently read into the record
by Mr. JPecoira.)
4382
STOCK EXCHANGE PEACTICES
Mr. PECORA. The letter received and marked " Committee's Exhibit
No. 52 " is on the letterhead of the City National Bank & Trust Co.
of Battle Creek, dated May 5,1930, and is as follows [reading] :
KOBERT O. LORD,
President Guardian Detroit Union Group, Inc.,
Detroit, Mich.
DEAR MR. LORD: Some amusement has been furnished here over a period of
a few months by reason of advertisements of the old Merchants National. Bank
& Trust Co., in which they use the phrase " combined resources, $28,000,000."
The total footings of the bank run from $17,000,000 to $19,000,000, and, of
course, the supposition is that in their trust department they have some
$8,000,000 to $10,000,000. What comes directly from this is not particularly
favorable; but, of course, it is only in a few instances. The public generally
may be impressed with the magnitude of business. It would seem to me just
as reasonable to make some approximate figures on the contents of your safetydeposit boxes and add that to your banking resources as to use the resources
of your trust department.
Last week Mr. Bryan, of your examining force, wanted to know why we did
not ask the Comptroller's office for a ruling. I noticed the other day, however,
in the advertisement of your unit in Port Huron that they incorporated the
resources of their trust department, thereby advertising the combined resources.
Personally I do not feel that I am enough concerned about it to go very far.
Therefore I am merely calling it to your attention for such consideration as
you may care to give it.
Very truly yours,
E. It. MORTON, Vice President
Mr. LORD. Might I say in that connection that the old Merchants
National Bank was not a Guardian unit.
Mr. PECORA. Might I also remind you in that same connection that
Mr. Morton in his letter to you tells you that in the advertisement of
your unit in Port Huron they had incorporated the resources of their
trust department, thereby advertising the combined resources.
Mr. LORD. They did, sir. I think you will find also, Mr. Pecora,
that in the 1931 annual report such items were entirely eliminated in
the consolidated statement.
Mr. PECORA. Were they entirely eliminated from the separate
statements of the bank units ?
Mr. LORD. SO far as I know. For quite a period the State banking
authorities in Michigan rather favored the publication of those
figures. I never did favor it personally.
Mr. PECORA. DO you mean to say that the State Banking Commissioner favored the making up of reports of banks in a manner that
included in the resources of the bank the accounts that they held in
trust?
Mr. LORD. In safe keeping.
Mr. PECORA. Or in safe keeping?
Mr. LORD. That is my understanding, sir, and I never could
understand it. I never liked it.
Mr. PECORA. I S that still the rule there ?
Mr. LORD. I don't know what the rule is now.
The CHAIRMAN. AS a matter of fact, funds that were held simply
for safe keeping were not resources of the bank at all ?
Mr. LORD. Senator Fletcher, the items referred to there were securities that were held subject to safe-keeping, not dollars and cents.
The CHAIRMAN. Not owned by the bank? They were not owned
by the bank?
STOCK EXCHANGE PRACTICES
4383
Mr. LORD. NO, sir, indeed they were not. And it showed not only
o n the asset side but an offsetting item on the liability side, which
^ras just a wash item.
Mr. PECORA. But they did not have any part in the bank's resources?
Mr. LORD. Absolutely none.
Mr. PECORA. And should not have been shown at all ?
Mr. LORD. Absolutely no. You cannot argue with me about it. I
am for it a hundred percent. They * should have been out.
Senator ADAMS. Mr. Lord, it would perhaps also follow that banks
ought not to accept that kind of items for safe-keeping, because it
does add a contingent liability under certain conditions?
Mr. LORD. Senator, banks have to do that service for their customers. Frequently a man may have a loan with a substantial
amount of collateral. He may pay the loan by check on some distant point, or when he is away, and asks the bank to hold that collateral in safe-keeping. Now, every bank which does that and does
ii> properly issues a separate safe-keeping receipt identifying in detail
those securities. They have to do that.
Senator ADAMS. They assume a certain liability?
Mr. LORD. They assume a certain liability, and it is a liability that
the banks do not like to assume, but it is a part of the service that
the banks have been asked to give for many years. A banker would
much rather have a man take his collateral down and put it in his
own safe-deposit box.
Mr. PECORA. NOW, I show you what purports to be a photostatic
reproduction of a letter addressed to Mr. Scott D. Carpenter, vice
president of the National Bank of Commerce, Boulevard Branch, Detroit, by Mr. James L. Walsh, vice president of the Guardian Detroit
Bank, dated August 4,1931. Will you look at it and tell me if you
recognize it as a true and correct copy of such a letter sent by Mr.
Walsh to Mr. Carpenter?
Mr. LORD. I don't recall ever having seen it, but I do not question
the authenticity of it.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted and entered in the record.
(Photostat of letter from James L. Walsh to Scott D. Carpenter,
dated Aug. 4,1931, was designated " Committee Exhibit No. 53, Dec.
:21, 1933 ", and appears immediately following, where read by Mr.
Pecora.)
Mr. PECORA. Letter marked " Committee's Exhibit No. 53 " is as
follows [reading]:
AUGUST1 4, 1981.
DEAK SCOTT : The president of one of the Group units, in answer to my letter
of July 10 regarding releasing news items to the press, wrote back as follows:
" I would appreciate the courtesy if you would advise me just what kind of
news items you will want and in approximately what kind of shape they should
be presented, in view of the general dangers resulting from publicity originating
from banks, et cetera."
Our answer to him was substantially as follows, and it occurred to me that a
copy of it might clear up certain questions in your1 mind and also in the mind
^f A. C. Voss, whom you have appointed to handle these matters for your bank.
" One of the big things we are striving to do is to convince the public of
the proven ability of the men who are behind the Group. We cannot do this
|>y writing eulogistic stories, but we can by showing the affiliations of our
4384
STOCK EXCHANGE PRACTICES
leaders, the successes of our leaders, and, when there is no possibility of a
kick-back, the views of our leaders. We have succeeded in obtaining a great
deal of advantageous publicity from newspapers, financial, business, and trade
publications, during the past 6 months, and we can safely say that we havecarefully avoided anything of a controversial nature, and only news that might
bring about a favorable and often an active good will for the Group has been
disseminated.
"We believe that anything that will show the strength, the liquidity, the
able management, the resources, and the wide services of the Group is advantageous. Resources, age, investment in United States Governments, no bills
payable, satisfactory earnings, increase in one quarter's earnings against theprevious quarter, increases in customers, increases in savings deposits, economies of operation and management—all of these things are distinctly valuable*
at this time. We have had many stories written around these facts, and we
expect to have many more.
"Promotions, since they give an oportunity to tell of a man's record, aregood, not only for the general public, for they point to ability and recognition,
of ability, but for the personnel, inasmuch as where one man can go aheadothers may. Such stories improve the morale. Human stories, not maudlin,
are good. They show that the institution, despite its size, is essentially a
human organization.
"We have endeavored to have stories appear that would point out that the
group and each of its units recognizes that it and they will prosper in direct
relation to the prosperity of the communities and the customers they serve.
An anniversary, either of the institution or of a member of the institution,,
should provide an opportunity to point to the human sense, growth, strength,,
willingness to serve.
"There are stories of this type in every unit of the group. Many of them
can be rewritten here and sent to the other units of the group, where, if*
they could not be used as written, they might show the way for similar
stories to be written that would provide good local material.
" Primarily, so far as the publicity activities of your bank are concerned, weare more anxious to see you get favorable publicity in your papers and to send
us copies in order that we can show your results to other units of the group.
It is much more difficult for us to obtain items in the metropolitan press in
Detroit; and few, if any, of the items you sent us so far as the bank is
concerned, would be suitable for Detroit papers. However, they might be for
the smaller papers in other group cities. We want to act as a clearing house
here for these publicity items, and it was for that reason that we asked you to
send us your publicity."
Cordially yours.
This letter would indicate sort of a general publicity policy on thepart of the Group and its unit banks, would it not?
Mr. LORD. Well, I would say so; yes. I am not a publicity expert..
Mr. PECORA. Was Mr. Walsh?
Mr. LORD. I assume he knew more about it than I did.
Mr. PECORA. And for that reason the publicity work was confided
to his care ?
Mr. LORD. TO a great extent; yes, sir.
Mr. PECORA. NOW, in cases where C.D.'S were resorted to to offset
bills payable, were the bills-payable items restored after the reports
had been made in compliance with calls for a condition report ?
Mr. LORD. Mr. Pecora, I would not have that information.
Mr. PECORA. Who would have?
Mr. LORD. I would assume that in some cases the unit bank required the funds and borrowed them later.
Mr. PECORA. Who would have that information?
Mr. LORD. I suppose the only way to get that information would
be to get it right off the books. I don't) know any other way. I t is
quite possible those bills-payable items were restored at the first of
the year when the Guardian Detroit Bank found it necessary to use
funds that had been deposited.
Digitized forthe
FRASER
STOCK EXCHANGE PKACTICES
4385
Mr. PECORA. NOW, referring to Committee's Exhibit No. 51 of this
date, which is the printed annual report of the Guardian Detroit
Union Group, Inc., as of December 31, 1929, isn't it a fact that in
that report there was included the resources, and so forth, of 7
banks that were actually not units of the Group as of December 31.
1929, the 7 banks in question being Grand Eapids National Bank,
Grand Rapids Trust Co., the Peoples' National Bank, First National
Bank & Trust Co. of Kalamazoo, Capital National Bank of Lansing,
City National Bank & Trust Co. of Niles, and the Second National
Bank of Saginaw?
Mr. LORD. Mr. Pecora, I did not prepare the statements. I cannot answer for that statement. I would assume they were included.
Mr. PECORA. What is that?
Mr. LORD. I did not prepare the statement. I cannot answer it. I
assume they were included, because the published statements are
here.
Mr. PECORA. Yes; they are included in that annual report, aren't
they?
Mr. LORD. They are included on a separate page; yes.
Mr. PECORA. Showing combined deposits in those seven banks, or
resources rather, aggregating $63,552,000; isn't that so?
Mr. LORD. Aggregating what?
Mr. PECORA. $63,552,000. That is the combined resources of those
seven banks.
Mr. LORD. I t does not show separately in that report.
Mr. PECORA. I know, but we have totaled them up and that is the
figure. Why were those 7 banks and their total resources included
in the annual report issued by the Group as of December 31, 1929,
when, as a matter of fact, those 7 banks were not units of the Group
at that time ?
Mr. LORD. Mr. Pecora, I assume they were units of the Group on
January 28. I haven't the details.
Mr. PECORA, Of what year?
Mr. LORD. Of 1930.
Mr. PECORA. Why should they be included then?
Mr. LORD. Because that is the date of the report.
Mr. PECORA. In the report as of December 31, 1929 ?
Mf. LORD. NO ; the date of the letter to the stockholders
is January
28, 1930.
Mr. PECORA. But the report which was forwarded to the stockholders under cover of that letter was the report as of December
81,1929.
Mr. LORD. Published statements were as of that date.
Mr. PECORA. Yes.
Mr. LORD. The report
itself and the contents of the report is as of
January 28, the date of the letter to the stockholders.
Mr. PECORA. Well now, the report that was sent to the stockholders with that letter or January 1930 is the report of the Group
or in behalf of the Group as of December 31, 1929, isn't it?
Mr. LORD. On the published statements only.
Mr. PECORA. Well, that exhibit you have in your hand is one of
those reports publicly issued, sent to each stockholder, is it not?
Mr. LORD. YOU mean this whole report?
4386
STOCK EXCHANGE PRACTICES
Mr. PECORA. Yes.
Mr. LORD. Yes; it
is sent to each stockholder under date of January 28, 1930.
Mr. PECORA. That is the date it was sent, but it purports to be thereport of the Group and its units as of December 31,1929, doesn't it?
Mr. LORD. NO, I don't agree with you. The date of the letter to«
the stockholders is January 28, 1930.
Mr. PECORA. What is the report that accompanied the letter?
Mr. LORD. That accompanies the letter?
Mr. PECORA. Yes.
Mr. LORD. A report
of the condition of these separate banks as of
December 31, 1929.
Mr. PECORA. And the separate banks referred to are supposed to
be the unit banks of the group as of December 31,1929, are they not?
Mr. LORD. NO, sir.
Mr. PECORA. Point
out in that report anything which says to the
contrary.
Mr. LORD. The letter is dated January 28, 1930, and it says the
Group owns all or practically all of the stock of certain banks, and I.
would take it that it meant as of January 28,1930.
Mr. PECORA. Will you let me have that exhibit?
(Mr. Lord handed exhibit 51 to Mr. Pecora.)
Mr. LORD. I t does not say the date, either December 31 or Januarjr
28. I would not know how to construe it any other way, Mr. Pecora.
Perhaps I am mistaken in this.
The CHAIRMAN. When did these seven banks come in ?
Mr. LORD. I don't recall. I assume before January 28, or they
would not have been included in that report.
Mr. PECORA. NOW, I call your attention to page 9 of exhibit 51r
entitled "Aggregate resources and liabilities of banks and trust companies affiliated with Guardian Detroit Union Group, Inc., as of
December 31, 1929." Are not the resources of these seven banks
included in that consolidated statement?
Mr. LORD. Mr. Pecora, I would construe that to mean aggregate
resources and liabilities of banks and trust companies as of December
31, 1929, now, January 28, affiliated with the Guardian Detroit
Union Group.
Mr. PECORA. Why didn't you say that in the letter, then?
Mr. LORD. Well, it may have been poorly expressed.
Mr. PECORA. Was it poorly expressed in order to create the impression through the issuance of the annual report of the Group as of
December 31, 1929?
Mr. LORD. It was not, sir. There was not any idea of deception
in the thing at all. I t never occurred to me. I never heard that
point brought up at any time.
Mr. PECORA. Well, perhaps nobody reading that report would suspect from anything in the report that those seven banks whose
total resources were included in the condensed statement shown on
page 9 were not as a matter of fact units of the Group on December
31, 1929. Does that occur to you?
Mr. LORD. It did
not.
Mr. PECORA. I S there any statement anywhere in the report that
specifically says that those seven banks were not units of the Group
on December 31, 1929 ?
STOCK EXCHANGE PRACTICES
4387
Mr. LORD. May I have that question again?
The SHORTHAND KEPORTER (Mr. Kandolph reading):
Is there any statement anywhere in the report that specifically says that
those seven banks were not units of the Group on December 31, 1929?
Mr. LORD. NO. But the mere date of the letter to my mind, Mr*
Pecora, brings the stockholder down to January 28, 1930.
Mr. PECORA. On January 28, 1920 a letter was sent to the stockholders of the Group accompanying what purported to be the annual
report for the Group as of December 31, 1929—isn't that so ?
Mr. LORD. Only to the extent of the published figures of the units
that were then in the Group on January 28,1930.
Mr. PECORA. Why, the report itself is captioned "Annual Eeport
1929 ", is it not, on the cover,page?
Mr. LORD. I realize that, the letter to the stockholders is dated
January 28,1930.
Mr. PECORA. DO you know when those seven banks were actually
taken into the group ?
Mr. LORD. I don't know. I suppose the contract had been signed
before that or it would not have been included.
Mr. PECORA. Well now, I have before me what purports to be a
photostatic copy of the minute book of the board of directors of
the Guardian Detroit Union Group, Inc., and according to this copy,
at a regular meeting of the board of directors of the Group held
on January 28, 1930, it appears that the acquisition of those seven
banks became effective on that date, namely, January 28,1930. Have
you any information or knowledge to the contrary ?
Mr. LORD. I do not know the date, Mr. Pecora.
Mr. PECORA. NOW, I want to ask you generally, Mr. Lord, if, at
the time any of these unit banks were acquired by the Group, an
examination was made in behalf of the group of the condition of
such banks?
Mr. LORD. Yes. indeed, sir.
Mr. PECORA. And reports of such examinations made to the
Group?
Mr. LORD. My recollection; yes, sir.
Mr. PECORA. What gentlemen made those examinations in behalf
of the Group?
Mr. LORD. I think almost exclusively, except in the case of the
Highland Park institutions, Mr. Patterson and his organization.
Mr. PECORA. There were included in his organization certain gentlemen who up to that time or up to a short time prior thereto were
national bank examiners under Mr. Patterson when he was chief
bank examiner for the seventh district?
Mr. LORD. I believe so.
Mr. PECORA. And the name of one of those gentlemen was Bryan?
Mr. LORD. Bryan and Penningroth.
Mr. PECORA. Hopkins, too? Do you know Mr. Hopkins?
Mr. LORD. He was never in Mr. Patterson's organization.
Mr. PECORA. Was he previously a national bank examiner?
Mr. LORD. Mr. Hopkins?
Mr. PECORA. Yes.
Mr. LORD. Yes, indeed.
4388
STOCK EXCHANGE PEACTICES
Mr. PECORA. Did any of these examiners for the Group report in
the case of any of these units a condition that caused them to recommend against the acquisition of the bank by the Group ?
Mr. LORD. I don't recall of any.
Mr. PECORA. Would you say that there were no such recommendations unfavorable to acquisition made?
Mr. LORD. I don't recall at all.
Mr. PECORA. YOU mean you don't recall whether there were or not?
Mr. LORD. I don't recall of any unfavorable recommendations.
Mr. PECORA. DO you recall whether or not Mr. Bryan made a report against the acquisition of the National Bank of Ionia because
of its condition?
Mr. LORD. I don't recall Mr. Bryan's reporting at all.
Mr. PECORA. DO you recall that he made a similar unfavorable
report in the case of the Grand Eapids Bank?
Mr. LORD. I do not.
Mr. PECORA. DO you
think you might have your recollection refreshed on that subject by conferring with Mr. Patterson, who is
here present?
Mr. LORD. If Mr. Patterson remembers, I will be glad to ask him.
(Mr. Patterson came forward and conferred with Mr. Lord.)
Mr. LORD. Mr. Patterson says that he does not recall whether Mr.
Bryan made any recommendations against the Grand Rapids, but he
does recall that Mr. Bryan had some criticism of the Ionia situation
until certain correction was made in the situation to the extent of
approximately $15,000. Personally, I do not recall the incident
at all.
Mr. PECORA. What was the reason for the acquisition of the
organization known as Keane, Higbie & Co. by the Group ?
Mr. LORD. Mr. Pecora, I had nothing to do with that. I cannot
answer that. I t was acquired by the Union Commerce Corporation.
Mr. PECORA. What was the business of Keane, Higbie & Co. ?
Mr. LORD. Investment securities.
Mr. PECORA. I t was a brokerage office, wasn't it; stock brokerage
office orfirm?
Mr. LORD. I t was not only a stock brokerage office but dealers in
bonds, municipal bonds, and other securities.
Mr. PECORA. Did the acquisition of that company or organization
result eventually in a loss to the Group ?
Mr. LORD. Very substantially.
Mr. PECORA. Of how much ?
Mr. LORD. I haven't the figures.
Mr. PECORA. Approximately.
Mr. LORD. I would say several millions.
Senator ADAMS. YOU were a director of Keane, Higbie?
Mr. LORD. After it was acquired.
Senator ADAMS. After it was acquired ?
Mr. LORD. Yes.
Mr. PECORA. HOW was that eventual loss brought about?
Mr. LORD. Depreciation in their inventory.
Mr. PECORA. What service did they render to the Group or any
of the units in the Group ?
Mr. LORD. The same that any brokerage house would render.
STOCK EXCHANGE PRACTICES
4389
Mr. PECORA. Just brokerage service ?
Mr. LORD. Just brokerage service; contacts with some of their
customers, helped in securing business for the banks and trust
companies.
Mr. PECORA. HOW did that organization come to cause such a
substantial loss to the Group if they simply operated as a brokerage
office?
Mr. LORD. N O ; they were investment dealers. They carried a substantial inventory, too.
Mr. PECORA. Was that what brought about the loss principally?
Mr. LORD. Principally; yes, sir.
Mr. PECORA. Would it not have been possible for the Group to have
obtained the benefit of brokerage services in the usual way and
through the payment of usual commissions to brokers, rather than
by acquiring the business of a brokerage firm?
Mr. LORD. I think it would. If you ask my opinion, I think it
was a mistake to ever acquire a brokerage office.
Mr. PECORA. Why was it acquired?
Mr. LORD. I did not acquire it. I cannot answer that.
Mr. PECORA. Why did the Group at the time of the merger with
the National Commerce Corporation take it in ?
Mr. LORD. Because it was already acquired with the Group ?
Mr. PECORA. Took in the bad with the good, is that it?
Mr. LORD. Yes, sir.
Mr. PECORA. Did not seek to eliminate the bad?
Mr. LORD. Could not be eliminated immediately.
The CHAIRMAN. Were they a corporation or a partnership?
Mr. LORD. They were a corporation, as I recall it.
Senator COTJZENS. Was Mr. Carl Higbie active in Keane, Higbie
& Co. at the time?
Mr. LORD. Yes; I think so, Senator.
Senator COTTZE^S. Was he also a member of the board of directors
of the purchasing group ?
Mr. LORD. I do not know whether he was a member of the Union
Commerce Corporation board or not.
Mr. PECORA. NOW, did the various unit banks in the group from
time to time make loans, and that frequently, to officers of the group
and directors of the group, which were secured in whole or in part
by the capital stock of the group?
Mr. LORD. I cannot answer that except for the Guardian National
Bank of Commerce, or rather for the Guardian Detroit Bank.
Mr. PECORA. Well, answer it for that bank.
Mr. LORD. For that bank, I think the record will show that outside
of substantial directors or officers who were directors the loans to
other officers were almost nil. In fact, we had a rule in the Guardian
Detroit Bank that an officer could not borrow from the bank.
Mr. PECORA. Well, how about the bank making loans to officers of
the other unit banks ?
Mr. LORD. That was done occasionally, as loans were made to any
outsider.
Mr. PECORA. Don't you know whether or not these unit banks carried in their loan accounts large amounts of stock of the group as collateral for loans?
175541—34—PT 9
13
4390
STOCK EXCHANGE PRACTICES
Mr. LORD. I think some of them carried some.
Mr. PECORA. DO you know what the peak was of the number of
shares of group stock carried by the unit banks ?
Mr. LORD. By officers?
Mr. PECORA. N O ; generally.
Mr. LORD. I think that report of examination, as I recall it, showed
141,000 shares.
Mr. PECORA. Was that the peak?
Mr. LORD. I don't know, Mr. Pecora. I would not know.
Mr. PECORA. NOW, the national bank examiners criticized that frequently, did they not ?
Mr. LORD. They did.
Mr. PECORA. What action if any was taken to correct that situation?
Mr. LORD. Mr. Pecora, every effort was made on the part of the
operating officers in the bank to eliminate any of the stock, and a
great deal of the stock that was among the collateral was stock which
was taken as additional security after an original loan had been
made, where the borrower had come to the end of his collateral and
where all he had left was Guardian Group stock, and it was taken as
supporting whatever security it might. I think you will find very
few loans in the last 2 years of operation, original loans, made on
Group stock.
J^r. PEGORA. HOW about the prior years?
Mr. LORD. Let me say this, that a great deal of the Guardian stock
came into the loan portfolio of the Guardian National Bank of Commerce through a consolidation; first, between the Bank of Detroit
and the Guardian Detroit Bank, and, second, a consolidation between
the Guardian Detroit Bank and the National Bank of Commerce.
For instance, an officer of the National Bank of Commerce may have
owned some stock of the National Bank of Commerce; he may have
had a loan on that stock at the Bank of Detroit. In the merger and
consolidation the National Bank of Commerce was therefore exchanged for Group stock, so that that was the only collateral he had;
or it must have constituted most of the collateral for his loan. The
result was that he had Group stock whereas he had started with stock
of an entirely different institution.
Mr. PECORA. In the national bank examiner's report of the condition of the National Guardian Bank of Commerce as of November
9, 1932, there are listed loans made to officers and employees of the
bank, both direct and indirect loans
Mr. LORD. Would you mind reading the total of those loans?
Mr. PECORA. I am trying to find a statement of the total.
Mr. LORD. I think it is $154,000 odd.
Mr. PECORA. Oh, no.
Mr. LORD. YOU mean,
the directors, too? I meant officers and
directors.
Mr. PECORA. I meant officers and employees.
Mr. LORD. Have you got it?
Mr. PECORA. Yes. Suppose I read it to you.
Mr. LORD. May I see that sheet? Well, you read it first, if you
like.
STOCK EXCHANGE PEACTICES
4391
Mr. PEOORA (reading):
Fred T. Murphy, chairman, direct loan, $606,250.
Robert O. Lord, president, indirect loan, $1,000.
Mr. LORD. Since paid.
Mr. PECORA (continuing reading) :
Henry E. Bodman, chairman of the governing committee, $4,500, indirect loan.
Ernest Kanzler, chairman of the executive committee, $382,190.52, direct loan;
$350,998.55, indirect.
Henry H. Sanger, vice chairman, direct loan, $59,000; indirect loan, $20,397.24.
George B. Judson, indirect loan, $14,215.84.
Harry G. Covington, $2,224. I am leaving off the cents.
Elbert S. Burns, direct loan, $18,171.
Fred J. Boyer, direct loan, $1,421.
Scott Carpenter, $6,700.
Frank P. Evans, Jr., vice president, nothing.
H. S. Finkenstaedt, direct loan, $107,000.
G. It. Harris, $3,065.76, direct loan; $14,869, indirect loan.
W. P. Jacobs, indirect loan, $24,426.
Charles A. Kanter, vice president, direct loan, $48,990; indirect loan, $9,684.
Samuel R. Kingston, direct loan, $61,000; indirect loan, $2,094.
Charles A. Kinney, indirect loan, $86,000.
Alvan Macauley, Jr., nothing.
Charles N. Maycock, vice president, direct loan, $7,696; indirect, $326.
Phelps Newberry, direct loan, $579,970; indirect loan, $5,000.
Lewis C. Van Auken, vice president, direct loan, $14,724.
Albert C, Voss, vice president, direct loan, $12,703.
James L. Walsh, vice president, indirect loan, $1,000.
Robert C, Wandel, vice president, indirect loan, $14,579.
W. E. Blakeley, assistant vice president, direct loan, $535.
S. A. Clark, assistant vice president, indirect loan, $27,878.
W. Ross Laing, assistant vice president, direct loan, $9,549.
Charles F. Sawyer, assistant vice president, $531.
A. D. Freydl, assistant cashier, direct loan, $1,203.
George L. Greenup, assistant cashier, $1,306.
E. T. McConnell, assistant cashier, $1,235, direct loan.
Gordon T. Murray, assistant cashier, $640.
Harry C, Schaefer, assistant cashier, indirect loan, $18,961.
G. A. Wellensick, auditor, direct loan, $3,645.
Leo E. Kangas, assistant auditor, direct loan, $675.
Other employees, main office, 49 borrowing, $69,000.
Uptown office, five borrowing, $8,654.
Mr. LORD. Mr. Pecora, I told you I could best answer the question
in regard to the Guardian Detroit Bank itself. May I have that
same statement and comment on it, that same list? Of the officers
who were not directors, those original Guardian Detroit Bank men—
of the officers who were not directors, they were as follows:
Frank P. Evans, Jr., no loan.
Alvan Macauley, Jr., no loan.
James J. O'Shea, no loan.
Don F. Valley, no loan.
James L. Walsh, no loan
Mr. PECORA. There is an indirect loan to Walsh.
Mr. LORD, I am speaking of direct loans. That indirect loan of
Colonel Walsh has since been paid, and was an endorsement, such as
my own loan of $1,000 on a note in the old Bank of Detroit.
E. A. Norman, no loan.^
Norman Rudolph, no loan.
Lester E. Zubrigg, no loan.
4392
STOCK EXCHANGE PRACTICES
I think that constitutes all of the old Guardian men.
Mr. PECORA. I only included in my recital from this report the
loans made—not the loans that were not made.
Mr. LORD. What I was trying to convey, Mr. Pecora, wa& that
those were loans that were acquired through the consolidation and
not new loans after the consolidation. The figure that I mentioned
of $154,000 was the figure shown in this examiner's report under
the item of loans to officers, not directors and employees (omit duplications). That shows liability as payer $154,256, and liability as
endorser or guarantor, $118,996. That was the figure that I was
using.
Senator ADAMS. Those larger items, like Fred Murphy's and Newberry's came out of the
Mr. LORD. They were directors' loans and they were almost invariably secured by outside stock. For instance, Murphy's loan was
very largely secured by stock in a New York bank. Another loan
was secured by stock of the Packard Motor Car Co., and another loan
by stock of the Universal Credit Corporation. Our policy was, so
far as possible, to make no loans on our own group stock. Much of
the collateral was taken as additional security and much of it came
in in exchange of old bank stock for group stock.
Mr. PECORA. Have you available at the present time a copy of the
report made by the national bank examiner as of June 16,1932?
Mr. LORD. NO ; I have not.
Mr. PECORA. According to a copy that I have of the report of
June 1932 made by the national bank examiner the total loans made
and outstanding on May 16, 1932, to directors of the bank aggregated $4,416,451.66 by way of direct loans, and $3,338,910.75 by way
of indirect loans. Does that correspond to your general knowledge
and belief, Mr. Lord?
Mr. LORD. I would not have any reason to question it at all, if it
was in the report.
The CHAIRMAN. DO you know what proportion of those loans was
paid?
Mr. LORD. Senator, if I may have a few minutes to look up a memorandum I made last summer I can give you some very interesting
data on the condition of those loans up to late summer. I have no
up-to-date data, because the receiver does not give us any information on the Guardian National Bank. Would it interest you to
have me read some of the data to show the present condition?
The CHAIRMAN. I think so.
Mr. LORD. Or the condition as of last summer. Personally I think
it is quite a remarkable showing, in view of the conditions in Detroit.
Wendell Anderson, at the time of the November report, showed
an indirect obligation of $414,000. I have no information as to what
was done with it. I know the security was marketable—general
mortgage bonds.
George R. Andrews showed an indirect obligation of $1,000, which
I understand has since been paid.
Henry E. Bodman showed an indirect obligation of $4,500, which
has been paid.
The next one I have no information on. I think the indebtedness
has been paid.
STOCK EXCHANGE PEACTICES
4393
Walter O. Briggs had no debt.
Harry C. Bulkley had reduced his debt. He had a direct loan of
$21,000.
Howard E. Coffin had a debt of $71,000. According to the information I get from his office, that was paid up entirely.
George K. Cooke had an indirect debt of $4,455. That was paid.
Harry G. Covington had a direct obligation of $2,224.27. That
has been paid.
Lyman J. Craig I have no information about.
Ward A. Detwiler had an indirect obligation of $45,000.
Harry C. Earhart had no debt.
G.Ogden Ellis had an indirect obligation of $1,000 that has been
paid.
Henry T. Ewald had a direct obligation of $156,976.38 and an
indirect obligation of $72,952. That has been paid—both of them.
George K. Fink I have no information about.
William A. Froher I have no information about.
Burch Foraker owed direct $20,726. That was paid.
Edsel B. Ford, no debt.
John H. French, no debt.
L. W. Goodenough, no debt.
Leslie H. Green, direct debt of $163,029. I know that has been
reduced. How much, I do not know.
Sherwin A. Hill owed $49,826.67. That was paid.
Charles H. Hodges, no debt.
James Inglis, $40,645. I think that has been cleaned up entirely.
George B. Judson I have no information on.
Albert Kahn, $19,240 direct; $17,353 indirect. That has been paid.
C. A. Kanter, no reduction.
Ernest Kanzler had an indirect debt of $33,061.84. That has been
reduced. I have no information as to that.
Jerome Keane, no reduction.
E. C. Kern, no information.
S. E. Kingston, no information.
Dwight B. Lee owed in November $75,917. Paid in full.
C. B. Longley, $1,370 direct debt; $75 indirect. I think it has been
paid.
I myself had only an indirect debt on the endorsement of an officer
of the Bank of Detroit, of $1,000, which has since been paid.
Alvan Macauley, no debt.
W. Ledyard Mitchell had a direct loan of $28,860.21, and an indirect of $155,251. Most of that item I understand has been paid.
Charles S. Mott, indirect, $330,000. I think that has been pretty
well cleaned up.
C. Hayward Murphy, $100,000. I have no information as to that.
Phelps Newberry—I beg your pardon. These figures that I am
lving you are the reductions made in the loans. For instance,
helps Newberry's loan which appears on the books at $579,000 has
been reduced to $399,000 by the middle of summer.
Hal. H. Smith had paid his loan in full.
Oscar W. Smith, no debts.
John W. Toolin, no debts.
f
4394
STOCK EXCHANGE PRACTICES
Charles B. Warren paid off $115,000 direct and $15,000 odd, indirect. In other words, there were very substantial reductions in all
these loans.
The CHAIRMAN. Those were all directors?
Mr. LORD. Yes,
sir.
Mr. PECORA. Are you through with that?
Mr. LORD. Yes.
Mr. PECORA. Mr.
Lord, the Guardian National Bank and the National Bank of Commerce consolidated as of December 31, 1931, did
they not?
Mr. LORD. I believe so; yes.
Mr. PECORA. The resultant institution known as the Guardian National Bank of Commerce had a board of directors of 61 members,
did it not, in the year 1932?
Mr. LORD. I do not recall, sir.
Mr. PECORA. I t was a very large number?
Mr. LORD. I t was too large.
Mr. PECORA. During the year 1932 was it the policy of the board
to meet regularly ?
Mr. LORD. Yes, indeed, sir:
Mr. PECORA. Was it?
Mr. LORD. Oh, yes.
Mr. PECORA. HOW frequently?
Mr. LORD. I don't know. Perhaps Colonel Walsh remembers.
Mr. WALSH. I do not know, in 1932; but in 1931, twice a month.
Mr. PECORA. I am speaking of 1932.
Mr. LORD. At least once a month, and maybe oftener whenever
a
quorum was available.
Mr. PECORA. I S it not a fact that during the year 1932 it was the
policy of the guiding spirits of the bank not to hold regular board
meetings of its entire board of directors, in view of the publicity and
reaction that they feared from such a large body of men?
Mr. LORD. NO, sir. They had to hold them.
The CHAIRMAN. What number constituted a quorum?
Mr. LORD. I do not recall. I do not know whether a majority,
or just what does constitute a quorum.
Mr. PECORA. DO you recall that after the examination which was
made by the national bank examiner, of the Guardian National
Bank or Commerce, on May 16,1932, a meeting was held of members
of the governing committee of the bank with the bank examiners?
Mr. LORD. I do not know whether it was the governing committee
of the bank or what committee it was.
Mr. PECORA. DO you recall that at that meeting which was held
during the week of June 11, which was just a few days after the
completion of the examination of the bank by the Comptroller of
the Currency, the examiners reported to the governing committee
what their examination disclosed with respect to slow and doubtful
Mr. LORD. I remember vaguely that there is a report, but I do not
have the figures in mind at the present time.
Mr. PECORA. I S your recollection only a vague one that such a
subject was brought up in the discussion?
Mr. LORD. N O ; the subject was certainly brought up, but as regards the figures
STOCK EXCHANGE PRACTICES
4395
Mr. PECORA. Your recollection is vague as regards the figures?
Mr. LORD. Yes, sir.
Mr. PECORA. According to my information, the examiners indicated to the members of the governing committee that their examination, completed only a few days before, disclosed slow assets of
$22,442,427 and doubtful assets of $11,982,427. Do you recall the
discussion that followed with regard to that?
Mr. LORD. Not in detail; no.
Mr. PECORA. Generally what do you recall about it?
Mr. LORD. Mr. Pecora, I am a little vague about that particular
meeting. The meeting that I recall particularly was in December; but I could not tell you all that transpired at that meeting.
I do not even remember who was there.
Mr. PECORA. DO you recall that at that same meeting there was
brought up for discussion the subject of so-called excessive loans
made by the bank to the Guardian Detroit Co., of $4,945*000?
Mr. LORD. I do.
Mr. PECORA. What was said
Mr. LORD. AS I recall it, it
about that loan?
was spoken of as an excessive loan,
although it was on the books as a repurchase agreement.
Mr. PECORA. HOW did that account originate?
Mr. LORD. When the Guardian Detroit Bank was a separate institution and before its consolidation, it was a State bank. In the
years prior to the date that you are speaking of the Guardian Detroit Bank would carry on a repurchase agreement with the Guardian Detroit Co., certain high grade marketable bonds at the cost
price to the Guardian Detroit Co. That was done by the bank in
order to give the bank an investment of its funds, and the bank received an interest coupon rate on those bonds. For instance, if
the Guardian Detroit Co. had purchased the bonds at 90, whether
they were worth on the market 95 or par, they were put in the repurchase agreement at 90. The bank received, if it was a 5 percent bond, a 5 percent coupon rate. That practice of carrying a
repurchase agreement was somewhat of a common practice in banks
in the way of carrying securities for dealers. It was recognized by
the State banking authorities as being entirely proper.
Mr. PECORA. Was it so recognized by the national bank examiners ?
Mr. LORD. May I explain that later ? I will bring it out clearly.
At the time of the consolidation of the Guardian Detroit Bank
and the National Bank of Commerce there was, as I recall it, somewhere in the neighborhood of $4,000,000 on this repurchase agreement in the Guardian Detroit Bank
Mr. PECORA. $4,945,000, was it not?
Mr. LORD. Just a minute, Mr. Pecora. There was also in the
National Bank of Commerce a repurchase agreement with the Guardian Detroit Co., so that the figure which you have there, the consolidated figure of the two repurchase agreements, when the banks
were put together—that repurchase agreement was discussed with
the bank examiners, the Federal examiners, at the time of the consolidation of the two banks into the Guardian National Bank of
Commerce, and the examiners spoke of it as an excess loan, although
in the State situation it was looked upon as a repurchase agreement
and not as a loan.
4396
STOCK EXCHANGE PEACTICES
The securities were gone over and the national bank authorities
accepted that as an admissible asset into the Guardian National Bank
of Commerce. They did say this, however, that they wanted it
liquidated down to a point wnere it would come within the loaning
limit of the Guardian National Bank of Commerce, just as rapidly
as possible. I think the record will show that the liquidation in
the year following was approximately $1,000,000. In other words,
it was being liquidated just as fast as it could be liquidated. The
market for securities was very much depressed and it was very
hard to sell bonds of any character.
The CHAIRMAN. Was the Guardian Detroit Co. an affiliate of the
group ?
Mr. LORD. The Guardian Detroit Co. was an affiliate of the group.
That loan, if you call it a loan—I would call it a repurchase agreement—we have always argued with the national bank authorities
that it was an admissible asset and accepted as such. The national
bank authorities knew all about it and they admitted it as an asset
in the Guardian National Bank at the time of the consolidation.
Mr. PECORA. At the time of this conference of the national bank
examiners in June 1932 with the members of the governing committee of the bank's board, the discussion also included the condition
of the other banks in the group system, did it not?
Mr. LORD. There were some comments made by Mr. Walker, I
believe it was.
Mr. PECORA. Mr. Walker was one of the examiners?
Mr. LORD. He was there at the meeting.
Mr. PECORA. What comment did he make?
Mr. LORD. The remark was to the effect that we had picked the
rotten banks of the State. That was immediately taken up, and I
think he withdrew the statement, as did Mr. Leyburn also.
Mr. PECORA. Was any reference made by any of the members of
the governing committee in reply to any observations made by the
examiners that the members of the governing committee of the bank
were basing great hopes for an improvement of the condition of the
group and its unit banks through the enactment by Congress of the
branch banking bill?
Mr. LORD. I do not recall that discussion. , They may have.
Mr. PECORA. Did the directors of the group entertain, as a matter
of fact, any such hopes?
Mr. LORD. I think the directors of the group all hoped that there
would be legislation permitting state-wide branch banking.
Mr. PECORA. HOW did the directors expect that such legislation
would improve the condition of the group and its unit banks?
Mr. LORD. It would enable the group to consolidate into a single
organization, and those banks which had excess capital structure as
against their deposit liabilities would of course be taken in and
would help those whose capital structure was not so large.
Mr. PECORA. Were the officersr and directors of the group doing
anything to promote such an enactment?
Mr. LORD. I was always in favor of it and spoke of it, as I recall
it, at the hearing on the Glass bill back 2 years ago. I spoke of it
in any public talks.
STOCK EXCHANGE PRACTICES
4397
The CHAIRMAN. DO the laws of Michigan permit state-wide branch
banking ?
Mr. LORD. NO, sir; only branch banking in the municipality in
which the bank is located; not state-wide.
Mr. PECORA. Following the making of the December 1932 examination of the bank by the national bank examiners, did the Comptroller
of the Currency send to your board a letter containing certain
criticisms ?
Mr. LORD. YOU mean the November state examination ?
Mr. PECORA. Yes; based upon the November examination.
Mr. LORD. Yes.
Mr. PECORA. Which was completed, as I understand it, on
December 7?
Mr. LORD. They did.
Mr. PECORA. Could you produce that letter?
Mr. LORD. I have not got it.
Mr. PECORA. Are you familiar in substance with the contents of
the letter?
Mr. LORD. I recall it in a general way. He criticized the repurchase agreement. He criticized the amount of Guardian stock, as I
remember it. He criticized the loan to the Union Co.
Mr. PECORA. Well, in words or substance do you recall this lanr
guage in that letter, which I understand was dated January 28,1933,
and was addressed by the Comptroller of the Currency to the Board
of Directors of the bank [reading] :
Despite the efforts that apparently have been put forth to improve the bank's
condition through the elimination of highly unsatisfactory assets, the aggregate
of criticized assets shows an increase over the previous report, the increase
being particularly noticeable in the doubtful items, which in themselves practically equal the bank's entire capital structure exclusive of the bond depreciation of over $2,000,000. Your special attention is called to the lines of
the Guardian Detroit Co. agents, $173,685.62; Guardian Detroit Co., $4,621,787; and Union Co., $1,074,097.42, as set out and commented upon by the examiner on page 4r-117, of which $2,077,783 is classed doubtful. Moreover, the
line to the Guardian Detroit Co. represented by a repurchase agreement on
the part of the company, of which $1,180,000 is classed doubtful, is an excessive
loan.
These extensions of credit are particularly objectionable and unsatisfactory
and forecast heavy losses and they should receive such action as will protect
the bank's interest so far as possible. Please bear in mind that the directors
are liable for loss on an excessive loan. It seems hardly reasonable to believe
that you are not aware of the fact that a repurchase agreement is equivalent
to a loan, the excessive feature of which should be corrected without delay.
Do you recall that?
Mr. LORD. I recall that letter; yes.
Senator COUZENS. Was that ever presented to your board of
directors ?
Mr. LORD. I t was presented to the board of directors after the
holiday. The time of the next board meeting was set for, as I
believe, the 14th, or something, but it came right in the bank holiday
and all the turmoil that took place.
Senator COUZENS. YOU say it was presented to the board of directors at the very next meeting after its receipt ?
Mr. LORD. That is my recollection. The next meeting that was
held.
4398
STOCK EXCHANGE PRACTICES
Mr. PECORA. NOW do you recall this further statement in the letter
of the Comptroller of the Currency to your board of directors:
Attention is also called to the special schedules on page 9-A and continuing
sheets which show the extent to which loans have been granted on stock of
the Guardian Detroit Union Group, which is to all intents and purposes
equivalent to loaning on the bank's own stock, as the group owns all of the
bank's stock except the qualifying shares of the directors.
Mr. LORD. Yes; I recall that.
Mr. PECORA. That was not the first time this kind of criticism had
been made, was it?
Mr. LORD. I t is the first time I recall any written criticism from
the Comptroller's office. I think we discussed with the examiners
the advisability of getting it out, though.
Mr. PECORA. Had there not been criticism expressed to you or to
the board by the Comptroller's representatives on prior occasions on
this score?
Mr. LORD. Possibly in personal conversation. They knew our attitude. We were trying to get it out just as fast as we could.
Mr. PECORA. Well, to what extent had any success been attained
in that respect?
Mr. LORD. I cannot give it to you, Mr. Pecora, but I know the
attitude of all of the officers.
Mr. PECORA. D O you recall this further statement in that letter
of the Comptroller of the Currency of January 28 last [continuing
reading]:
The extent to which the other Teal-estate account has increased and in all
probability will continue to increase should be a source of considerable concern
to you, since the present investment in these undesirable bank assets aggregates
$5,196,237 and apparently you are unable to dispose of any of the parcels.
Present indications forecast heavy losses in the other real-estate account.
Mr. LORD. Mr. Pecora, you could not have moved any real estate
in Detroit at that time. Every effort in the world was, being made
to move the real estate.
Mr. PECORA. Can you tell why such heavy commitments were made
in real estate investments ?
Mr. LORD. They were made in banks that finally came into the
Guardian Detroit Bank. I cannot tell you. The Uuardian Detroit
Bank did not itself as a matter of policy loan on real estate. Most
of our mortgages came in from the Bank of Detroit and the National
Bank of Commerce. And we showed, as I recall it, about $17,000,000
of mortgages.
Mr. PECORA. Let me read further to you from the letter of the
Comptroller of last January [continuing reading] :
With the existing situation ini your bank and condition of the assets and
bond depreciation, the bank is in no condition to pay dividends. Every dollar
of available earnings would appear to be needed to effect limitation of
developing losses and to provide for further probable defaults in the bond
account.
Please give careful consideration to the examiner's report at your next
board meeting and thereafter advise this office of the action taken and progress
made in remedying each of the matters mentioned herein and also mentioned
and commented upon by the examiner on pages 11 and 11-F, giving names and
amounts as to collections and adjustments effected in the doubtful assets, the
action taken in connection with the Guardian Detroit Co. agents, Guardian
Detroit Co., and the Union Co. lines mentioned above and the large concentration of stock of the Guardian Detroit Union group and state whether the
STOCK EXCHANGE PRACTICES
4399
excessive loan referred to above has been reduced to the legal limit, forwarding
copies of your communication to Chief National Bank Examiner A. P.
Layburn * * *
Do you recall that?
Mr. LORD. Yes, sir.
Mr. PECORA. Was any action taken
Mr. LORD. There was no possibility
thereon?
of action because the bank was
in the hands of the holiday, and then in the hands of the conservator,
and then in the hands 01 the receiver before any action could be
taken.
Mr. PECORA. Well, now, the specific items of criticism referred to
in this letter of the Comptroller of the Currency were based on fact,
were they not?
Mr. LORD. Yes. But may I state in connection with that repurchase agreement? They recognized it and took that in as an admissible asset, and the bank was doing everything possible to reduce it.
The CHAIRMAN. Did they have many foreclosures?
Mr. LORD. There were many foreclosures in Detroit, Senator I
do not know the figures.
The CHAIRMAN. I mean in your institution?
Mr. LORD. Yes, I suppose we did. I do not have the figures.
Mr. PECORA. DO you know what became of the original letter of
the Comptroller of the Currency to which I have referred in the last
few questions?
Mr. LORD. I do not. I supposed it was in the bank's files.
Mr. PECORA. This letter was signed by Gibbs Lyons, Deputy
Comptroller. Do you recall that?
Mr. LORD. I think that is the fact; yes.
The CHAIRMAN. Mr. Lord, some reference has been made to temporary deposits. What would you call a temporary deposit?
Mr. LORD. I do not know wnat you call a temporary deposit. A
few weeks or a few days.
The CHAIRMAN. Usually a few days or a few weeks ?
Mr. LORD. Well, I would call a few days quite a temporary deposit.
A 30-day deposit I would call more or less temporary; yes. It is
pretty hard to describe " temporary."
The CHAIRMAN. HOW were they designated? Say a depositor
came in with $100,000?
Mr. LORD. I t is put in the checking account or a certificate of
deposit; just whatever the customer wanted.
Mr. PECORA. They were not entered in any manner different from
any other deposit, were they?
Mr. LORD. NO.
The CHAIRMAN.
Say that a man made a temporary deposit and
said he wanted to make this deposit for 3 days; if the bank went
under in the meantime he was just an ordinary depositor ?
Mr. LORD. He took his chance on it just like any long-time
depositor.
Mr. PECORA. Well, frequently large depositors in your bank, like
the Ford Motor Co., were asked to make a temporary deposit?
Mr. LORD. I should say occasionally; not frequently.
Mr. PECORA. Well, how frequently?
Mr. LORD. I do not recall.
Mr. PECORA. Well, do the best you can, in your recollection.
4400
STOCK EXCHANGE PRACTICES
Mr. LORD. Once or twice a year, maybe.
Mr. PECORA. Once or twice a year?
Mr. LORD. May I say this ? The Ford Motor Co. deposits in their
active account were very temporary deposits in any event. They
would deposit, as I recall it, on the 20th of the month to pay for
their purchases. By the first of the following month most of that
money would have been checked out.
Mr. PECORA. Yes, but once or twice a year, in any event, a request
would be made to a depositor like the Ford Motor Company to make
what was asked for as a temporary deposit for a few days?
Mr. LORD. I doubt if the Ford Motor Co. was asked once or twice
a year for a temporary deposit.
Mr. PEOORA. Well, I simply took your estimate.
Mr. LORD. I do not know how often it was. Maybe once every
two years.
Mr. PECORA. Well, whenever it was, it was done for what purpose?
Mr. LORD. TO increase our deposits. Take us out of bills payable.
Senator COUZENS. AS you look back over the situation now, Mr.
Lord, would you say it was a good thing to consolidate the National
Bank of Commerce and the Guardian Detroit Bank and the Bank of
Detroit?
Mr. LORD. Senator, that is a very hard question to answer. I
would say it was not a bad thing to have done it. I am assuming
from the Senator's question he wonders whether the situation would
have been different so far as the present status of the institution is
concerned if they had not been consolidated. I t is very difficult to
answer that question.
Senator COUZENS. Well, how is it that the Detroit Savings Bank,
one of the oldest banks, did not succumb ?
Mr. LORD. Because they were a State institution.
Senator COUZENS. Yes; and so was the Bank of Detroit a State
institution.
Mr. LORD. Yes.
Senator COUZENS.
And so was the Guardian Bank of Detroit a
State institution.
Mr. LORD. I think it probably would have been better for the
Guardian institution had they been organized under the State banking laws instead of the national.
Senator COUZENS. And had that been the case you still would have
believed it was a good thing to have consolidated those three independent banks?
Mr. LORD. Yes; I think it would have. Economies in operation,
Senator, and a saving in various expenses.
Senator COUZENS. The depositors have not seen any evidence of the
economies, and I do not think the stockholders have. But what I
am getting at is this: Here is the oldest bank, the Detroit Savings
Bank, which did not succumb to the consolidation fever, and did not
close but continued to operate, while the other banks, the Guardian
Detroit Bank, the National Bank of Commerce, and the Bank of
Detroit, succumbed under the pressure. Why is it so in that case and
not so in the case of the Detroit Savings Bank?
Mr. LORD. Senator, I do not think it is proper that I should discuss
the condition of the Detroit Savings Bank.
STOCK EXCHANGE PRACTICES
4401
Senator COTJZENS. I am not asking you to diecuss the condition of
the Detroit Savings Bank.
Mr. LORD. In my opinion had the Guardian been a State institution
they would have been alive and going today.
Senator COTJZENS. SO you would advise a new bank starting, to take
out a State charter, is that so?
Mr. LORD. Not necessarily, no; but under the conditions in Michigan, yes; as they existed.
The CHAIRMAN. Why would converting them from State banks to
national banks affect them adversely?
Mr. LORD. Because I do not think that the national banks have
gotten the cooperation that the State banks got from the banking;
authorities.
The CHAIRMAN. They had the Federal Eeserve to fall back on?
Mr. LORD. Senator, when the holiday came the Guardian National
Bank of Commerce did not owe anybody a cent, and had $22,000,000
in cash in the till.
Senator COUZENS. And never applied for a loan from the R.F.C.?
Mr. LORD. And never applied for a loan from the K.F.C., and owed
the Federal Reserve Bank nothing.
The CHAIRMAN. Why did they not reopen?
Mr. LORD. Because they were not permitted to reopen.
The CHAIRMAN. By the State authorities?
Mr. LORD. By the national authorities.
The CHAIRMAN. It seems to me that the national authorities would
not have the power to cause a bank that was perfectly solvent to close.
Mr. LORD. They did have the power.
The CHAIRMAN. This examiner's report does not show they had
$22,000,000 of assets.
Mr. LORD. I did not say $22,000,000 of assets. I said that they had
$22,000,000 in cash on hand at the time of the closing, and owed the
Federal Reserve Bank nothing nor the Reconstruction Finance Corporation anything.
The CHAIRMAN. HOW large were their deposits?
Mr. LORD. Their deposits were, as I recall it, about $118,000,000.
Mr. PECORA. NOW Mr. Lord, the first exhibit put in evidence when
you took the stand before this committee on Tuesday of this week
was a copy of the articles of association of the Guardian Detroit
Group, Inc., which, in other words, is its charter.
Mr. LORD. I recall it.
Mr. PECORA. And Article 9 of that exhibit contains the following
provision:
The holders of the stock of this corporation shall be individually and severally
liable (in proportion to the number of shares of its stock held by them respectively) for any statutory liability imposed upon this corporation by reason of
its ownership of shares of the capital stock of any bank or trust company.
Now in offering this stock to the public that provision of the
charter was adverted to in public advertisements, was it not?
Mr. LORD. And on the back of the certificate, as I recall it.
Mr. PECORA. I was coming to that. It was also called attention
to in the advertisements offering this stock to the public^ was it not?
Mr. LORD. Mr. Pecora, I do not know of any advertisement ever
offering the stock to the public.
4402
STOCK EXCHANGE PRACTICES
Senator COTTZENS. I do not think it was.
Mr. PECORA. Well, this provision of the charter was
Mr. LORD (interposing). I t was well known to everybody.
Mr. PECORA (continuing). Was shown upon the certificates of
stock?
Mr. LORD. Yes, sir.
Mr. PECORA. That were issued by the Group ?
Mr. LORD. Yes, sir.
Mr. PECORA. NOW is it not a fact that on October
18, 1929, these
articles of association of the Group were amended by adding the
following clause to article 9, which is the article I have just read to
you:
And the stockholders of this corporation by the acceptance of their certificates
of stock of this corporation severally agree that such liability may be enforced
in the same manner as statutory liabilities may now or hereafter be enforceable against stockholders of banks or trust companies under the laws of the
United States or the State of Michigan. A list of the stockholders of this corporation shall be filed with the Banking Commissioner of Michigan and the
OomptroUer of the Currency whenever requested by either of these officers.
Do you recall that amendment?
Mr. LORD. Yes; I do.
Mr. PECORA. And was that provision also shown upon the certificates of stock issued by the Group ?
Mr. LORD. I assume it was on the certificates issued after that date.
Mr. PECORA. NOW, to your knowledge, is it not a fact that Mr.
B. C. Schram, the receiver of the Guardian National Bank of Commerce of Detroit, and Alexander Groesbeck, the receiver of the
Guardian Detroit Union Group, Inc., in those capacities, have
brought actions against stockholders of the Guardian Detroit Union
Group, Inc., to enforce the double liability in favor of the bank?
Mr. LORD. I think there is an action. 1 did not realize Governor
Groesbeck was in on it.
Mr. PECORA. Well, I think the affirmative action for the enforcement of such liability was brought by Mr. Schram as the receiver of
the bank.
Mr. LORD. That is my recollection. I do not know the legal
phases of it, but that is my understanding.
Mr. PECORA. NOW, do you know that in that action that an action
was brought against Mr. Schram as receiver of the bank and against
Governor Groesbeck as receiver o,f the Group to restrain them from
enforcing this liability ?
Mr. LORD. I know there is such an action. I know nothing about
the details, nor have I ever seen the papers.
Mr. PECORA. And among the parties plaintiff in that action were
officers and directors and, m fact, founders of the Group?
Mr. LORD. I believe there were one or two; yes, sir.
Mr. PECORA. Well, just the names that occur to me hastily now.
Mr. Fred T. Murphy?
Mr. LORD. He was chairman of the board of the bank.
Mr. PECORA. He was chairman of the board of the bank?
Mr. LORD. Yes, sir.
Mr. PECORA. Also an
officer of the group or director of the group ?
STOCK EXCHANGE PRACTICES
4403
Mr. LOKD. He was a director.
Mr. PECORA. And one of the founders?
Mr. LORD. Of the bank; yes.
Mr. PECORA. Phelps Newberry?
Mr. LORD. He was an officer of the bank.
Mr. PECORA. And also a director of the group ?
Mr. LORD. A director; yes.
Mr. PECORA. Mr. Carl B. Tuttle was roue of the directors of the
National Bank of Commerce at the time it was merged with the
Guardian Detroit Bank, was he not?
Mr. LORD. He was also a director of the Guardian National Bank
of Commerce.
The CHAIRMAN. The committee will now take a recess until 10:30
tomorrow morning.
(Thereupon, at 4:25 p.m., Thursday, Dec. 21, 1933, an adjournment was taken until 10:30 a.m. the next day, Friday, Dec. 22,1933.)
STOCK EXCHANGE PEACTICES
FRIDAY, DECEMBER 22, 1933
UNITED STATES SENATE,
SUBCOMMITTEE OF THE COMMITTEE
ON BANKING AND CURRENCY,
Washington, D.C.
The subcommittee met at 10:30 a.m., pursuant to adjournment on
yesterday, in Koom No. 301 of the Senate Office Building, Senator
Duncan U. Fletcher presiding.
Present: Senator^ Fletcher (chairman), Gore (substitute for
Barkley), Adams (proxy for Costigan), Norbeck, Couzens, and
Townsend.
Present also: Ferdinand Pecora, counsel to the committee; Julius
Silver and David Saperstein, associate counsel to the committee; and
Frank J. Meehan, chief statistician to the committee.
The CHAIRMAN. The subcommittee will come to order, please.
You may proceed, Mr. Pecora.
Mr. PECORA. IS Mr. Stalker here ?
Mr. STALKER. Yes, sir.
Mr. PECORA. Take the stand, please.
The CHAIRMAN. Mr. Stalker, please
come forward, hold up your
right hand, and be sworn: You solemnly swear that you will tell the
truth, the whole truth, and nothing but the truth, regarding the
matters now under investigation by the subcommittee. So help
you, God.
Mr. STALKER. I
do.
TESTIMONY OF JOHN XT. STALKER, GROSSE POINTS SHORES, MICH.
Mr. PECORA. Mr. Stalker, were you at one time connected with a
banking institution known as the Union Guardian Trust Co. in
Detroit, Mich.?
Mr. STALKER. I was.
Mr. PECORA. In what capacity?
Mr. STALKER. After the Union Guardian
Trust Co.—well, I might
say first that I was with the old Union Trust Co., which later
changed its name to Union Guardian Trust Co. at the time of consolidation with the Guardian Trust Co. At that time I was elected
president of the combined institutions. Prior to that time I was
execuive vice president of the Union Trust Co.
Mr. PECORA. When was the Union Trust Co. consolidated with the
Guardian Trust Co.?
Mr. STALKER. AS of the close of business March 31, 1930.
175541—34—PT 9
14
4405
4406
STOCK EXCHANGE PRACTICES
Mr. PECORA. And you were then made president of the enlarged
institution, which was then called the Union Guardian Trust Co.?
Mr. STACKER. That is right.
Mr. PECORA. And that trust company was one of the unit banks of
the Guardian Detroit Union Group, Inc., wasn't it?
Mr. STALKER. Yes, sir.
Mr. PECORA. HOW long
did you continue as the president of the
Union Guardian Trust Co.?
Mr. STALKER. Until January of 1932.
Mr. PECORA. Did you then severyour connection with the bank, or
were you then made some other officer?
Mr. STALKER. I was made vice chairman of the board.
Mr. PECORA. Who succeeded you as president?
Mr. STALKER. Mr. Longley.
Mr. PECORA. HOW much of the capital stock of the Union Guardian Trust Co. was owned by the Guardian Detroit Union Group, Inc. ?
Mr. STALKER. All except directors' qualifying shares.
Senator COUZENS. When did they purchase the Union Trust Co.,
or did they own them at the time of the consolidation?
Mr. STALKER. The Union Trust Co. was a unit of the Union Commerce Corporation, and the Guardian Trust Co. was a unit of the
Guardian Detroit Group.
Mr. PECORA. Then those two holding companies became consolidated on December 16,1932.
Mr. STALKER. I think that was the date; yes, sir.
Mr. PECORA. I show you a photostatic copy of a letter which has
been introduced in evidence and marked " Committee Exhibit No. 6,
December 19,1933 ", which purports to be a copy of a letter addressed
to you under date of June 4,1930, by Mr. Kobert O. Lord, who then
was president of the Group. Will you look at it and tell me if you
recall that letter.
Mr. STALKER (after looking at the photostat). I believe that is a
correct copy, sir.
Mr. PECORA. NOW, there also has been introduced in evidence here
a letter marked " Committee Exhibit No. 7, December 19, 1933 ",
which I now show you. I ask you if you recall having written the
original of that letter to Mr. Lord in reply to this letter to you
marked " Committee Exhibit No. 6 "?
Mr. STALKER (after looking at letter). Yes, sir. Now, may I just
review this letter?
Mr. PECORA. Yes; certainly.
Mr. STALKER (after reading letter). Here it is.
Mr. PECORA. I also want to show you another letter which has
been received in evidence here as Committee Exhibit No. 8, December
19,1930, and which purports to be a copy of a letter written by you to
Mr. Lord under date of June 26,1930. Will you look at it and tell us
if you recall having written the original of that letter to Mr. Lord?
And you might also read it so that you may acquaint yourself or
refresh your mind as to its contents.
Mr. STALKER (after looking at letter). I remember it, sir. And
now I will read it. [After reading the letter.] Here it is.
Mr. PECORA. What is your answer?
Mr. STALKER. Yes,
sir.
STOCK EXCHANGE PRACTICES
4407
Mr. PECORA. NOW, Mr. Stalker, you will notice that in the letter
addressed to you under date of June 4, 1930, marked " Committee
Exhibit No. 6 ", you were asked as the chief executive head or president of the Union Guardian Trust Co., to have your board declare a
dividend at the rate of 5 percent for the quarter ending June 30,
1930, and the reply you made to that letter, evidenced by committee
exhibit no. 7, was, in part, to the effect that a quarterly dividend of
5 percent was more than the bank had earned in that quarter. Now,
will you tell the subcommittee what conversations or other Communications passed between you and Mr. Lord, or any other officer
or officers of the Group, with regard to the declaration of this
dividend?
Mr. STALKER. I would find it hard to do that, Mr. Pecora. We
had conversations back and forth between the Detroit officers of the
Group more or less constantly in the matter of dividends, and other
matters were also discussed. I think that letter was intended to
place on record or confirm the substance of those conversations. I do
not believe I could add to it.
Mr. PECOKA. NOW, your letter of June 5,1930, marked " Committee
Exhibit No. 7 ", was written, apparently, on the same day that you
received Mr. Lord's letter dated June 4. And in this letter of yours
you say:
I presume a dividend of this amount—
Namely, 5 percent quarterly—
is necessary to the fulfillment of your plan, and the officers are prepared to
recommend it to the board.
Now, when you say you presume a dividend at that rate was necessary to the fulfillment of Mr. Lord's plan what did you have in mind
in employing that language?
Mr. STALKER. Undoubtedly it was this: That the group contemplated a dividend of so much, and their office considered that our
share of that dividend would be the amount that was asked for. I
assume that was the situation.
Mr. PECORA. NOW, you also informed Mr. Lord in this letter as
follows:
However, as you are aware, a dividend of .this amount has not been earned.
That was the fact, wasn't it, that earnings justifying that rate of
dividend had not been earned in that quarter?
Mr. STALKER. I haven't the figures in mind, but I do not doubt the
accuracy of the statement.
Mr. PECORA. YOU also said:
The officers-
Meaning the officers of your bank, undoubtedly—
are prepared to recommend it to the board.
That is to say, recommend the declaration of a 5-percent quarterly
dividend. Now, why were the officers prepared to recommend the
declaration of a dividend at a rate exceeding the earnings of the
bank?
Mr. STALKER. Of course, we were relying on our undivided profits
account. You see, the earnings of any institution vary from year
to year, and from quarter to quarter, and such portions of earnings
4408
STOCK EXCHANGE PRACTICES
as are not paid out in dividends accumulate in the undivided profits
account, which are available for dividends if it is desired to pay
them.
Mr, PECORA. Well, the undivided profits account is also available
for the setting up of reserves, and so forth, against losses, and
against depreciation in the portfolios of banks, isnT it ?
Mr. STALKER. Yes,
Mr. PECORA. And
sir.
in the mid-summer, or rather in June of 1930,.
economic conditions and banking conditions were such that you, as
an experienced bank officer, felt that those undivided profits should
be very carefully conserved, didn't you?
.Mr. STALKER. Yes. Of course, I was trained for a good many
years along lines that were rather conservative in the matter of
payment of dividends. Back in the old Union Trust Co. we used
to figure that paying out about half of our earnings was what we
should do. I think that is a fair statement in general.
Mr. PECORA. And you have never had occasion to regret the caution
of the atmosphere in which you were trained in banking circles^
have you?
Mr. STALKER. Nobody these days regrets any conservatism he
ever had.
Mr. PECORA. Was there any special reason why you departed from
that conservatism in June of 1930 ? Please tell us, if there was any
such special reason, what that reason was.
Mr. STALKER. O I course, my point of view was this: The matter
of determination of dividend was a matter for board action; and in
connection with the consideration of the June 30 dividend by the
board, it was the duty of the officers to lay the facts frankly liefore
the board, as we did, and leave the decision to them.
Mr. PECORA. But in this particular instance, apparently, you did
more than that. According to your letter to Mr. Lord of June 5
you stated that the officers were prepared to recommend to the board
the declaration of the dividend at the rate suggested by Mr. Lord.
Mr. STALKER. Yes, sir. We believed, or I can say for myself
that I believed, that providing we w e r e relieved in the latter jmrt
of the year of some part of that dividend, it would not be particularly improper to dip into our undivided profits to the limited
extent necessary to cover that dividend.
Mr. PECORA. Why were you as the executive officer of the bank
prepared to recommend to your board at that time, in June of 1930,
the declaration of a quarterly dividend at a rate that you felt was
not justified by earnings.
Mr. STALKER. Well, there were several reasons. Among those
reasons there was this: The merger of the Guardian Trust Co. and
the Union Trust Co. was effected as of March 31. That consolidation did not decrease the gross earnings of either institution, but
it did decrease their expenses. You see, there was a good deal of
overhead that was absorbed by bringing the two institutions together, so the natural tendency of that would be to increase net
earnings. Furthermore, it was always the rule with us that the
second half of the year was better so far as earnings were concerned than the first half. That was true for this reason, that fees
on our trust business were, possibly sometimes monthly, and some
STOCK EXCHANGE PEACTICES
4409
times quarterly, and sometimes semiannually, and even annually,
stnd annual fees tended to concentrate in December.
Senator COTJZENS. Was the portfolio of either the Guardian Trust
'Co. or the Union Trust Co. affected in any way by the consolidation?
Mr. STALKER. Not that I can recall, Senator Couzens. I do not
Tight at this minute remember any changes.
Senator COUZENS. In other words, the portfolio of the combined
Union Trust Co. and Guardian Trust Co. was as good and as strong
.-as the individual banks were standing alone?
Mr. STALKER. I believe so; yes, sir.
The CHAIRMAN. Wasn't it one of your ideas that you wanted to
retain such a status with the group that, in case you needed any
•assistance from them, you would be able to command it, and therefore you wanted to declare the dividends they desired?
Mr. STALKER. Well, I think I would rather express the situation
in this way, Senator Fletcher: That our unit, as I believe all units,
desired to cooperate fully with the group. We believed, or I
Relieved, at that time that the group idea was a good one, that it was
making for the strength of the units. We desired to cooperate fully.
We believed, and we were right in believing, that the group would
do all it could to assist us if we needed help.
Senator ADAMS. Well, the group owned, really, didn't it, 100 percent ofyour stock?
Mr. STALKER. Except the qualifying shares.
Senator ADAMS. SO that they were in a position to tell you what
to do if they wanted to do it? That is, you did not have much
option about the matter, did you ?
Mr. STALKER. N O ; except this, Senator Adams: That whatever the
stockholders might have decided to do, after all the directors were
independent men, who would be guided by their own judgment.
Senator ADAMS. That is true, but if they disregarded the request
•of the owners of the bank there were certain natural consequences.
Mr. STALKER. Well of course the stockholders of any institution
liave a right to select their board of directors.
Senator ADAMS. And if the stockholders of an institution give
their officers, who represent them, orders, or I might say make
requests, and of course requests are frequently orders, they are
expected to obey.
r. STALKER. WellMr. PECORA (interposing). Were you consulted about the dividend rate fixed by the Group to be paid to its stockholders ?
Mr. STALKER. I was at that time, Mr. Pecora, a member of the
"board of the Group.
Mr. PECORA. Yes; and the board of the Group had determined
upon a dividend at the rate of $3.20 per annum on its $20 par value
stock.
Mr. STALKER. Yes,
sir.
Mr. PECORA. Did you approve of that?
Mr. STALKER. I have no doubt I did, but I could not recall positively.
Mr. PECORA. AS you now recall it did you approve of it unqualifiedly, or did you have any misgivings or doubts in your mind as
4410
ST/OCK EXCHANGE PEAOTICES
to the wisdom of paying a dividend at the rate of about 16 percent
on the par value of the stock?
Mr. STALKER. Mr. Pecora, my acquaintance with the earning:
power and the ability to pay dividends of the various units that
comprised the Group was limited to my knowledge of the affairs
of the Union Guardian Trust Co.
Mr. PECORA. Which was the bank that you headed?
Mr. STALKER. Yes, sir. And, of course, that earning power—that
is, the ability of the Group to pay dividends—depended not upon
the earning power of any given institution but upon the earningpower of the units as a whole.
Mr. PECORA. Of all the units?
Mr. STALKER. Yes,
Mr. PECORA. YOU
sir.
were only familiar with the dividend-paying
power of your particular unit bank?
Mr. STALKER. Yes, sir.
Mr. PECORA. Well, as a
director of the Group weren't you kept
advised concerning the earnings of all the unit banks of the Group,,
so that you as a director could act with full knowledge on the matter
of dividend policy for the Group?
Mr. STALKER. Yes; and I do not want to have any misconception:
here, sir. The directors of the Group Co. were, of course, provided
with earnings statements of the units of the Group, which included
the Union Guardian Trust Co. and all other units. When I spokeof knowledge, I meant that particular and close information regarding? earnings and reserves, which I had with respect to the Union?
Guardian Trust Co.
Mr. PECORA. Well, your letter of June 5, 1930, addressed to MrLord was really designed by you as a protest mildly expressed against
your bank being required to declare a 5 percent quarterly dividend,,
wasn't it?
Mr. STALKER. I would have preferred to have seen that dividend
less.
Mr. PECORA. Was that the thought you intended to convey by ai
gentle intimation to Mr. Lord in your letter ?
Mr. STALKER. Yes; I think that is a fair statement. I believed
that we should build up reserves more fully than we then were.
Mr. PECORA. Apparently at that time, as I understand your letter,,
your company was not setting up any reserves.
Mr. STALKER. That is true as of the first half of the year.
Mr. PECORA. And you thought it was an unwise policy?
Mr. STALKER. Yes, sir.
Mr. PECORA. Why didn't
Mr. STALKER. Well, our
it set up reserves at that time?
earnings were not sufficient at that time.
But we hoped that we would be able to set up reserves in the latter
half of the year.
Mr. PECORA. Didn't you as an experienced banker believe it wiser
to take enough of the earnings and put them in your undivided
profits account as would be the basis for the setting up of reserves,,
rather than to pay dividends ?
Mr. STALKER. If we had been operating as a sole and independent
unit,^ there is no doubt but what that would have been true. Of
course, we were a part of the group picture, and at the time we believed and I still believe, added greatly to the strength of the units
STOCK EXCHANGE PRACTICES
4411
We also had savings in the matter of expenses resulting from the
merger, which we believed, and we were right in believing, would be
made effective in the latter part of the year.
Mr. PECORA. Would you say, on the basis of the answer that you
have just made, that it is your judgment this form of group banking;
has evils inherent in it?
Mr. STALKER. I do not know of any sort of banking that hasn't
evils inherent in it, any sort of banking that has been devised up to
date.
Mr. PECORA. I mean evils peculiar to group banking.
Mr. STALKER. Yes, sir; and also as to other banking.
Mr. PECORA. What are the evils that you recognize in this kind of
group-banking system?
Mr. STALKER. Chiefly this: That while I think the failure of any
unit is less likely to occur with the strength of the group behind ity
yet if failure does occur the effect is more disastrous.
Mr. PECORA. Because the failure would spread to the other units
in the system?
Mr. STALKER. There is always that danger.
Mr. PECORA. Well, that is no inconsiderable danger, is it?
Mr. STALKER. NO. Although, of course, I do not think anybody
at that time—and I certainly could not—conceive of any possible
likelihood of failure on the part of the Group or any of its units.
Mr. PECORA. For how long a period of time did the Group maintain this annual dividend disbursement at the rate of $3.20 a share?
Mr. STALKER. I could not say with certainty, sir.
Mr. PECORA. When* it was declaring a dividend at that rate, what
proportion of its earnings did that disbursement represent?
Mr. STALKER. I could not answer that question, either.
Mr. PECORA. I do not expect you to be able to answer it accurately, but can you give us an approximation which would represent
your opinion? I am not asking you under oath to pin yourself
down to specific facts on that.
Mr. STALKER. Well, Mr. Pecora, I am not trying to avoid answering your question, but——
Mr. PECORA (interposing). I know that.
Mr. STALKER (continuing). But I would hesitate to attempt to
say. I had very little contact with the Group figures, and I just
would not attempt to say, sir. I think you doubtless have available
those figures.
Mr. PECORA. What knowledge did you, as a member of the Group's
board, possess which enabled you to act with any intelligence and
understanding of all the surrounding factors to express your judgment on the matter of the dividend to be paid by the Group to its
stockholders?
Mr. STALKER. The reports of the officers of the Group which were
presented at the Group meetings.
Mr. PECORA. That gave you general knowledge at least of the
earnings of the Group?
Mr. STALKER. Yes.
Mr. PECORA. When the Group was declaring dividends at the rate
of $3.20 a share, couldn't you tell us, approximately, what proportion
of earnings that dividend rate represented?
4412
STOCK EXCHANGE PRACTICES
Mr. STALKER. I t might seem as if I ought to remember that very
distinctly, sir, but conditions changed, you know, so rapidly, there
were so many things going on, conditions that were true in one year
were not true the next, as you recall, and my recollection is merely
this, that in every case the dividend which was proposed seemed
to be amply covered by the earnings of the units. I do not believe
I could go further than that, sir.
Mr. PECORA. DO you mean by that that the earnings were sufficient
to pay the dividends?
Mr. STALKER. Yes.
Mr. PECORA. Wasn't
it considered advisable to set up an undivided
profits account out of the earnings of the Group and make that
account as large as possible in view of the conditions that existed?
Mr. STALKER. I cannot answer for the Group accounts very much,
Mr. Pecora.
Mr. PECORA. That would lead me to feel, Mr. Stalker, that the
directors of the Group did not have, for some reason or other, the
knowledge of Group earnings and conditions surrounding each unit
in the Group to have enabled them to pass on dividend questions
of the Group with a full knowledge of all the facts. Am I correct
in that assumption?
Mr. STALKER. I would not want to convey that impression, sir.
At the meetings of the Group board there were submitted earnings
of each of the units, and those earnings were combined, the proposed
dividend was proposed, and the directors took action as to its advisability. I cannot remember what each of those individual units
earned.
Mr. PECORA. NOW, from time to time, when the directors of the
Group met and discussed the matter of dividend to be declared on
its stock, were protests or objections of any kind received from any
of the unit banks either in writing or orally, which were laid before
the Group's board and fully discussed?
Mr. STALKER. I could not say whether there were or not. I do
not recall any at the moment. Yet there might have been. There
was a frank discussion of the problems of the Group at the Group
meetings.
Mr. PECORA. DO you recall any instance where you attended a
meeting of the board of directors of the Group at which there was
presented for the consideration of the directors a protest or protests of any unit banks with respect to the dividend) rate that such
banks were requested in behalf of the Group to declare?
Mr. STALKER. I do not recall any such, but I would not want to
say that it never happened.
Mr. PECORA. Were you present at any meeting of the board of
directors at which the protest embodied in your letter of June 5,
1930, was considered?
Mr. STALKER. I believe not.
Mr. PECORA. Doesn't it appear from this correspondence that the
procedure with regard to dividend policy of the Group and its respective units was something in this fashion: The Group first determined the amount of dividend that it was going to pay on its stock
and then called upon the respective unit banks to declare such dividends as would enable the Group to pay the dividend that it had
agreed upon to be paid to its own stockholders?
STOCK EXCHANGE PRACTICES
4413
Mr. STALKER. Whether or not that is putting the cart before the
horse I am not absolutely sure. I would be as willing to believe that
the Group officers considered the earnings of the various unit banks
and then determined from those earnings what dividend they could
Droperly pay. In fact, I do believe that that was the procedure
Mr. PECORA. Was that the procedure followed by the board of
directors of the Group ?
Mr. STALKER. I believe so.
Mr. PECORA. Well, have you any doubt in your mind as to whether
it was or not?
Mr. STALKER. NO ; I have not. But when I say
Mr. PECORA (interposing). Then will you tell me this, Mr. Stalker,
why was it, at the meeting of the board of directors of the Group at
which the board determined the rate of dividend or the amount of
dividend it was going to pay to its stockholders for the quarter
ending June 30, 1930, that your protest against the declaration of a
5-percent dividend for that quarter by your bank was not then
presented?
Mr. STALKER. I could not say.
Mr. PECORA. DO you recall any meeting of the board of directors
of the Group at which there was discussed dividend to be paid by
the Group for the quarter ending June 30, 1930?
Mr. STALKER. I nave no recollection of that meeting at all, sir.
Mr. PECORA. When you received the letter of June 4, 1930, from
Mr. Lord were you surprised at the request that your bank declare a
quarterly dividend of 5 percent?
Mr. STALKER. NO ; I was not, because our previous record of earnings would apparently quite justify that dividend. You see, prior
to that time—prior to the merger—the Union Trust Co. had its own
bond department, which was a distinctly profitable department.
Mr. PECORA. It was profitable to the extent of around $300,000 a
year, approximately, wasn't it ?
Mr. STALKER. Yes. As a part of the merger that bond department
was transferred to the Guardian Detroit Co.
Mr. PECORA. That was the securities affiliate of the Guardian
Detroit Bank?
Mr. STALKER. Yes, sir. It seemed unwise—it was unwise—to run
two competing institutions doing the same type of business when one
could handle it better. So it seemed a perfectly proper move to
transfer that bond department to the Guardian Detroit Co., but it
did affect the earnings of the Trust Co.
Mr. PECORA. Affected them rather substantially?
Mr. STALKER. Yes,
sir.
Mr. PECORA. What had been the amount of dividends paid by the
Union Trust Co. for the year preceding the time of its merger with
the Guardian Trust Co. ?
Mr. STALKER. I could not say with certainty, sir. I do not really
remember. I t was in that neighborhood. I can say that.
Mr. PECORA. Wasn't it at the rate of 4 percent per quarter?
Mr. STALKER. I t might have been. First we had added to the
Union Trust Co. the Guardian Trust Co., which might readily have
accounted for the increase from 4 to 5.
4414
STOCK EXCHANGE PRACTICES
Mr. PECORA. DO you know the amount in dollars and cents disbursed as dividends by the Union Trust Co. during the 12 months
preceding its consolidation with the Guardian Trust Co. ?
Mr. STALKER. That would be for the year 1929, wouldn't it? I
don't recall, sir.
Senator COUZENS. When the Group Co., of which you were a
director, set up its .dividend rate, did they prepare a schedule of
what each unit was to contribute to that dividend ?
Mr. STALKER. There is no doubt in my mind, Senator, though I
don't recall that I ever saw those figures, that they considered the
earnings of each unit and considered what each unit might properly
pay.
Senator COUZENS. YOU never saw a schedule, then, of what each
unit was to contribute to the group dividend?
Mr. STALKER. I have no doubt that schedules were brought into
the board meetings, though I don't definitely recall.
Senator COUZENS. DO you recall what the Union Guardian Trust
Co.'s share of the Group's dividend was to be ?
Mr. STALKER. Well, I think each dividend was considered by
itself.
Senator COUZENS. I mean with respect to any specific dividend
then.
Mr. STALKER. I think that this particular dividend that we are
discussing now
Senator COUZENS. Yes.
Mr. STALKER. The suggestion was that the Union Guardian Trust
Co. pay 5 percent of its capital.
Senator COUZENS. Yes. Well, what share was that toward the
Group dividend? What percentage of the Group dividend was
that?
Mr. STALKER. Well, let's see. As I recall it, there was about a
million—I can only give some rough figures.
Senator COUZENS. We understand that.
Mr. STALKER. Yes. As I recall it, there were^ about a million and
a half shares of Group stock outstanding. $3.20 a year would be
80 cents a quarter. That would be $1,200,000. Five percent of the
Union Guardian Trust Co.'s capital would be $250,000. I think those
figures are right.
Senator COUZENS. SO that your share1 would be somewhere about
one fifth, is that right?
Mr. STALKER. That would be about right; yes, sir.
Mr. PECORA. Mr. Stalker, in your letter of June 5, 1930, where
you stated that the officers of your bank were prepared to recommend
to your board the declaration of a 5 percent dividend for that quarter—I withdraw that question.
After you wrote your letter of June 5,1930, to Mr. Lord, in which
you stated that the officers of your bank were prepared to recommend
to your board the declaration of a quarterly dividend of 5 percent,
did your board meet and consider the request contained in Mr. Lord's
letter of June 4?
Mr. STALKER. Yes,
Mr. PECORA. Did
sir.
they act favorably at their first meeting after
the receipt of the letter of June 4 upon the suggestion therein contained?
STOCK EXCHANGE PRACTICES
4415
Mr. STALKER. I believe so.
Mr. PECORA. Did they act favorably at the very outset?
Mr. STALKER. Well, I cannot remember, Mr. Pecora, the details
of the discussion. The whole matter was proposed to the board.
The board was furnished with statements. The matter was discussed, I suppose, as those matters were always discussed. I have
no recollection of any particular comment or discussion on it from
any individual. And the stock was voted.
Senator COUZENS. DO I understand you to mean when you said
that they passed upon the dividend that the reports had not been
submitted?
Mr. STALKER. The reports of the Union Guardian Trust Co. were
always submitted, sir.
Senator COUZENS. Well, I understood you in your answer a while
ago to say that in the discussion of this dividend you required the
submission of the reports of earnings.
Mr. STALKER. NO. Of course, we did not have at the time that
dividend was declared the full earnings for the month of June.
Senator COUZENS. YOU say the meeting was held during the
month of June?
Mr. STALKER. We did have complete earnings for the preceding 5
months.
Senator COUZENS. SO that the picture was not complete when they
approved of the dividend?
Mr. STALKER. Not entirely complete, but practically so.
Senator COUZENS. Was your letter to Mr. Lord presented to the
board of directors for discussion?
Mr. STALKER. I don't know that it was.
Senator COUZENS. Well, you recommended to the board that they
•approve of the 5 percent dividend, did you not?
Mr. STALKER. I probably did, sir. I don't recall.
Senator COUZENS. But you did not present to the board your protest, mildly put to Mr. Lord in your letter, did you ?
Mr. STALKER. That protest, Senator Couzens, I think should be
considered in this way: I desired to call the attention of the Group's
officers to the fact that we were not building up reserves as I believed
we should. Now, I did not see any particular objection to declaring
that one dividend of the rate requested, provided our situation was
clearly understood by the Group officers and provided we got the relief in the latter part of the year which I asked for.
Senator COUZENS. Yes, but I am anxious to know whether you submitted to the board of directors when they declared this dividend
the fact that you were not setting up any reserves and that you had
presented the facts to the Group officers ?
Mr. STALKER. The fact that we were not setting up any reserves
was known to our board.
Senator COUZENS. Did you emphasize it?
Mr. STALKER. Well, it was clearly stated, sir. Each month at our
board meetings we had a very complete statement of earnings and
expenses which was submitted to the board. That statement showed
all the earnings, all the expenses, charges to undivided for losses and
charges to undivided for reserves. I t gave a complete picture of the
entire earnings situation.
4416
STOCK EXCHANGE PRACTICES
Senator COTXZENS. But you did not tell the board of directors that
you had written Mr. Lord that you thought the dividend was excessive?
Mr. STALKER. I might have said so. I really cannot remember.
Senator COTXZENS. But in spite of that you recommended the dividend be paid?
Mr. STALKER. I have no doubt that I recommended it. I don't
recall that, either.
The CHAIRMAN. HOW many of these 5 percent dividends did yora
pay?
Mr. STALKER. That was the last one.
The CHAIRMAN. And then what was the next?
Mr. STALKER. Four percent.
The CHAIRMAN. And then after that ?
Mr. STALKER. Four percent. Following that two and a half.
The CHAIRMAN. When was the two and a half paid ?
Mr. STALKER. The following year.
The CHAIRMAN. SO the dividends went down year after year ?
Mr. STALKER. Yes, sir.
The CHAIRMAN. The depression was on then ?
Mr. STALKER. It was indeed; yes, sir;
Mr. PECORA. I t was on in 1930, too, wasn't it, also ?
Mr. STALKER. Yes, sir. But, of course, we were looking
for pros-
perity around the corner.
Senator COTTZENS. Are you looking for it now ?
Mr. STALKER. NO, sir.
Mr. PECORA. Mr. Stalker,
would you, as the executive head of your
bank in June 1930, on your own judgment and feeling with respect to*
what the dividend rate should have been, have recommended to your
board or would you have favored the declaration of a 5 percent
quarterly dividend by your board if you had been left to the exercise*
of your own untrammeled judgment?
Mr. STALKER. If we had been an independent institution I would!
certainly have not.
Mr. PECORA. YOU would have recommended a declaration of ai
dividend at a rate lower than 5 percent at that quarter ?
Mr. STALKER. Yes,
sir.
Mr. PECORA. HOW much lower?
Mr. STALKER. Well, that is a pretty hard question, sir. You see.,
that decision would have had to have been reached in the light of
all the circumstances at the time. And I do want to bring thisfact out, that if the Union Guardian Trust Co. or the Group were*1
a manufacturing concern, not dependent for its existence upon the
confidence of the public, I believe it is a perfectly safe statement
to say that dividends would haye been drastically and immediately
reduced right after the crash.
Mr. PECORA. Just a moment—do you mean by that that in the*
case of banks the declaration of dividends is based, among other
things, on the factor of retaining or preserving or increasing the*
confidence of the depositors in the bank?
Mr. STALKER. N O ; but we were not under normal conditions at
the time. At that time, as you recall, there was a great deal of public
STOCK EXCHANGE PRACTICES
4417
unrest. Banks were failing. People were hoarding money. There
were rumors around everywhere that this bank and that bank was
in a dangerous position. If anjr given institution, no matter how
strong, had suddenly stopped dividends or reduced them drastically,
it might easily have precipitated a run on that institution. Euns will
start from almost nothing, and they grow like snowballs.
Mr. PECORA. Was that in your mind when dividends were declared
by your board during the depression period?
Mr. STALKER. I had it in my mind; yes, sir.
Mr. PECORA. Then, dividends were declared at a rate not justified
by the earnings partly to bolster up public confidence or the confidence of your depositors in your bank?
Mr. STALKER. I would not say they were not justified by earnings,
sir. I do not think the Group Co., for instance, declared dividends
which were not covered by earnings. In the particular case that
you mention the Trust Co. had to draw on undivided profits to pay
a portion of that dividend.
Mr. PECORA. I t would not have done that normally if it had been
an independent bank instead of a unit in a group, would it?
Mr. STALKER. I can only speak for myself. I would not favor it.
Mr. PECORA. Why did your board in the spring and summer of
1930 depart from its theretofore commendable policy of setting aside
a portion of earnings to the account of undivided profits in order
to take care of necessary reserves ? Why was that done in the year
1930?
Mr. STALKER. Well, I think it was just this way: The dividend
had become a more or less fixed institution.
Mr. PECORA. Why?
Mr. STALKER. From the course of years of practice. And we had
a loss in earnings. We all hoped and believed that was a temporary
loss. We did not believe that it would continue.
Mr. PECORA. But in view of the fact that you had had losses to a
degree exceeding those that you experienced in normal times, didn't
that make it all the more necessary and imperative to set up a fund
from which reserves could have been taken for losses?
Mr. STALKER. It made it desirable, but, of course, you will bear
this in mind, that our good fortune in the past, because we were
lucky enough to have encountered previously very few losses, had
resulted in our accumulating a very substantial amount of undivided
profits.
Senator COTJZENS. HOW much?
Mr. STALKER. I just do not want to say at that time, Senator.
Senator COUZENS. Approximately?
Mr. STALKER. Well, with all the good will in the world, Senator, I
am not just clear enough on those figures. You see, I had no chance—
have had no chance—to review any of the statements of the institution since those days; and since the closing of the holiday I had no
records and have no access to the information of the Trust Co.
Senator COTTZENS. Were the undivided profits a million dollars?
Mr. STALKER. I believe probably Mr. Pecora has the exact figures
here.
4418
STOCK EXCHANGE PRACTICES
Mr. PECORA. The exact figures here for the year ending December
31, 1929, were only $402,000.
Mr. STALKER. And have you got the figures for the year following, sir?
Mr. PECORA. 1930—$293,406.
Mr. STALKER. We had not only undivided profits but of course
reserves.
Mr. PECORA. NO, wait; I read the wrong item. The undivided
profits at the close of business on December 31, 1930, according to
the annual report of the Group marked in evidence here as " Exhibit No. 36 " of the Union Guardian Trust Co., was $732,000.
Mr. STALKER. There were reserves in addition to that which did
not appear in the undivided profits picture.
Mr. PECORA. There were reserves, according to this annual report,
of $293,000.
Senator COTJZENS. Had you not been required to pay the 5 percent
dividend how much would you have set aside for the reserve, have
you any idea?
Mr. STALKER. Well, it is a little hard, looking back for 3 years,
to say what I would have done if I had done something else, sir. I
don't know.
Senator COTJZENS. YOU have no figures in your mind now?
Mr. STALKER. NO, I have not.
Mr. PECORA. NOW, I notice, comparing the annual reports of your
bank as of the close of business on December 31, 1930, with the.close
of business as of December 31, 1931, that at the end of 1930 your
/surplus was $5,000,000 and at the end of 1931 it was $2,500,000;
whereas at the end of the year 1929, the first fiscal year preceding
your entry into the group, your surplus was ?% million dollars.
Mr. STALKER. That was accounted for, Mr. Pecora, by the fact
that the Union Trust Co. owned the Union Trust Building, as it was
then called, and had an investment of about 5 million dollars of its
own money in that building. At or about the time of the merger
that 5 million dollars was declared out as a special dividend payable
in the stock of the building company, which depleted the surplus
by 5 million dollars.
Mr. PECORA. When was that done?
Mr. STALKER. At or about the time of the merger.
Mr. PECORA. Why was that done at that time ?
Mr. STALKER. We did not believe that the stock of a building company was a proper asset to continue to hold in the trust company.
Mr. PECORA. NOW, in view of that very substantial depreciation in
the surplus account, didn't you think it was unwise to declare the
dividend that was requested by the group as of the end of June
1930?
Mr. STALKER. NO. Haven't I already testified
Mr. PECORA (interposing). You cut that surplus account down by
two thirds?
Mr. STALKER. Yes. Of course, that cutting down of the surplus
was more apparent than real, Mr. Pecora, because, as a matter of
fact, it consisted of the ownership of the building, which was not,
as we believed, a proper banking asset to continue to hold.
STOCK EXCHANGE PKAOTICES
Senator COUZENS. That conclusion
Mr. STALKER. I t has.
The CHAIRMAN. Still that went to
4419
has turned out to be correct?
the public as a surplus in the
Trust Co.?
Mr. STALKER. That was the reason: that we took it out, Senator.
Believing that we should not report to the public that we had so
much surplus that consisted of the ownership of a building, we took
it out.
The CHAIRMAN. What had been your dividend prior to this 5
percent?
Mr. STALKER. I believe for the preceding year it was 4 percent
quarterly, but I am not sure of that. I think that was it.
Mr. PECORA. Four percent quarterly or 16 percent a year.
The CHAIRMAN. The effect of this procedure and practice and
policy of the Group to fix these dividends at about 16 percent on their
stock and then raise it by requiring dividends from the units was to
impress the public with the solid financial condition of the Group,
and that reflected in a measure on the banks, and that policy, together with the policy with reference to bills payable, gave an
enhanced value to the stock of the Group ?
Mr. STALKER. I don't think, Senator, there was any director of
the Group Co. who believed that the strength of the group organization was overstated to the public. I did not belieive so.
Mr. DECORA. Well, whether it was overstated or not, were not the
facts embodied in Senator Fletcher's question to you the actual facts?
Mr. STALKER. Might I have that question again, please?
Mr. PECORA. Yes, because I think you should listen to that as a
comprehensive question.
The SHORTHAND REPORTER (reading) :
The effect of this procedure and practice and policy of the group to fix these
dividends at about 16 percent on their stock and then raise it by requiring
dividends from the units was to impress the public with the solid fianancial condition of the group, and that reflected in a measure on the banks, and that
policy, together with the policy with reference to bills payable, gave an
enhanced value to the stock of the group?
Mr. STALKER. When we use the expression, Senator, "enhanced
value ", it is not absolutely clear what that means. You mean more
than it should have been ?
The CHAIRMAN. Yes, I mean exaggerated value.
Mr. STALKER. Well, speaking for myself, I did not think at that
time that the reports to the public gave an exaggerated idea of the
value of the group stock. I can best prove that fact by stating that
I continued, simple-mindedly as I did, to buy group stock after that
time, which I would not have done if I had not thought it was worth
as much as it was selling for.
Senator COUZENS. What is your occupation now, Mr. Stalker?
Mr. STALKER. I have none.
Senator COUZENS. Did you get out of the bank when the banks
closed?
Mr. STALKER. Yes, sir. When I say I have none, Senator, I have
organized a little company, but we haven't any business yet to
speak of.
4420
STOCK EXCHANGE PBACTICES
Mr, PECORA. Mr. Stalker, I notice in your letter of June 5, 1930,
to Mr. Lord you also said this:
In addition to that—
and the pronoun " t h a t " refers to the previous sentence where you
said—
However, as you are aware, a dividend of this amount has not been earned—
in addition to that, the Trust Co. is setting up no reserves, and we feel that
is not as it should be.
Who were the " we " ?
Mr. STALKER. The officers of the Trust Co.
Mr. PEOORA. Then why didn't the officers set up the reserves when
in their judgment it should have been done?
Mr. STALKER. At that particular time the earnings were not available for the purpose. That is the reason for bringing the situation
to Mr. Lord's attention.
Mr. PEOORA. Well, was it because there was any suggestion by the
Group or anyone in the Group to your board that no reserves snould
be set up ?
Mr. STALKER. NO.
Mr. PECORA. Apparently it was the judgment of yourself and the
other officers of the bank that reserves should be set up ?
Mr. STALKER. Yes.
Mr. PECORA. Then why wasn't it done?
Mr. STALKER. At that time—I think I have testified to this before—at that time the earnings were not sufficient to do so. However
Mr. PECORA (interposing). Then if the earnings were not sufficient
to set up reserves, why did you, out of those reduced earnings, increase your dividends ?
Mr. STALKER. May I repeat a little bit what I think I have previously testified? We had several considerations in mind. One of
them was the recent merger between the Guardian Trust Co. and the
Union Trust Co., which we believed would result in better net earnings. There was the further fact that the latter half of the year,
in the experience of the Union Trust Co., was always distinctly better than the first half of the year. We believed and hoped that, the
second half of the year we would set up the reserves which ought to
be set up.
Mr. PECORA. Well now, Mr. Stalker, didn't you know that in
June 1930?
Mr. STALKER. Didn't I know what, sir?
Mr. PECORA. What you have just stated.
Mr. STALKER. Yes.
Mr. PECORA. Why didn't
you let each quarter take care of itself on
the matter of the dividend to be declared for each quarter ?
Mr. STALKER. Because the earnings of the Trust Co., Mr. Pecora,
do not come in in even quarters the way interest comes in, for instance. A considerable number of our fees are charged either semiannually or annually, and on the annual fees the tendency is for them
to concentrate in the summer of each year.
Mr. PECORA. Why, as a matter of fact, you said in this letter of
June 5,1930:
STOCK EXCHANGE PKACTICES
4421
Were our earnings sufficient to justify the dividends at the annual rate of
20 percent, we would not raise the question of a loss in income from the bond
department, but under the circumstances we feel that the Trust Co. is entitled
to and must have some relief the latter part of the year.
Mr. STALKER. And we got it.
Mr. PECORA. In what way?
Mr. STALKER. The dividends
were reduced the latter part of the
year from 5 percent quarterly to 4 percent quarterly.
Mr. PECORA. NOW, isn't it a fact that one of the considerations, and
perhaps the most important and the most persuasive consideration,
that actuated your board in adopting the suggestion of the group
in June 1930 to declare a dividend at the rate of 5 percent for that
quarter, was that it was felt by you and your officers and your board
that you were more or less under the duty of carrying out the suggestion of the group ?
Mr. STALKER. I would not put it quite that way.
Mr. PECORA. TO what extent would you tone that statement down?
Mr. STALKER. I would say this, sir, that the officers and directors
of the Union Guardian Trust Co. desired to cooperate fully in the
work of the Group Co.
Mr. PECORA. That is another way virtually of stating what I said,
isn't it?
Mr. STALKER. Well, there may be that much difference.
Mr. PECORA. And that actuated the board at all subsequent times
in the declaration of its dividends, did it not?
Mr. STALKER. I would not want to convey the impression, Mr.
Pecora, that the board lost at any time its right of independent
action.
Mr. PECORA. Whether it lost its right of independent action, did
it exercise its right of independent action?
Mr. STALKER. First, to determine that question, you have to get
into the minds of the individual members of the board, but from
my knowledge of those men I cannot believe that they would vote for
a dividend which they did not believe was a proper dividend to
pay. They are not the type of men who would do that.
Mr. PECORA. Isn't that exactly what they did do in declaring
the dividend rate in June 1930?
Mr. STALKER. NO, sir; I believe in the light of all the circumstances, by which I mean the probability of betterment of conditions
in the latter part of the year, we were all looking for a turn in the
tide, as you probably remember.
Senator COUZENS. AS a matter of fact, Mr. Stalker, isn't it the
general practice that the board of directors have to rely largely on
the recommendations of their officers?
Mr. STALKER. That is true, Senator Couzens, to the extent that
they have to depend on them for information about the condition
of the company.
Senator COUZENS. Oh, and also on recommendations as to policy,
do they not?
Mr. STALKER. I would suppose that they pay attention to that,
Senator.
Senator COUZENS. They obviously must have confidence in their
officers, or they would not have them, would they?
Mr. STALKER. True.
175541—34—PT 9
15
4422
STOCK EXCHANGE PRACTICES
Senator COUZENS. SO they automatically, as a matter of fact, have
to rely upon the recommendations of the officers ?
Mr. STALKER. But not exclusively.
Senator COUZENS. N O ; I know, but as a matter of fact, they do.
And so the directors at that time may not have been said to have
been under the domination or the influence of the Group, yet it is
apparent that you had agreed prior to the meeting, notwithstanding your own views, to recommend to the board that they pay this
dividend.
Mr. STALKER. I would like to again say, if I may, Senator Couzens,
that the letter I wrote to Mr. Lord was not directed exclusively at
the matter of this particular dividend. I wanted to bring out before
him the question of the earning situation of the trust company, the
fact that we desired relief the latter part of the year, which we got.
Senator COUZENS. What was the date again that you were taken
out of the presidency and Mr. Longley was put in ?
Mr. STALKER. I think it was in January of 1932.
Senator COUZENS. What was that done for ?
Mr. STALKER. I would not know that.
Senator COUZENS. Who did it ?
Mr. STALKER. I will tell you all I know about it, sir. Hal
Smith, who was one of our directors, called me into his office one
day and said that it had been proposed that it would be desirable
for Mr. Longley to assume the presidency and for me to be vice
chairman of the board, and I said, "All right."
Mr. PECORA. In view of the fact that all of the capital stock, with
the exception of the qualifying shares for directors of your bank
was owned by the Group, didn't you and your associate officers
virtually feel that you were the employees of the Group ?
Mr. STALKER. NO.
Mr. PECORA. A S a matter
of fact, were you not that, in substance if
not in form ?
Mr. STALKER. That would assume that our directors were rubber
stamps.
Mr. PECORA. I said the officers.
Mr. STALKER. I know; but I meant the officers were working for
the directors and under their control and I would not
Mr. PECORA. And the directors were chosen by the stockholders;
and the only stockholder was the Group ?
Mr. STALKER. Correct. Nevertheless^ that does not mean that any
director is a rubber stamp. I don't think our directors were rubber
stamps.
Mr. PECORA. AS a matter of fact, though, didn't you, as the executive head of the bank, feel that your tenure depended more or less
upon your satisfying the Group ?
Mr. STALKER. I never spent an awful lot of time thinking about
my own situation, to tell ypu the truth.
Mr. PECORA. It was not necessary to spend a lot of time thinking
about it, in view of the fact being so patent that it did not require
much thought to impress the fact upon your mind; is not that so?
Mr. STALKER. I am not just quite sure about the question, but I
will state it in this way: We had directors of the Trust Co. who
I believed and still believe were interested in the affairs of the com
STOCK EXCHANGE PRACTICES
4423
pany. I was accountable to them. That is where I began and about
where I stopped.
The CHAIRMAN. They were all interested in the group, were they
not?
Mr. STALKER. Some of them were directors of the group, and
some were not.
The CHAIRMAN. I gained the impression as indicated by my question to you a moment ago, and I do not wonder that you bought
stock in the group when you realized that they had the power, and
exercised it, to tax the units so as to pay their dividends.
Mr. STALKER. Of course it would have been a very foolish thing
for me, Senator, to have bought stock in a concern that was being
bled. I would not have done that.
The CHAIRMAN. They were not being bled. They got their dividends by assessing the units.
Mr. STALKER. But the group itself had no earnings except such
as were derived from the units. Now, if I had* believed that the
condition of the units was being generally imperiled by excessive
dividends I would certainly not have bought more stock in the group.
Mr. PECORA. The board declared its 5 percent quarterly dividend
in June 1930 and forwarded the dividends accruing to the group as
the sole owners of the stock of your bank in time to enable the
group to pay its dividend for that quarter, which it did on or about
June 16. 1930?
Mr. STALKER. I have not the date, but otherwise your statement
is correct.
Mr. PECORA. In other words, after your board declared its 5 percent quarterly dividend and paid it to the group, you wrote this
letter of June 26, 1930, to Mr. Lord, which is marked as an exhibit
in this hearing, as of December 19,1933, and in this letter you said,
among other things, as follows:
As against $500,000 in dividends wnieh we are paying the first 6 months of
this year our earnings will probably not run over $425,000, and that is without
setting up any reserve at all. Our policy in the past has always been to set up
liberal reserves, although we were fortunate enough to need them only to a
very limited extent. At the present time we feel that reserves are rather
urgently required and find ourselves unable to provide them.
Why did you write that to Mr. Lord?
Mr. STALKER. TO have it a matter of record.
Mr. PECORA. And also because those were the facts?
Mr. STALKER. Yes, sir; as I believed and now believe.
Mr. PECORA. This letter was written within 2 weeks after the
date when the dividend of 5 percent for that quarter was paid by
your bank to the Group. Was it that circumstance that left your
bank on June 26, 1930, unable to provide or set up reserves that
were then urgently required?
Mr. STALKER. That would be a factor in the situation.
Mr. PECORA. Then I still marvel that if your board were exercising
independent judgment in connection with this dividend declaration
it did not reject the suggestion of the, Group with regard to the
dividend that your bank should declare.
Mr. STALKER. Of course they were motivated, without doubt, by
the decreased expenses which we expected would result from the
4424
STOCK EXCHANGE PRACTICES
merger of the two trust companies and by the increased earnings
that were customary at the latter half of the year, and also
Mr. PECORA. With regard to that, let me remind you that ypur
letter of June 26, 1930, to Mr. Lord also said this, about the latter
part of the year:
Mr. Blair and I are of the opinion that for the last half of this year dividend
aggregating $400,000, or at the annual rate of 16 percent, is the maximum that
this company should undertake to pay.
Mr. STALKER. We wanted to get those dividends reduced so that
^we could set up reserves which we thought we ought to. have.
Mr. PECORA. YOU knew then that your earnings were decreasing,
did you not ?
Mr. STALKER. NO.
Mr. PECORA. They had been decreasing, had they not? You had
lost approximately $300,000 a year through the transfer of your
bond business to the Group, had you not?
Mr. STALKER. That was an accomplished fact. That was a nonrecurring loss, so to speak.
Mr. PECORA. And you had been well aware of the fact that reserves wene urgently required and found yourselves unable to
provide them; and in the face of that condition you paid the dividend at the increased rate. That is so, is it not?
Mr. STALKER. I do not think it was an increased rate when you
add together the dividends previously paid by the Guardian Trust
and the Union Trust. I have not got the figures before me, but I
think that would be just about the rate those trust companies had
been paying.
Mr. PECORA. The last dividend that was declared by the Union
Guardian Trust Co. was declared for the quarter ending March 31,
1932, was it not?
Mr. STALKER. I believe so.
Mr. PECORA. That dividend amounted to $50,000 cash, did it riot?
Mr. STALKER. Yes.
Mr. PECORA. Did the
condition of the bank at that time justify
the payment of any dividend?
Mr. STALKER. Looking back now
Mr. PECORA. N O ; the conditions as you knew those conditions to
be then?
Mr. STALKER. YOU get there the question of loss of public confidence through a drastic change in dividend action.
Mr. PECORA. Was it because of the fear of the public or the fact
that the confidence of your depositors in the bank would be seriously
affected that the bank in March 1932 declared that dividend?
Mr. STALKER. I cannot speak for our directors, Mr. Pecora, but
I know that that was certainly in my mind.
Mr. PECORA. Was it the moving factor in your mind in favor of
the declaration of the dividend in March 1932?
Mr. STALKER. I t was.
Mr. PECORA. Could you not tell from the discussion that you
heard that the meeting of your board in regard to the declaring of
this dividend in March 1932 whether or not that was also in the
mind of your associate directors ?
STOCK EXCHANGE PRACTICES
4425
Mr. STALKER. I cannot remember very much about the discussion
of that dividend. It was a small one. I cannot remember the discussion at all, to tell you the truth.
Mr. PECORA. The condition of the bank in March 1932 was very,
very unfortunate, was it not ?
Mr. STALKER. It was. Our assets were badly frozen. We believed our assets were sound, but they were frozen.
Mr. PECORA. In the exercise of your own soundest judgment at
that time were you in favor of the declaration of any dividend?
Mr. STALKER. From the standpoint of—well, I will put it this
way—we were not particularly concerned about the earning aspect,
Mr. Pecora; that is, we had every confidence that with conditions
restored, as we hoped they would ultimately be
Mr. PECORA (interposing). Were you still declaring dividends for
a 2-year period of time based upon hopes for the future ? Had not
those hopes sunk pretty low by that time ?
Mr. STALKER. The longer you are in going through a depression,
the nearer you are to getting out on the other side, supposedly.
Mr. PECORA. And as you were getting deeper and deeper into it
you tried more and more to lift yourselves by your own boot straps
out of it?
Mr. STALKER. NO. But what I was about to say was this: In the
case of that dividend or other dividends at that time, the earning
aspect of it did not concfern us particularly. I t was mor6 the cash
aspect of it. The amount of cash that we took out of the Trust Co.
was relatively insignificant, only $50,000. You could lose more in 10
minutes through some stockholder's loss of confidence than the entire
dividend amounted to.
Mr. PECORA. Why was not that considered by the Group itself
in determining their dividend policy for that period ?
Mr. STALKER. I was not a member of the Group board at that time.
Mr. PECORA. When did you cease being a member of the Group
board ?
Mr. STALKER. I speak from memory here. I am not too ^ure of
this, Mr. Pecora, but I think it was about the first of 1931.
Mr. PECORA. Did you get out as a member of the Group board
voluntarily, or was it at some one's suggestion ?
Mr. STALKER. I think—in fact, I know—that they were reducing
the membership on that board. I t was considered to be too large.
Mr. PECORA. And you were one of those that were dropped ?
Mr. STALKER. Yes, sir.
Senator COTTZENS. When
you got out of the presidency of the
Union Guardian Trust Co. what reason did Mr. Smith give you for
desiring the change in the presidency ?
Mr. STALKER. He did not give any.
Senator COUZENS. And you did not ask for any ?
Mr. STALKER. I did not.
Senator COUZENS. Were you conscious of any reason?
Mr. STALKER. N O ; not particularly.
Senator COTJZENS. YOU did not have much curiosity
about your
future, when a change took place like that, without having any intimate knowledge of your own or without being advised of any reason.
4426
STUCK EXCHANGE PBACTICES
Mr. STALKER. Of course, the situation as I sensed it was this, that
Mr. Longley was considered to be better qualified to handle problems
of the Trust Co. under the situation as it existed than I was.
Senator COXJZENS. Was that conclusion reached) by the group
board ?
Mr. STALKER. There were a number of people, I judge, that were
of that opinion, and it was far from me to dispute it.
Mr. PECORA. What was Mr. Longley's business or occupation at
that time ?
Mr. STALKER. At that time he was already vice chairman of the
board.
Mr. PECORA. N O ; what was his business or occupation?
Mr. STALKER. He was an attorney.
Mr. PECORA. A lawyer. I t had then reached the point where it
was considered that a lawyer would make a better president of the
bank than a banker ?
Mr. STALKER. Possibly in the case of a good lawyer and a bad
banker, he might.
Mr. PECORA. YOU had not shown yourself to be a bad banker, judging by the record of your institution prior to becoming a unit of the
group. I do not want you to pin medals on yourself, but is not
that the fact ? The record of your institution under your presidency,
prior to your becoming a unit in the group, was one that you could
be proud of?
Mr. STALKER. Well, I am not so proud of it now as I was once.
Mr. PECORA. But you were proud of it, and justifiably proud of
it, up to the time the bank became a group unit, were you not?
Mr. STALKER. Up to that time I was not president; I was merely
an executive vice president. Mr. Blair was president of the bank.
Mr. PECORA. YOU were president in 1929 sometime, according to
Mr. STALKER. Oh; I guess you are right there. I think I was
elected at or about the time that it was agreed to be desirable to merge
the Guardian Detroit Group and the Union Commerce Corporation.
Mr. PECORA. Had the affairs of your bank in March 1932, or in the
early part of 1932, when you ceased being its president and were
succeeded by Mr. Longley, reached a stage or condition where a
lawyer was considered more useful to the bank as its executive head
than a banker?
Mr. STALKER. He evidently was.
Mr. PECORA. I am not casting any aspersions on lawyers now.
Senator COUZENS. Perhaps I would if I were examining you.
Mr. PECORA. I do not know anything about Michigan lawyers.
Is this the fact, Mr. Stalker, that in view of the set-up of the
group and the relationships of the unit banks to that group it was
considered imperatively necessary in order to sustain the confidence
of the public and of the depositors in the various unit banks of the
group as well as in the group itself, for the group to continue to
pay dividends and hence for the unit banks to continue to pay dividends to the group ?
Mr. STALKER. It was considered desirable.
Mr. PECORA. Was it not virtually rendered necessary as a matter
of policy in order to retain the confidence of depositors and of the
public stockholders of the Group?
STOCK EXCHANGE PRACTICES
4427
Mr. STALKER. Of course it is a very difficult question for any man
sitting on the inside of an institution to determine what the public
on the outside of the institution think about it.
Mr. PECORA. I S not that what you have been telling us? That is
what the Group board and officers as well as the unit boards and
officers were doing—they were thinking of the public reaction?
Mr. STALKER. I spoke for myself, Mr. Pecora; but I have no doubt
that there were others who thought the same.
Mr. PECORA. I t was that necessity of preserving the confidence of
the depositors in the unit bank and of the stockholders in the Group
that made it necessary to declare dividends when otherwise they
would not have been declared?
Mr. STALKER. I do not want to have any misconception here, sir.
I am not prepared to say it was necessary to declare dividends. I
think that in determining on the declaration of dividends they were
believed to be justified by the circumstances at the time. Consideration was given tp the fact that you would by so doing avoid upsetting
public confidence and perhaps precipitating runs which might wreck
the institutions.
Mr. PECORA. Did you attend as a member any meetings of the
board of directors of the Group at which there was discussed the
form and the contents of the annual reports put out from time to
time by the Group ?
Mr. STALKER. I did.
Mr. PECORA. Can you
tell this committee, therefore, the reason
why the Group at no time in its annual reports included therein a
statement of those units of the Group that did not consist of banks.
Mr. STALKER. NO ; I would not be in position to testify on that. I
suppose it was this way, that the Group was primarily an organization whose units were banks and trust companies. I t was in the
tanks and trust companies that the public was chiefly interested.
I would surmise that to be the purpose.
Mr. PECORA. Were not the stockholders of the Group interested
in all of the units of the Group, including those units that did not
consist of banks ?
Mr. STALKER. Undoubtedly.
Mr. PECORA. Then why were not the stockholders of the Group
permitted to know at any time through the medium of reports issued to them by the Group the condition of those units that were
not banks ?
Mr. STALKER. I have not before me, Mr. Pecora, any of those
annual reports.
Mr. PECORA. Suppose I take a few of them and put them before
you for whatever consideration you want to give them in answering
these questions [handing documents to the witness].
Mr. STALKER. I note here a reference as I read to the Union Title
& Guaranty Co. This is on the first page I come to
•
Mr. PECORA. Which report are you looking at ?
Mr. STALKER. 1931. I will read this, Mr. Pecora:
Total operating loss of affiliated institutions, other than banks and trust companies, amounted to $542,957.68, equal to 35 cents per share. During the fourth
quarter drastic economies were effected in all of these companies which should
result in larger future earnings regardless of any increase in business activities.
4428
STOCK EXCHANGE PRACTICES
That does not seem to be withholding any information.
Mr. PECORA. I S it giving to the stockholders or to the public the
full information with regard to the condition of each unit corporation that was not a bank?
Mr. STALKER. NO. Of course the length of the report—this is a
long report as it is; 47 pages
Mr. PECORA. It would have to be a long report, because the Group
had so many units.
Mr. STALKER. I t is a 47-pag;e report, but there is a clear indication here what the net operating results of these units other than
banks and trust companies were; and any stockholder was welcome
at any time to inquire about the condition of any unit.
Mr. PECORA. We know that any stockholder is entitled or welcome
to inquire at any time; but why should it be left to individual
stockholders to make inquiry when the information could have been
furnished to them as part of the annual report of the Group ?
Mr. STALKER. The stockholders all had notice of what the result
was. If they were not satisfied or if they desired further information we would probably have heard from it or the Group would have
heard from it.
Mr. PECORA. What reason can you give, as a director of the Group,
for not having included in the annual reports of the Group a balance
sheet statement for each of the nonbank units of the Group similar
in form and content to the balance sheet statement embodied in the
annual report for those units that were banks ?
Mr. STALKER. Less important and less interesting.
Mr. PECORA. Don't you think a stockholder would be just as much
interested in learning the financial condition of each and every unit,
whether it was a bank unit or not?
Mr. STALKER. With a banking institution the thing that a stockholder, I believe, looks at first would be the deposits, the undivided
profits, their cash resources, and liquid resources. Those are the
most interesting things, to my way of thinking, in a bank statement,
and those are the things which a stockholder looks at first.
Mr. PECORA. But the stockholders of this Group were not bank
stockholders, were they? They were stockholders in a group which
included in its combination not only banks but nonbanking units.
Mr. STALKER. I will rephrase my answer, sir. The stockholders
of the Guardian Detroit Union Group, Inc., in looking at this statement or any similar report that might be made, would be chiefly
interested, in my opinion, in connection with the unit banks and
trust companies in the cash and liquid resources which those banks
had; whereas in the case of the nonbanking units I would think
they would be chiefly interested in the net earnings.
Senator COTJZENS. Are the net earnings stated for the nonbanking
units ?
Mr. STALKER. Yes, sir. I just read it, Senator. Shall I read it
again ?
Senator COTJZENS. For each unit?
Mr. STALKER. NO ; the combination.
Senator COTJZENS. Why would they not be interested in each unit
rather than the combination of units ?
STOCK EXCHANGE PRACTICES
4429
Mr. STALKER. I suppose they would; but there are limitations of
space in a report that is going to be read.
Senator COTJZENS. When you filed your annual statement with the
secretary of state or the securities commission did you show the same
figures as are indicated in the annual report?
Mr. STALKER. I would not know anything about that, Senator.
I was not an active officer of the group at any time.
Mr. PECORA. Will you let me see that report from which you have
read the statement?
(The paper referred to was handed to Mr. Pecora.)
Did you know, Mr. Stalker, that for the year 1930 the group
reported to the Michigan Securities Commission, in accordance with
the laws of the State of Michigan requiring it to make a report, that
for that year 1930 there was a deficit sustained by the group of
$39,387.57?
Mr. STALKER. If I knew of it, I had forgotten it.
Mr. PECORA. Did you know that in the report which the Group
filed with the Michigan Securities Commission for the year 1931 it
showed a deficit for that year of $288,930.33?
Mr. STALKER. If I knew that, I had forgotten it. May I inquire
whether those are operating deficits or whether they are after losses
and charge-offs ?
Mr. PECORA. I will show you a photostatic copy of the report filed
by the Group with the Michigan Securities Commission for the year
1930 [handing a paper to the witness]. You can see from the face of
the report itself what it shows.
Mr. STALKER. I never saw this report before. They would appear
to be operating figures.
Mr. PECORA. In this annual report for 1930 the Group informed
the Michigan Securities Commission that it had sustained a deficit
for the year 1930 of $39,387.57; that statement being reported under
an item reading " Statement of profit and loss account for the past
12 months."
Mr. STALKER. Correct.
Mr. PECORA. Mr. Lord, will you come up for a moment, please?
TESTIMONY OF ROBERT 0. LORD—Resumed
Mr. Lord, I want to show you this document purporting to be a
photostatic reproduction of the annual report for the year 1930 filed
with the Michigan Securities Commission by and on behalf of the
Detroit Guardian Union Group, Inc. Will you look at it and tell me
if the reproduction of the signature reading "Robert O. Lord"
appearing thereon is your signature?
Mr. LORD. That is my signature.
Mr. PECORA. I S that a true and correct copy of the report ?
Mr. LORD. I would say so.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted.
(Photostatic reproduction of Annual Eeport of Guardian Detroit
Union Group, Inc., for the jrear 1930, filed with the Michigan Securities Commission, was received in evidence, marked " Committee's
4430
STOCK EXCHANGE PEACTICES
Exhibit No. 54, Dec. 22, 1933 ", and will be found printed in full at
the end of today's transcript.)
Mr. PECORA. While you are still on the stand, Mr. Lord, I show
you this other document which purports to be a photostatic reproduction of the annual report for the year 1931 filed by the Guardian
Detroit Union Group, Inc., with the Michigan Securities Commission, in accordance with the laws of the State of Michigan, and ask
you if you recognize it to be a true and correct copy of such report.
Mr. LORD. I would judge so. I t has my signature.
Mr. PECORA. The signature appearing thereon reading " Eobert O.
Lord " is in your handwriting ?
Mr. LORD. Yes, sir.
Mr. PECORA. That is, it is a reproduction
Mr. LORD. I t is.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted.
of your handwriting?
(Photostatic reproduction of Annual Report of Guardian Detroit
Union Group, Inc., for the year 1931, filed with the Michigan
Securities Commission, was received in evidence, marked a Committee's
Exhibit No. 55, Dec. 22, 1933 ", and will be found printed in full at
the end of this transcript.)
Senator COTJZENS. What did it show?
Mr. PECORA. I t showed a deficit of $288,930.33.
I want to show you this other document that purports to be a
photostatic copy of the annual report for the year 1932 filed by and
on behalf of the Guardian Detroit Union Group, Inc., with the
Michigan Securities Commission in accordance with the laws of the
State of Michigan. Will you look at it and tell me if you recognize
it to be a true and correct copy of such a report sofiled?
Mr. LORD. That is not my signature.
Mr. PECORA. I S that a true and correct copy of the report ?
Mr. LORD. I assume it is; I do not know.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted.
(Photostatic copjr of Annual Report for the year 1932 filed by
the Guardian Detroit Union Group, Inc., with the Michigan Securities Commission, was received in evidence, marked " Committee Exhibit No. 56, Dec. 22, 1933," and will be found printed in full at
the end of this transcript.)
The CHAIRMAN. Whose signature is it, Mr. Lord?
Mr. LORD. I have no idea.
Senator ADAMS. Whose name is it?
Mr. LORD. My name is signed, but it is not my signature.
Mr. PECORA. There is a signature on this report reading " Robert
O. Lord " over the printed word " President", and also a signature
on this report reading " C. H. Haberkorn, Jr." over the printed word
" Secretary." You say the signature reading " Eobert O. Lord " is
not in your handwriting?
Mr. LORD. Yes.
Mr. PECORA. DO you recall signing the
Mr. LORD. I do not recall signing it. I
annual report?
may have signed an annual
report, but I did not sign that. That is not my writing.
STOCK EXCHANGE PRACTICES
4431
Mr. PECORA. DO you recognize the signature reading " C. H.
Haberkorn, Jr.," as being in the handwriting of Mr. Haberkorn?
Mr. LORD. I t is not.
Mr. PECORA. DO you
know in whose handwriting the signature
reading " Eobert O. Lord " is?
Mr. LORD. I do not.
Mr. PECORA. Or the signature reading " C. H.
Mr. LORD. NO, sir; I do not.
Senator ADAMS. Did you authorize anybody
Haberkorn, Jr." ?
to sign your name
to* those documents ?
Mr. LORD. I don't recall it. That may possibly be an office copy
that was simply filed.
Mr. PECORA. This we obtained from the county clerk's office, where
the original is on file.
Mr. LORD. That is not my signature.
Senator ADAMS. I S that a verified signature?
Mr. PECORA. Yes, sir. This report is sworn to under date of
February 28. 1933. I am referring now to the 1932 report. I t is
sworn to beiore Pauline P. Mosher, notary public. Do you know
Pauline P. Mosher?
Mr. LORD. Mrs. Mosher, I believe, was Mr. Haberkorn's secretary,
but that is not my signature, nor is it Mr. Haberkorn's signature.
Mr. PECORA. DO you recognize any of the handwriting of those
signatures?
Mr. LORD. May I look at it again? [After examining paper.]
I do not know Mrs. Mosher's signature, so I could not say I recognize it.
Mr. PECORA. YOU know that under the laws of the State of Michigan you, as president of this Group, were required to sign and verify
and file with the commission, and in the county clerk's office, an
annual report?
Mr. LORD. I have always understood so.
Mr. PECORA. DO you recall having signed, sworn to, and caused
to be filed an annual report, as president of the Group, for the
year 1931?
Mr. LORD. I do not recall one way or the other.
Mr. PECORA. What is that?
Mr. LORD. I do not recall it; no.
The CHAIRMAN. Can you look at that report and signify whether
now you think it is a correct report?
Mr. LORD. I do not know, Senator. I assume it is a photostatic
copy of the record that was filed.
Mr. PECORA. This report, if the committee please, reports a deficit
for the Group for the year 1932 of $714,331.26.
Now, have you any reason to doubt the correctness of the statement
appearing on committee's exhibit 56, which is the annual report
for 1932 filed on behalf of the Group, and which shows a deficit
of $714,331.26 for the year 1932?
Mr. LORD. NO ; I have not any reason to doubt it.
Mr. PECORA. Have you reason to doubt the accuracy of the figures
shown on the annual report for 1931, which is marked " Committee's
Exhibit No. 55", and which reports a deficit of $288,930.33 for
the year?
4432
STOCK EXCHANGE PRACTICES
Mr. LORD. NO ; I have no reason to doubt it.
Mr. PECORA. Have you any reason to doubt the accuracy of the
statement shown in the annual report for 1930, which is marked
" Committee's Exhibit No. 54?"
Mr. LORD. NO.
Mr. PECORA. And
which reports a deficit for that calendar w a r
of $39,387.57.
Mr. LORD. NO ; I have not any reason to doubt it.
Mr. PECORA. Mr. Lord, were a n y of these deficits reported to the
stockholders of the Group in any report or statement issued by the
Group to them?
Mr. LORD. I would have to pheck that very carefully. I would
say not.
Mr. PECORA. Why not? Why wasn't it done?
Mr. LORD. Mr. Pecora, I would have to go over the entire statement and check it to be able to answer it properly. The figures for
the annual report, and the figures of that report—those that I
signed—were prepared by the Group's accounting department, competent men, and I had no reason to question the accuracy of the
figures.
Mr. PECORA. What figures are you talking about now, the figures
shown in the printed annual reports issued to stockholders ?
Mr. LORD. I am talking about both the figures in the printed
annual report and the figures in the report to the State of Michigan.
Senator COTJZENS. After signing the report to the State commission showing a loss, when you came to sign the 1930 annual report,
would you not notice that there was nothing shown in the report to
indicate that the Group had suffered a loss ?
Mr. LORD. I do not recall the date of that report for 1930.
Mr. PECORA. Are you referring to the report filed with the Michigan Securities Commission?
Mr. LORD. Yes. I do not recall the date of it.
Senator COUZENS. I t was for the calendar year, was it not?
Mr. PECORA. I will give you the date of it. [After examining
papers.] I will have to take that statement back. The report does
not have any date, nor does it appear to have been sworn to, for the
year 1930. That is another thing that somewhat mystifies me,
although the printed form furnished by the Michigan Securities
Commission required to be filled out, requires its being sworn to by
the officers signing it. Do you know why you did not swear to the
1930 report filed with the Michigan Securities Commission ?
Mr. LORD. I have no idea. The reports are prepared in the
accounting department, and brought to me for signature, and I sign
them.
The CHAIRMAN. This report, exhibit 56, was the last you made.
Mr. LORD. I did not hear you, Senator.
The CHAIRMAN. This exhibit no. 56
Mr. LORD. What year is that?
The CHAIRMAN. It is sworn to the 27th day of February 1933.
Mr. LORD. That was the last report that was made so far as I
know.
Mr. PECORA. Let me read this portion of the form of the printed
annual report for 1930, which the Michigan Securities Commission
STOCK EXCHANGE PBACTICES
4433
required to be signed and sworn to by the president and secretary
of your company [reading] :
We, the president and secretary of the Guardian Detroit Union Group, Inc.,
do solemnly swear that the above statement is true to the best of our knowledge
and belief, and that this report has been carefully filled out and fully and
correctly exhibits the true state of the several matters contained, as shown
by the books of the company.
You signed that report immediately under that portion of the
statement that I have read to you. When you signed it, did you know
the report to correctly exhibit the true state of the several matters
that are set forth in the report ?
Mr. LORD. I assumed it did.
Mr. PECORA. The form of the oath required to be taken, or the
form of verification, rather, required by this form
Mr. LORD. TO the best of my knowledge and belief it was a correct
statement, Mr. Pecora.
Mr. PECORA. DO you know why you did not swear to it?
Mr. LORD. I have not any recollection. There certainly was no
intention to avoid swearing to it, not the slightest.
Mr. PECORA. I notice, from exhibit no. 55, that the annual report
for 1931, which you say was signed by you, likewise was not sworn
to, although the form required that it be sworn to.
Mr. LORD. There was not any reason why it should not have been
sworn to, and I do not know why it was not.
Mr. PECORA. I notice that the report for 1932, which bears your
name and Mr. Haberkorn's name as secretary—which signatures
you say are not the signatures either of yourself or Mr. Haberkorn—
is sworn to, although not signed by you.
Mr. LORD. I have not any idea how it was done, because I did not
sign it.
Mr. PECORA. Did you have any attorney or attorneys who prepared these reports for filing with the Michigan Securities Commission?
Mr. LORD. I assume the reports are prepared, or were prepared
in the accounting department.
Mr. PECORA. Were the formalities of the filing of these reports
and the execution by its executive officers, supervised or attended
to by attorneys for the company or for you ?
Mr. LORD. I do not recall whether they were in those cases or not.
Mr. PECORA. I ask you again what I asked you a few minutes
ago. Why was not the deficit of $39,387.57 that is shown in the
annual report of your group filed with the Michigan Securities
Commission, reported to the stockholders of the group ?
Mr. LORD. Mr. Pecora, I would have to study the annual report
for 1930 and check it with the figures in order to explain the reason
why it was not reported.
Senator COUZENS. Does that deficit occur after dividends or before
dividends?
Mr. LORD. I do not know, Senator. I would have to consult the
officers
Senator COUZENS. May I ask, Mr. Pecora, if that statement filed
with the Michigan Securities Commission, showing a deficit of
some $39,000, was
Mr. LORD. That is after dividends.
4434
STOCK EXCHANGE PRACTICES
Senator COUZENS. After dividends?
Mr. LORD. Yes.
Senator COUZENS. YOU said previously
Mr. LORD. I did not understand your
that you did not know.
question. I t was after
dividends.
Mr. PECORA. I t is after dividends, apparently, because the report
shows on its face that dividends for the year 1930 were paid in the
aggregate sum of $4,930,991.28.
Senator COUZENS. SO, the payment of that dividend created a
deficit?
Mr. PECORA. Yes.
Senator COUZENS.
Does the report show any figures as to what
the earnings were of that year?
Mr. PECORA. I t shows income as follows: Interest and discount,
$39,905.07; dividends received or accrued, $5,123,372.60; profits on
sales of securities, $16,796.88. As against those items of income, the
following expense items are shown: Miscellaneous expense, $67,155.84; interest paid $121.88; insurance, $1,039.56; stationery, printing, and office supplies, $17,942.26 ;adyertising, $39,900.32; salaries,
$86,575.95; taxes, other than Federal income, $75,735.03; dividends,
common stock, $4,930,991.28* making a total of expenses, and so
forth, of $5,219,462.12.
Mr. LORD. Mr. Pecora, may I try to explain? So far as my understanding is concerned, in the matter of the signatures on these reports, if I understand it, the original report is sent to Lansing, and
these office copies which you have here, photostats, I believe, are
the ones that are filed in the Detroit office, and I believe that if you
go to the Lansing office you will find the report in complete and
proper form, so far as the signatures and acknowledgments are concerned. That is the only explanation I could give for those two
signatures, which are neither mine nor Mr. Haberkorn's.
Mr. PECORA. That is a plausible explanation, and probably the
correct explanation.
Mr. LORD. I think it is the correct explanation.
Senator COTJZENS. Would you please explain what you mean in
this report by " dividends received or accrued " ? You mean they
are accrued after the declaration, or before?
Mr. LORD. Senator, I would have to ask one of the accountants
about that. My guess would be that they were all dividends
received.
Senator COTJZENS. Can someone here explain to me what " dividends accrued " means in that report?
TESTIMONY OP W. A. EUBANK, DETROIT, MICH.
The CHAIRMAN. YOU solemnly swear that you will tell the truth,
the whole truth, and nothing but the truth, regarding the matters
now under investigation by the committee. So help you God.
Mr. EUBANK. I do.
Mr. PECORA. Just one
or two preliminary questions, Mr. Eubank.
Were you at any time connected with the Guardian Detroit Union
Group, Inc. ?
Mr. EUBANK. Yes, sir; from about August of 1930 until along in
the summer of this year.
STOCK EXCHANGE PRACTICES
4435
Mr. PECORA. In what capacity?
Mr. EUBANK. I had charge of the accounting.
Mr. PECORA. NOW, will you answer Senator Couzens' question?
Senator COUZENS. Will you explain what that means on the annual
report, showing the dividends received and accrued?
Mr. PECORA. May I suggest, Senator, so that the record will not
show any confusion as to which Annual Report ^ou mean, that you
are referring to the annual report marked " Exhibit No. 54 "?
Senator COUZENS. Yes.
Mr. EUBANK. For one thing, a bank may have declared a dividend
as of December 31, and mailed their check on December 31, which
we did not receive until the first day we were operating at the beginning of the year.
Senator COUZENS. HOW would you get advice of the accrued
dividends in that event?
Mr. EUBANK. They would advise us by letter.
Senator COUZENS. That they had declared the dividend?
Mr. EUBANK. I will not say in every case. We had a good understanding that the dividends would be paid, and I presume every one
was confirmed by letter. We certainly had a basis for every accrual
that we picked up, and off hand I do not recall a single instance
where I took as an accrual something that we did not receive.
Senator COUZENS. YOU mean that you did not receive later ?
Mr. EUBANK. Within a few days.
Senator COUZENS. It would have been received
Mr. EUBANK. It was just a matter of delay in the mails and getting
the checks in. It is physically impossible sometimes, where a bank
waits until the last day to mail a check, to put it through on our
books the same day.
TESTIMONY OF ROBERT 0. LORD—Resumed
Senator COUZENS. Mr. Lord, I am unable to find in this 1930
report
Mr. PECORA. That is the printed annual report to the stockholders?
Senator COUZENS. The one I have just been talking to Mr. Eubank
about. I am unable to find in this report any reference to the loss
that you reported to the Michigan Securities Commission, and yet
I find this on page 5 of the report under discussion. I find this
language
Mr. PECORA. That is Exhibit No. 36.
Senator COUZENS. I quote [reading] :
The policy of maintaining a highly liquid position is naturally reflected in
reduced earnings. Nevertheless your company earned more than sufficient to
pay during 1930 regular quarterly dividends at the rate of $2 per annum, and
an extra dividend at the rate of $1.20 per annum.
I assume that that is literally correct, according to the report
that you made to the Michigan Securities Commission, but the inference is perfectly plain that in paying those dividends you did
not incur a loss, while the fact is that you did incur a loss.
Mr. LORD. Senator, all these figures come to me from the accounting department. I would have to check them very carefully before
being in a position to testify. I t would appear, on the face of the
4436
STOCK EXCHANGE PRACTICES
statement here, that the reference is made to the dividends themselves, which amounted to $4,930,000 and odd, against dividends received of $5,123,000. I would like to check it. This is all beyond
my scope, and a matter of accounting, and I do not like to answer
the question without knowing that I am accurate in my reply.
Senator COUZENS. While you are looking that up, some of your
staff ought to find this out, because in the 1931 annual report which
you filed with the Michigan Securities Commission you show a
net deficit of $288,930.33, and having paid out $3,085,416.38 in dividends; and in the 1931 printed reports which were mailed to the
public, on page 7,1 find the following (reading) :
For the year ended December 31, 1931, the net earnings of the banks and
trust companies of the Group, after all expenses of operation and after setting
aside adequate reserves for taxes and depreciation of banking quarters and
equipment, but before charge-offs, were $3,887,052.86, or at the rate of $2.51
per share on the 1,544,844 shares of the group stock $20 par value outstanding.
This shows that you had a net earning.
Mr. LORD. Senator, just a minute
Senator COUZENS. But the report to the commission shows a loss.
Mr. LORD. That shows in the banks and trust companies.
Mr. PECORA. That means on the bank units.
Senator COUZENS. I am coming to that. I understand English,
and I understand the inference anyone gets from such a statement
as that. No reference is made there at all to the fact that the Group
as a whole—and this is a Group statement—showed any deficit for
the year 1931. That is perfectly plain. I understand it, and if
I were reading that report as a stockholder of the Group, I would
under no circumstances understand that you had sustained a loss of
over $288,000.
Mr. LORD. That statement refers to the banks and trust company
units in the Group.
Senator COUZENS. Yes; I understand.
Mr. LORD. The report in question is the report of the Group
corporation.
Mr. PECORA. But the annual report to the stockholders was also
a report of the Group, was it not?
Mr. LORD. Yes. I t was the report of the Group.
Mr. PECORA. Why did you then use that language in the 1931
report to the stockholders, that has been read to you by Senator
Couzens ?
Mr. LORD. Mr. Pecora, that language is a perfectly true statement.
Mr. PECORA. It is a half truth, is it not, insofar as it purports to
give a picture of the Group as a whole ?
Mr. LORD. I would not say so. I t certainly was not intended as
a half truth.
Mr. PECORA. I S there anything in this annual report to the stockholders for the year 1931 that informs the stockholders of the &ct
that for the year the Group sustained a deficit or loss of $288,930.33 ?
Mr. LORD. I do not recall any such statement in that report; no.
Mr. PECORA. Why was that information, then, withheld in this
annual report to the stockholders from the Group ?
STOCK EXCHANGE PRACTICES
4437
Mr. LORD. I suppose it never occurred to us to put it in. I do not
know the reason. I would have to go back into the details and
study the figures.
Mr. PECORA. Suppose you go back into the details.
Mr. LORD. I t would take me considerable time to study these
figures.
Mr. PECORA. Was not this report gotten out as a matter of policy
by the group ?
Mr. LORD. Certainly it was gotten out as a matter of policy.
Mr. PECORA. And did that policy include the feature ox not advising the stockholders of the actual deficit or loss incurred by the
company, or the Group, rather, for that year 1931 ?
Mr. LORD. That is a very difficult question to answer, the way you
ask it. Did it include a feature not to do something?
Mr. PECORA. I asked it advisedly and purposely in that form, because I want your answer.
Mr. LORD. I do not know how to answer a question of that kind.
Mr. PECORA. I am assuming that there was some reason for not
telling the stockholders of the group, in the annual report of the
Group that was issued to them, that the company, for the year
1931, incurred a loss or deficit of over $288,000. Is that a false
assumption ?
Mr. LORD. I would not know whether it was or not.
Mr. PECORA. If you would not know, who in the world would
know?
Mr. LORD. Will you repeat the question, please ?
(The reporter read the pending question.)
Mr. LORD. I do not know of any reason for not telling them.
Perhaps it should have been put in the report.
Mr. PECORA. Why was it not put in the report ?
Mr. LORD. I do not know why it ^as not.
Mr. PECORA. If you do not know, who would know? You were
the executive head of the group. Now, if you do not know, who
would know?
Mr. LORD. The report was sent out after a full discussion of the
details of it and the form of it, by the executive committee.
Mr. PECORA. And you participated in such discussion.
Mr. LORD. I assume I did; yes, sir.
Mr. PECORA. Then, why can you not tell us why the deficit incurred for the year was not stated in the annual report issued by the
Group to its stockholders ?
Mr. LORD. I do not know why it was not.
Senator ADAMS. Mr. Lord, I had assumed that the purpose of the
formation of the group was to make profits. I t had no other
purpose than that?
Mr. LORD. I suppose that is the purpose of every business.
Senator ADAMS. Would it not seem, then, that the accomplishment,
or failure to accomplish the specific purpose would be one of the
things the stockholders would be interested in?
Mr. LORD. I would think so; yes. Probably we were at fault in
not including that detail.
Mr. PECORA. Would it not also seem that there was a studious
concealment
175541—34—PT 9
16
4438
STOCK EXCHANGE PRACTICES
Mr. LORD. NO, sir.
Mr. PECORA (continuing). From the stockholders of the Group,
of the fact that the Group, in the year 1931, operated in a. fashion
that incurred a loss or deficit of over $288,000?
Mr. LORD. I would certainly say not, sir.
Mr. PECORA. D O you think that if the Group, for the year 1931,
had made a substantial profit, that the amount of that profit, and
the fact of the making of that profit, would not have been mentioned
in the annual report to the stockholders?
Mr. LORD. I do not know whether it would have been or not.
Mr. PECORA. Oh!
Mr. LORD. But there certainly was no effort at concealment.
Senator COTTZENS. Mr. Lord has said there was no studious attempt not to inform the stockholders, and yet for 3 successive years,
1930, 1931, and 1932, the annual report to the Michigan Securities
Commission showed substantial losses, and no report was ever made
to the stockholders to that effect, for 3 successive years. For the
year 1932 your, report showed a loss of $714,331.26, and no report
was ever made to the stockholders, nor for the two previous years.
Mr. LORD. There was no annual report made to the stockholders
Senator COTJZENS. Certainly not; and yet you say there was no
studious attempt to keep from the stockholders the fact that for
three successive years you had sustained a loss.
Mr. PECORA. That is the fact, is it not, Mr. Lord ?
Mr. LORD. A S you state it, it is the fact, but there was no studious
attempt to deceive the stockholders or anybody else.
Mr. PECORA. And you are utterly unable to give this committee a
single reason why, in the annual reports issued to the stockholders
for each of those three years, 1930,1931, and 1932, no mention whatsoever was made of the loss sustained by the Group in each one
of those years?
Mr. LORD. I do not know why it was omitted.
Senator ADAMS. I think, Mr. Pecora, we can infer why. I think
we do not advertise our losses.
Mr. PECORA. I would say that is a studious concealment.
Senator ADAMS. Yes.
Mr. PECORA. But this witness denies that.
The CHAIRMAN. For each of those years the group paid a
dividend.
Mr. LORD. Yes, sir.
Senator COTJZENS. Was
not a part of the consideration given to
this subject the fact that in nearly all of your units there was a lot
of the Group stock up as security for loans?
Mr. LOKD. No, sir; that was not so. I never heard the question
of leaving out those figures discussed at any time by anybody.
Senator COTJZENS. A S a matter of fact, the units in that Group
did have a lot of the Group stock as security for loans.
Mr. LORD. That was explained yesterday, Senator Couzens.
Senator COUZENS. SO, the publication of a statement showing that
the group was operating at a loss for 3 successive years would
obviously affect the value of the security back of these loans, would
it not?
STOCK EXCHANGE PKACTICES
4439
Mr. LORD. I do not know.
Senator COTJZENS. Here is a trained banker who does not know
Mr. LORD. Senator, it might have.
Mr. PECORA. Mr. Lord, let me ask you who actually drafted and
prepared the text of the printed report issued by the* group to its
stockholders for the year 1930.
Mr. LORD. I do not know, sir. I think several people probably
took part in it.
Mr. PECORA. Who were those several people?
Mr. LORD. I probably took part in it; Mr. Patterson probably took
part in it; Mr. Kanzler may nave taken part in it. Other members
of the executive committee may have taken part in it.
Mr. PECORA. If you took part in it, it would seem to me that you
ought to know the part you took in it. In taking the part which
you took in it, can you not tell this committee why you did not include in the report, or suggest that there be included in the report to
the stockholders, a mention of this loss or deficit?
Mr. LORD. Mr. Pecora, all of the figures that came to us for use
in the report came from the accounting department.
Mr. PECORA. It was that same accounting department that supplied
the figures embodied in the report to tha Michigan Securities Commission for that year?
Mr. LORD. That is true.
Mr. PECORA. NOW, you apparently had the same sets of figures
coming from the same source, for the purposes of preparing, respectively, the annual report to the stockholders and the annual
report to the Michigan Securities Commission. Why was not the
outstanding fact as to whether or not the Group operated at a profit
or at a loss for the year, embodied in the report to the stockholders ?
Mr. LORD. The committee which prepared this report were furnished with these figures which were in the report. Why they were
not furnished with those figures also showing further details, I do
not know.
Mr. PECORA. Why did this committee, or the group of persons who
prepared the annual report to the stockholders for the year 1931,
say specifically to the stockholders in the report for that year, the
statement that appears on page 1 of the printed report, reading as
follows [reading]:
For the year ended December 31, 1931, the net earnings of the banks and
trust companies of the Group, after all expenses of operation and after setting
aside adequate reserves for taxes and depreciation of banking quarters and
equipment, but before charge-offs, were $3,887,052.86, or at the rate of $2.51
per share on the 1,544,844 shares of the group stock $20 par value outstanding?
Mr. LORD. Why did they say that?
Mr. PECORA. Yes.
Mr. LORD. Because, I take it,
Mr. PECORA. I t was also the
it was the fact.
fact that the Group as a whole, for
the year, operated at a loss. Why was not the loss mentioned, that
the Group as a whole sustained, in view of the fact that you mentioned specifically, in dollars and cents, a profit accruing to the
Group from only a part of its business, namely, the part represented
by the units that were banks ?
Mr. LORD. Mr. Pecora, this report is broken down so that it contains later on a reference to the losses in the affiliates, and the thing
4440
STOCK EXCHANGE PRACTICES
was divided in two. I do not know why these exactly similar figures
were not used. I think it was because it was felt it was more to the
interest of the stockholders, and they were more interested in knowing the earnings of the banks and trust companies which constituted the principal assets of that company.
Mr. PECORA. Well, now, Mr. Lord, don't you think the stockholders
were more interested in knowing whether or not the group as a
whole conducted its business at a profit or a loss for the year ?
Mr. LORD. I t is a natural question for you to ask. Yes; it is the
natural thing that they should.
Mr. PECORA. Why weren't they told, then, whether or not the
group operated at a loss for the year?
Mr, LORD. Mr. Pecora, I don't know. But I want to say this, that
the men in this outfit are not men that indulge in studious concealment, and I do not like that inference, you know the men that are
in this group.
Mr. PECORA. I don't know them except as I have met them here,
and it wouldn't make any difference whether I did know them or
not. I am being guided by the facts and not by personalities.
The CHAIRMAN. Did the losses come from the banks or the other
members of the group ?
Mr. LORD. The losses that are referred to to create the deficit are
some of the expenses of the Group Corporation.
The CHAIRMAN. The expenses of the Group Corporation. That
included all banks as well as the trust companies?
Mr. LORD. NO ; of the corporation itself.
Mr. PECORA. Thas is, the group itself and all of its units ?
Mr. LORD. Yes.
Mr. PECORA. Mr.
The CHAIRMAN.
Chairman, it is now about 1 o'clock.
The subcommittee will take a recess until 2
o'clock p.m.
Mr. LORD. Mr. Pecora, do you want me back again?
Mr. PECORA. Mr. Stalker, I am through with you.
Mr. STAiiKER. I thank you very much.
(Thereupon, at 1:05 p.m., Friday, Dec. 22,1933, the subcommittee
recessed until 2 p.m. the same day, at the same place.)
AFTER RECESS
The subcommittee resumed at 2 p.m. on the expiration of the
noon recess.
The CHAIRMAN. The subcommittee will resume. You may proceed,
Mr. Pecora.
TESTIMONY OF ROBERT 0. LORD—Resumed
Mr. PECORA. Mr. Lord, the other day when you were on the witness stand you identified photostatic copy of what purported to be
the proposed report of stockholders for the year 1932 that it was
intended to issue by or on behalf of the Guardian Detroit Union
Group, Inc.
Mr. LORD. I do not know that that was more than a few preliminary paragraphs from that report, Mr. Pecora.
STOCK EXCHANGE PRACTICES
4441
Mr. PECORA. Yes; it was part of the report that it was contemplated to issue to the stockholders of the Group for the year 1932,
~was it not?
Mr. LORD. It was some paragraphs in preparation of the report,
certainly.
Mr. PECORA. Yes. Now the opening statement, or the first paragraph in that proposed report, which is addressed " To the Stockholders Guardian Detroit union Group, Inc." reads as follows:
The liquidity of our banking institutions has continued to improve notwithstanding the conditions existing in the year 1932.
Was that statement an accurate statement?
Mr. LORD. I would have to figure it out.
Mr. PECORA. Well, do you not know generally whether the liquidity
of the banking units in the group continued to improve throughout
the year 1932, notwithstanding the general conditions that existed
in that year?
Mr. LORD. I know definitely that the Guardian National Bank of
-Commerce continued to improve. I would say that the Trust Co.
did not.
Mr. PECORA. N O ; but the statement here is that—
The liquidity of our. banking institutions has continued to improve, notwithstanding the conditions existing in the year 1932.
Now that was intended to refer to all of the banking units of the
Oroup, was it not?
Mr. LORD. Either that or to take the aggregate figures.
Mr. PECORA. What do you mean by taking the aggregate figures?
Do you mean giving the net result of all the banks as a group?
Mr. LORD. In the annual reports previously there was usually included a statement of the aggregate of all the resources and liabilities of the bank. Mr. Pecora, let me say this, that that statement
or that report was never sent to the stockholders.
Mr. PECORA. I know that.
Mr. LORD. And was simply material put down to go over by the
•executive committee, and I do not see that what was said in that is
particularly pertinent, because such statement, whether true or not
true, did not go to any stockholders.
Mr. PECORA. Well, while it might not be pertinent in some respects,
it might be pertinent as evincing or evidencing a policy on the part
of the officers and directors of the group with regard to thQ kind
of information that they would give to their stockholders.
Mr. LORD. I would not think so, Mr. Pecora. That particular
sentence might have been prepared by a single individual. I do not
know who prepared that.
Mr. PECORA. Well; as a matter of fact, as you now recall it had
the liquidity of the bank units of the group continued to improve
throughout the year 1932?
Mr. LORD. As I recall it, taking the aggregate figures, it showed a
better liquidity statement than the year previous. That is my recollection.
Mr. PECORA. HOW much better do you think it was ?
Mr. LORD. I do not recall. That is my impression.
4442
STOCK EXCHANGE PRACTICES
Mr. PECORA. NOW it appears from the annual report for the year
1930 filed by the group with the Michigan Securities Commission*
and which has been marked in evidence " Committee's Exhibit No.
54 ", that outside of dividends that were paid to the stockholders
for that year by the group, the largest disbursement is charged to<
the item of salaries, namely $86,575.95. I notice that in the annual
report filed with the securities commission for the year 1931 the
item of expense attributed to salaries had increased to $136,624.24,.
but, that the deficit for the year 1931 reported to the securities commission had increased to the sum of $288,930.33, as compared with
the deficit of the preceding year of $39,000 plus. As deficits were
growing the salaries to the.officers of the group were being increased?
Mr. LORD. Mr. Pecora, the salaries, the individual salaries, were
not increased. At the inception of the group many officers contributed tiiiie and effort to group activities and their salaries were
paid by the particular units with which they han been connected,
which was not a fair allocation of the salaries. For instance, as I
recall it, the first year of the group my own salary was paid, if I
recollect, entirely by the bank. As a matter of fact, I think that
the total number of employees in the group in 1932 was considerably
less than in 1930, and so far as individual salaries were concerned,,
there were certainly no increases. They were Cutting salaries.
Mr. PECORA. NOW, let us see about that. The annual report filed
with the commission for the year 1932, marked here as " Committee
Exhibit No. 56", shows a salaries expense item of $161,280.65, as
compared with $136,000 and odd for 1931 and $86,000 and odd for
1930.
Mr. LORD. That is what I tried to explain. J think that was
probably the allocation of salaries as between a particular unit with
which an individual working for the group may have been connected also. Now, I cannot give you the detail. I think that either
Mr. Eubank or Mr. Patterson can tell you more about those salaries
than I can. But so far as those individual salaries were concerned
we were taking cuts. Would it not clarify it if you asked Mr..
Eubanks about these salaries—how they were handled?
Mr. PECORA. Well, I will ask him a number of questions later on.
I just wanted to see how much you, as president of the group, could
tell us about these things. Now, I notice in the annual report for
the year 1930 filed with the securities commission, an expense item
of interest paid $121.88. Whereas in the annual report filed for
the year 1931 with the commission the item of expense of interest
paid is $18,649.83; and that item of expense of interest paid for
the year 1932, according to the filed report, was $722,164.59. What
was that interest paid on in the year 1932 to that aggregate amount
of $722,000?
Mr. LORD. On the obligations of the Group Co., which I believe L
testified to in connection with the endorsements of Mr. Edsel B.
Ford and Mr. Mott in connection with the funds that the Ford Motor*
Co. loaned to the Group Co., and other loans of the Group Corporation, Mr. Pecora.
Mr. PECORA. In other words, during the year 1932 the borrowings
that were contracted by the group because of business conditions, or
the condition of its own business, were such that nearly three quar
STOCK EXCHANGE PRACTICES
4443
ters of a million dollars in interest charges had to be paid, on those
borrowings for that year; is that right?
Mr. LORD. I would say so; yes, sir.
Mr. PECORA. And in that year, despite that fact, the group paid
dividends to its stockholders in the aggregate sum of $375,134,.
according to the filed report for the year 1932 ?
Mr. LOKD. Yes, sir.
Mr. PECORA. And there
was a deficit that year, according to this
filed report, of $714,331.26?
Mr. LORD. Yes, sir.
Mr. PECORA. NOW will
you tell the committee, please, why in the
face of these conditions the group paid dividends that year of
$375,000 plus, when it had a deficit of $714,000 for the year?
Mr. LORD. Mr. Pecora, I think to a gjreat extent the group directors,
were influenced in the payment of dividends by the general fear and
unrest and the conditions that were existent at that time. In the
matter of the payment of these dividends, before that April dividend, which was the only one paijd in 1932—before the payment of
that dividend there was a very full discussion with the banks that
were creditors of the Group Co., and it was upon their advice that
that small payment was made. They felt that it was better for the
entire situation that the Group Co. should pay that dividend, in view
of the very serious unrest and unsettlement and fear in the city of
Detroit.
Mr. PECORA. Well, will you explain that more in detail ? Instead
of using general terms such as " Because of the general fear ", tell
us exactly what you mean by that.
Mr. LORD. Mr. Pecora, there were rumors up and down the street
of bank troubles in Chicago, New York, New Orleans, Cleveland^
and particularly in Detroit, in our own city.
Mr. PECORA. Were they mere rumors, or were they observation^
or comments based on fact?
Mr. LORD. They were what I should consider as rumors.
Mr. PECORA. Not based on fact?
Mr. LORD. Well, very few of them.
Mr. PECORA. Which were based on fact ?
Mr. LORD. AS to the condition of the Guardian National Bank of
Commerce, as to it closing its doors; as to a million things that were
absolutely not based upon fact.
Mr. PECORA. I asked you which were based on fact?
Mr. LORD. I do not know any that were based on fact. You
know what rumors are.
Mr. PECORA. I know that very often rumors come pretty near hitting the bull's eye. I wondered if any of these rumors were in that
category.
Mr. LORD. I do not think they did, Mr. Pecora.
Mr. PECORA. Well, you said that, because of fears produced by
these rumors, the board of the group declared and paid out dividends,
amounting to $375,000 approximately in the year 1932, or for part
of that year, in the face of a business that resulted in that year in a
total deficit of $714,000 plus. In other words, you are telling u&
that this dividend was paid in the year 1932 because of rumors. I s
that so?
4444
STOCK EXCHANGE PRACTICES
Mr. LORD. Very largely.
Mr. PECORA. DO you think that is a safe basis upon which to
declare dividends?
Mr. LORD. Mr. Pecora, the dividend was paid in order to stabilize
the entire situation.
Mf. PECORA. HOW was it being stabilized by the payment of these
dividends?
Mr. LORD. That was the judgment not only of our own directors
but of the banks to whom the Group Co. was indebted.
Mr. PECORA. NOW, how were these conditions stabilized by the
payment of these dividends?
Mr. LORD. I t increased confidence in the institutions.
Mr: PECORA. In order to pay these dividends the group had to
have dividends declared by the unit banks ?
Mr. LORD. Yes, sir.
Mr. PECORA. Then
the dividend declaration by the group was
actuated by a desire to allay fears on the part of depositors with
respect to the condition of the banks, is that right?
Mr. LORD. Allay the fears of the depositors—I do not know
whether in respect to the condition of the banks, but certainly allay
the fears of the depositors in respect to the condition of all banks.
Mr. PECORA. Particularly their banks ?
Mr. LORD. Yes; I assume so.
Mr. PECORA. All right. Then the policy adopted by the board,
so far as I am afole to follow you in your present statement of it,
was that the directors of this group in order to inspire or promote or
encourage a faith on the part of the depositors in their banks was
one that operated, as a matter of fact, to weaken the banks through
the declaration and payment of unwise dividends; is that not so?
Mr. LORD. I would say, Mr. Pecora, that a bank would be very
much more weakened, by an increase in the velocity of a run or the
speed of withdrawals than it would by the declaration of a moderate dividend.
Mr. PECORA. Then in order to prevent those runs or to prevent
an acceleration of any run that migh have been started the banks
were weakened financially through the declaration of unwi^S dividends ? Is that not so ?
Mr. LORD. I would not say that they were unwise dividends.
Mr. PECORA. Well, they were unwise to the extent that they were
not dictated by earnings?
Mr. LORD. I do not recall which units paid the dividends that
year.
Mr. PECORA. Was not this a situation where the banks needed a
blood transfusion, and the kind of blood transfusion they got was
by pumping ice water into them?
Mr. LORD. I would not say so, sir. The stockholders pumped
$27,000,000 into the situation. I do not call $27,000,000 ice water.
Mr. PECORA. NOW as a matter of fact the condition of the banks
could be described as anemic at that time, could it not ?
Mr. LORD. Well, I would not use that word. If you want to use
it—the condition of a very large percentage of the banks in this
country was anemic at this time.
Mr. PECORA. Well, that included the banks under your jurisdiction
and supervision?
STOCK EXCHANGE PRACTICES
4445
Mr. LORD. And elsewhere.
Mr. PECORA. And to relieve them of this anemic condition their
resources were drained to the extent of the dividends that they
declared and paid?
Mr. LORD. I would rather say that they paid out a certain amount
in dividends to improve the condition than to speak of it as draining
the resources.
Mr. PECORA. If it had not been for the declaration of those dividends for the purposes that you have described here there would have
been that much more money available for the depositors, would
there not?
Mr. LORD. Presumably.
Mr. PECORA. I will now call Mr. Eubank.
Mr. LORD. DO you want me to stay here?
Mr. PECORA. Yes.
TESTIMONY OF W. A. ETIBANK—Resumed
Mr. PECORA. HOW long, Mr. Eubank, were you connected with the
Guardian Detroit Union Group, Inc.?
Mr. EURANK. From about August 1930 until, I believe, it was the
latter part of September this year.
.Mr. PECORA. YOU were an auditor?
Mr. EUBANK. NO, sir.
Mr. PECORA. What was your position specifically?
Mr. EUBANK. I had charge of the accounting of the
holding company. I did not attempt to audit, though—to go out and audit units,
if that is the inference.
Mr. PECORA. YOU were in charge of its accounting system?
Mr. EUBANK. The assembly of the figures; yes.
Mr. PECORA. A S the man in charge of the accounting department
of the Group did you compile or gather or marshal the facts and
figures that were embodied or were intended to be embodied or incorporated in the annual report for the year 1930 that was issued to
the stockholders of that group and a copy of which report is marked
here as " Committee's Exhibit No. 36 "?
Mr. EUBANK. I am not absolutely certain that I had the absolute
assembly of them, but I think I assisted that year. I am positive
about '31 and '32.
Mr. PECORA. YOU did have charge of the preparation or compilation of the figures for the years 1931 and 1932?
Mr. EURANK. And I also assisted in the assembly of the figures for
'31. At that particular time, I was fairly new at the work, having
been
Mr. PECORA (interposing). You mean for 1930?
Mr. EUBANK. For 1930; pardon me. In 1930,1 was new at it, and
there were some things that I did not comprehend. I was afraid to
assume entire responsibility. At that time I assisted.
Mr. PECORA. And did you render similar services in connection
with the preparation and filing of the annual reports that were filed
in behalf of the group with the Michigan Securities Commission
for the years 1930,1931, and 1932 respectively?
Mr. EUBANK. I believe I did; quite sure.
4446
STOCK EXCHANGE PRACTICES
Mr. PECORA. What figures in general did you compile and give to
the officers or directors of the group for the purpose of making not
only the reports to the Securities Commission but also the reports to
the stockholders?
Mr. EUBANK. May I explain the nature of the annual report first?
I think that will clear up one thing.
Mr. PECORA. Which annual report, the one for the stockholders or
the report to the Securities Commission?
Mr. EUBANK. The report to the Securities Commission.
Mr. PECORA. All right.
Mr. EUBANK. The Group Co. had approximately 35 or 40 subsidiaries, each of which had to file a separate report to the secretary
of state. The holding company also filed its report to the secretary
of state, which did not include any of the figures of the subsidiaries.
The report was on its own figures. In the annual report to the
stockholders the Group Co. is one component in an adding machine
recap for the whole works. It is a consolidated picture. In other
words, in the assembly of earnings figures, for instance, the Group
Co. is treated the same as the Guardian National Bank of Commerce. I t is just one more unit.
Mr. PECORA. In other words, the Group Co.'s report to the Securities Commission and the Group Co.'s report to its stockholders were
based upon the same set of figures that you compiled and submitted
to the officers and directors of the Group?
Mr. EUBANK. It would be physically impossible to make the figures
to the stockholders in a consolidated statement identical with the
figures in the annual report to the secretary of state, as a matter
of mechanics.
Mr. PECORA. Why not? Why couldn't it be done?
Mr. EUBANK. I mean the summary of the figures. For the reason
that in compiling the figures for the consolidated report it is an
adding-machine run of all the units, including the holding company.
Mr. PECORA. Isn't that true of the report to the stockholders as
well as the report to the Securities Commission?
Mr. EUBANK. I am not clear on that.
Mr. PECORA. Well, now, let me put it another way: The Michigan law required the group as a separate corporate entity to file
annually with the Michigan Securities Commission a report showing
finally the net profits or net loss?
Mr. EUBANK. That is right.
Mr. PECORA. And those figures were compiled and presented to the
officers and directors of the group in order to enable them to make
out their annual report required by the laws of the State of
Michigan ?
Mr. EUBANK. Yes,
Mr. PECORA. NOW,
sir.
in the making of a report by the Group to its
stockholders, would not the same facts, the same figures, be set
forth?
Mr. EUBANK. The same figures would be set forth if w§ had the
Group Co.'s statement in the annual folder as a separate statement.
Mr. PECORA. Didn't you have the Group Co. report issued as a
separate document from the statement to its stockholders ?
Mr. EUBANK. The Group Co. alone?
STUCK EXCHANGE PKA0T1CES
4447
Mr. PECORA. Yes.
Mr. EUBANK. In the
publication of the Group Co.'s own figures it
-would not be possible to show the balance sheets of banks and trust
companies, unless
Mr. PECORA (interposing). Would it be possible to show the net
profit or loss for the year?
Mr. EUBANK. Yes.
Mr. PECORA. Of the Group as a corporate entity?
Mr. EUBANK. That is right.
Mr. PECORA. And that figure would be the same shown in the
.annual report filed by the Group with the Securities Commission,
would it not?
Mr. EUBANK. I don't see how it is possible. I explained that an
earning of a bank could never be a part of an earning of the holding
company itself. The Group Co. never took into its earnings a bank's
Mr. PECORA. Well, it could only take into its earnings that proportion or part of the bank's earnings that the Group received as
dividend on its stock?
Mr. EUBANK. That is correct.
Mr. PECORA. NOW, when the Group issued a report annually to its
stockholders did you or did you not compile figures, as the man in
charge of the accounting of the Group, and present those figures to
the officers and directors of the Group so that the officers and directors would be enabled to see whether or not the Group for the year
showed a profit or loss?
Mr. EUBANK. I think we did.
Mr. PECORA. YOU did do that, didn't you ?
Mr. EUBANK. I am quite sure of it; yes.
Mr. PECORA. DO you know why those figures were not included
in any annual report issued by the Group to its stockholders ?
Mr; EUBANK. Well, I will give you my opinion, but I have no
reason to—I am not trying to confuse it with any opinions of others.
I don't think it would be a sensible thing to do under the circumstances.
Mr. PECORA. YOU don't think what would be a sensible thing to
do?
Mr. EUBANK. TO publish individual statements of the subsidiaries
along with the banks.
Mr. PECORA. I didn't ask you anything about that.
Mr. EUBANK. I don't comprehend you, I must confess. I have
explained that the figures of the Group Co. are one set of figures and
"the individual banks are separate figures.
Mr. PECORA. I will try to get it in another way, Mr. Eubank. I
have before me the exhibit known as " Committee's Exhibit No. 55 "
of this date, which is a copy of the Annual Report filed by the group
with the Michigan Securities Commission for the year 1931, and it
shows a deficit for the year suffered or incurred by the group as a
separate corporate entity of $288,930.33. You are familiar with
-that'fact, are you not?
Mr. EUBANK. Yes, sir.
Mr. PECORA. NOW, did
you, as the man in charge of the accounting, for the group, compile and submit to the officers and directors
4448
STOCK EXCHANGE PRACTICES
of the group figures that showed this deficit of two hundred and
eighty-eight thousand and odd dollars that was set forth in the annual report for that year which was filed by the group with the
securities commission?
Mr. EUBANK. Yes, sir.
Mr. PECORA. Did you also
compile, prepare, or submit to the officers and directors of the group the figures which would have enabled that group, through its officers and directors, in its annual
report to its stockholders, to show that deficit that was reported in
the report filed with the securities commission ?
Mr. EUBANK. Yes,
Mr. PECORA. That
sir.
being the case, do you know why, in its annuaL
report to the stockholders for the year 1931, that deficit of $288,000*
plus is nowhere set forth ?
Mr. EUBANK. I would not say that I have their reasons. I have
my reasons.
Mr. PECORA. Give us what you think were the reasons.
Mr. EUBANK. I t would have had a reactionary effect on the public
and might have caused a collapse of the banking institutions we
were operating.
Mr. PECORA. I think that is a very sensible reason—that is, I think
it is a very accurate reason; but this is the first time I have been
able to get it from anybody, and I thank you very much for it,.
Mr. Eubank.
Now I want to resume my examination of Mr. Lord.
TESTIMONY OF ROBERT 0. LORD—Besumed
Mr. PECORA. Mr. Lord, did you hear the testimony just given by
Mr. Eubank?
Mr. LORD. I did, sir.
Mr. PECORA. Did you
hear the reason that he gave as his opinion,
of why the officers and directors of the Group in the annual report
which they caused to be issued to the stockholders for the year
1931 failed to make any mention of the fact that the company for
the year 1931 sustained a deficit of over $288,000?
Mr. LORD. Mr. Eubank's reason ?
Mr. PECORA. Yes.
Mr. LORD. Yes; I heard it.
Mr. PECORA. What would you
say about that? Do you think he
was mistaken ?
Mr. LORD. He gave that as his opinion.
Mr. PECORA. Yes. Do you think his opinion was sound?
Mr. LORD. I t was a good reason.
Mr. PECORA. DO you think the opinion was sound ? Or let me
put it another way: Do you think his opinion coincided with the
fact?
Mr. LORD. Mr. Pecora, that question was never discussed with the
directors.
Mr. PECORA. I am discussing it now, Mr. Lord.
Mr. LORD. I am speaking about those figures. Those figures were
never discussed, and I cannot say whether that was the fact or the
opinion of the board. The annual report figures which were fur
STOCK EXCHANGE PRACTICES
4449
nished to the committee for incorporation in their report were the
figures that were included in the report.
Senator COUZENS. That is not the testimony of Mr. Eubank.
Mr. LORD. I don't recall
Mr. PECORA (interposing). Mr. Eubank's testimony boils down to
this, that the figures that he presented as the man in charge of the
accounting for the company—by " the company " I mean the Group
Co.—to the officers and directors of the Group showing the condition
of business for the year 1931 included figures which showed a deficit
of $288,000 plus. You heard his testimony to that effect?
Mr. LORD. I heard his testimony, and I didn't think at the time
that he understood the question, because I do not believe that that
annual report was ever discussed by any committee or any board.
Mr. PECORA. Well, how in the world was it gotten up if it was
not gotten up as a result of discussion by anybody ? Was there any
conservatory of a peculiar kind attached to the offices of the Group
where these reports grew and sprouted by themselves and took the
form in which they appear in the printed report that is in evidence
here?
Mr. LORD. I would say no to that.
Mr. PECORA. Because, if there was, I would like to know what kind
of fertilizing material was used on that soil. How were these reports
prepared ?
Mr. LORD. Which are you speaking of, these reports here?
Mr. PECORA. These annual reports to the stockholders.
Mr. LORD. I think I have answered that quetsion. Those reports
were prepared by individuals.
Mr. PECORA. Who were the individuals?
Mr. LORD. Several individuals from the accounting department,
myself, other officers of the institution working on them. They were
then presented for discussion and consideration by the executive
committee.
Mr. PECORA. Well, what discussion was had by any of the executive
committee which led to the decision not to mention in the reports
to the stockholders the deficit that had been incurred for the year?
Mr. LORD. I don't think there was any discussion. I don't recall any.
Mr. PECORA. What did the discussion relate to? If it did not
relate to the matter of showing a profit or loss, whatever it might
have been, for the year, what in the world did it relate to?
Mr. LORD. The earnings of the unit institutions, to their statements of condition, to the general facts regarding business, and the
business of the organization.
Mr. PECORA. Aren't all of those things summarized in a deficit
or profit, as the case might be?
Mr. LORD. I don't think your question is clear, Mr. Pecora.
Mr. PECORA. What was the principal purpose of making any report
annually to the stockholders of the group?
Mr. LORD. TO advise the stockholders of the condition of their
Mr. PECORA. And to advise them of the condition of the company
and the business of the cpmpany, wasn't it?
Mr. LORD. I would think so.
4450
STOCK EXCHANGE PRACTICES
Mr. PECORA. And the principal thing that a stockholder would be
interested in knowing is whether or not his company conducted
business at a profit or at a loss for the year, is it not?
Mr. LORD. I think it was one of the things he should know; yes*
Mr. PECORA. Then why wasn't he told that in the annual report,,
if you think it is one of the things he should have known?
Mr. LORD. Mr. Pecora, I have attempted this morning to answer
that question.
Mr. PECORA. I don't think you have answered it yet. You have
not yet given a single reason why no mention was made of the deficit
incurred in any one of these years in the annual reports issued to
the stockholders, have you?
Mr. LORD. I have not.
Mr. PECORA. Then why do you say you have told me that already?
Mr. LORD. I said I had attempted to answer your question.
Mr. PECORA. NOW will you please make another attempt, and
this time see if you can't answer it?
Mr. LORD. Will you please repeat the question?
The SHORTHAND EEPORTER (reading):
Then why wasn't he told that in the annual report, if you think it is one
of the things he should have known?
Mr. LORD. Mr. Pecora, I dont' know, unless the form of the report
as it was prepared by the committee was the form in which they
thought it should be prepared.
Now, let me say this, that if these reports did not include information that the stockholder should have, we were unquestionably subject to criticism. I will admit that.
The CHAIRMAN. These people who prepared the report knew about
the deficit, didnt' they ?
Mr. LORD. I don't know, at the time when those reports were prepared, but I assume they did, Senator.
The CHAIRMAN. Did you know the deficit?
Mr. LORD. I don't know that I did at the time of the preparation of
the annual report. I don't know when these reports were filed and
when I saw that statement.
Senator COTJZENS. YOU do not agree with Mr. Eubank, then, that
prepared this statement and
Mr. LORD (interposing). Not in that form. He may have had a
lot of different figures that would contain the same information. I
don't recall ever seeing a statement presented at an executive committee meeting in that form or in that general form.
Mr. PECORA. Well, did you ever see a report, compilation of figures,
that showed definitely that the company for the year had operated
at a loss?
Mr. LORD. I assume I did; yes, sir.
Mr. PECORA. IS that anything more than an assumption?
Mr. LORD. Well, yes; I did. I t was my duty to do it.
Mr. PECORA. If you did, why didn't you, as the executive head of
the company and as the man who signed the report to the stockholders, see to it that mention of the deficit was made in the report issued
to the stockholders?
Mr. LORD. I suppose I should have, Mr. Pecora.
STOCK EXCHANGE PRACTICES
4451
Mr. PicoRA. I know you should have. I agree with you. That is
the whole trouble, that you should have. But I am asking you why
you did not?
Mr. LORD. Because I though the information contained in the
report was the pertinent information to the stockholders of the
Group.
Mr. PECORA. Why, in the last few minutes you told this committee
under oath that you felt that the stockholders should have had this
information about the deficit.
Mr. LORD. I do now.
Mr. PECORA. Oh, you did not think so then?
Mr. LORD. I did not; ^LO. I do now. I think
the stockholder
should have every bit of information about his corporation that is
possible to give him.
Mr. PECORA. Why didn't you think the stickholders should have
had the information concerning the deficit at the time these annual
reports were sent to the stockholders?
Mr. LORD. Because I thought the information we gave him was the
information he should have had.
Mr. PECORA. Why didn't you think then that the information he
should have had would have been such as would have told him that
the company had operated at a deficit for the year ?
Mr. LORD. I thonght we did give him the information that he was
entitled to have at that time.
Mr. PECORA. NOW, did you, at that time, think he was entitled to
the information that showed the company operated at a loss?
Mr. LORD. I did not, at that time.
Mr. PECORA. Why didn't you ?
Mr. LORD. Because I thought we gave him the information that
showed the picture accurately, showed the earnings of the units,
and the mere fact that the corporation of itself had additional expenses, the statement that was made in the annual report was a statement of the unit earnings, and we did not attempt to cover the
detailed operating set-up.
Mr. PECORA. NOW, Mr. Lord, in view of that answer that you have
just made I am going to read something to you. What I want to
read to you is this extract from letter written by the then chief
national bank examiner for the seventh district, that included banks
in Michigan, to the Comptroller of the Currency under date of
June 14, 1932. This is the extract:
The Guardian Group—
Referring to the Guardian Detroit Union Group, Incorporated—
was somewhat of a 'promotion scheme, and1 in order to show satisfactory
earnings in the holding company dividends were declared far beyond the
point of conservation and losses were not taken in the banks. They have
always been extremely reluctant to charge off losses and have always desired
that they be taken from earnings, but the record of earnings of these banks
is most unsatisfactory, and this plan would not permit the elimination of many
losses.
It is very apparent that Mr. Lord of the Guardian Group is not a banker
and he never has been and never will be one. He is more of a glad-hand
promotion type, and he always chooses the path of least resistance, which
has now created the present problem with the Group.
4452
STOCK EXCHANGE PRACTICES
Do you think those comments were too severe, unwarranted?
Mr. LORD. DO you think it is for me to answer that?
Mr. PECORA. I would like to have you answer it, in view of the
philosophy you have expressed here.
Mr. LORD. I don't think I should be asked to answer a criticism
like that.
Mr. PECORA. I think that is all of this witness at this time.
Mr. LORD. May I say a few things ?
Mr. PECORA. AH right.
Mr. LORD. In the testimony of yesterday there was considerable
comment on the directors' loans in the Guardian National Bank of
Commerce. I would like to give for the benefit of those directors a
little information as to the status of those loans last summer.
Senator COUZENS. Let us find out whether those records come from
the bank or from the individual statement of the borrower.
Mr. LORD. They come from information received from the
individual.
Senator COUZENS. And are not the records of the bank?
Mr. LORD. They are not, because the records of the bank are not
available to any director.
Senator COUZENS. I just want to make the record clear.
Mr. LORD. This information was compiled by conferring with
these directors.
The CHAIRMAN. It is really in the nature of hearsay ?
Mr. LORD. I would not call direct contact with a director hearsay.
The CHAIRMAN. He is not making the statement; you are making
the statement.
Mr. LORD. I am making the statement based on information
received from the director.
Senator COTJZENS. I thought yesterday you gave us a long list of
directors who have paid off.
Mr. LORD. Yes; but this rather consolidates some of the information which I thought would be of interest to this committee. The
newspapers came out with substantial-sized figures of directors'
loans. I think in justice to those directors this committee should
have the additional information. If you don't care to admit it, I
will not give it.
Senator COUZENS. I am perfectly willing that the directors should
be treated justly, but I understood yesterday that you gave for the
record a long list of directors who had paid.
Mr. LORD. I gave a list of some of the reductions, Senator.
Senator COUZENS. YOU are not going to repeat those?
Mr. LORD. NO, sir; I am not. On November 9 there were 62
directors in the group. Of those 25 had no loans at all. At the
time those loans were originally made all were secured by ample or
more than ample collateral, except in 1 or 2 cases where the loan had
been made on a satisfactory statement of the borrower.
Senator COUZENS. Are you going to separate those ?
Mr. LORD. The only one I recall at this time was Leslie Green,
who made it on a statement of his own holdings of his own private
business.
A check-up made last summer with all of those directors who
could be reached indicated that of the directors who were borrowing
S^OCK EXCHANGE PRACTICES
4453
at the date of the examination at least 16 had paid their direqt loans
in full, 10 had paid their indirect obligations in full, and others
had made very substantial reductions.
Furthermore, based on information given to me by those directors,
an aggregate of approximately $2,100,000 had been paid on those
loans up to last summer, which represented about 50 percent of the
amount of the loans as of November 9,1932.
In addition thereto $1,250,000 had been paid on loans which
directors had endorsed or guaranteed, representing about 40 percent
of such indirect obligations.
It may also be of interest to know that of the $3,700,000 approximately of direct loans to corporations in which the directors and
officers were largely interested, more than $2,100,000 of such loans
had already been paid by last summer, representing about 60 percent
of the total of such loans.
It seems to me that that is an indication of a fine record of those
directors' loans, which, in the newspapers at least, were subject to
some criticism.
I would like to make one more statement. I have been severely
criticized in this meeting by Mr. Leyburn. Whether it is a question
of personal antagonism to me or not, I do not know. I feel that
it is entirely unjust. My experience as a banker extended from 1906
to 1932, during which period I started as a clerk or an office boy in(
the Harris Trust & Savings Bank in Chicago and worked up to the
position of one of the senior vice presidents before I went to Detroit.
I would like to say two or three more things before I leave the
stand. In commenting on the general situation as regards the
group, the actions taken by the group managers and by the unit
banks to which reference was made, most, if not all, of those actions
were taken with one purpose in mind—to protect the interest of
all the depositors against the effects of the panic on the part of a
few. So far as I personally know, no one connected with the Group
made a dime out of any of these transactions. Many of the directors
and officers, including' myself, lost sizable fortunes. So far as the
Guardian National Bank of Commerce is concerned, it seems to me
that evidence of the inherent soundness of that institution is indicated by the fact that with only moderate aid from the R.F.C.,
amounting to something less than $28,000,000 or $30,000,000, that
bank has arranged to pay in less than 1 year approximately $105,000,000 of its December 31, 1932, deposits out of $138,000,000, and
that during most of this period that bank was closed.
Furthermore, in my opinion under a careful administration of the
remaining assets of that bank, I believe the depositors will receive
100 cents on the dollar in due course.
The CHAIRMAN. Who was the Comptroller who took over the bank?
Mr. LORD. Who was the Comptroller?
The CHAIRMAN. Yes.
Mr. LORD. I did not get the date of that communication
The CHAIRMAN. NO ; when the bank was taken over, who was the
Comptroller ?
Mr. LORD. Mr. Await, Acting Comptroller.
Mr. PECORA. Mr. Lord, I will have some evidence to present to
this committee when sessions are resumed within the next 2 weeks
175541—34—PT 9
17
4454
STOCK EXCHANGE PEACTICES
with regard to the condition of these banks at the time they were
closed.
(Witness temporarily excused.)
TESTIMONY OF BEET K. PATTERSON, CHICAGO, ILL.
The CHAIRMAN. Mr. Patterson, do you solemnly swear that the
testimony you will give at this hearing will be the truth, the whole
truth, and nothing but the truth, so help you God ?
Mr. PATTERSON. I do.
Mr. PECORA. Your full name and address, please.
Mr. PATTERSON. Bert K. Patterson, 7606 Bosworth
Avenue, Chicago.
Mr. PECORA. What at the present time is your business or occupation ?
Mr. PATTERSON. Bank examiner, Federal Reserve Bank of Chicago.
Mr. PECORA. Were you at one time connected with the corporation
called the Guardian Detroit Union Group, Inc. ?
Mr. PATTERSON. Yes, sir.
Mr. PECORA. In what capacity ?
Mr. PATTERSON. Vice president and treasurer.,
Mr. PECORA. Were you executive vice president for
Mr. PATTERSON. Yes.
Mr. PECORA. When did you first become connected
a period ?
with that corporation ?
Mr. PATTERSON. August 16, 1929.
Mr. PECORA. That was shortly after it was incorporated under
its original corporate name of (ruardian Detroit Group, Inc.?
Mr. PATTERSON. About 3 months afterward.
Senator COUZENS. Prior to that what was your occupation ? Prior
to going with the Guardian Group, what was your occupation?
Mr. PATTERSON. I was chief national bank examiner of the seventh
Federal Eeserve district, at Chicago.
Senator COUZENS. For how long?
Mr. PATTERSON. One year.
Mr. PECORA. Did that take in the Michigan banks?
Mr. PATTERSON. Yes.
Mr. PECORA. That is, the seventh district ?
Mr. PATTERSON. A part of the State of Michigan.
Mr. PECORA. Including the city of Detroit ?
Mr. PATTERSON. Yes, sir.
Senator COUZENS. Prior to being chief bank examiner
for the
seventh Federal Eeserve district, what was your occupation?
Mr. PATTERSON. Chief bank examiner at Minneapolis.
Senator COUZENS. For how long?
Mr. PATTERSON. Four years.
Senator COUZENS. Prior to that, what was your occupation?
Mr. PATTERSON. I was national bank examiner bearing the commission of the Comptroller of the Currency dated June 3, 1918.
Senator COUZENS. For how long were you such examiner?
Mr. PATTERSON. From June 3, 1918, until approximately September 1,1924.
Senator COUZENS. At that time you went with the Minneapolis
Federal Reserve district?
STOCK EXCHANGE PRACTICES
4455
Mr. PATTERSON. I was promoted.
Mr. PECORA. YOU resigned as a member of the examiner's staff of
the Comptroller of the Currency to become vice president and treasurer of the Guardian Detroit Group, did you not?
Mr. PATTERSON. Yes, sir.
Mr. PECORA. Who extended
to you the offer to join with the
Guardian Detroit Group as one of its officers?
Mr. PATTERSON. Mr. Kobert O.JLofd.
Mr. PECORA. What was the salary that you were receiving as chief
national bank examiner for the seventh district at the time that you
resigned to become connected with the Guardian Detroit Group ?
Mr. PATTERSON. $14,000 a year.
Mr. PECORA. What was the salary that you received upon becoming
an officer of the group ?
Mr. PATTERSON. $16,000 a year.
Mr. PECORA. Any stock?
Mr. PATTERSON. NO, sir.
Mr. PECORA. Any bonuses?
Mr. PATTERSON. NO, sir. Well, in 1929, at the end of the year; yes,
Mr. PECORA. HOW much of a bonus did you receive ?
Mr. PATTERSON. $3,000 at that time.
Mr. PECORA. At that time did the other officers of the group
receive bonuses in addition to their salaries?
Mr. PATTERSON. I do not know, positively.
Mr. PECORA. Who fixed the bonuses?
Mr. PATTERSON. I do not know that, either.
The CHAIRMAN. Did you have to do with organizing or creating
this Detroit Group ?
Mr. PATTERSON. I believe not, sir.
The CHAIRMAN. YOU did not advise or negotiate or arrange for
the organization of the group ?
Mr. PATTERSON. I do not believe so.
Mr. PECORA. At the time you resigned as chief national bank examiner for the seventh district to become an officer of the Guardian
Detroit Union Group, or, as it was then called, the Guardian Detroit
Group, Ino,, were you promised a bonus in addition to your salary?
Mr. PATTERSON. NO, sir.
Mr. PECORA. Nothing was said about a bonus then ?
Mr. PATTERSON. NO, sir.
Mr. PECORA. Were you given, at the time you became an officer of
the group, any options to acquire any of the stock of the group
at any preferential price?
Mr. PATTERSON. Not an option, Mr. Pecora. I signed a contract
on October 1,1929, to purchase 300 shares of the stock.
Mr. PECORA. At what price?
Mr. PATTERSON. $275 a share.
Mr. PECORA. What was the market price then?
Mr. PATTERSON. I cannot remember now.
Mr. PECORA. Was it more than that?
Mr. PATTERSON. Slightly more than that.
Mr. PECORA. Did you exercise the option?
Mr. PATTERSON. NO, sir; I never purchased it.
Senator ADAMS. When you say you signed a contract, was it an
obligatory contract or an option!
4456
STOCK EXCHANGE PRACTICES
Mr. PATTERSON. I t was an obligatory contract.
Senator ADAMS. Why was it not carried out, then?
Mr. PATTERSON. Because I could not pay for it.
Senator ADAMS. I think that is a complete answer.
Mr. PECORA. YOU heard the testimony of Mr. Lord given to this
committee during the current week, did you not?
Mr. PATTERSON. Yes, sir.
Mr. PECORA. YOU heard all of it?
Mr. PATTERSON. I believe I did.
Mr. PECORA. Did you also hear the
testimony given by Mr. Eubank
this afternoon?
Mr. PATTERSON. Yes, sir.
Mr. PECORA. A S I recall the
testimony of Mr. Lord, he referred
to you more than once as one of the officers of the group who helped,
to make up the annual reports that were issued by the group to its
stockholders. Do you recall that reference to you in Mr. Lord's
testimony?
Mr. PATTERSON. Yes, sir; I do.
Mr. PECORA. Were you one of the
officers who helped to prepare
the annual reports issued to the stockholders by the group?
Mr. PATTERSON. Yes, sir. I aided.
Mr. PECORA. Can you tell us who actually dictated or drafted the
textual form of these annual reports to the stockholders?
Mr. PATTERSON. Mr. Pecora, the text of the report was prepared by
several individuals, just as Mr. Lord has testified. He did a part
of it. I don't believe I prepared any of the text. There were
probably four or five other people, including some members of different committees, who aided tnem.
Mr. PECORA. DO you know who those persons were, those four or
five other persons?
Mr. PATTERSON. I t occurs to me that Colonel Walsh was one; Mr.
Kanzler, Mr. Bodman; I believe Dr. Murphy was asked at different
times, or suggested.
Mr. PECORA. DO you know any reason why the annual report
issued to th6 stockholders of the group for the year 1930 made no
mention therein of the fact that in that year the group incurred
a deficit of $39,387.57?
Mr. PATTERSON. There was no intention^to make a misstatement in
regard to it.
Mr. PECORA. Was there any intention to omit the statement or any
information concerning a deficit?
Mr.
PATTERSON. NO, sir.
Mr. PECORA. Can you account for the fact that no such mention
of the deficit was made in that report ?
Mr. PATTERSON. Except that the report was intended as a consolidated report and as brief a report as possible.
Mr. PECORA. Was it in the interest of brevity that a line or two
was not included in the report setting forth for that year that the
bank showed a deficit of $39,387.57?
Mr. PATTERSON. Yes; I think it was.
Mr. PECORA. Mr. Patterson, do you mean to tell this committee that
in the annual report issued to the stockholders by the group for the
year 1930, which comprises a printed document of 39 pages exclusive
STOCK EXCHANGE PEACTICES
4457
of the cover, that in the interest of brevity a simple statement was
not included in this 39-page report to the effect, in words or substance, that the company for that year operated at a loss of thirtynine-thousand-and-odd dollars ?
Mr. PATTERSON. There are 39 pages there, but a great deal of it
was made up of bank statements.
Mr. PECORA. I know that.
Mr. PATTERSON. The textual matter is relatively brief.
Mr. PECORA. DO you mean to say that in the preparation or compilation of this 39-page report no room could have been found for
a line or two which simply would have informed the stockholders
of the group that a deficit of thirty-nine-thousand-and-odd dollars
had been incurred?
Mr. PATTERSON. Certainly; I will agree to that.
Mr. PECORA. Then the reason why it was not mentioned was not
because it was desired to abbreviate the report as much as possible,
was it?
Mr. PATTERSON. That was not the main reason; no.
Mr. PECORA. What was the main reason?
Mr. PATTERSON. I don't suppose that
Senator ADAMS. TO abbreviate the information.
Mr. PATTERSON. What was that?
Mr. PECORA. Senator Adams attempted to answer the question for
you by suggesting that it was done to abbreviate the information.
Mr. PATTERSON. I was going to say
Mr. PECORA. What were you going to say ?
Mr. PATTERSON . I was going to say that the whole text of the report was intended as a consolidated one, so far as the earnings were
concerned.
Mr. PECORA. Can you give the committee any reason why there
was entirely omitted from this report to the stockholders any reference to the fact that the company had incurred a deficit ior that
year of thirty-nine-thousand-and-odd dollars?
Mr. PATTERSON. I cannot give you any reason.
Mr. PECORA. Can you give any reason why in the preparation of
the annual report to the stockholders for the year 1931 no mention
was made of the fact that in that year the group operated at a
loss of $288,930.33?
Mr. PATTERSON. There never was any discussion about that particular point in the preparation of the report, Mr. Pecora.
Mr. PECORA. Let me ask you your opinion now as to whether or
not the stockholders were entitled to such information from their
company ?
Mr. PATTERSON. Perhaps my opinion would not be worth anything.
Mr. PECORA. I would like to have it, whether it is worth anything
or not.
Mr. PATTERSON. I say they were entitled to it; yes, sir.
Mr. PECORA. Did you participate in the various discussions that,
according to Mr. Lord, were had from time to time in connection
with the preparation and issuance of these annual reports to
stockholders?
Mr. PATTERSON. Yes; I
did.
4458
STOCK EXCHANGE PRACTICES
Mr. PECORA. Did you in any of those discussions tell your other
conferees your view or opinion that the stockholders were entitled
to information showing that the company had operated at a loss ?
Mr. PATTERSON. We had that always in mind. The particular
point that you are speaking of was not discussed, as I say.
Mr. PECORA. What did you have always in mind?
Mr. PATTERSON. That the stockholders were entitled to all the
information.
Mr. PECORA. If you always had it in mind in those discussions,
why was it not mentioned in the reports ?
Mr. PATTERSON. I say it was not discussed as to that particular
point.
Mr. PECORA. DO you know upon whose judgment the reports were
so prepared and drafted as to omit mention of the fact that the
company had operated at a loss ?
Mr. PATTERSON. I do not think there was anyone who suggested
views on that particular point, for the reason that it was not, as I
say, particularly discussed, so far as I recall.
The CHAIRMAN. YOU say that the object of the report was to
advise the stockholders about the earnings of the company ?
Mr. PATTERSON. Yes, sir.
The CHAIRMAN. I S it a fair
statement of the earnings if it shows
only earnings and does not show expenses or losses or a deficit ?
Mr. PATTERSON. . The earnings, as I recall them, are expressed net,
I believe, Senator; I am not sure without reference to it.
Senator COUZENS. YOU heard Mr. Eubank's testimony as to his
reason for the deficit being left out. Would you agree with him?
Mr. PATTERSON. I do not recall what he said, now—exactly his
language.
Senator COUZENS. I understand him to express the view—and he
is here and may correct me if I am inaccurate—that they did not
think it was advisable to let the public know that they had been
operating at a deficit. Would that be one of your reasons for not
putting it in the annual report?
Mr. PATTERSON. NO, sir.
The CHAIRMAN. YOU say
the report shows the net earnings. If
there was a deficit there were no net earnings.
Mr. PATTERSON. I meant the consolidated figures. Where one unit
would probably show profit and another unit would show a loss, the
aggregate of the two would be a net profit Or loss.
The CHAIRMAN. This is a report by the company. It does not
show any net earnings; it shows a deficit.
Mr. PATTERSON. Which report are you referring to, Senator ?
Mr. PECORA. The report filed with the securities commission.
Mr. PATTERSON. Yes; that is a report by that corporation, which
did not include any of its affiliates.
Mr. PECORA. The report to the stockholders of the group could
easily have shown whether or not the company or the group operated
at a loss ?
Mr. PATTERSON. Yes; it could.
Mr. PECORA. NOW, in view of what you have said, if it was a fact
that there was no discussion among the officers or directors who
SfIOCK EXCHANGE PRACTICES
4459
worked on the preparation of the report to the stockholders, let me
for the purpose of possibly refreshing your recollection read to you
the following extract from the minutes of the meeting of the operating committee of the group held on May 15, 1931, which recites you
as among those present [reading] :
The chairman referred to a resolution passed at the last meeting of the
executive committee providing for the preparation of a composite statement
of condition of all banks and trust companies in the group, to be published
after the next bank call in June. A form was submitted, and after a general
discussion was approved with minor corrections. A small quantity will be
set up in large type on cards 22 by 18 inches for display purposes. It was
the consensus that individual bank statements be prepared along the same
lines as the consolidated form, in large type, and both placed on display in a
favorable position in each unit bank. It was recommended that every customer who evidences an interest in the units of the group should be given a
reduced mimeographed copy of these statements with a remark something
along these lines: " We are extremely proud of the statements of this bank
and the Guardian Detroit Union Group, Inc., of which we are a member. We
should like you to go over these figures, for we believe you as a customer of
the bank will be as proud of the excellent showing as we are."
The next sentence in the minutes is—
The reason for this is obvious.
Is it not also equally obvious to you now, Mr. Patterson if it was
not in 1930 and 1931, when you collaborated in the preparation of
these annual reports to the stockholders of the group, why no mention was made in those annual reports to the stockholders of the fact
that the company was operating at a loss, and hence a fact that
might not make a stockholder or a customer of the unit bank proud
of the group ?
Mr. PATTERSON. The term " obvious " there—I don't know what is
meant by it.
Mr. PECORA. Well, answer my question.
Mr. PATTERSON. What is the question?
(The pending question was read by the reporter as above recorded.)
Mr. PATTERSON. I do not believe the consolidated companies were
operating at a loss in 1931, Mr. Pecora.
Mr. PECORA. All I know is that the report filed by the group
with the Michigan Securities Commission for the year 1931 reports
a deficit of $288,000 plus.
Mr. PATTERSON. I referred to the units of the group when I said I
did not believe they were operating at a loss in 1931.
Mr. PECORA. The group was operating at a loss in 1931, was it not?
Mr. PATTERSON. The Group Corporation, as one of the component
parts of the entire organization; yes.
Mr. PECORA. The Group Corporation was the big corporation of
which the other companies were units. In other words, the Group
Corporation was the entire entity that comprised twenty-odd companies, including banks, as units, was it not?
Mr. PATTERSON. I suppose a construction of that sort is permissible.
Mr. PECORA. Therefore it was this large corporate entity that
comprised the smaller units.
Mr. PATTERSON. Yes.
4460
STOCK EXCHANGE PKACTICES
Mr. PECOBA. And it was operated at a loss not only in 1930 but
in 1931 and 1932?
Mr. PATTERSON. That is correct.
Mr. PECORA. And we are discussing here the report of that
corporate entity known as the " group " ?
Mr. PATTERSON. That is correct.
Mr. PECORA. It is obvious to you now why the group officers arid
directors in publishing to their stockholders their annual reports did
not mention the fact that the group operated at a loss in each of
those years?
Mr. PATTERSON. I say again that the subject of reporting that separately was never discussed, to my knowledge. There was never
any intention of making a misstatement regarding it when the report
to the stockholders was made.
Mr. PECORA. Why was emphasis placed in these annual reports
upon consolidated statements of earnings and profits of the banking
units of the group if it was not to instill in the stockholders a faith
and a confidence and a reliance upon the security and the stability
and the soundness of the group ?
Mr. PATTERSON. I do not think it was emphasized.
Mr. PECORA. It was mentioned. Whether emphasized or not, it
was mentioned, and no mention was made of the net deficit.
Mr. PATTERSON. That is true.
Mr. PECORA. Was that done by design or by accident?
Mr. PATTERSON. Not by design.
Mr. PECORA. Then it was done by accident?
Mr. PATTERSON. I t was never discussed.
Mr. PECORA. What was the reason that you never discussed it?
Mr. PATTERSON. I do not know.
Mr. PECORA. YOU were there for the purpose of discussing the
things that would be told to the stockholders in the annual report,
were you not?
Mr. PATTERSON. Part of the time; yes.
Mr. PECORA. Did it not ever occur to you to bring xxp for discussion
the question of reporting to the stockholders the deficit under which
the company operated?
Mr. PATTERSON. The whole report, Mr. Pecora, was arranged on
the basis of consolidated figures, and those figures were given to the
stockholders in good faith in that manner.
Mr. PECORA. Mr. Chairman, I am tired of hearing answers of that
sort, and I suggest that we adjourn—it is half past three—until
January 3.
The CHAIRMAN. Did you continue as vice president of this group
until the receivership was begun ?
Mr. PATTERSON. Until March 11, 1933.
The CHAIRMAN. What happened then?
Mr. PATTERSON. I resigned.
Senator COXJZENS. Who was your superior officer in the Federal
Reserve bank?
Mr. PATTERSON. I had the commission of Mr. Stephens.
Senator COUZENS. What is his position?
4461
STOCK EXCHANGE PRACTICES
Mr. PATTERSON. Federal Reserve agent.
Mr. PECORA. Mr. Chairman, I respectfully ask that you announce
to the witnesses who are under subpena, with the exception of Mr,
Eubank, to return here on January 3. We do not need Mr. Stalker
either.
The CHAIRMAN. We will excuse Mr. Stalker and Mr. Eubank. All
other witnesses under subpena wilj. appear here at 10 a.m. on
January 3 next. The committee will now adjourn to meet again on
January 3, 1934, at 10 o'clock, in this room when we will resume the
hearings.
(Whereupon, at 3:30 p.m., the subcommittee adjourned until
Wednesday, Jan. 3, 1934, at 10 a.m.)
COMMITTEE EXHIBIT NO. 54, DECEMBER 22,
1933
{This report must be on file before March 1st, 1931. A filing fee of ONE
DOLLAR must accompany this report.)
ANNUAL REPORT
1930
(Name of Corporation) GUARDIAN DETROIT UNION GROUP, INC.;
{Street Address) Griswold at Fort; City, Detroit; State, Michigan.
Date of Incorporation, May 10, 1929.
MICHIGAN SECURITIES COMMISSION,
SIRS:—In accordance with Section 28 of Act 220, Public Acts of 1923, as
amended, the undersigned Secretary of the above Company, respectfully submits
the following report of its condition on the thirty-first day of December, 1930.
1. Financial Statement.
Issued
During
Par Value.
Year.
Authorized.
Issued.
Common Stock
$20.00
$4,843,360
$50,000,000 $3(
$
Preferred Stock- $ none
$
_
$
No Par Stock
Shs.—,
Shs. none Shs.This statement should reflect the condition of Company after closing current
year, and must balance.
Assets
Cash
_
Notes Receivable
Accounts Receivable
Inventory—Materials
Inventory—Mfd. Products
Real Estate & Buildings
Machinery & Equipment
Office Equipment
_
Patterns
Prepaid Expense
Advances
Investments
Interest & Dividends Receivable
Goodwill
Commissions.
Organization Expenses
Promotion
Patents
Deficit—12-31-30
Total.
Liabilities
Amount
Common Stock Outstanding—.
Preferred Stock O u t s t a n d i n g No Par Stock Outstanding
647.~94 Notes Payable
Mortgages
_
Trade Acceptances
Accounts Payable
Sinking Fund
Reserve for
Other Liabilities
,—.
202.02 Capital Surplus
40,947,540.00 Paid in Surplus
47,322.93 Surplus (after closing 12-31-30).
$45,883.96
204,060.51
"§9,"387."57
41,285,044.93
Total.
Amount
$30,896,880.00
8,095,664.93
2,292,500.00
41,285,044.93
4462
STOCK EXCHANGE PBACTICES
2. Statement of Profit and Loss Account for the past twelve months. (If a new
corporation, from date of organization.) The footing MUST BALANCE.
Expense.
To Deficit in Surplus 12-31-29
Returns and Allowances
Cost of Sales
Manufacturing Expense
Administrative Expense
Miscellaneous Expense
Commission Stock Sales
Repairs & Replacements
Interest Paid
Insurance
Sta., Printing & Off. Supp
Advertising
Salaries
Taxes—other than Fed. Income
Dividends, Common Stock..
Dividends, Preferred Stock
Dividends, No Par Stock
Net Surplus, 12-31-30
Total-
Income.
By Surplus 12-31-29.
$67,155.84
121.88
1,039.56
17,942.26
39,900.32
86,575.95
75,735.03
4,930,991.28
Services
Rents
Commissions
Miscellaneous
Interest &.Discount....
Div. Received or AccruedAppreciation
Profits on Sales of Sec
$39,905.07
'5,123,372.60
16,796.88
39,387.57
Deficit—12-31-30..
l y 219.462.12
Total
$5,219,462.12
Any entries affecting Surplus account and not passing through Profit and
Loss account must be explained in a statement or letter attached.
3. Statement, showing the consideration received from the stock issued since
date of filing original application. (From date of last report if previous
report has been filed.)
10,000-._
1,500—
30,000—
10,000—
6,000—
7,500—
12,600—
1,500—
2,328—
Peoples National Bank of Jackson
City Nat'l Bank & Trust Co., Niles
Capital National Bank of Lansing
Grand Rapids National Bank
First National Bank & Trust Co., Kalamazoo.
Qrand Rapids Trust Company
Second Nat'l Bank & Trust Co., Saginaw
National Bank of Ionia
_
3/20ths miscellaneous..
.__
$20.00
100.00
20.00
100.00
100.00
100.00
100.00
100.00
17,500
4,126
36,000
45,000
36.000
22,500
75,000
5,250
793
242,168
were given in to the company and carried on the books.
4. Has license to sell your Securities in any other state been revoked? No.
Withdrawn? No If so give reason
5. Have any changes been made in the following particulars since ycur application was filed?
A—in the name, nature, or plan of business: No
B—In the plan adopted for sale of its Securities: No
C—In the price at which they are being sold: No
D—In the amount of per cent of commission paid on their sale: No
E—In the amount allowed for promotion or intangibles: No
6. Have you employed Broker to sell your Stock in Michigan during the year?
No If so, who?
7. Is your company dormant or inactive? No. If so explain
B—Date of order giving permission to sell securities. (Since last report:)
1-7-30
98, 500 shares
1-22-30
62,625 "
1-28-30
75,000 "
4-9-30
6,043 "
242,168 shares
C—State amount given permission to sell and class of same
D—State amount still unsold: None. Stock issued in each instance to acquire
the capital stock of banks and other financial institutions.
(The above questions must be answered in every instance.)
STOCK EXCHANGE PRACTICES
4463
8. At what price have Securities been sold in Michigan?
Price
Amount Sold
Commission Paid
Preferred Stock
$
$ none
$
Common Stock
$
$ none
$
No Par Stock
$
$ none
$
Total $
Total $
9. A—What commission paid on stock sold in Michigan
% none.
B—What commission paid in other states
% none.
C—Who has paid for advertising of sale of stock, Company or Broker? none.
10. Cash disbursements made since last report for the following:
For ^patents
$ none
For Advertising Stock Sales
$ none
For Promotion
$ none
For any other Intangibles
$ none
(The above questions must be answered! in every instance.)
Explanations:
11. Business engaged in: The Company owns shares of stock of various Bank,
Trust Companies, and other corporations.
12. The following is a list of officers of the company and the salaries paid to
each:
We. the President and Secretary of the GUARDIAN DETROIT UNION
GROUP, INC., do solemnly swear that the above statement is true to the best
of our knowledge and belief and that this report has been carefully filled out
and fully and correctly exhibits the true state of the several matters contained,
as,, shown by the books of the ^Company.
State of Michigan,
ALBERT O. LOED,
President.
County of Wayne
A. A. F . MAXWELL,
Subscribed and sworn to before me this the
day of
Secretary.
19
Notary Public.
My commission expires
(See that CORPORATE SEAL is affixed.)
ALL QUESTIONS MUST BE ANSWERED FULLY OR REPORT WILL BE RETURNED FOR
CORRECTION.
[Endorsement on back]
File No.
.
Name, ——
; Street, Penobscot Bldg.; Detroit.
Annual report, 1930;
filed
, 1931, with Michigan Securities Commission.
Form 16.
SECTION 28, ACT NO. 220, P.A. 1923, AS AMENDED
SEC. 28. Every essuer of securities (filed under this act shall, uritil such time
as is otherwise ordered by the commission, or before March first of each year,
file with the commission, on blanks to be provided by it, a detailed statementshowing the condition of said issuer on the thirty-first day of December preceding, and shall at the same time pay a filing fee therefor of $1.
COMMITTEE EXHIBIT NO. 55, DECEMBER 22, 1933
(This report must be on file before March 1st, 1932. A filing fee of one dollar
must accompany this report.)
ANNUAL REPORT 1 9 3 1
(Name of Corporation) Guardian Detroit Union Group, Inc.; Fill in (Street
Address) Fort & Griswold Sts.; City Detroit; State Michigan.
Date of Incorporation, May 10th, 1929.
4464.
STOCK EXCHANGE PRACTICES
MICHIGAN SECURITIES COMMISSION.
SIRS:—In accordance with Section 28 of Act 220, Public Acts of 1923, as
amended, the undersigned Secretary of the above Company, respectfully submits
the following report of its condition on the thirty-first day of December, 1931.
1. Financial Statement.
Authorized.
Issued.
Common stock
$50,000,000 $30,896,800
Preferred stock
$ None
$
No par stock
Shs. None
Shs
This statement should reflect the condition of company
year, and must balance.
Assets.
Amount.
Cash
$2,118.213.67
Notes receivable
5,817,428.10
Accounts Receivable...
__
30,000.00
Inventory—Materials._
Inventory—Mfd. Products
Real Estate & Buildings...
7,861.77
Machinery & Equipment.Office Equipment
Patterns
-- - - - - Prepaid Expense
Advances
260.00
Investments
._ 33,111,616.76
Interest & Prepaid Exp
111,509.64
Goodwill
Commissions
Organization _
Promotion
Patents
Deficit—12-31-31
288,930.33
Total
$41,485,820.27
Issued
During
p n l . vaina
rA
v u
Year.
"
$ None
$20.00
$
$
Shs
after closing current
Liabilities.
Common Stock Outstanding
Preferred Stock Outstanding
No Par Stock Outstanding *
Notes Payable
Mortgages. . .
.
Trade Acceptances
_
Accounts P&yabla
Sinking Fund
Reserve for
Other Liabilities:
_.__
Capital Surplus
Paid fa Surplus
__
Surplus (after closing 12-31-31)
Total
Amount.
$30,896,880.00
_.
7,500,000.00
._..
3,375.34
793,064.93
2,292,500.00
$41,485,820.27
* Liability on non par stock must be set up at the amount the company received for the issuance of same.
2. Statement of Profit and Loss Account for the past twelve months. (If a
new corporation, from date of organization.) The footing MUST BALANCE.
Income.
Expense.
To Deficit in Surplus 12-31-30
Returns and Allowances
Cost of Sales
_
. . ._
Manufacturing Expense
Administrative Expense_ .
Miscellaneous Expense
Commission Stock Sales
Repairs & Replacements
Interest Paid
Bond Amortization
Advertising
Insurance
.,
Stationery & Ptg
Salaries
.
Taxes
......
Organization Expense
Dividends, Common Stock..
Dividends, Preferred Stock
Dividends, No Par Stock
Net Surplus, 12-31-31
$39,387.57
80,108.33
18,649.83
2,319.35
32,102.80
1,696.14
8,394.26
136,624.24
20,973.50
204,060.51
3,085,416.38
By Surplus, 12-31-30
Sales
Services
Rents
Commissions
Miscellaneous
.
Interest & Discount
Dividends
Profits—Sale of Secur..
Apprec'n of Investment
Appreciation
Deficit—12^31-31
Total
3,629,732.91
Total
$500.00
61,479.74
3,231,587.40
5,580.35
41,655.00
288,930.33
3,629,732.91
Any entries affecting Surplus account and not passing through Profit and Losa
account must be explained in a statement or letter attached.
4465
STOCK EXCHANGE PRACTICES
S. Statement, showing the consideration received from the stock issued since
date of filing original application. (From date of last report if previous
report has been filed.)
Common
Preferred
No.
Shares
Actual Cash
Notes
Real Estate
Plant
Amount
No.
Shares
Amount
No par
No.
Shares
Amount
$
$
$
*$
*$
*$
lSntiipiTMftit
Salaries
Dividends
Commissions
_
_
Organization..
Promotion
Patents
Totals*
* This column should specify the actual amount of cash or notes received, or*the actual value of real
estate, etc., received in exchange for stock issued, and should correspond with the value at which these
different items were given in to the company and carried on the books.
4. Has license to sell your Securities in any other state been revoked? No.
Withdraw? No. If so give reason
5. Have any changes been madfe in the following particulars since your
application was filed?
A—In the name, nature, or plan of business: No.
B—In the plan adopted for sale of its Securities: No.
C—In the price at which they are being sold: No.
D—In the amount of per cent of commission paid on their sale: No.
E-^-In the amount allowed for promotion or intangibles: No.
6. Have you employed Broker to sell your Stock in Michigan during the year?
No. If so, who?
7. Is your company dormant or inactive? No. If so explain
—
B—Date of order giving permission to sell securities
C—State amount given permission to sell and class of same
D—State amount still unsold
(The above questions must be answered in every instance.)
8. At what price have Securities been sold in Michigan?
Price
Preferred Stock
Common Stock
No Par Stock
Amount Sold
$Nohe
$None
$None
Commission Paid
$
$
,Total $
Total $
9. A—What commission paid on stock sold in Michigan
% None.
B—What commission paid in other states
% None.
C—Who has, paid for advertising of sale of stock, Company or Broker?
None.
10. Cash disbursements made since last report for the following:
For patents
$ None
For Advertising. Stock Sales
$ None
For Promotion
$ None
For any other Intangibles
$ None
(The above questions must be answered in every instance.)
.Explanations:
11. Business engaged in: The Company owns shares of stock of various Banks
and Trust Companies and other Corporations.
4466
STOCK EXCHANGE PRACTICES
12. The following is a list of officers of the company and the salaries paid
to each:
Residence Address.
Name.
President
-
Secretary
Treasurer
General Manaser
Directors:
1
2.
3
4.
5
6.
___
7
8.
Salary.
_._.'.
-
- .
. . .
_
.
.
.__
We, the President and Secretary of the GUARDIAN DETROIT UNION
GROUP, INC. Company, do solemnly swear that the above statement is true
to the best of our knowledge and belief and that this report has been carefully
filled out and fully and correctly exhibits the true state of the several matters
contained, as shown by the books of the Company.
ROBERT O. BONE,
President.
C. H. HABEBKOBN, Jr.,
Secretary.
STATE OP MICHIGAN
County of Waytw
Subscribed and sworn to before me this 24th day of February, 1932.
Notary Publio.
My commission expires
(See that CORPORATE SEAL is affixed.)
ALL QUESTIONS MUST BE ANSWEREDFULLY OB REPORT WILL BE RETURNED WOB
CORRECTION.
OFFICERS
Name
1
Residence Address (Michigan)
Chairman of Board, Frank W. Blair
1716 W.Boston Blvd., Detroit
Chairman Advisory Committee, Fred T. 17620 E. Jefferson Ave., Grosse Pte—.
Murphy.
Chairman. Executive Committee, Henry E. 20 McKinley Place, Grosse Pte
Bodman.
17 McKinley Place, Grosse Pte
President, Robert O. Lord
Vice Chmn. of Board, C. H. Haberkorn, Jr
15440 Windmill Pte., Grosse P t e . . .
Vice President, Ernest Kanzler
2501 Iroquois Ave., Detroit
Vice President, James L. Walsh
8162 E. Jefferson Ave., Detroit
Vice Pres. & Treas., Bert K. Patterson
700 Seward Avenue, Detroit—
Vice President Herbert S. Reynolds
J 300 So. Brown St., Jackson.
Vice President, R. Perry Shorts.
438 N . Jefferson Ave., Saginaw
Vice President, Frank J. Maurice
.
RFD-3, Manor Rd.,_Birmingham..
Vice President, Phelps Newberry
... 36 Cloverly, Grosse Pte
Vice President, John N. Stalker.
677 Lakeshore Drive, Grosse Pte..:
Vice President, Henry H. Sanger.
333 University PI., Grosse Pte-.
Vice President, Harry S. Covington.7 Cloverly, Grosse Pte
Vice President, Charles A. Kanter
:
1481 Seminole, Detroit;
Statler Hotel. Detroit
Vice President, Andrew L. Malott
19519 Shrewsbury, Detroit
Vice President, Lewis K. Walker
Vice President, Joel H. Prescott
9200 Dwight Ave., Detroit
Vice President, Samuel R. Kingston
1971 Longfellow. Detroit...
Secretary, A; A. F. Maxwelh
1550 Lawrence 4ve.,' Detroit
Asst. Treasurer, W. J. Penningrothl
2929 Wibb, Detroit
Comptroller, O. A. Waldow
3025 Cortland, Detroit
Salary
STOCK EXCHANGE PKACT1CES
4467
DIRECTORS
Residence Address (Michigan)
Name
Frank W, Blair
Arthur C. Bloomfield.
Henry E. Bodman
Clarence H. Booth
Joseph H. Brewer
Walter O. Briggs
Daniel D. Brown
Harry C. Bulkley
Charles S. Campbell—.
Roy D. Chapin
George R. Cooke
Harry S. Covington....
George R. Fink
William A. Fisher
EdselB. Ford
John H. French.
Frank E. Gorman
Stephen A, Graham
C. H. Haberkorn, Jr...
Carlton M. Higbie
Sherwin A. Hill
Charles H. Hodges
James Inglis
George B. Judson
Ernest Kanzler
Jerome E. J.. Keane.
Dwight B. Lee
Robert O. Lord
Clifford B. Longley
Alvan Macauley
Frank J. Maurice
Francis C. McMath :„
Duncan'J: McNabbi^—
George B. Morley—
Edwin R. Morton
Charles S. Mott
Fred T. Murphy (Dr.)—
Edwin H. Nelson
Phelps Newberry
Ransom E. Olds
Bert K. Patterson
Herbert S. Reynolds
John R. Russel
Murray W. Sales
Henry H. Sanger
R. Perry Shorts
Hal H. Smith
Oscar W. Smith—
John N. Stalker
James L. Walsh
Charels Beecher Warren.
Herbert R. WiUrin-1
Salary
1716 W. Boston Blvd., Detroit
750 Michigan Ave. W., Jackson
20 McKinloy Place, Grosse Pte
Lone Pine Road, Bloomfield Hills
Blythefield Farms, Belmont, Mich
700 Boston Blvd. W., Detroit
2458 Military St., Pt. Huron
749 Seminole, Detroit
Whites Road, Kalamazoo
447 Lake Shore Rd., Grosse Pte
64 Country Club Lane, Grosse Pte
7 Cloverly, Grosse Pte—
_
17 Cloverly Rd., Grosse Pte
1791 Wellesley Dr., Palmer Woods, Detroit.
Gaukler Pte., Grosse Pte. ^Shores
936 Lakeshore Rd., Grosse Pte
1224 N. Genessee Dr., Lansing
4000 Gratiot Ave., Pt. Huron
15440 Windmill Pte., Grosse Pte
246 Lakeland Ave., Grosse Pte
"Greenmead", Northville, Mich
354 Washington Road, Grosse Pte
2301 Highland Ave., Ann Arbor
19233 Woodston Rd., Palmer Woods,
Detroit.
2501 Iroquois Ave., Detroit
379 Lakeland Ave., Grosse Pte
P.O. Box No. 643, Detroit
17 McKinley Place. Grosse Pte
11 Touraine, Detroit.
735 Lake Shore Rd., Grosse Pte
RFD-3, Manor Rd., Birmingham
1037 Iroquois Ave., Detroit
Grosse He, Michigan
316 N. Washington Ave., Saginaw
88 Orchard Place, Battle Creek
1400 E. Kearsley 8V, Flint
17620 E. Jefferson Ave., Detroit
3 D. Garden Court Apts., Detroit
36 Cloverly Road, Grosse Pte
720 S. Washington Ave., Lansing
700 Seward Ave., Detriot
300 S. Brown St., Jackson
4 Woodland Place, Grosse Pte
17743 E. Jefferson Ave., Detroit
333 University Place, Grosse Pte
438 N. Jefferson Ave., Saginaw
15530 Windmill Pte. Drive, Grosse Pte
8120 E. Jefferson Ave., Detroit
677 Lake Shore Road, Grosse Pte
8162 E. Jefferson Ave., Detroit
273 Lake Shore Road, Grosse Pte
1144 Woodside Drive, Flint
[Endorsement]
File No.
Name —
-; Street-
-; City
SECTION 28, ACT NO. 220, P.A. 1923 AS AMENDED.
SEC. 28. Every issuer of securities, filed under this act, shall until such
time as is otherwise ordered by the commission, or before March first of each
year, file with the commission, on blanks to be provided by it, a detailed
statement showing the condition of said issuer on the thirty-first day of
December preceding, and shall at the same time pay a filing fee therefor of one
dollar.
Annual Report, 1931; Filed (Leave Blank), 1932 with Michigan Securities
Commission; Form 16.
4468
STOCK EXCHANGE PRACTICES
1933
(Office Copy)
THIS REPORT MUST BE ON FILE BEFORE MARCH 1st, 1933. A filing
fee of ONE DOLLAR must accompany this report.
COMMITTEE EXHIBIT NO. 56, DECEMBER
ANNUAL REPORT
1932
(Name of Corpora tion) GUARDIAN DETROIT UNION GROUP, INC.
(Street Address) FORT c GRISWOLD STS.; City, DETROIT; State,
MICHIGAN.
Date of Incorporation May 10th, 1929.
MICHIGAN SECURITIES COMMISSION,
SIRS :—In accordance with Section 28 of Act 220, Public Acts of 1923, as
amended, the undersigend Secretary of the above Company, respectfully submits the following report of its condition on the thirty-first day of December,
1932
1. Financial Statement.
During
Year.
Par Value*
Authorized.
Issued.
$20.00
Common Stock
$50,000,000 $30,896, 880 $ None
Preferred Stock
$ None
$
$
No Par Stock
Srs. None
Shs
Shs
This statement should reflect the condition of Company after closing current
year, and must balance.
Amount
Cash
Notes Beceivable
Accounts Receivable
Inventory—Materials
Inventory—Mfd. P r o d u c t s Real Estate & Buildings
Machinery & Equipment
Office Equipment
Patterns
Prepaid Expense
Investments
Good Will
Commissions . _-_
Organization
Promotion
Patents
Deficit—12-31-32
Total
$627,182.34
17,643,155.38
30,445.17
31,390,637.88
714,331.26
Liabilities
Common Stock Outstanding...
Preferred Stock OutstandingNo Par Stock Outstanding*...
Notes Payable...
Mortgages
Trade Acceptances
Accounts Payable
Sinking Fund
Reserve for
_
Other Liabilities:
Accrued Interest & Expense
Capital Surplus
Paid In Surplus
Surplus (after closing 12-31-32).
Total.
Amount
$30,896,880.00
16,"259,"543."68
126,597.32
689,182.93
2,332,901.01
$50,205,752.03
$50,205,752.03
* Liability on non par stock must be set up at the amount the company received for the issuance of same
2. Statement of Profit and Loss Account for the past twelve months. (If a
new corporation, frqm date of organization.) The footing MUST BALANCE.
Income.
To deficit in Surplus 12-31-31Returns and Allowances
Cost of Sales
Manufacturing Expense
Administrative Expense
Miscellaneous Expense
Commission Stock Sales
Repairs & Replacements
Interest Paid
Loss on Sale of Sec
Advertising
Insurance
Stationery & Printing
Salaries
Taxes
—
Rent
Legal Expense
Loss from Bad Debts
Dividends, Common Stock
Dividends, Preferred Stock
Dividends, No Par Stock
Net Surplus, 12-31-32
Total
$288,930.33
35,494.06
722,164.5
78,739.29
16,236.46
1,657.38
7,837.89
161,280.65
By Surplus 12-31-31
Sales
Services
Rents
Commissions
Miscellaneous
Interest & DiscountDividends
Appreciation
$579,428.79
663,000.00
60,280.90
14,081.70
61,072.93
143,849.87
375,134.00
Deficit—12-31-32
1,956,760.05
Total
714,331.26
1,956,760.05
4469
STOCK EXCHANGE PRACTICES
Any entries affecting Surplus account and not passing through Profit and
Loss account must be explained in a statement or letter attached.
3. Statement, showing the consideration received from the stock issued since
date of filing original application. (From date of last report if previous
report has been filed.)
Common
Preferred
No.
Shares
Amount
$
Actual CashNotes^
Real Estate
Plant
Equipment _
Salaries
Dividends
No.
Shares
Amount
$
No Par
No.
Shares
Amount
$
^ommissionis
Organization
Promotion
Patents
Totals *
_ _ _.
$*
$*
* This column should specify the actual amount of cash or notes received, or the actual value of real estate,
etc., received in exchange for stock issued, and should correspond with the value at which these different
items were given in to the company and carried on the books.
4. Has license to sell your securities in any other State been revoked? No.
Withdrawn? No. If so, give reason
5. Have any changes been made in the following particulars since your application was filed?
A—In the name, nature, or plan of business: No.
B—In the plan adopted for sale of its securities: No.
C—In the price at which they are being sold: No.
D—In the amount of percent of commission paid on their sale: No.
E—In the amount allowed for promotion or intangibles: No.
@. Have you employed broker to sell your stock in Michigan during the year?
No. If so, who?
7. Is your company dormant or inactive? No. If so, explain
B—Date of order giving permission to sell securities
C—State amount given permission to sell, and class of same
D—State amount still unsold
:—
(The above questions must be answered in every instance.)
8. At what price have Securities been sold in Michigan?
Price
Preferred StockCommon Stock
No Par S t o c k -
Amount Sold
$
$
$
None
None
None
Commission Paid
$
$
Total $
Total $
9. A—What commission paid on stock sold in Michigan
%
None
B—What commission paid in other states
% None
C—Who has paid for advertising of sale of stock, Company or Broker? None
10. Cash disbursements made since last report for the following:
For patents
$ None
For Promotion
$ None
For Advertising Stock Sales
$ None
For any other Intangibles
$ None
(The above questions must be answered in every instance.)
Explanations
11. Business engaged in: The Company owns shares of stock of various Banks
and Trust Companies and other corporations.
175541—34—PT 9
18
4470
STOCK EXCHANGE PRACTICES
12. The following is a list of officers of the company and the salaries paid to
each:
President
Vice President
Secretary
Treasurer
General Manager
Directors:
1.
2.
3
4.
5.___
6.
7
8.
Salary.
Residence Address.
Name.
-
_____
_ _
.
.„
We, the President and Secretary of the GUARDIAN DETROIT UNION
GROUP, INC. Company, do solemnly swear that the above statement is true to
the best of our knowledge and belief and that this report has been carefully
filled out and fully and correctly exhibits the true state of the several matters
contained, as shown by the books of the Company.
STATE OF MICHIGAN
1
ROBERT O. LORD,
President.
County of Wayne]
C. H. HABERKORN, JR., Secretary.
Subscribed and sworn to before me this the 28th day of February, 1933.
PAULINE P. MOSIER, Notary
Public,
My commission expires, June 17, 1935.
(See that CORPORATE SEAL is affixed.)
ALL QUESTIONS MUST B E ANSWERED FULLY OR REPORT WILL B E RETURNED FOR
CORRECTION.
OFFICERS
Residence address (Michigan)
Name
Chairman of Board Ernest Kanzler..
"
of Executive Committee R. Perry
Shorts.
Counsel Henry E. Bodman
President Robert O. Lord
Exec. Vice President James L. Walsh
"
"
" Bert K. Patterson
"
" Herbert R. Wilkin
*'
"
" Ralph E. Badger_-_._
Vice Pres. & Sec'y. C. H. Haberkorn, Jr.
"
" & Comptroller Richard C. Huelsman.
Asst. Vice President Norman H. Moysey
" W. C. Goddard
Treas. & Asst. Sec'y. Harvey C. Emery.
General Auditor Ottmar A. Waldo
2501 Iroquois Ave., Detroit
438 N . Jefferson Ave., Saginaw
20 McKinley Place, Grosse Pte
17 McKinley Place, Grosse Pte..
8162 E. Jefferson Ave., Detroit
700 Seward Avenue, Detroit
8120 E. Jefferson Ave., Detroit
17595 WMeme*e Av&, Detroit.
15440 Windmill Place, Grosse Pte
17525 Wildemere Ave., Detroit
2252 Yorkshire Avenue, Birmingham..
16913 Maumee Ave., Grosse Pte
Ann Arbor
3023 Cortland Ave., Detroit
DIRECTORS
Arthur C. Bloomfield
Henry E. Bodman...
Clarence H. Booth...
Joseph H. Brewer
Walter O. Briggs
Harry C. Bulkley.—
Charles I. Campbell-.
Roy D . Chapin
George R. Cooke
Harry S. Covington..
George m F i n k i . . : . .
William A. Fisher. . .
EdselB. Ford
John H. French
Frank E. Gorman...
Stephen A. Graham..
C. H. Haberkorn, Jr.
750 Michigan Ave., W., Jackson...
20 McKinley Place, Grosse Pte
Lone Pine Road, Bloomfield Hills _
Blythefleld Farms, Belmont
700 Boston Blvd., w . , Detroit
749 Seminole Ave., Detroit
Whites Road, Kalamazoo
447 Lakeshore Road, Grosse Pte—.
64 Country Club Lane, Grosse Pte.
7 Cloverly Road, Grosse Pte
17 Cloverly Road, Grosse £>te_
1791 Wellesley Drive, Detroit.
Gaukler Pointe, Grosse Pte
936 Lakeshore Road, Grosse Pte.—
1224 N. Genesee Drive, Lansing....
4000 Gratiot Avenue, Port Huron..
15440 Windmill Place, Grosse Pte_.
Salary
STOCK EXCHANGE PBAOTICES
4471
DIRECTORS—Continued
Name
JSherwin A. Hill
Charles H. Hodges...
James Inglis
George B. Judson
Ernest Kanzler
Dwight B. Lee
Cliffords. Longley..
Robert O. Lord
Alvan Macauley
Frank J. Maurice—..
•George B. Morley....
-Charles S. Mott
Fred J. Murphy
PhelpsNewberry...
Ransom E. Olds
Bert K. Patterson...
Herbert S. Reynolds
.Murray W. Sales....
Henry H. Sanger
JUger Sheldon
R. Perry Shorts
Hal H. Smith
Oscar W. Smith
James L. Walsh
Charles B. WarrenHerbert R. Wilkin-
Residence address (Michigan)
Salary
Greenmead—Northville
364 Washington Road, Grosse Pte
2301 Highland Ave., Ann Arbor
19233 Woodston Road, Detroit
2501 Lroquois Avenue, Detroit
P. O. Box 643, Detroit
11 Touraine, Detroit
17 McKindly Place, Grosse Pte
735 Lakeshore Road, Grosse Pte
R.F.D. No. 3 Manor Road, Birmingham.—
316 N. Washington Avenue, Detroit
1400 E. Kearsley Street, Flint..
17620 E. Jefferson Avenue, Detroit
36 Cloverly Road, Grosse Pte
720 So. Washington Ave., Lansing
700 Seward Avenue, Detroit
300 So. Brown Street, Jackson
17743 E. Jefferson Ave., Detroit
333 University Place, Grosse Pte
525 Lakeshore Road, Grosse Pte
438 North Jefferson Ave., Saginaw
15530 Windmill Pte. Drive, Grosse Pte
_
8120 E. Jefferson Ave., Detroit
8162 E. Jefferson Ave., Detroit
273 Lakeshore Road, Grosse Pte
8120 E. Jefferson Ave., Detroit
[Endorsement]
File No.
Name Guardian Detroit Union Group, Inc.; Street Penobscot Bldg.; City
.Detroit.
Annual report, 19S2; Filed (Leave Blank), 1933 With Michigan Securities
Commission; Form 16.
SECTION 28, ACT NO. 220, P.A. 1923 AS AMENDED
SEC. 28. Every issuer of securities, filed under this act, shall until such time
AS is otherwise ordered by the commission, or* before March first of each year,
file with the commission, on blanks to be provided by it, a detailed statement showing the condition of said issuer on the thirty-first day of December
preceding, and shall at the same time pay a filing fee therefor of one dollar.
STOCK EXCHANGE PBACTICES
WEDNESDAY, JANUARY 3, 1934
UNITED STATES SENATE,
SUBCOMMITTEE OF THE COMMITTEE ON
BANKING AND CURRENCY,
Washington, D.C.
The subcommittee met at 10 a.m., pursuant to adjournment on
.Friday, December 22, 1933, in Room No. 301 of the Senate Office
Building, Senator Duncan U. Fletcher, presiding.
Present: Senators Fletcher (chairman), Barkley, Townsend,
Couzens, and Goldsborough (substitute for Norbeck).
Present also: Ferdinand Pecora, counsel to the committee, Julius
Silver and David Saperstein, associate counsel to the committee; and
Frank J. Meehan, chief statistician to the committee.
The CHAIRMAN. The subcommittee will come to order, please.
Mr. Pecora, have you your witnesses present?
Mr. PECORA. Yes, sir. I think we will recall Mr. Patterson, who
l a s already been sworn.
TESTIMONY OF BERT K. PATTERSON—Resumed
Mr. PECORA. Mr. ^Patterson, when you became Vice President of
the Guardian Detroit Union Group, Inc., what, particularly, were
the duties that were assigned to you, or which you undertook to
perform?
Mr. PATTERSON. The first duties were to make examinations of
banks which Mr. Lord had tentatively made arrangements with to
exchange shares for.
Mr. PECORA. That is, the various banks that that Group contemplated acquiring
Mr. PATTERSON. That is right.
Mr. PECORA. Through purchase or acquisition of their stock?
Mr.
PATTERSON. Yes,
sir.
Mr. PECORA. Well, did that remain as your principal duty during
the entire period of your service as executive vice president of the
Group?
Mr. PATTERSON. Yes, sir.
PECORA. That is, it was your special function
Mr. PATTERSON. It was.
Mr. PECORA. TO look after the condition of the various
Mr.
bank units
of the Group.
Mr. PATTERSON. With the exception of a part of 1932, Mr. Pecora,
when the work was divided. When Mr. Wilkin was brought from
Flint to Detroit and made an officer of the Group Co., whereupon
4473
4474
STOCK EXCHANGE PEACTICES
certain banks were allocated to him, that is, certain banks were'
allocated to my supervision and certain banks to Mr. Wilkin for his
supervision.
Mr. PECORA. Did you, for the purpose of observing the condition
of the various banking units of the Group, from time to time make
examinations of those unit banks or cause them to be made?
Mr. PATTERSON. Yes, caused them to be made mostly. At the
beginning I personally made an examination of the Union National
Bank & Trust Co. of Jackson for the purpose of acquisition, and later
I personally made an examination of the Federal Commercial &
Savings Bank of Port Huron, and also of the First National Bank of
Port Huron. When the arrangements with the Union Commerce
Corporation was far enough along I also made a personal examination
of the Union Trust Co. of Detroit. After that I do not believe I personally made any examinations. That was all done with the help of"
Mr. Bryan and Mr. Penningroth.
Mr. PECORA. And Mr. Hopkins?
Mr. PATTERSON. NO. Mr. Hopkins did not make any examinations
of banks forming the Group.
Mr. PECORA. NOW, the three gentlemen last named had been bank
examiners in the office of the Comptroller of the Currency for quite a
number df years before they became connected with the Group, hadn 't
they?
Mr. PATTERSON. That is right.
Mr. PECORA. And you also had had many years of service as a
national bank examiner immediately prior to your becoming connected
with the Group.
Mr. PATTERSON. Yes, sir.
Mr. PECORA. Well, when
those examinations of unit banks were
made by others than yourself while you were vice president of the
Group, were the results of their examinations submitted to you for
your action?
Mr. PATTERSON. Yes, sir.
Mr. PECORA. Was that true of all the banking
Mr. PATTERSON. I believe it was.
Mr. PECORA. Did you also in connection with
units of the Group?
your supervision of
those examinations of the various unit banks have access to copies
of reports on those banks made by the public authorities from time
to time, both State and Federal?
Mr. PATTERSON. AS to the national banks, yes. The commissioner
of banking in Michigan has not followed the practice of supplying
State banks with reports of examinations other than merely a letter
of criticism.
Mr. PECORA. YOU were the vice president of the Group when on
December 31, 1931, the Guardian National Bank merged with the
National Bank of Commerce?
Mr. PATTERSON. Yes, I was.
Mr. PECORA. And became the
Guardian National Bank of Com-
merce?
Mr. PATTERSON. Yes, sir.
Mr. PECORA. Had you made
or caused to be made anj examination
of the National Bank of Commerce prior to that consolidation for the
purpose of ascertaining the condition of that bank?
Mr. PATTERSON. Yes,
sir.
STOCK EXCHANGE PRACTICES
4475
Mr. PECORA. And did you make any special report to the Group?
Mr. PATTERSON. Yes, sir.
Mr. PECORA. Have you a copy of it?
Mr. PATTERSON. NO, I have not.
Mr. PECORA. DO you recall the substance
of the conclusions that
you stated in your report with regard to the condition of the National
Bank of Commerce and the desirability or advisability of the Guardian National Bank merging or consolidating with it?
Mr. PATTERSON. It wasn't my report, Mr. Pecora, and I don't
recall much about it now.
Mr. PECORA. Well, can't you tell the committee from your personal
recollection whether or not you recommended the consolidation?
Mr. PATTERSON. Yes; I believe I did.
Mr. PECORA. And did you recommend it because your examination
revealed to you a healthy condition of the National Bank of Commerce
at the time?
Mr. PATTERSON. Well, there were many very excellent economies
to be effected by the consolidation. I do not recall whether the condition of the bank was healthy or not, and could not say until I
could see the figures, Mr. Pecora.
Mr. PECORA. Well, that was one of the more important consolidations of unit banks effected by the Group, was it not?
Mr. PATTERSON. Yes.
Mr. PECORA. Can't you
recall whether or not your judgment, as a
result of your examination of the National Bank of Commerce prior
to consolidation, was that it was in a good, healthy, wholesome condition or otherwise?
Mr. PATTERSON. I will answer that question in this way: If there
were any undesirable assets of quantity there, there was sufficient
capital to eliminate them and still leave the consolidated bank with
ample capital to protect the deposits. I do not recall the figures so
as to accurately answer your question now.
Mr. PECORA. One of the reasons I am asking you these questions,
Mr. Patterson, is because my recollection is to the effect that Mr. Lord
stated in the course of his testimony before this subcommittee, amongr
othfer things, that certain conditions of the Guardian National Bank
of Commerce were really inherited by his original institution as a
result of this consolidation with the National Bank of Commerce.
Mr. PATTERSON. That is probably apparent now. That is to say,
at the time of consolidation, or at the time of the examination made
by the Group examiners prior to consolidation, conditions were such
that assets afterwards taken over proved to be good—or, rather,
proved to be poor as the depression continued and collateral values
slipped off.
Mr. PECORA. DO you recall having found in the National Bank of
Commerce, prior to consolidation with the Guardian National Bank,
that the former bank, the first-named bank, had carried a largeamount of the Group stock as collateral for loans?
Mr. PATTERSON. NO; I do not recall it now; sir.
Mr. PECORA. DO you recall what the situation was in that particular respect with the Group banking linits generally?
Mr. PATTERSON. Yes; I do.
Mr. PECORA. What was it?
4476
STOCK EXCHANGE PRACTICES
Mr. PATTERSON. There was a great amount of collateral of the
Group stock held as security for loans.
Mr. PECORA. And to whom or to what classes of persons had those
loans so secured been made by the various unit banks? Were they
made to officers or directors of the Group or of the unit banks themselves in large part?
Mr. PATTERSON. N O ; not in large part.
Mr. PECORA. Well, to a substantial extent?
Mr. PATTERSON. N O ; I wouldn't even say that. Not knowing
exactly what the split would be between loans to officers of banks
and to other individuals, I could not say that. But may I say this,
that as time went on the amount of the Group stock held was the
result of the exchange of Group stock for bank stock.
Mr. PECORA. Well, I am speaking now of the policy of making
loans secured by Group stock, regardless of how the Group stock
found its way into the hands of borrowers.
Mr. PATTERSON. I do not believe there was any pronounced policy
to deliberately make loans and take Group stock as collateral. It
was only taken when it was necessary to get any or all kinds of
security to protect a poor loan, or as it became poor.
Mr. PECORA. DO you recall that various national bank examiners
from time to time severely criticized the large amount or blocks of
Group stock which various unit banks held as collateral for loans?
Mr. PATTERSON. Yes, sir; I do.
Mr. PECORA. DO you recall that
those criticisms were constantly
recurring?
Mr. PATTERSON. Yes, I do.
Mr. PECORA. What, if anything,
was done by the. Group officials
to remedy that situation?
Mr. PATTERSON. Anything and everything.
Mr. PECORA. Well, what? That answer is too general.
Mr. PATTERSON. Well, we were having a war out in our country,
and we were trying to collect loans from people who were nearly
broke. And I think that the record of liquidation in the banks of
the Group, particularly at Flint, at Grand Rapids, and at Saginaw,
if you could review them you would agree with me that they had done
all that anybody humanly could do.
Mr. PECORA. Well, will you tell us what, specifically, was done to
meet the criticisms of national-bank examiners which were based, in
part, upon the holding of so many shares of Group stock as collateral
for loans?
Mr. PATTERSON. Why, the officers endeavored to convert the loans
into cash wherever they could.
Mr. PECORA. Did they succeed?
Mr. PATTERSON. I think they did, pretty well.
Mr. PECORA. Or did those loans secured by Group stock increase
in amount from the time national-bank examiners first began to
criticize them.
Mr. PATTERSON. Well, I do not believe I could specifically answer
that question, Mr. Pecora, unless I could have the figures to go on,
I would not want to trust my memory. I should say that there were
none purchased.
Mr. PECORA. Would you say that they were reduced to meet the
criticisms of national-bank examiners?
STOCK EXCHANGE PEACTICES
4477
Mr. PATTERSON. Possibly not substantially reduced.
Mr. PECORA. Would you say they were reduced at all?
Mr. PATTERSON. Yes; I would.
Mr. PECORA. NOW, let me call your attention to the following item
of criticism embodied in the report of the examination of the National
Bank of Commerce, which report was made in April of 1929 by William
Taylor, then bank examiner and now chief national-bank examiner in
Chicago. I am quoting from the report:
Loans aggregating $2,029,015 secured entirely or in part by 2,583 shares of
stock—
Eeferring to stock of the Union Commerce Investment Co.—
are subject to criticism on two occasions: First, the concentration is regarded as
excessive; and, second, for the reason that the investment company owns practically all the stock in the subject bank, and the pledged stock as collateral for
loans amounts to a circumvention of the law.
Did you become familiar with the situation referred to in that
criticism?
Mr. PATTERSON. In April of 1929?
Mr. PECORA. Yes.
Mr. PATTERSON. NO. And I was not
Mr. PECORA (interposing). I know that
you were not connected
with the Group at that time; but I mean when you specifically made
an examination of the National Bank of Commerce for the purpose
of determining or enabling the Group to determine the advisability
of consolidating that bank with the Guardian National Bank.
Mr. PATTERSON. Yes.
Mr. PECORA. Did you then familiarize yourself
Mr. PATTERSON (interposing). Yes.
Mr. PECORA (continuing). With those criticisms?
Mr. PATTERSON. N O ; not with the criticisms.
Mr. PECORA. Well, with the condition?
Mr. PATTERSON. Yes; I knew what they had.
Mr. PECORA. NOW, the Union Commerce Investment
Co. was the
investment affiliate or securities affiliate of the National Bank of
Commerce, wasn't it?
Mr. PATTERSON. I believe it was; but I cannot tell you very much
about the Union Commerce Investment Co.
Mr. PECORA. Why not?
Mr. PATTERSON. Because I do not know much about it.
Mr. PECORA. Well, it was one of the units owned by the Group,
wasn't it?
Mr. PATTERSON. NO. It was a corporation which Mr. Blair and
his associates formed for the purpose of acquiring banks, and the
Guardian Detroit Group afterwards acquired the Union Commerce
Corporation.
Mr. PECORA. This Union Commerce Investment Co. was a holding
company, wasn't it?
Mr. PATTERSON. I cannot tell you much about it, Mr. Pecora.
The CHAIRMAN. What became of it? Did it disappear entirety;
that is, I mean the corporation, or what became of it?
Mr. PATTERSON. The Union Commerce Corporation was merged
with the Guardian Detroit Group, and afterwards liquidated by them.
Mr. PECORA. Mr. Patterson, it so happens that you were chief
national bank examiner for the seventh district in April of 1929, when
4478
STOCK EXCHANGE PRACTICES
the National Bank of Commerce was examined by Mr. William
Taylor.
Mr. PATTERSON. Yes, sir.
Mr. PECORA. And you signed the report, didn't you?
Mr. PATTERSON. Yes, sir.
Mr. PECORA. NOW, the criticism that I read to you is
embodied in
the report which you yourself signed.
Mr. PATTERSON. Those reports are signed, Mr. Pecora, by all chief
bank examiners as a matter of routine.
Mr. PECORA. Only as a matter of routine?
Mr. PATTERSON. Pretty largely that; yes, sir.
Mr. PECORA. Doesn't the chief national bank examiner when he
reviews reports made by examiners working under his direction do
something more than merely affix his signature to the examiner's
report as a matter of form?
Mr. PATTERSON. Oh, yes, sir, depending upon the situation. But
chief national bank examiners are in no different category than any
other examiner, and each examiner prepares his own report, and it
is his.
Mr. PECORA. It is his report, but it is submitted first to the chief
national bank examiner for the district, and then is transmitted to
the Comptroller of the Currency, isn't it?
Mr. PATTERSON. I will put it this way: The report is prepared by
the field examiner for the Comptroller of the Currency, and the report
is typed in the chief examiner's office, and he signs it and forwards
it to the Comptroller of the Currency.
Mr. PECORA. Well, does the chief examiner sign it without familiarizing himself with its contents? Is that the custom?
Mr. PATTERSON. Oh, no. Reports are scanned. It is assumed
always, unless it is a very difficult, case, that the examiner has handled all the criticisms on the ground.
Mr. PECORA. Well, the purpose of the examiner itemizing subjects
of criticism is to concentrate attention, isn't it?
Mr. PATTERSON. That is right.
Mr. PECORA. Not only on the part of the Comptroller of the Currency but on the part of the immediate superior of the field examiner,
namely, the chief bank examiner for the district.
Mr. PATTERSON. That is correct.
Mr. PECORA. Well, now, didn't you notice that your field examiners
in the early part of 1929 were calling attention to the vice embodied
in the situation where a bank carried a substantial line of loans
secured by stock of a holding company which, in turn, owned the
bank through stock ownership?
Mr. PATTERSON. NO, sir. That was not noticed. That is to say,
it was not brought up as a major item at that time.
Mr. PECORA. Well, now, let us see about that
Mr. PATTERSON (continuing). It was one form of concentration of
credit it is true, which was probably entitled to criticism, but not
particularly noticeable merely because it was holding company stock
acting as security for a large aggregate of loans.
Mr. PECORA. Just let us see what the field examiner said, for this
is the field examiner's language embodied in the report which you
STOCK EXCHANGE PRACTICES
4479
signed. Under the caption " Loans Secured by Stock in Union
Commerce Investment Company", he says:
Loans aggregating $2,029,015 secured entirely or in part by 2,583 shares of
stock of this company, are subject to criticism on two occasions: First, the concentration is regarded as excessive; and, secondly, for the reason that the investment company owns practically all the stock in the subject bank, and the pledged
stock as collateral for loans amounts to a circumvention of the law.
Now, that was not an ordinary criticism, was it?
Mr. PATTERSON. Why, yes, I would think it was.
Mr. PECORA. DO you think where a field examiner reports a condition which he regards as practically amounting to a, violation or
circumvention of the law, is something that does not require any
special consideration by the chief bank examiner?
Mr. PATTERSON. Well, that was his opinion, as to circumvention
•of the law.
Mr. PECORA. And you adopted that opinion when you signed the
report, didn't you?
Mr. PATTERSON. N O ; I did
not.
Mr. PECORA. Why did you sign the report if you disagreed with
-an3r part of it?
Mr. PATTERSON. I did not disagree with any part of it. I signed
it as a matter of office routine.
Mr. PECORA. Well, I asked you before if that was the spirit in
which chief national bank examiners performed their duties when
they signed reports made to them by their field examiners. Do they
merely sign the reports without any consideration of their contents?
Mr. PATTERSON. NO, sir; they do not.
Mr. PECORA. DO they sign them, in other words, as a matter of
routine as you have just stated?
Mr. PATTERSON. They sign them pretty largely as a matter of routine, and they make note of any serious criticisms, and it is always
assumed that the examiner has endeavored to correct the criticisms
while on the job.
Mr. PECORA. Well, now, when you signed your field., examiner's
report in this instance, did you observe this criticism that lie made
with respect to a practice that he found in the bank and which he
specifically reported amounted to a circumvention of the law?
Mr. PATTERSON. That report is almost a matter of fair phraseology,
and I do not recall it.
Mr. PECORA. I am now reminding you of it by reading to you the
precise language, and am asking you for a statement of policy which
"was adopted by you as the chief national bank examiner in the district at the time.
Mr. PATTERSON. The policy in regard to all concentration of loans
was to recommend to the Comptroller of the Currency that the banks
be written and their attention called to them, and I imagine the
Comptroller did it in this case.
Mr. PECORA. NOW, the criticism that I have read to you from this
report, Mr. Patterson, appears on that page of the report which is
captioned "List of Items Requiring Attention and not any Corrections
Made or Promised During Examination."
Wouldn't any items of criticism, appearing under that caption,
require especially the attention of the chief national bank examiner of
the district?
4480
STOCK EXCHANGE PRACTICES
Mr. PATTERSON. NO. Those criticisms are written for the attention of the Comptroller of the Currency.
Mr. PECORA. Well, does the chief national bank examiner pass
them on without any consideration of his own?
Mr. PATTERSON. It is only in unusual cases where the chief examiner, in transmitting another examiner's report to the Comptroller
of the Currency, will write a letter about it. Reports are merely
signed and forwarded in that way to the Comptroller's office.
Mr. PECORA. Are you trying to tell us by that answer that the chief
national bank examiner signs reports prepared by his field examiners
purely as a matter of routine?
Mr. PATTERSON. Not always. Wherever
Mr. PECORA (interposing). Is that the general rule, or did you
follow that rule generally?
Mr. PATTERSON. I followed that general rule; yes, sir.
Mr. PECORA. And do you know whether that was followed in thesame fashion by other chief national bank examineis in other districts?
Mr. PATTERSON. N O ; I cannot say as to that.
Mr. PECORA. The next examination of the National Bank of
Commerce appears to have been made in October 1929. By that
time you had ceased to be the Chief National Bank Examiner for
the 7th District and had become vice president of the Guardian
Detroit Union Group, had you not?
Mr. PATTERSON. Yes,
sir.
Mr. PECORA. From the report which was made of the examination
of the National Bank of Commerce in October 1929 let me read the
following item of criticism to you, on the page captioned "List of
Items Requiring Attention" and "note any corrections made or
promised during examination," the following item appears "Loans
secured by Union Commerce Company stock: 10,665 shares secures
loans totaling $2,294,910.81. Such loans have technically been made
in violation of law, since all but 391 shares of stock of subject bank is
owned by this company "
Doesn't that indicate to you, Mr. Patterson, that the condition
complained of by the examiner whose report you signed as the Chief
National Bank Examiner for the District in April 1929, instead of
having been abated by the bank's officials, had become more aggravated by October 1929?
Mr. PATTERSON. In that period; yes, sir. The loans had increased
and the collateral had increased. I would like to make this observation, however, that undoubtedly a review of the market price
of that collateral will show that a great many of the loans were
adequately secured. The examiner is merely calling attention to a
concentration of credit.
Mr. PECORA. The examiner did something more than that, didn't
he?
Mr. PATTERSON. What was it'!
Mr. PECORA. Called' attention to the continued violation or contravention of the law?
Mr. PATTERSON. Yes, he did.
Mr. PECORA, That is a matter of serious
Mr. PATTERSON. It was his opinion as to
contravention of law.
consideration, is it not?
whether or not it was a
STOCK EXCHANGE PBACTICES
4481
Mr. PECORA. Did your opinion differ from the field examiner's
opinion on that when you signed the April 1929 report?
Mr. PATTERSON. I believe it did, sir.
Mr. PECORA Then why did you sign the report?
Mr. PATTERSON. I say I signed the report merely transmitting
it to the Comptroller.
Mr. PECORA. And you signed it knowing or feeling that the field
examiner had made a criticism of a very serious character in which
he virtually charged a violation of the law, while you disagreed with
that conclusion of the field examiner?
Mr. PATTERSON. There are many reports the chief examiner signed
of many other field examiners where violations of law are more pronounced than that.
Mr. PECORA. Let us confine ourselves to the instance that we are
speaking of. Won't you please do that, Mr. Patterson?
Mr. PATTERSON. Yes, sir.
Mr. PECORA. YOU want the
committee to understand that when
you signed the field examiner's report of the examination of the
^National Bank of Commerce of Detroit in April 1929, which report
called attention to what the field examiner stated to be a circumvention of the law, of the National Banking Act in other words,
did you sign that report as the Chief National Bank Examiner foi
the district while you disagreed with that conclusion or criticism
of the field examiner?
Mr. PATTERSON. I signed the report but did not indicate any such
disapproval. I tell you now that I probably did disagree with the
examiner then.
Mr. PECORA. Then why did you ^permit that criticism to stand if
you thought it was an unjust or unfair one?
Mr. PATTERSON. It was the examiner's own criticism and not mine.
Mr. PECORA. But you made it your own when you signed the
report, did you not?
Mr. PATTERSON. Oh, no; I beg to differ. The report was signed
as a matter of transmitting it to the Comptroller.
Mr. PECORA. Would not a forwarding letter merely serve to
transmit the report without your having signed it as the Chief
Examiner?
Mr. PATTERSON. That is not the way it is done, sir.
Mr. PECORA. Then do you still want us to understand that the
Chief National Bank Examiner signs the reports of examinations
made by his field examiners without regard to their contents and
merely for the purpose of forwarding them to the Comptroller of the
Currency?
Mr. PATTERSON. It is largely that. As a matter of fact, the chief
examiner is merely, in signing the report, the examiner's attorney-infact.
Mr. PECORA. Did you ever disagree while you were chief examiner
in anjr district with the conclusions of your field examiners embodied
in their reports?
Mr. PATTERSON. Many times.
Mr. PECORA. Well, did you indicate that disagreement?
Mr. PATTERSON. Not always; no, sir.
Mr. PECORA. Where you did, how did you indicate it?
Mr. PATTERSON. By letter.
4482
STOCK EXCHANGE PRACTICES
Mr. PECORA. By letter to whom?
Mr. PATTERSON. TO the Comptroller.
Mr. PECORA. DO you recall whether in this instance you gave
expression to your disagreement with that conclusion of the field
examiner in any letter you sent to the Comptroller of the Currency?
Mr. PATTERSON. I don't recall. I don't believe I did.
Mr. PECORA. DO you mean that you were willing to pass on to the
Comptroller of the Currency over your signature as a chief national,
bank examiner for the district a report which in words stated that
certain things were being done by the bank in contravention of thelaw without calling the Comptroller's attention to the fact that you
disagreed with that conclusion of the field examiner?
Mr. PATTERSON. Yes; I apparently did that in that case.
Mr. PECORA. DO you think that that is the way in which a chief
national bank examiner should attend to his duties?
Mr. PATTERSON. Well, the chief national bank examiner has many
duties, and sometimes he cannot cover everything.
Senator COTJZENS. While you are on that point, Mr. Patterson,
will you please tell the committee what the duties of the chief national bank examiner are, and particularly in view of the fact that
you say you signed all these reports as a matter of form?
Mr. PATTERSON. His duties are to maintain the office of the chief
examiner, which includes the supervision of clerks who reconcile
bank accounts, correspondent accounts, the typing and preparation
of the field examiners' reports, to see that the various examinations
at the banks are kept up and men routed, provide that they are
properly systemized.
Senator COUZENS. Does not include visiting any of the banks that
are examined at all?
Mr. PATTERSON. Sometimes.
Senator COUZENS. Isn't it a fact that some of the chief bank
examiners do go around and call on the banks which their assistants
examine and discuss these matters with the directors?
Mr. PATTERSON. Yes, sir.
Senator COUZENS. Describe your duties in that connection.
Mr. PATTERSON. In some of the larger and more difficult examina-
tions I participated in the discussions with the field examiners, or if
it was not possible for me to attend the discussions at that time later
on I called the bank. It was merely a matter of call.
Senator COUZENS. NOW, in connection with the query that has ji.st
been made by Mr. Pecora, did you discuss with any of these banks
who were criticized as carrying their own stocks or circumventing the
law or making technical violations, any of those questions?
Mr. PATTERSON. NO, sir.
Senator COUZENS. Then apparently
you must have thought that
these technical violations and circumventions of law were an ordinary
occasion and that there was no particular object of your discussing
them with the banks who were charged with them?
Mr. PATTERSON. I left that to the Comptroller to determinewhether or not it was a circumvention of law, inasmuch as I believed
it was merely the examiner's opinion.
Senator BARKLEY. Were these reports of the examiner made to you,
or to the Comptroller and just passed through you?
Mr. PATTERSON. TO the Comptroller.
STOCK EXCHANGE PRACTICES
4483
Senator BARKLEY. They were not made to you at all?
Mr. PATTERSON. The field examiner's pencil copy of reports are
forwarded to the chief examiner's office for typing and finished.
Many times the examiner cannot be present when the report is
finished and we sign his name for him. Each chief examiner signs
for him.
Senator BARKLEY. YOU sign his name and then sign your own?
Mr. PATTERSON. That is right.
The CHAIRMAN. What is the precise language preceding your own
signature?
Mr. PATTERSON. I don't remember, Senator, what it is.
Mr. PECORA. I was just looking at that, Senator.
The CHAIRMAN. It was a question of whether you merely say
" I herewith transmit the report of the field examiner", or whether
you sign some sort of certificate as to its correctness or soundness.
Mr. PATTERSON. The examiner supplies us with a small form or
certificate authorizing the chief examiner to sign for him.
The CHAIRMAN. I mean following that comes the signature of the
chief examiner, either that he is hereby transmitting the report of the
field examiner or that the report he has examined and approved.
Mr. PATTERSON. Yes.
The CHAIRMAN. NOW, which happens? What does happen?
Mr. PATTERSON. I would say it was merely a transmittal.
Senator BARKLEY. Where the report of the examiner shows
a
situation which is so serious that it ought not to wait for the ordinary
routine of a transmittal to Washington and a report from the Comptroller, does the chief examiner assume any authority to take any
action and make any examination to correct it?
Mr. PATTERSON. When the examination has been finished, Senator,
and the situation is very serious, the examiner will ask the chief
examiner to immediately participate with him in formulating some
plan and correct whatever is found to be wrong. Many times directors
are called into the chief examiner's office for discussion as to means to
effect that correction. If the situation is large and immediate, the
chief examiner will get in touch with the Comptroller's office for advice.
The CHAIRMAN. What provision of the law do you have in mind as
being contrevened? Do you recall that? What law is that?
Mr. PATTERSON. I would sajr that it was the statute preventing
the making of loans secured by its own bank stock.
The CHAIRMAN. There is a statute against that?
Mr. PATTERSON. Yes, sir.
THe CHAIRMAN. Well, that was done here, was it not?
Mr. PATTERSON. It was holding company stock, Senator.
Mr. PECORA. But the holding company owned all but some
three
hundred-odd shares of the capital stock of the subject bank, did it
not?
Mr. PATTERSON. That is correct.
Mr. PECORA. And that circumstance was specially called attention
to by the field examiner?
Mr. PATTERSON. That was one of his criticisms that was specially
mentioned; yes, sir.
Mr. PECORA. SO that in effect he was reporting that the bank had
made a substantial number of loans, the amount of loans aggregating over $2,000,000, which were secured by the stock of the
4484
STOCK EXCHANGE PRACTICES
holding company, which in turn owned practically all of the capital
stock of the bank?
Mr. PATTERSON. Yes. It is quite probable that this examiner was
proceeding on the same theory that many others have. The large
amount of shares here was undoubtedly due to the exchange of bank
shares, wherein the holders got a great many shares more of holding
company stock than they formerly held of bank stock.
Mr. PECORA. What has that got to do with the matter of correcting what is reported to be a circumvention of the law with regard
to the making of loans?
Mr. PATTERSON. It hasn't anything to do. I was merely offering
an explanation of the large number of shares which were reported.
The CHAIRMAN. Were any of these loans made to the directors of
the bank?
Mr. PATTERSON. I don't recall whether they were or not.
Mr. PECORA. Mr. Chairman, I have before me a photostatic
reproduction of the entire report that was made of the National
Bank of Commerce as of April 25, 1929. That report is signed in
the following manner: The signature of. William Taylor—or rather
the name " William Taylor"—is typewritten on a line over the printed
word "Examiner." Directly underneath is the typewritten word
" b y " ; then the handwritten signature of " B . K. Patterson, Chief
Examiner." So that the only handwritten signature is that of the
chief examiner.
Mr. PATTERSON. That is right.
Mr. PECORA. And you say that in this case you affixed your
signature to Mr. Taylor's report virtually as a matter of form or
routine?
Mr. PATTERSON. I think you should see the form or certificate which
each examiner, including Mr. Taylor, signed in transmitting this
pencil copy authorizing me to sign the finished copy for him. I don't
recall just what that is, Mr. Pecora.
Mr. PECORA. We will find it for you. Now, by October 1929, you
had, as already testified, become the vice president of The Group.
Was it then called to your attention that the condition complained of
by Examiner Taylor m April 1929, had not been allayed, but that
rather had been aggravated?
Mr. PATTERSON. Yes; I knew that there had been an increase in
shares and some increase in loans based upon those shares.
Mr. PECORA. What, if anything, did you do about it?
Mr. PATTERSON. In October 1929?
Mr. PECORA. Yes.
Mr. PATTERSON. Nothing.
Mr. PECORA. An examination
of the National Bank of Commerce
and Union Trust Co. was made as of September 15, 1930, By the
National Bank Examiners and again attention was called to this evil
of the bank making loans secured by the stock of the holding company,
which in turn owned practically all of the shares of the bank. Are
you familiar with the situation that was disclosed by that report?
Mr. PATTERSON. I don't recall it now.
Mr. PECORA. DO you recall whether by that time anything at
all had been done by the group to alleviate the condition complained of with respect to the unit banks making, and particularly
STOCK EXCHANGE PBAOTICES
4485
the National Bank of Commerce making, a large amount of loans
secured by the stock of the holding company?
Mr. PATTEESON. I recall that there was a pretty well-defined
policy to try to reduce as much as possible.
Mr. PECORA. DO you recall that in the pursuit of that policy the
outcome was an increase in the amount of collateral consisting of
stock of the group held by the bank?
Mr. PATTERSON. NO, I don't recall it now.
Senator COUZENS. Mr. Patterson, while Mr. Pecora is looking that
up will you tell us what jurisdiction you have over your subordinates?
Mr. PATTERSON. While with the group?
Senator COUZENS. NO, while you were chief bank examiner of
the seventh district.
Mr. PATTERSON. Well, they were all directly the employees of the
Comptroller of the Currency, and chief examiners are also employees
of the Comptroller of the Currency. Each of the field examiners
is assigned to specific subdistricts within each Federal Reserve
district.
Senator COUZENS. By whom?
Mr. PATTERSON. By the Comptroller of the Currency. And he
establishes convenient headquarters in order to examine the banks
as economically as possible. He proceeds to do that without any
particular orders from the chief examiner, inasmuch as he knows
what banks are due for examinations.
In addition to that the chief examiner is provided with three or
more examiners who are not assigned to any particular district, for
work at large. These examiners are specifically assigned by the
chief examiner to special cases or to large examinations in the larger
districts.
Senator COUZENS. Have you any jurisdiction to remove or reprimand or facilitate the efficiency of the examiners?
Mr. PATTERSON. That should come directly from the Comptroller,
although in many instances the chief examiner makes recommendations to the Comptroller.
Senator COUZENS. But you do not check up on the examiners to
see whether they are doing efficient work or not or whether their
reports are reliable, do you?
Mr. PATTERSON. Not particularly, no, sir, unless it is a flagrant
case.
Senator COUZENS. Well, who is responsible for looking after the
examiners to see that they do properly the work and their reports
are satisfactory and the examinations are satisfactory? Whose
responsibility is that?
Mr. PATTERSON. Well, directly the Comptroller, I would say, but
of course the chief exariiiher is held responsible, too.
Senator COUZENS. YOU h&ve no authority to remove anybody or to
change them or to reprimand them for the kind of examinations that
they make?
Mr. PATTERSON. NO, sir.
Senator BARKLEY. YOU do
have authority to recommend removals
and you do have authority to transfer men in your district from one
place to another, don't you?
Mr. PATTERSON. Only by recommendation, Senator.
175541—34—PT 9
19
4486
STOCK EXCHANGE PBACTICES
Senator BARKLEY. YOU mean you cannot take a man out of one
territory within your district and put him in another?
Mr. PATTERSON. NO, sir.
Senator BARKLEY. Don't
you direct where he should go to examine
a bank?
Mr. PATTERSON. Only within his own district.
Senator BARKLEY. That is what I mean.
Mr. PATTERSON. Yes.
Senator BARKLEY. And you
Mr. PATTERSON. If he were
do recommend in other cases?
to be transferred to another district
that would have to be recommended to the Comptroller and he
would arrange it.
Senator BARKLEY. But you would make the recommendation
for transfer?
Mr. PATTERSON. Yes, sir.
Senator BARKLEY. And you
do make the recommendations for
dismissals where you do not think that the examiner is complying
with your idea of his performance of his duties?
Mr. PATTERSON. Yes, sir.
Senator BARKLEY. And in
order to make such a recommendation
you have to know something about his work, don't you?
Mr. PATTERSON. Yes, sir.
Senator BARKLEY. And you know
Mr. PATTERSON. Yes, sir.
Senator BARKLEY. SO that you do
that from examining him?
have a good deal of authority
over him?
Mr. PATTERSON. Well, sometimes; sometimes not.
Senator COUZENS. I still do not understand. If you signed those
reports in behalf of Mr. Taylor, then you did it just as a matter of
form and without any knowledge of your own as to whether Mr.
Taylor had conducted an efficient and competent examination?
Mr. PATTERSON. Why, Senator, many of these reports are sigped
by the chief clerk in the chief examiner's office when the chief examiner
is away from the office.
Senator COUZENS. SO those examiners are free-lances and there is
no one around anywhere apparently to check up on the examiners
to see whether they are doing competent and efficient work—is that
not a fact?
Mr. PATTERSON. N O ; I would not say that.
Senator COUZENS. Just what is the check? I am trying to find
out what check there is to find out whether the national-bank examiner does a proper and efficient job. Whose responsibility is it
and who passes on it?
Mr. PATTERSON. It is likely reflected in the kind of reports he makes
and the amount of correction of criticizable things he discovers.
Senator COUZENS. Well, in signing this report for Mr. Taylor you
did not agree apparently with the statement that he made that these
were technical violations and a contravention of the law; you did not
agree, but you let it go by without any comment. Who is supposed
to comment on that, the Comptroller's office?
Mr. PATTEROSN. Yes, sir.
Mr. PECORA. Does not the
Comptroller's office look to the chief
national-bank examiner for a review of the field report?
Mr. PATTERSON. Not in all cases, no, sir.
STOCK EXCHANGE PRACTICES
4487
Mr. PECORA. Well, in what cases does the Comptroller of the
Currency rely upon the chief national-bank examiner for a review
of the field reports?
Mr. PATTERSON. Only in those cases where it is a very serious
affair.
Mr. PECORA. And who is supposed originally to determine whether
there is a very serious affair, as you call it?
Mr. PATTERSON. The examiner.
Mr. PECORA. And after him the chief examiner?
Mr. PATTERSON. Yes; he will frequently call upon the chiefexaminer for his advice.
Mr. PECORA. From the way you have described the manner in
which you acted in transmitting after signing the reports of the field
examiners under your supervision one might be led to believe that the
chief national-bank examiner in each district is nothing more than a
rubber stamp for the field examiners. That is not a sound conception:
of the chief examiner's function, is it?
Mr. PATTERSON. Well, that may be the way you have construed it.
I believe in actual practice you would find differently.
Mr. PECORA. What would you find in actual practice that would
make him anything more than a rubber stamp for the field examiner?
Mr. PATTERSON. YOU are referring to the report only?
Mr. PECORA. I am referring to the performance of duty by a chief
national-bank examiner.
Mr. PATTERSON. Certainly not.
Mr. PECORA. If the chief examiner signs his name on the field examiner's reports as matter of routine, why is he anything more than
a mere rubber stamp for the field examiner?
Mr. PATTERSON. Well, I would not say that he is a rubber stamp.
Mr. PECORA. Why not?
Senator COUZENS. AS a matter of pride—that is all you say it for,,
not as a matter of fact?
Mr. PATTERSON. N O ; I think that if you could understand some'
of the duties of the chief examiner you would think that he was anything but a rubber stamp.<
Senator COUZENS. That is what we are trying to find out.
Mr. PECORA. Yes. Tell us what the duties are.
Mr. PATTERSON. Well, I have just told you that while reports are
signed by the chief examiner for the examiner upon his authorization to sign them, in difficult cases the chief examiner will immediately get into it himself and find out what is the matter and try toassist the examiner in the correction of serious affairs.
Senator COUZENS. Then you did not construe this as a difficult
case?
Mr. PATTERSON. NO, sir; apparently not.
Mr. PECORA. Why did you disagree with the conclusion of Examiner Taylor when he reported that these loans made by the banks
secured by the stock of the holding company, which in turn owned
practically all of the stock of the bank, were in circumvention of the
National Banking Act prohibiting the making of loans secured, by
the bank's own stock?
Mr. PATTERSON. A holding company holding bank stock was a
rather new thing in April of 1929, at least in the seventh district,
and it was not clear to me that any position had been taken on it
4488
STOCK EXCHANGE PRACTICES
by the Comptroller's office as to whether or not it did amount to a
circumvention. I don't recall now that the Comptroller's office ever
took a position on that point.
Mr. PECORA. YOU were thoroughly familiar with the provision of
the Banking Act prohibiting a national bank from making loans
secured on its capital stock, were you not?
Mr. PATTERSON. Yes, sir; except in those cases where they take
the collateral for debts previously contracted.
Mr. PECORA. In the instance of the examination of the National
Bank of Commerce made in April 1929 it was reported to you that
loans had been made by the bank in contravention of that provision
of the National Banking Act that I have just called your attention
to. Why did you disagree with Examiner Taylor's conclusion in
that respect?
Mr. PATTERSON. I have just stated that I did not believe it had
been clearly outlined by the Comptroller's office that a circumvention had occurred, inasmuch as holding companies who held bank
stocks were so new in the seventh district that it never had been
decided.
Mr. PECORA. Was that any reason you took a position contrary to
that advanced by the field examiner?
Mr. PATTERSON. That was the reason why I did.
Mr. PECORA. Well, weren't you called upon as the chief examiner
for the district to reach some determination yourself on that? The
mere fact that the question was a novel one to you was no reason why
you should sidestep it, was it?
Mr. PATTERSON. NO.
Mr. PECORA. AS you
now reflect on the situation, is it still your
opinion that the making of those loans secured by the stock of the
holding company which owned the stock of the bank was not in substance a contravention of the law?
Mr. PATTERSON. NO, sir; I don't believe it is.
Senator COUZENS. Will you explain why, because from a practical
standpoint it seems to me that it is loaning money on the bank stock?
I would like to have your angle of it.
Mr. PATTERSON. It is a direct loan on a corporation stock and not
bank stock, as defined in the statute.
Mr. PECORA. YOU were looking here to form rather than substance
when you reached that conclusion, were you not?
Mr. PATTERSON. That is right.
Senator ADAMS. Mr. Patterson, if the holding company had only
held stock of this one bank could you have drawn that distinction
then?
Mr. PATTERSON. NO, sir. I beg your pardon—I did not understand your question, Senator.
Senator ADAMS. My question was this: You were drawing a distinction between loaning on a bank's stock itself and loaning on the
stock of & corporation which held the bank stock.
Mr. PATTERSON. Yes, sir.
Senator ADAMS. I was asking
you if the holding company had
limited its ownership to the stock of the particular bank that was
leaking the loan
Mr, PATTERSON- Yes.
STOCK EXCHANGE PRACTICES
4489
Senator ADAMS. Would you then have looked through the form to
the substance of it?
Mr. PATTERSON. N O ; I don't believe I would change my opinion
even then.
Senator ADAMS. YOU would have still thought that was all right?
Mr. PATTERSON. Yes, sir.
Mr. PECORA. DO you revere form more than you do substance?
Mr. PATTERSON. Well, no; I would not say so.
Mr. PECORA. Don't you think in effect that is what you were doing
here?
Mr. PATTERSON. Well, as a matter of fact, I didn't do anything
there, Mr. Pecora.
Mr. PECORA. Then you were a rubber stamp in this particular
instance?
Mr. PATTERSON. NO.
Mr. PECORA. YOU say you
did not do anything, but you signed the
report. Does the signing of the report represent an idle act? In
other words, is your signature simply a rubber stamp signature?
Mr. PATTERSON. SO far as the report is concerned it is merely a
signature under the authorization of the examiner to transmit the
report to the Treasury.
Mr. PECORA. Was it in substance a rubber stamp signature then?
Mr. PATTERSON. Oh, if you wish to call it that; yes, sir.
Mr. PECORA. All right.
Senator ADAMS. What became of the original pencil copy, which I
assume was signed?
Mr. PATTERSON. That is filed in the chief examiner's office*
Senator ADAMS. YOU retain that?
Mr. PATTERSON. Yes, sir.
Senator ADAMS. That comes as a signed copy?
Mr. PATTERSON. Yes, sir.
Mr. PECORA. In the examination of the National
Bank of Commerce, made in the fall of 1930, the following criticism appears:
Loans secured by Guardian Detroit Union Group stock, 48,431 shares of this
stock held as collateral.
New loans with this stock as collateral unfavorably regarded. Numerous
loans based thereon at present lacking collateral coverage.
Did you, as vice president of the Group, whose special function it
was to attend to or supervise examinations of the various banks, the
unit banks of the Group, do anything about meeting this criticism?
Mr. PATTERSON. I do not recall that particular instance, except
that I was almost in daily contact with officers of that bank in regard
to many matters. I did not get the date of that report, Mr. Pecora.
Mr. PECORA. September 15, 1930.
Mr. PATTERSON. By that time the market price of the collateral
had gone off seriously, which accounts for the examiner's statement
that the collateral is short, I believe you said, or words to that effect.
Mr. PECORA. He said, " Numerous loans based thereon at present
lacking collateral coverage."
Mr. PATTERSON. That is right.
Mr. PECORA. He also called attention to the fact that over 48,000
shares of the Group stock was held as collateral for loans by the
National Bank of Commerce.
4490
STOCK EXCHANGE PRACTICES
Mr. PATTERSON. Yes,
Mr. PECORA. SO that
sir.
Mr. PATTERSON. Yes,
sir.
the amount of such stock had increased over
the amount reported during the preceding year?
Mr. PECORA. Which leads to the conclusion that the condition
called attention to in the preceding year had not been allayed but
had been permitted to become aggravated?
Mr. PATTERSON. Largely because of the fact that they had to
acquire any and all collateral possible in order to protect the loans.
I will say now, without knowing the circumstances, that no new loan
was made.
Mr. PECORA. Don't you know that the number of loans increased
substantially, which were secured by the group stock, by September
1930?
Mr. PATTERSON. NO, sir; I do not recall.
Mr. PECORA. The next examination of the bank—that is, the
National Bank of Commerce—appears to have been made as of
March 2, 1931, and the field examiner happened to be Mr. R. L.
Hopkins in that instance, who finally became an officer of the group
^or one of its unit banks. Do you recall that?
Mr. PATTERSON. Yes,
sir.
Mr. PECORA. DO you recall the condition reported by Examiner
Hopkins as the result of his examination of March 1931, with respect
particularly to the amount of group stock held as collateral by the
.National Bank of Commerce?
Mr. PATTERSON. NO, sir; I do not recall that.
Mr. PECORA. DO you recall that the report indicated that the condition had continued to become aggravated instead of relieved?
Mr. PATTERSON. I do not even recall having seen that particular
report.
Mr. PECORA. Were these reports kept from you?
Mr. PATTERSON. NO, sir; they were kept by officers of the bank.
Mr. PECORA. But you, as the vice president of the group, were
specially charged with the function, as I understood your testimony
earlier this morning, of supervising these reports made by your bank
^examiners.
Mr. PATTERSON. N O ; not supervising the reports.
Mr. PECORA. TO act upon the conditions indicated by the reports?
Mr. PATTERSON. We endeavored to make our own examinations;
-and my testimony was with respect to Messrs. Bryan and Penningroth, and not with respect to the national bank examiners' reports
tafter I had gone with the Group.
Mr. PECORA. Let me read to you the following criticism made by
Examiner Hopkins in March 1931:
The bank has necessarily had to be lenient in their attitude in dealing with loans
secured by the stock of their parent corporation, and undoubtedly a policy of
reducing the aggregate of such loans will be carried out as soon as practicable.
Do you recall that?
Mr. PATTERSON. N O ; I do not.
Mr. PECORA. DO you recall the
condition that prompted the bank
to be lenient in its attitude toward loans secured by the stock of the
Group or, as Mr. Hopkins calls it, the "parent corporation"?
Mr. PATTERSON. N O ; I do not think I do recall that.
STOCK EXCHANGE PRACTICES
4491
Mr. PECORA. Were those criticisms being lightly passed over or
ignored by the Group officers?
Mr. PATTERSON. Certainly not.
Mr. PECORA. What was being done about this particular item of
criticism between 1929 and the spring of 1931?
Mr. PATTERSON. Everything that it was humanly possible for
officers of the bank to do, to reduce loans which were already undercollateral because of the shrinkage in security values, and particularly
in that stock, the holding company's stock.
Mr. PECORA. What, specifically, was done?
Mr. PATTERSON. The collection of the loans or the acquisition of
additional collateral to strengthen the loans.
Mr. PECORA. Was any measurable success made at all in that
respect?
Mr. PATTERSON. I think so.
Mr. PECORA. Let me read further to you what Mr. Hopkins had to
say in his report of the March 1931 examination, under the caption of
"List of Items Requiring Attention":
Loans secured by the capital stock of the Guardian Detroit Union Group*
The management should seriously consider the possibility of an unwarranted
concentration being brought about through an apparent liberal policy in extending
loans predicated on shares of an affiliated or parent concern. Many of the loans
classified as slow in this report are secured by this stock and now show a deficit
due to the reduction in market value. Being unable to forecast the future trend
of the market price of this stock no other course is felt warranted. Should the
stock increase in market value to an average over the past 18 months many of
these loans will automatically be removed from the classified section. The bank
has necessarily had to be lenient in their attitude in dealing with loans secured by
the stock of their parent corporation, and undoubtedly a policy of reducing the
aggregate of such loans will be carried out as soon as practicable.
Mr. PATTERSON. I do not recall those remarks; I do not think I
ever heard them before.
Mr. PECORA. YOU were an executive officer of the group and a
former chief national bank examiner who, you said, were specially
charged with the function, as such vice president of the group, to
look into the condition from time to time of the various unit banks of
the system. Now, you are telling us that the report of the national
bank examiner on the National Bank of Commerce, one of the unit
banks, made in March 1931, was not brought to your attention by
anybody?
Mr. PATTERSON. I do not think it was.
Mr. PECORA. HOW do you account for that?
Mr. PATTERSON. I do not know.
Mr. PECORA. DO you think there was any studious attempt to
keep this information from you?
Mr. PATTERSON. No; I do not believe so.
Mr. PECORA. But you are unable to account for the fact that this
report was not brought to your attention?
Mr. PATTERSON. I would like to ask, Mr. Pecora, whether you are
reading from the confidential section of that report or the open section of the report, in those remarks?
Mr. PECORA. This is the open section of the report.
Mr. PATTERSON. I do not recall ever having seen it, sir.
Mr. PECORA. Can you give any reason why you did not see it?
Do you know why it was withheld from you or that you were not
permitted to see it, by anybody?
4492
STOCK EXCHANGE PRACTICES
Mr. PATTERSON. NO, sir.
Mr. PECORA. YOU knew an
examination had been made, did you
not?
Mr. PATTERSON. Yes, sir.
Mr. PECORA. Did you call for the report?
Mr. PATTERSON. N O ; I did not.
Mr. PECORA. Why didn't you do that?
Mr. PATTERSON. We were going on our own
Mr. PECORA. When you say that, do you
reports pretty largely.
mean that you were
ignoring the reports made by the national bank examiners and relying upon the examinations made by your own men?
Mr. PATTERSON. N O ; not ignoring them at all.
Mr. PECORA. Apparently, when you had not even seen the report
or had it brought to your notice, if you were not ignoring it somebody
was seeing to it that you did not learn of it.
Mr. PATTERSON. I do not know who it was.
Mr. PECORA. Why did you not call for the report of an examination
that you knew had been made?
Mr. PATTERSON. AS I say, we were relying on our own reports of
Examinations.
Mr. PECORA. More than you were on the reports of the national
bank examiners?
Mr PATTERSON Well, yes
Mr. PECORA. DO you think that is a fair guide, Mr. Patterson,
for a bank officer to be guided more by an examination made by some
one employed by the bank rather than an examination made under the
independent auspices of the Comptroller of the Currency?
Mr. PATTERSON. Well, frankly, Mr. Pecora, I had a little more
faith in our own men in making our own examinations.
Senator ADAMS. Were you a director of the bank?
Mr. PATTERSON. NO, sir; I was not.
Senator ADAMS. YOU do know that the
bank directors are forced to
send word to the Comptroller's office that they have personally
given consideration to these reports?
Mr..PATTERSON. Yes, sir; I know that.
Mr. PECORA. Mr. Patterson, let me repeat part of the language of
this criticism:
The management should seriously consider the possibility of an unwarranted
concentration being brought about through the apparent liberal policy of extending
loans predicated on the shares of an affiliated or parent concern.
In view of that language, how is it that the management, or at
least that part of the management that you took part in, did not even
consider this report or learn of it?
Mr. PATTERSON. I was not a part of the management of the bank.
Mr. PECORA. Would you think that referred only to the management of the bank?
Mr. PATTERSON. Yes,
sir.
Mr. PECORA. The stock of the bank was owned by the group.
Did not that place the responsibility for the management of the bank
directly upon the group's officers and board?
Mr. PATTERSON. Not entirely; no. The management of each
bank was left up to its own officers and its own directors.
STOCK EXCHANGE PRACTICES
4493
Mr. PECORA. Without any siipervision by the group?
Mr. PATTERSON. Oh, yes.
Mr. PECORA. Why was not
that supervision given to it in tbis
instance?
Senator COUZENS. When you said, " Oh, yes ", what did you mean?
Mr. PATTERSON. I have lost it now, Senator Couzens.
Senator COUZENS. The reporter will read the question and the
answer, please.
(The question and answer referred to were read by the reporter as
above recorded.)
Mr. PATTERSON. I was mistaken. I would like to change it and
say no.
Senator COUZENS. Then it was under some supervision of the
group?
Mr. PATTERSON. Yes.
Senator COUZENS. It appeared before in the evidence that they
were dictating the dividend policies of the banks, so I thought you
must have been in error when you made your answer, "Oh, yes."
Mr. PATTERSON. When I say that the banks were supervised by
the group, I mean we. made examinations of them and we were in
daily contact with whatever problems they had. The management
of the ^National Bank of Commerce was very well regarded, and I
am sure that they put full confidence in a criticism of Mr. Hopkins or
other examiners and they did all they could to protect bad loans as
security values were fluctuating.
Senator COUZENS. Who employed Mr, Hopkins in the group?
Mr. PATTERSON. The employment of Mr. Hopkins came about in
this way, Senator. Mr. Mott, of Flint, had talked to Mr. Covington
and myself about the affairs there, and he asked us if we could make
a suggestion for some one to take Mr. Wilkin's place. Mr. Covington
and I conferred and we thought that Mr. Hopkins would make a
desirable bank officer in Flint, and suggested his name to Mr. Mott.
Later on Mr. Mott and Mr. Hopkins were brought together.
Senator COUZENS. SO you recommended, or at least joined in the
recommendation of Mr. Hopkins to Mr. Mott?
Mr. PATTERSON. Yes, sir.
Senator COUZENS. I assume
you know that Mr. Hopkins had been
reporting to the Comptroller of the Currency that they should be
lenient with your Group, do you not?
Mr. PATTERSON. N O ; I did not know that.
Mr. PECORA. YOU said that you depended more on your own examinations of these unit banks than on the examiners, the national
bank examiners. Was a report of the examining committee of this
bank, that is, of the National Bank of Commerce, made in May 1931?
Mr. PATTERSON. I do not know.
Mr. PECORA. Well, perhaps this will serve to refresh your recollection, if I read to you the following extract from a report made by the
examining committee of the National Bank of Commerce in May
1931?
Senator COUZENS. Will you please state at that point who the
examiners were, Mi*. Pecora?
Mr. PECORA. The members of the examining committee were as
follows: Edwin H. Nelson, John R. Russel, George H. Klein, Francis
C. McMath, and Hal H. Smith.
4494
STOCK EXCHANGE PRACTICES
I will read the entire report, Mr. Patterson to see if it refreshes
your recollection [reading]:
The committee has reviewed in detail every loan which has been marked "slow,
doubtful, or loss" by either the national bank examiner or by the bank's officers,
and has discussed as to each of said loans the responsibility of the maker, the
security to the loan, and the prospects of payment. The total estimate of loss
($3,097,944.73 on 268 loans) represents a combined judgment of the committee
and the bank's officers as to such loss. It has not yet been able to review in
detail the bonds, securities, and mortgages owned by the bank. It has accepted
the statement of the national bank examiner as to the bank's cash, the correctness of its accounts and the physical presence of the bank's securities in its vaults.
The large amount of the estimated loss on the loans calls for some explanation
and comment by the committee. It is the opinion that the major cause of these
larger losses and the greater number of loans which have been so estimated has
been the poor credit information assembled by the credit department in the past
and the lack of proper organization of the loaning responsibility in the officers of
the bank. These two major causes have, however, as the committee believes,
now been corrected. The credit department has been reorganized and remanned
and the loaning responsibility and authority of the officers has been radically and
materially strengthened. All poor credits cannot be eliminated, but the committee has reason to believe that the fundamental defects have been removed.
The committee, however, feels called upon to make the following suggestions
and recommendations as to future policies for which it asks the approval of the
board:
1. Not sufficient attention has been paid in the past to the character of the
respective borrowers and their income capacity. Too much emphasis has been
placed on the collateral alone. A large number of loans have been made on what
was sufficient collateral at the time of the inception of the loan, but where the
maker was of doubtful earning capacity and not good character as a credit risk.
This should be corrected in the future. The fundamental of every loan should
be the character of the borrower and the excess of collateral should not justify
a loan to any one of doubtful honesty or without any material earning capacity.
2. The committee finds in the list of bad loans many loans that obviously have
no other purpose than speculation in the stock market. The makers of these
loans had only limited earnings and no prospects of the payment of the loan
otherwise than the rise in stock prices. They are made to clerks, stenographers,
bank officers and bank clerks, salesmen, and others whose income was not sufficient
to warrant any substantial credit. These loans should be definitely discouraged
in the future.
3. The committeefindsalso in the list of bad loans, loans to officers of this bank
and officers in other banks which were clearly made to assist or further stockmarket operations. This class of loans has been a source of loss to the bank, and
the encouragement of these loans has ruined many worthy bank officials. In the
future no loaning officer of this bank should be permitted to have a margin account
or should become indebted to this bank or any of its correspondents to purchase
stocks. If knowledge of loans of this character made by any officer of this bank
comes to the attention of the officials of this bank the officer should be required
to close out such loans at the earliest practicable moment. Applications by,
officers of other banks for this class of loans should be reported to executives of
that bank before any action is taken. These rules should be rigidly enforced.
4. One of the major causes of loss has been loans to real-estate operators and
companies engaged in real-estate operations and stock equities in real estate.
In almost every instance the real estate has been subject to prior indebtedness, and
the loan, therefore, no matter what form it takes, is certainly no better than a
second mortgage. This class of loans should be definitely eliminated. Loans
on real estate or any equity therein should not be accepted except in particular
instances, and on approval of responsible committees of the bank.
5. We find on the list of loans a substantial number of individuals who have
been recommended by directors of the bank for such loans, loans to friends of
directors whose only claim for the accommodation is that of acquaintanceship,
loans to associates of directors in business, and loans to concerns in which the
directors are interested or in which they were officers. Obviously the cases in
which a director should recommend any loan to the bank without his endorsement should be rare. Where there is any doubt as to the credit or the matter
of a loan is as described above, the endorsement of the directors should be asked.
This rule should be applied to the loans now in the bank and any loans made in
the future.
STOCK EXCHANGE PBACTICES
4495
6. The committee finds in the list of bad loans a great many so-called "policy"
loans. Judges of courts, referees in bankruptcy, and other political officers havebeen extended substantial credit. Many of these loans are doubtful. All these
loans should be stopped, and the so-called "policy" loans should be eliminated.
Doubtful loans made where the action is in reality the hope of securing a deposit
should be eliminated. Every loan should, in the future, meet the single test of
the maker's ability to pay, independent of all the foregoing considerations.
7. We have, in the course of the examination, found that the makers of some,
slow and doubtful loans have complained that they made the loan in order to buy
certain securities recommended bv^ an officer of the bank or securities in which
this bank or some affiliated institution was directly or indirectly interested.
Loans made for this purpose should be rigidly scrutinized and a definite policy
should obtain, except in cases where there is some good reason for the exception,
of declining loans for the purpose of financing the purchase of any securities in
which this bank or its affiliates are directly or indirectly interested.
8. Instances were brought to the attention of the committee where pertaim
officers of the bank have recommended the purchase of stock or securities. A
definite rule should be established that this should not be done, and the officer
breaking this rule should be promptly disciplined.
9. The bank has been from time to time requested to purchase bonds or other
securities on^ a repurchase agreement. This is not sound banking practice and
should be discouraged even with the members of the Guardian Detroit UnionGroup.
10. The committee feels that the discount committee of the bank has not been*
given the opportunity to pass on a sufficient number of the loans in the past,,
and has not given sufficient attention to the application of the borrowers. It isobvious that the committee could not pass upon all minor loans, but if it were
frequently convened it could see that the loaning policy of the bank as fixed
by the board was maintained. We recommend that the committee be asked to
meet frequently and that every loan and its renewal be submitted.
11. The credit files do not contain all the information that the officeus desire.
The committee recommends that the officers should be instructed to ask for a
certified balance sheet and detailed statements of all unsecured loans of corporations of $10,000 or over.
12. The large deposit accounts which the bank has on which demands may bemade at any time for substantial payments require, in the opinion of the committee, that particular attention be given to the investment of funds in commercial paper and in loans that are eligible for rediscount with the Federal
Reserve bank or in securities in which there can be an immediate realization.
This policy is, in the opinion of the committee, more important than the increase
of our miscellaneous deposits or the distribution of our loans and discount facilities
over a wide range of borrowers.
13. The amount of investments of the bank in bonds and securities is so great
that the committee believes that the responsibility of keeping a daily check on
the situation of these bonds and securities, if not now delegated, should be delegated to some one officer designated by the president. A special committee should
be created for the purpose of reviewing these investments at least once a month.
The purchase of bonds should continue to be handled by the president. The
constantly changing situation on municipal securities and the fluctuations in the
value of other bonds require, in our opinion, much more constant and detailed
consideration of this class of the bank's assets than has been given it in the past..
14. The bylaws of the bank at the present time require that the examining
committee count the cash and verify the accounts of the bank. This is too great
a responsibility for the committee. It is obvious that it should do neither. The
bylaws should be amended to relieve it of this responsibility. It should still be
required, however, to examine the loans and investments in detail and still" be
permitted to report its recommendations as to the general policies of the bank.
The committtee will, if it be continued, examine the mortgages and the bonds*
of the bank and make a further report thereon.
A schedule of the criticized loans is attached. It is likely that a salvage witt
be made from these loans, but the committee urges that full support be given tothe particular officers who now have the direct responsibility for those collections,
and that every officer make every effort to realize as much as possible on these?
debts. The progress on this work should be reported monthly to. the board..
Respectfully submitted.
4496
STOCK EXCHANGE PRACTICES
That is the end of the report, with the exception of the schedule
of the criticized loans.
The CHAIRMAN. It is something like locking the stable door after
the horse has been stolen.
The committee will now take a recess until half past 2.
(Whereupon, at 11:45 a.m., a recess was taken until 2:30 p.m., the
same day, Jan. 3, 1934.)
AFTER RECESS
The subcommittee resumed at 2:30 p.m. on the expiration of the
recess.
The CHAIRMAN. The subcommittee will resume.
TESTIMONY OP BERT K. PATTERSON—Resumed
Mr. PECORA. Mr. Patterson -Mr. PATTERSON (interposing). Mr. Pecora, might I make a few
remarks with regard to the testimony of this morning?
Mr. PECORA. Yes.
Mr. PATTERSON. In
connection with certain criticisms of bank
examiners, in the matter of examination of the National Bank of Commerce of Detroit during 1929 and 1930, where there was raised the
question as to the legality of a national bank lending against collateral
of a holding company: During the noon recess one of my associates
called my attention to a letter, which I had never seen before, written
by the Comptroller of the Currency to another national bank examiner
in January of 1929, and with your permission I should like to read the
letter. One of my reasons for asking this permission is that it will
show, I think, that examiners reported directly to the Comptroller of
the Currency, and had the privilege of writing the Comptroller in
regard to examinations, or on any other subject; and, secondly, it
will be somewhat of a confirmation of my idea at the time and which
I testified to this morning.
The CHAIRMAN. Have you the original letter or is that a copy?
Mr. PATTERSON. This is a copy.
The CHAIRMAN. DO you know whether it is a correct copy?
Mr. PATTERSON. Yes, sir; I believe it is a correct copy.
The CHAIRMAN. All right.
Mr. PATTERSON. It is in confirmation I think, too, of what my idea
was relative to the legality of the stock as collateral in a national
bank. This letter is dated January 10, 1929, and is addressed to
Earl W. Moon, national bank examiner, 164 West Jackson Boulevard, Chicago, III.:
DEAB SIR: Your letter of January 4 is received requesting an answer to
your letter of December 19.
You state that the officers, directors, and stockholders interested in the Union
Trust Company, Griswold First State Bank, and the National Bank of Commerce, all of Detroit, Mich., have organized a corporation known as the
Union Commerce Investment Company, but that this corporation is in reality
a holding company for the stock of these three institutions; that the assets of the
Union Commerce Investment Company consist of the total capital stock of the
three institutions except for directors' qualifying shares, and request to be
advised whether the National Bank of Commerce may lawfully and without
criticism hold stock of the Union Commerce Investment Company as collateral
to loans.
STOCK EXCHANGE PRACTICES
4497
The stock of the corporation referred to is not capital stock of the bank within
the meaning of section 5201 of the United States Revised Statutes, even though
a part of its assets consist of stock of the bank. In the matter of accepting stock
of the company as collateral to a loan, it is one for the determination of the
management of the bank, although this office does not look with favor on loans
secured by stock of a company so closely allied to the bank and having little or
no assets other than the stock of banks, national and state.
Your letter of December 19 was inadvertently placed in the files before being
answered.
Respectfully,
JOHN S. PROCTOR, Deputy Comptroller.
Mr. PECOEA. Have you another copy of that letter?
Mr. PATTERSON. I only have this one.
Mr. PECORA. Will you let me have it?
Mr. PATTERSON. Yes, sir.
Mr. PECORA. I want to have the text of it
Mr. PATTERSON. Here it is.
Mr. PECORA. IS there any other statement
before me.
that you want to make
before I resume your examination?
Mr. PATTERSON. I believe not.
Mr. PECORA. NOW, when did this letter which you have just read
into the record, first come to your attention, Mr. Patterson?
Mr. PATTERSON. This noon.
Mr. PECORA. And through what channels was it brought to your
notice this noon?
Mr. PATTERSON. Mr. Frank Blair called my attention to it.
Mr. PECORA. Who is Mr. Frank Blair?
Mr. PATTERSON. Mr. Frank Blair used to be the president of the
Union Trust Co., and later on of the Union Guardian Trust Co., and
is now connected with the Union Joint Stock Land Bank of Detroit.
Mr. PECORA. I notice that this letter, or the copy thereof which
you handed to me, is addressed by the Deputy Comptroller to the
national-bank examiner in Chicago.
Mr. PATTERSON. Yes, sir.
Mr. PECORA. DO you know
how it happens to find its way in the
possession of anyone not connected with the Comptroller of the
Currency?
Mr. PATTERSON. NO, sir; I do not.
Mr. PECORA. Did you know Mr. Earl W. Moon, National Bank
Examiner, to whom this letter was addressed?
Mr. PATTERSON. Yes, sir.
Mr. PECORA. Did he serve under you at any time?
Mr. PATTERSON. Yes, sir.
Mr. PECORA. DO you advance
this letter now, or the information
or ruling2 whatever you may prefer to call it, therein contained, as a
justification for your having disagreed with the conclusion or judgment
of Mr. Taylor, national bank examiner, or field examiner,, under
you, who examined the National Bank of Commerce in 1929, and
from whose report I read to you this morning?
Mr. PATTERSON. Well, I offer it here because I do not think the
question was very clear to the subcommittee this morning, in view
of the examiner's criticism. And it is the first thing I have seen
bearing on the subject.
Mr. PECORA. YOU will recall that what Mr. Taylor said in his field
report was not that the lending of money on collateral consisting of
4498
STOCK EXCHANGE PEACTICES
stock of the holding company, which in turn owned the stock of the
bank, was not a violation of the banking law, but rather was a circumvention of it.
Mr. PATTERSON.
Yes.
Mr. PECORA. YOU understand that there is a clear distinction
between a violation and a circumvention of any legal provision,
don't you?
Mr. PATTERSON. Yes.
Mr. PECORA. Well, apparently
the Deputy Comptroller in this
very letter that you now advance as a measure of justification for
your judgment, felt that in some fashion or other it was an unwise
policy for a national bank to make loans on security consisting of
the stock of a holding company which in turn owned all the stock of
the bank, or substantially all of it. Don't you observe that statement in Mr. Proctor's letter?
Mr. PATTERSON. Yes; I know it is there.
Mr. PECORA. He says:
•"In the matter of accepting stock of the company as collateral to a loan, that
is one for the determination of the management of the bank, although this office
does not look with favor on loans secured by stock of a company so closely allied
to the bank and having little or no assets other than the stock of banks, national
and state."
Mr. PATTERSON. Yes,
sir.
Mr. PECORA. DO you disregard that statement by Mr. Proctor?
Mr. PATTERSON. N O ; I do not.
But as I say
Mr. PECORA (interposing). Do you think it is sound?
Mr. PATTERSON. I think it is.
Mr. PECORA. Did you think it was sound back in 1929 when you
disagreed with the judgment or conclusion expressed by Mr. Taylor,
your subordinate field examiner?
Mr. PATTERSON. Well, Mr. Pecora, I think that, as I stated this
morning, as to the legality of the thing, that was something for the
Comptroller to pass upon.
Mr. PECORA. YOU also stated this morning that you did not agree
with Mr. Taylor's statement.
Mr. PATTERSON. That is true.
Mr. PECORA. That those loans so secured were a circumvention of
the law as distinguished from a violation of it.
Mr. PATTERSON. Oh. Well, I misunderstood you, then. I thought
you meant that it was a violation of law.
Mr. PECORA. NO. I read the exact language contained in Mr.
Taylor's report, which was signed by you as Chief Examiner.
Mr. PATTERSON. Well, I think I would still believe that it was not a
(circumvention of the law.
Mr. PECORA. Wasn't it in effect the making of loans on security
.that rested on the bank's stock?
Mr. PATTERSON. That is right.
Mr. PECORA. Isn't that a circumvention of that provision of the
law vwhich directly prohibits the making of such a loan, directly secured by the bank!s stock?
Mr. PATTERSON. Well, I think that is a legal matter, and I do not
Relieve J .could answer it.
STOCK EXCHANGE PRACTICES
4499
Mr. PECORA. Apart from its legality, apart from its legalistic
aspect and as a matter of substance don't you think it is just as much
a violation of the spirit of the law?
Mr. PATTERSON. N O ; I do not think so.
Mr. PECORA. DO you think it is in accord with both the spirit and
the letter of the law?
Mr. PATTERSON. I do.
Mr. PECORA. What do you
think was the purpose of the enactment
which prohibited national banks from making loans secured by their
owii stock?
Mr. PATTERSON. I do not believe I could answer that question
either.
Mr. PECORA. Why not?
Mr. PATTERSON. Well, it was, perhaps, for the purpose of preventing the lending of the bank's own capital.
Mr. PECORA. That is sound public policy, isn't it?
Mr. PATTERSON. Yes,
sir
Mr. PECORA. NOW, where a bank's own capital is owned by
another corporation, not organized under the banking laws but
practically whose sole asset is the bank's capital, don't you think a
loan made by such a bank secured by the stock of the holding company, is in effect a loan secured by the stock of the bank?
Mr. PATTERSON. N O ; I do not.
Mr. PECORA. What are the differences?
Mr. PATTERSON. I think you are lending
against entirely different
collateral.
Mr. PECORA. Well, of course it is different collateral in form, but
the value of the collateral upon which the loan is made is dependent
upon the value of the bank's stock, which is the sole asset of the
company whose security in the shape of stock is taken as collateral.
Isn't that a fact?
Mr. PATTERSON. Yes, sir.
Mr. PECORA. YOU still see a difference between the two?
Mr. PATTERSON. AS to form, I think there is a difference.
Mr. PECORA. Oh, there is no doubt that there is a difference
as to
form, but why do you ignore the substance?
Mr. PATTERSON. Well, I suppose you would have to recognize
that, too.
Mr. PECORA. Well, do you recognize it?
Mr. PATTERSON. Yes.
Mr. PECORA. And recognizing
the substance do you still say that
there is fundamentally a difference between the two acts?
Mr. PETERSON. I think if you followed it right on through you
would trace it on to a violation.
Mr. PECORA. DO what?
Mr. PATTERSON. That you would probably trace it on to a
violation.
Mr. PECORA. Did you follow it through while you were the executive vice president of the group?
Mr. PATTERSON. We accumulated that stock largely as the result
of other loans, and we did all we could, all that was humanly possible,
during the shrinkage in values, to get the loans out of the bank.
We were fighting a war in Detroit, and every loan officer was doing
4500
STOCK EXCHANGE PRACTICES
all he possibly could to get that collateral out, not only in Detroit
but all over Michigan.
Mr. PECORA. YOU were fighting a war in Detroit, were you?
Mr. PATTERSON. That is right.
Mr. PECORA. Fighting a war against whom?
Mr. PATTERSON. Against the depression, and the shrinkage of
values.
Mr. PECORA. And ia order to enable jon to fight that war successfully the bank was doing the things that its own examining committee
complained of in this report of May 1931, including the making of
so-called "policy loans" to the politicians; isn't that so?
Mr. PATTERSON. NO.
Mr. PECORA. Was that
a part of your campaign to fight the war
against depression?
Mr. PATTERSON. NO.
Mr. PECORA. And for
Mr. PATTERSON. The
the conservation of the depositors' interests?
loans that you read this morning were old
loans, and they were not made during the time we were "fighting the
war" as I term it.
Mr. PECORA. Well, if they were old loans why hadn't they been
liquidated at the time that the bank came under the control of the
Group?
Mr. PATTERSON. The loans at that time that came under the control of the group, as I remember the situation, were probably good
loans as to their security.
Mr. PECORA. Well, isn't that at variance with what the examining
committee reported in May of 1931?
Mr. PATTERSON. That was considerably after the time when collateral values had slipped off.
Mr. PECORA. Did you see a copy of this examining committee's
report that I read into the record this morning?
Mr. PATTERSON. I think I did.
Mr. PECORA. Did you do anything about it?
Mr. PATTERSON. That was left to the management of the bank.
Mr. PECORA. What was done, if anything, by the management of
the bank, do you know?
Mr. PATTERSON. AS I say, I think they did all they possibly could.
Mr. PECORA. DO you know what they did?
Mr. PATTERSON. NO, sir.
Mr. PECORA. Did the group do anything about it?
Mr. PATTERSON. NO, sir.
Mr. PECORA. Why not?
Mr. PATTERSON. Except to institute a policy in regard
to any new
loans based upon group stock.
Mr. PECORA. NOW, you said that the group sought to remedy the
situation represented by its unit banks holding large blocks of stock
of the group as collateral for loans, by seeking to have those! loans
reduced by payment. Let me call your attention in that regard to
the following item of criticism:
Loans secured by Guardian Detroit Union Group stock: 48,431 shares of this
stock held as collateral.
New loans with this stock as collateral unfavorably regarded. Numerous loans
based thereon at present lacking collateral coverage.
STOCK EXCHANGE PEACTICES
4501
Now, that was based upon an examination as of September 15,1930.
The next examination of that bank was made as of March 2,1931, and
it indicates that at that time there were 57,531 shares of Group stock
held by the bank as collateral for loans, as against 48,431 shares of
that stock held in September of 1930. So apparently the group had
not succeeded in effectuating what you said was the policy it embarked
upon with regard to clearing those loans secured by group stock;
isn't that so?
Mr. PATTERSON. It is my opinion, without knowing what the
records are between those dates, that any increase in collateral in
group stock to any loans, was due to the acquisition of additional
collateral of that type to protect poor loans. I do not believe there
were any made, or none that I know of at least, any new loans
based entirely upon group stock, or largely upon group stock, after
the policy had been instituted some time in 1930 as I recall it. They
were trying to get any and all collateral they possibly could together,
and if that consisted only of group stock the officers took it.
Mr. PECORA. NOW let me read to you from the report made by
Mr. Hopkins, field examiner, and who afterwards became connected
with the Group, based upon his examination of the bank as of March
2, 1931:
Your examiner is of the opinion that the loans secured by the stock of the
Guardian Detroit Union Group constitute an unwarranted concentration. The
bank is handicapped in liquidating its debts from the sale of this stock for the
reason that the most of its shareholders acquired the stock at a period when it
was selling on the market anywhere from $100 to $300. At the beginning of
the examination the market value of the stock was $50, and at the time the
examination closed the market value had dropped to $40 due to the closing of the
American State Bank.
Your examiner has no opinion as to the recovery of the stock, but it is surmised that a long period will be required before the bank is in position to eliminate many of these losses.
Were you familiar with that criticism made b y M r . Hopkins?
Mr. PATTERSON. I do not believe I ever read it, but it sounds
familiar.
Mr. PECORA. YOU have said this afternoon, referring to those
loans that were secured in large part by the stock of the Group or
holding company that owned the bank's stock, that you thought the
most of those loans were old loans and had been made before the
Guardian Detroit Union Group had acquired control of the bank.
Am I correct in that statement of your testimony?
Mr. PATTEESON. YOU are substantially correct, I believe.
Mr. PECORA. Then those loans must have been made at the time
when you were the chief national bank examiner in that district, isn't
that so?
Mr. PATTERSON. That is probably so, and probably before then.
Mr. PECORA. Was that fact brought to your attention?
Mr. PATTERSON. NO, sir; it was not.
Mr. PECORA. Well, wasn't it actually
brought to your attention
by Mr. Taylor, among other persons, in his report of the bank of
April 1929?
Mr. PATTERSON. Not particularly that phase of it; no, sir.
The CHAIRMAN. When did the Commerce and those other unit
banks begin to call in their loans and refuse loans?
175541—34—PT 9,
20
4502
STOCK EXCHANGE PEACTICES
Mr. PATTERSON. During the latter part of 1930,1 believe, Senator
Fletcher, and continuing through 1931, all banks were liquidating as
fast as they could.
The CHAIRMAN. In the latter part of 1930?
Mr. PATTERSON. Yes, sir.
The CHAIRMAN. I thought
that was begun pretty soon after
October of 1929.
Mr. PATTERSON. Well, I do not believe many of them began as
soon as that.
Mr. PECORA. While I am waiting for some data let me ask you this,
Mr. Patterson: You heard the testimony week before last submitted
to this subcommittee while Mr. Lord was on the stand, with regard
to the policy of the group not to have its unit banks snow any bills
payable on statements made in compliance to the call of the Comptroller of the Currency from time to time for such statements, didn't
you?
Mr. PATTERSON. Yes, sir.
Mr. PECORA. YOU are familiar with that testimony?
Mr. PATTERSON. Yes.
Mr. PECORA. What do you know about that policy?
Mr. PATTERSON. I know that we were trying to make
as good a
showing in all the banks as we could, at all times. Where there were
excess funds in the Guardian Bank and other units of the group were
in need of funds, the Guardian Bank made deposits in those unit banks.
Mr. PECORA. TO enable them, primarily, or rather temporarily, to
take care of bills payable items?
Mr. PATTERSON. Or any other items.
Mr. PECORA. TO enable them to take care of bills-payable items
specifically, I ask?
Mr. PATTERSON. Yes, sir.
Mr. PECORA. Did you approve of that policy?
Mr. PATTERSON. That was the policy that had
been in current use
by many banks for years.
Mr. PECORA. Did you approve of that policy, Mr. Patterson, is
what I asked you.
Mr. PATTERSON. I was going to add, inasmuch as the Guardian
Bank was in funds to lift those bills payable, I approved it; yes, sir.
Mr. PECORA. In other words, you approved of a policy winch had
for its object a window-dressing purpose, didn't you?
Mr. PATTERSON. Well, that is the term commonly used.
Mr. PECORA. That is the vernacular.
Mr. PATTERSON. Yes, sir.
Mr. PECORA. But it is a very
apt characterization of the situation,
isn't it?
Mr. PATTERSON. Yes, sir; that was quite widespread in its use.
Many banks have done that sort of thing.
Mr. PECORA. Did you approve of it in principle?
Mr. PATTERSON. N O ; I cannot say that I did, Mr. Pecora.
Mr. PECORA. Did you disapprove of it in principle by,any affirmative action that you took?
Mr. PATTERSON. NO. AS a matter of fact, however, I think that
in view of the circumstances, wherever it was used, in certain units
of the Group, that at the time it was done it was probably the very
STOCK EXCHANGE PRACTICES
4503
best thing to do. The war that we were fighting in Michigan had
worn the morale of the people to a very low point, where they were
very much concerned about banks in general.
Mr. PECORA. And you thought that morale could better be sustained by misrepresentation.
Mr. PATTERSON. I did not consider it misrepresentation.
Mr. PECORA. Well, was it anything other than misrepresentation
in substance if not in form?
Mr. PATTERSON. In principle I did not approve of the practice
wherever it could be avoided. However, the circumstances, I repeat,
justified it in my mind.
Mr. PECORA. DO you recall any instances where a large depositor
of any one of these unit banks was asked to help out in a temporary
situation by the making of a large deposit which was permitted to
remain on deposit for only a few days or a very short period of time?
Mr. PATTERSON. Yes, sir.
Mr. PECORA. HOW frequently was that done, Mr. Patterson?
Mr. PATTERSON. I personally know of two instances.
Mr. PECORA. And who was the depositor who was asked to make
such temporary deposits?
Mr. PATTERSON. General Motors Corporation.
Mr. PECORA. Anyone else?
Mr. PATTERSON. Not that I know of personally.
Mr. PECORA. DO you know of any instance where a large depositor
of any one of the unit banks also maintained a very large deposit
account in a Chicago bank and near the end of the year, of a certain
year, in response to a request from the Group or its officials drew out
a large sum from its Chicago bank by check, deposited it in the Detroit
bank and then drew it out of the Detroit bank by check, and the two
checks crossed in the mails?
Mr. PATTERSON. NO.
Mr. PECORA. DO you know of any such instance?
Mr. PATTERSON. I don't believe I do.
The CHAIRMAN. HOW long has that practice been going on among
banks, the practice of banks eliminating temporarily in this way bills
payable?
Mr. PATTERSON. Why, I don't know, Senator, for how many years,
but in certain distressed areas of the country where bank failures have
been the rule it has been a common practice probably for 10 years,
perhaps.
The CHAIRMAN. AS bank examiner did you have occasion to inquire into that sort of practice or disapprove of it in any way?
Mr. PATTERSON. Yes, sir; we did.
The CHAIRMAN. Generally you would
not as an examiner condone
or favor a practice like that?
Mr. PATTERSON. It would depend upon the circumstances, Senator,
just as it did in our Group during 1930, '31, and '32. I do not want
to speak for all national bank examiners, but I think a constructive
examiner will take into consideration the existing circumstances.
The CHAIRMAN. Did you ever know of any just such circumstance
arising before?
Mr. PATTERSON. Yes. Where a bank is an important one and more
or less in a distressed condition, efforts upon the part of national bank
examiners are to try to save the bank from disaster, and in the course
4504
STOCK EXCHANGE PRACTICES
of that if they are successful in getting large deposits in the bank in
order to make a better showing in a statement which will not arouse
the public, many of them practiced it.
The CHAIRMAN. The effect of it was to represent to the public
that the bank's financial condition was better than it really was,
was it not?
Mr. PATTERSON. The general idea was to protect the larger public
interest and prevent failure, prevent a run.
Senator COTJZENS. When you were on the witness stand week before last, Mr. Patterson, I think you were asked the question whether
you purchased any stock which you had contracted to purchase when
you entered the employ of the Guardian Group. Is that correct?
Mr. PATTERSON. Yes. I contracted to purchase 300 shares of
stock. The contract is dated October 1, 1929, and calls for the purchase of 300 shares at $275 a share.
Senator COTXZENS. Did you purchase that?
Mr. PATTERSON. I did not pay for it.
Senator COUZENS. YOU did purchase it, though?
Mr. PATTERSON. The contract was signed, yes, sir.
Senator COUZENS. Well, did you follow out the contract?
Mr. PATTERSON. I paid about $11,000 in interest on that
contract,
nothing on the principal.
Senator COUZENS. Did you borrow any money to do that with?
Mr. PATTERSON. NO, sir.
^ Senator COUZENS. Are you a bank examiner now out of the seventh
district?
Mr. PATTERSON. I am employed by the Federal Reserve Bank of
Chicago.
Senator COUZENS. And what are your activities with the Federal
Reserve Bank of Chicago?
Mr. PATTERSON. I have been principally engaged in the handling of
applications by State banks for membership in the Federal Reserve
system.
Senator COUZENS. Are you in debt to any of the hanks?
Mr. PATTERSON. NO, sir.
Senator COUZENS. YOU are not in
Mr. PATTERSON. NO, sir.
Senator COUZENS. SO you did not
debt to any of them?
borrow any to pay that $11,000
interest on your contract?
Mr. PATTERSON. NO, sir; I did
not.
Senator COUZENS. IS the contract canceled now?
Mr. PATTERSON. N O ; it is not.
Senator COUZENS. IS it still an obligation you have?
Mr. PATTERSON. The receiver of tne Guardian Holding
Co. holds
it as an asset. I presume it is still in force.
Senator COUZENS. YOU do not feel that you are going to be able to
carry oat the contract?
Mr. PATTERSON. I don't think so.
Mr. PECORA. Let me read to you the following general remarks
made by Examiner Hopkins while he was national bank examiner of
the condition of the National Bank of Commerce as of October 6,1931:
Large balances: Including public funds, the records show that $43,500,000 is.
carried in 54 accounts. The largest of these is the Ford Motor Co., which has a
balance of $25,420,000, others ranging from $7,000,000 down.
STOCK EXCHANGE PEACTICES
4505
This fact might appear to constitute a dangerous situation. However, the
management maintains that all of them are extremely close to the bank and that
in event of a Tun on the bank by its depositors these particular depositors would
in no manner afford any trouble. If this be true, the extreme quick liability of
:the bank's assets would be sufficient to pay off all of the other depositors.
"Liquidity" is probably what was meant.
is "liability".
The word in the report
The fact remains, however, that the Ford Motor Co. account is rather erratic
at times, and frequently the bank finds it difficult to borrow funds for a few
days' duration. The management has agreed to strengthen the liquid position.
Under the caption of'' Earnings'':
The earnings have not been all they might have been desired, because of the
low interest return on so large a portion of the assets. Every economy possible
is being maintained in order to show greater earnings. The large amount of
interest paid on deposits is having its effect on the net earnings.
And under the caption of "Guardian Detroit Union Group"
.appears this:
All of the stock of this bank except the directors' qualifying shares is owned by
the Guardian Detroit Union Group. A list of the affiliations is shown on page
11 A. Considerable weakness is known to exist in several of the affiliated banks.
The Group has apparently failed in contributing policies which tend to clean up
these affiliated banks, and charge-offs are made reluctantly. Apparently the
Group management has been unable to inject policies which were originally
planned into the various units, and the local management operates almost in the
same manner as they did prior to their acquisition.
The stock of the Group has continuously declined from a high point of $310 to
$20 since 1929. At the time of this examination the stock was priced at the
market of $23. The market is rather inactive, and efforts to stabilize it at higher
prices have been unsuccessful. A large portion of the losses resulting to this bank
has come from the policy of riding along on those loans which were secured by
this stock, and for the reason that foreclosing out of such loans would create a
feeling of hostility among those customers who had paid excessive prices in the
beginning. Undoubtedly, all of the units hold substantial amounts of this stock
"in their collateral files.
In view of these facts, the stock has lost its liquidity, since any suggestion of
forced sales would run the market to very low figures. This situation should be
closely watched.
Mr. Covington, the vice president of this bank, stated to me that he would
undertake to create a pool from the directorate of the group banks with sufficient
contributed funds to furnish relief to this bank and at the same time maintain the
market on the stock.
The CHAIRMAN. What bank is that?
Mr. PECORA. This is the National Bank of Commerce, one of the
unit banks which was at the end of this year, 1931, consolidated with
the Guardian National Bank.
Senator Cow ENS. Was what Mr. Covington promised carried out,
Mr. Patterson?
Mr. PATTERSON. I believe so, yes.
Mr. PECORA. Under the caption of " Losses " the following appears
in this report of Mr. Hopkins while he was the national bank examiner:
The losses shown in the report by no means represent the actual losses set up
at the time of the discussion, and other estimated losses of approximately
$1,000,000 could have been set up. The examiner accepts the responsibility
for this action, inasmuch as the bank has so recently reduced its surplus fund to
the sum of 2% million dollars and met the recommendations of the examiner
in the matter of charge-offs at the time of the previous examination. To further
xeduce the surplus fund at this time would undoubtedly create undesirable comment in this city and might prove disastrous.
4506
STOCK EXCHANGE PRACTICES
The bank is unquestionably solvent. The condition found here is not altogether
desirable, and a strong letter should be addressed to the board of directors touching on the matters contained herein. If not inconsistent with the policies of your
office, the matter of holding shares of the Guardian Detroit Union Group as collateral to loans should be brought to their attention.
Are you familiar with those remarks in this report?
Mr. PECORA. Was this matter ever brought to the attention of the*
board so far as you know? I am referring to the matter of holding
shares of the Guardian Detroit Union Group as coDateral to loans.
Mr. PATTERSON. I think Mr. Hopkins may have called it to the
attention of the executive committee of the bank.
Mr. PECORA. DO you know what action was taken on it?
Mr. PATTERSON. NO, sir; I do not.
Senator COUZENS. What is Mr. Hopkins doing now?
Mr. PATTERSON. Mr. Hopkins is employed by the Federal
Deposit
Insurance Corporation.
Senator COUZENS. Where?
Mr. PATTERSON. At Lansing.
Senator COUZENS. Michigan?
Mr. PATTERSON. Yes,
sir.
Mr. PECORA. NOW, following the consolidation of the National
Bank of Commerce with the Guardian National Bank, Mr. Lord,
who had been president of the Guardian National Bank prior to the
consolidation, continued as president of the consolidated institution,,
did he not?
Mr. PATTERSON. Yes, sir.
Mr. PECORA. Are you familiar
with the report made on the examination of the bank by the national examiner as of May 16, 1932?
Mr. PATTERSON. I don't believe I ever saw that report, Mr.
Pecora. That was the examination by Examiner Walker?
Mr. PECORA. By Examiner Walker, yes.
Mr. PATTERSON. I never saw that.
Mr. PECORA. DO you know why you did not see it? Do you know
any reason why you did not see it?
Mr. PATTERSON. I think the officers merely kept it.
Mr. PECORA. What were you doing about exercising the main
function that I understood from your testimony this morning had
been delegated to you as executive bank president of the Group of
attending to the examination of these banks and keeping the Group
posted as to their condition from time to time?
Mr. PATTERSON. Mr. Lord was president of the bank, and I presume he saw the report, and Mr. Covington also, and I did not
think it was necessary for any Group officer to go any further than
that.
Mr. PECORA. Were they kept from you for any reason?
Mr. PATTERSON. N O ; I don't believe they were kept from me for
any particular purpose.
Mr. PECORA. Let me read the following statements under the caption of " General remarks " from the report of the bank, the Guardian
National Bank of Commerce, as of May 16, 1932, under the caption
of "Losses":
The losses listed at this time are only a nominal amount in comparison with
the actually existing losses irrespective of further substantial doubtful itemsIn extended meeting with the bank's executive committee, at which meeting
Chief Examiner Leyburn and your examiner was present, it was agreed that
STOCK EXCHANGE PRACTICES
4507
losses of roughly $1,200,000 were to be charged off at this time. The committee
felt that to charge off an amount in excess of this figure when conditions are in
their present demoralized condition would only add fuel to theflamesand would
do more harm than good by impairing the surplus fund in any way.
And under the caption of " management" let me read these remarks
in the report:
The management of the bank has rested in the hands of President Lord, who
is not the strong, dominant type that the bank is so much in need of today. He
is believed to be more or less heavily involved and probably insolvent, though
he is not borrowing of the bank and does not furnish a statement. In this con-^
dition himself, he is hardly qualified to pass intelligently upon credits, for your
examiner has noticed that when a loaning officer is himself in badfinancialcondition he does not view credits in the same light that he would were he in good
financial condition himself. His attitude is more one of riding along to see what
is going to happen next, rather than to face the facts and tofigureout corrective
measures immediately.
Under the caption of overhead charges I will read to you as follows
from the report:
Salaries have been reduced 10 percent, which is not enough in proportion to
earnings, but there are many officers and employees who are owing substantial
amounts to the bank who cannot meet their interest payments unless the bank
pays them enough to do so. In other words, then, the bank is actually paying
the interest for the employee, for in numerous instances other capable men could'
be employed at materially less money than is being paid now, and the bank would
be receiving just as much value for materially less money.
Were you familiar with that condition at that time?
Mr. PATTERSON. Yes. I never heard the report before.
Mr. PECORA. That was the condition, was it not?
Mr. PATTERSON. Approximately that; yes, sir.
Mr. PECORA. The bank could not let go these officers who owed it
money for fear that the bank would thereby not be able to collect
even the interest on the loans?
Mr. PATTERSON. Well, the remarks of the examiner in my opinion
are a little too general. I do not think that would apply to every
officer in the bank.
Mr. PECORA. He does not say that it applies to every officer.
He said "There are many officers and employees/' That is correct,,
isn't it?
Mr. PATTERSON. Well, yes; I would say that it is.
Mr. PECORA. NOW let me read this portion of the report under the
caption of "Real Estate Mortgages Uader Foreclosure:"
Detroit has probably been as hard hit as any large industrial city in the United
States, for prosperity of this town is of course contingent upon the automobile
industry. Forty percent of the bank's capital is now invested in the other real
estate account, and with mortgages going into foreclosure every day, the next
examination will doubtless reflect a very material increase in this undesirable
account.
Are you familiar with the fact that as much as 40 percent of the
bank's capital was invested in real estate mortgages?
Mr. PATTERSON. I do not remember just what the figures are. It
occurs to me at the moment that the examiner is somewhat overdrawing the picture there, Mr. Pecora. The capital of the bank was
$10,000,000, as I recall. Forty percent of that would be approximately $4,000,000, and it does not seem to me that $4,000,000 of
the real estate mortgages were in foreclosure. Now I may be wrong,,
but I just don't recall that amount.
4508
STOCK EXCHANGE PRACTICES
Mr. PECORA. Well, as a matter of fact, according to the report of
the condition of the bank as of May 16, 1932, the bank actually had
loaned $4,085,015.71 on " other real estate." That is other real
estate than that owned by the bank.
Mr. PATTERSON. Well, I had forgotten.
Mr. PECORA. NOW let me read the following statement from this
report of condition or examination as of May 16, 1932, under the
caption of "Guardian Detroit Union stock held as collateral'':
A. list of the loans which this bank is carrying on this stock is incorporated in
this report, and it is not surprising that there are many of these loans which
are short on collateral by large amounts, when we stop to reflect that the stock
sold for over $350 a share and is now quoted nominally at $5.50, though no
material amount of the stock could be liquidated at even this figure.
You know that at that time the bank actually carried 149,574
shares of the Group stock as collateral for loans?
Mr. PATTERSON. Yes; that sounds about right.
Mr. PECORA. Which represented an increase of nearly 100,000
shares over the number of shares carried as collateral on loans as of
March 2, 1931?
Mr. PATTERSON. I imagine, however, that increase is due to the
consolidation of the banks that occurred on December 31, 1931.
Mr. PECORA. Was that increase also due to the fact that the bank
continued to loan on that kind of collateral?
Mr. PATTERSON. I would say not.
Mr. PECORA. Are you sure of that?
Mr. PATTERSON. I am quite sure of it; yes, sir.
Mr. PECORA. Had the practice prevailed in the Guardian National
Bank prior to the consolidation with the Guardian Detroit Bank of
making loans secured by the stock of the Group or holding company?
Mr. PATTERSON. With very few exceptions, and certainly not after
approximately the middle of 1930
Mr. PECORA. Under the caption of "Large balances" let me read
IJO you as follows from this report as of May 16, 1932:
Over 30 percent of the bank's deposits are in 11 accounts, as shown in the
confidential section of this report. While some of these deposits might prove
a source of strength, that is, the Ford balances might remain and even be built
up somewhat in case of an emergency, there are other balances which probably
would not prove to be as friendly. There are so many angles to this situation,
and most of which are weaknesses, that this institution could find itself in even
more serious difficulties if some one of its affiliated banks or itself should be subjected to a heavy run. On the other hand, the names of Edsel Ford, Charles S.
Mott, and some others, lend material strength to the picture.
Are you familiar with the situation reflected in that portion of the
report?
Mr. PATTERSON. YOU are referring to the amount of deposits in a
few accounts? Yes, sir; I am.
Mr. PECORA. I am referring to what I have read from the report*
Mr. PATTERSON. It is the first time I have heard the report, but I
am familiar with the condition that he is talking about.
Mr. PECORA. NOW let me read from this report the following statement made by the examiner as an answer to the form question reading:
What person or persons, if any, in your opinion, dominate the policies of the
bank, and to what extent?
STOCK EXCHANGE PRACTICES
4509
The answer is as follows:
There seems to be friction existing between President Lord and Executive Vice
President Covington.
Were you familiar with that situation?
Mr. PATTERSON. I don't believe there was any friction between thetwo men, Mr. Pecora.
Mr. PECORA. In answer to this form question:
If control is owned by individual or affiliated interests, give particulars as tohow maintained and the amount of stock owned or controlled.
The answer of the examiner is:
All shares except directors' qualifying shares stand in the name of Guardiam
Detroit Un'on Group.
That was true; wasn't it?
Mr. PATTERSON. Yes, sir.
Mr. PECORA. NOW let me read the examiner's answer to this
question:
Are the directors men of independent judgment and familiar with the affairs,
or are they dependent upon active officers or directors and leave the management
to them?
The answer is as follows:
Men of independent judgment who as a rule, judging from the attendance
record, leave the bank's operations largely in the hands of the active officers.
Do you think that is a fair statement?
Mr. PATTERSON. Yes; I do.
Mr. PECORA. In answer to the question in the printed form of the
report reading:
Do you consider the bank absolutely solvent, both in having collectable assets
sufficient to pay depositors and other creditors and its ability to meet maturing
and the usual demands in the ordinary course?
The answer to that is, "See remarks", and these are the remarks
embodied in the report:
Aside from the many serious criticisms listed on page 11, the most serious of
all is the fact that not only is there practically no justified earnings which the
parent corporation can acquire in the form of dividends from its various affiliated
banks, but the Detroit Union Group has liabilities of about $14,500,000, which
together with the expense of operation of around $130,000 a year, makes it
encumbent upon the company to derive revenue of around $850 000 to meet
interest charges and expenses. In other words, in the ordinary unit bank the
double liability feature is a source of some strength as a rule, whereas here we
have not only no strength from the principal stockholder, the Guardian Detroit
Union Group, but in addition the parent company must derive, as stated above,
some $850,000 a year to keep its own head above water.
From this angle it will be readily seen that the situation is a serious one, and I
would not care to hazard a guess as to the future of this bank and the others in
the group, few if any of which could keep their doors open if this bank found it
impossible to carry on.
Senator COUZENS. What date was that?
Mr. PECORA. This is as of May 16, 1932.
Senator COUZENS. IS that the copy of the report sent to the
Comptroller?
Mr. PECORA. Yes, sir. This is a report made by Mr. Harry W
Walker, field examiner, which is signed by the chief examiner.
Would you say that those remarks were based upon the existing,
facts?
4510
STOCK EXCHANGE PRACTICES
Mr. PATTERSON. I think the examiner has drawn a picture just
about as I see it.
Mr. PECORA. In other words, he was fairly accurate?
Mr. PATTERSON. I think he was.
Mr. PECORA. DO you know when the Guardian National Bank of
Commerce declared its first dividened in the year 1932?
Mr. PATTERSON. NO, Mr. Pecora; I do not recall.
Mr. PECORA. DO you recall that the National Bank of Commerce
declared a dividend amounting to $200,000 for the first quarter of the
year 1932?
Mr. PATTERSON. Yes; I think I do.
Mr. PECORA. DO you know the circumstances under which that
dividend was declared?
Mr. PATTERSON. Well, it was for the purpose of paying a dividend
on the Group stock, together with dividends received from other units
of the Group.
Mr. PECORA. Was it done in order to help the group out?
Mr. PATTERSON. I do not think so. You mean, to pay interest?
Mr. PECORA. In order to help the group out by putting it in
possession of funds with which to meet its own obligations?
Mr. PATTERSON. NO. My recollection is that it was paid to group
stockholders as a dividend. Those funds which you spoke of, $200,000, together with other funds from the other units of the group,
were used to pay a dividend.
Mr. PECORA. DO you recall the last dividend that was declared
and paid by the group on its stock?
Mr. PATTERSON. I think it was the first quarter of 1932.
Mr. PECORA. It then paid a dividend amounting to $386,022 for
that first quarter of the year 1932?
Mr. PATTERSON. That is about 25 cents a share.
Mr. PECORA. Yes; exactly 25 cents a share. Of that dividend of
$386,000-odd, $200,000 was obtained from a dividend of that amount
paid by the Guardian National Bank of Commerce, was it not?
Mr. PATTERSON. Yes, sir.
Mr. PECORA. DO you know
the circumstances under s which the
'Guardian National Bank of Commerce declared that dividend for
the first quarter of 1932?
Mr. PATTERSON. I do not know what you mean by "circumstances."
Their profit account probably was sufficient for them to declare that
amount into the group company.
Mr. PECORA. Why do you say that the profit account was probably
sufficient?
Mr. PATTERSON. WeJl, I do not know what the figures are now.
Mr. PECORA. Have you any consciousness or recollection of the
fact that the condition of the bank in its earnings did not justify the
payment of such a dividend by the bank?
Mr. PATTERSON. NO, I do not. My recollection is that they did
have sufficient earnings to pay that dividend.
Mr. PECORA. DO you know whether or not the dividend was actually
paid out of current earnings or was it paid in part out of earnings and
in part out of surplus funds?
Mr. PATTERSON. I cannot remember the figures now.
STOCK EXCHANGE PRACTICES
4511
Mr. PECOBA. YOU know that the national bank examiner in his
report of the condition of the Guardian National Bank of Commerce
on May 16, 1932, stated that the dividend which was declared for the
first quarter of 1932 was illegal?
Mr. PATTERSON. N O ; I did not know that he stated that.
Mr. PECORA. And that the reason it was illegal was because there
was not a quorum of the board of directors in attendance?
Mr. PATTERSON. N O ; I did not know that, Mr. Pecora.
Mr. PECORA. Did you know that in his report of condition as of
May 16, 1932, the national bank examiner stated that the condition
of the assets of the bank did not warrant the declaration of any
dividend at the end of the current dividend period, which would be
for the second quarter?
Mr. PATTERSON. N O ; I did not know that it was in the report.
Mr. PECORA. Apparently the bank did not declare a dividend for
the second quarter of 1932. Do you recall that fact?
Mr. PATTERSON. Yes,
Mr. PECORA. Did it
sir.
declare a dividend at any subsequent time
during the year 1932?
Mr. PATTERSON. I have not the dividend record here; I could not
say.
Mr. PECORA. Well, according to the dividend record which I have,
the bank declared a dividend for the final quarter amounting to
$150,000. Do you know whether the payment or the declaration of
that dividend was justified by the earnings and by all the other circumstances of the oank?
Mr. PATTERSON. I would say that it was justified at the time. It
seems to me that there were earnings sufficient then to declare that
amount.
Mr. PECORA. Were you a member of the board of this bank?
Mr. PATTERSON. NO, sir.
Mr. PECORA. But as the executive vice president of the group
whose special function it was to inquire from time to time into the
condition of the bank units of the group, did you not know the condition of the bank?
Mr. PATTERSON. Approximately; not intimately.
Mr. PECORA. According to the report of the National Bank
Examiner, who in this instance was Mr. W. A. Reagan, on the condition of the Guardian National Bank of Commerce as of November
9, 1932, he then reported slow loans aggregating $5,388,682.52,
doubtful loans $18,692,876.22, and loss of $546,942.07. Does that
accord with your recollection of the condition of the bank?
Mr. PATTERSON. I do not remember ever seeing Mr. Reagan's
report. I believe that that report was not delivered to the bank
until some time after the 1st of January, although I am a little bit
hazy on that point, and by that time we were working very hard at
other matters.
Mr. PECORA. Did you know that the doubtful loans alone, independently of the slow loans, that were reported by the National
Bank Examiner as of November 9, 1932, actually exceeded the
-entire capital funds of the bank at that time, which aggregated
$17,945,433.93?
Mr. PATTERSON. Yes; apparently they did.
Senator COUZENS. Did you know it at that time?
4512
STOCK EXCHANGE PKAOTICES
Mr. PATTERSON. NO, sir.
Mr. PECORA. DO you think
that under those circumstances any
dividend should have been declared for the final quarter of the year
1932?
Mr. PATTERSON. In view of the necessity to take care of some of
the indebtedness of the Group Corporation, I would say, yes.
Mr. PECORA. Of the Group Corporation?
Mr. PATTERSON. Yes.
Mr. PECORA. Then the interests of depositors were being sacrificed
to take care of the interests of the stockholders of the group?
Mr. PATTERSON. NO.
Mr. PECORA. IS not that so?
Mr. PATTERSON. N O .
Mr. PECORA. Does not that necessarily
follow from the answer you
have given?
Mr. PATTERSON. N O ; I believe not.
Mr. PECORA. Have you not said in words here or in substance,
just now, that you justify the declaration of the dividend because of
the necessity for taking care of the group?
Mr. PATTERSON. The declaration of a dividend by the Guardian
National Bank of Commerce would come out of the profit account7
of that bank, and the assets were to take care of the depositors
interests, and they have, pretty largely, 7so far.
Mr. PECORA. Are not the depositors interests supposed to be
protected also by the capital funds of the bank?
Mr. PATTERSON. That is true; but $150,000 would not
Mr. PECORA. Would not pay them in full, of course. We know
that.
Mr. PATTERSON. Would not jeopardize the depositors' interests.
Mr. PECORA. It would to that extent, would it not?
Mr. PATTERSON. Yes.
Mr. PECORA. It would
jeopardize them to the amount of dollars
and cents involved in the dividend.
Mr. PATTERSON. That is right.
Mr. PECORA. DO you think, under those circumstances, that the
officers did their full duty to the depositors in declaring that dividend,
with the bank in that condition?
Mr. PATTERSON. Viewing it strictly as a bank operation, you are
right.
Mr. PECORA. DO you know why the dividend was declared by
the bank?
Mr. PATTERSON. Only, as I said before, it was used to pay some
of the current indebtedness of the Group Corporation.
Mr. PECORA. What interest did the depositors of the bank have
in taking care of the Group Corporation?
Mr. PATTERSON. Well, the Group Corporation was the stockholder
of bank stock, and, I believe, had a right to declare earnings out of
that bank.
Mr. PECORA. Even though the earnings of the bank itself, considering the bank as a separate entity, were not sufficient to make
the declaration of a dividend advisable?
Mr. PATTERSON. I do not believe there was any legal objection to
declaring dividends, even though the profit account is used or some
of the surplus.
STOCK EXCHANGE PRACTICES
4513
Mr. PECORA. I am not talking about a legal objection; I am talking
about the practical consideration of principles of sound banking.
Mr. PATTERSON. AS a practical consideration it was wrong.
Mr. PECORA. It was wrong?
Mr. PATTERSON. Yes, sir.
Mr. PECORA. DO you know
at whose instance this wrong thing was
done?
Mr. PATTERSON. NO, sir; I do
not.
Mr. PECORA. Can't you guess?
Mr. PATTERSON. I suppose it was the directors of the bank who
declared the dividend,
Mr. PECORA. DO you think the directors of the bank did it upon
their own initiative, or do you think they acted in response to a suggestion, if you please, from the group?
Mr. PATTERSON. I don't know, sir.
Mr. PECORA. DO you know anybody that would know that?
Mr. PATTERSON. I presume Mr. Lord could tell you.
Mr. PECORA. Mr. Lord told us, when he was on the stand that
suggestions only were made to the unit banks by the group on the
subject of declaration of dividends. You heard that testimony, did
you not, week before last?
Mr.
PATTERSON. Yes,
sir.
Mr. PECORA. Didn't it appear to you that those suggestions were
regarded as commands?
Mr. PATTERSON. Oh, no, sir; not at all.
Mr. PECORA. They were not regarded as commands by those
officers of the bank who, when they first received the suggestion,
reported back that the earnings of their bank did not justify the declaration of the dividend suggested by the group?
Mr. PATTERSON. NO, sir; and I can positively state that so far as
any apparent domination is concerned, that did not exist in my experience with the Guardian Group.
Mr. PECORA. And you say that, despite the documentary as well as
oral evidence that was introduced week before last before this committee?
Mr. PATTERSON. I am speaking in a perfectly practical manner,
now, about day-to-day operations; and any suggestion
Mr. PECORA. I am not talking about day-to-day operations; I am
talking about operations based upon general policy.
Mr. PATTERSON. I do not believe there was any domination by the
group officers of any of the units.
Mr. PECORA. Was it customary when you were chief national bank
examiner for you to notify a bank that it was to be examined and the
date when the examination would commence?
Mr. PATTERSON. NO, sir.
Mr. PECORA. AS a matter of fact, do you know whether or not any
of the officers, either of the group or of the unit banks of the group,
received at any time any information concerning the time of the examination of any one of those banks or that an examination was to be
made by the national bank examiners?
Mr. PATTERSON. Yes; I know of one instance.
Mr. PECORA. When was that instance?
Mr. PATTERSON. I believe it was Examiner Walker's examination
of the Guardian Bank in May of 1932, when he and one of his assist
4514
STOCK EXCHANGE PBACTICES
ants came to me and made preliminary arrangements to conduct an
examination. The bank was quite a large one, Mr. Pecora
Mr. PECOKA. Which bank are you referring to?
Mr. PATTERSON. The Guardian National Bank of Commerce, of
Detroit, Mich. The bank had 28 branches, and part of its operations
were conducted in what we call the Union Guardian Trust Building,
and a part of its operations were conducted in the Penobscot Building*
It was his first examination of the bank, and he came to see me to
learn what the physical layout of the institution was, to determine
where the branches were located, where the loans and discounts were
handled, and with regard to the large office in the Boulevard District,
in the General Motors Building.
Mr. PECORA. IS that the only instance that you recall?
Mr. PATTERSON. I do not remember any other. I believe we
participated with the national bank examiners—I am referring now
to the examiners of the Group corporation—I believe we participated
with the national bank examiners in an examination of the Grand
Rapids National Bank at one time.
Mr. PECORA. Under what circumstances was that done?
Mr. PATTERSON. After the national bank examiners had taken
charge of the bank for examination we were notified and sent men
over there to participate with them rather than to discommode the
bank with two examinations.
Mr. PECORA. DO you recall receiving a letter dated December 17,
1931, from Mr. Leyburn, then chief national bank examiner, a
photostatic copy of which I now show you?
Mr. PATTERSON. Yes; I recall this letter.
Mr. PECORA. That was another instance, was it not, where you
received notice in advance that an examination was going to be made
of the bank on a certain date?
Mr. PATTERSON. Yes, apparently; although it does not state that
an examination is to be made.
Mr. PECORA. What does it state? Suppose you read the letter,
yourself, into the record while you have it before you.
Mr. PATTERSON. It is addressed to me. [Reading:]
Hopkins will be in Detroit Saturday morning with Norsen and McLean to line
the work up and start it off. He will have to be away Monday and then he will
return and he will have some more help.
Mr. PECORA. What did you think these examiners were coming
there for?
Mr. PATTERSON. I would think now it was for the purpose of some
examination; but I do not just recall what this particular instance was.
Mr. PECORA. Will you look at this document which I now show
you and which purports to be a photostatic reproduction of an intraGroup memorandum addressed by you to Messrs. Lord, Kanzler,
Covington, and Walsh, under date of December 18, 1931, and tell me
if you recognize it to be a correct copy of such a memorandum prepared and sent by you to the gentlemen to whom it is addressed?
Mr. PATTERSON. Yes; I recall it.
Mr. PECORA. I want to offer that memorandum in evidence.
The CHAIRMAN. Let it be admitted.
(Photostatic copy of memorandum dated Dec. 18, 1931, addressed by Mr. Patterson to Messrs. Lord, Kanzler, Covington, and
STOCK EXCHANGE PRACTICES
4515
Walsh, was received in evidence, marked " Committee Exhibit No. 57,.
Jan. 3, 1934.")
Mr. PECORA. The memorandum in question that has just been
received in evidence as Committee Exhibit No. 57 is on the letterhead
of the Guardian Detroit Union Group, Inc., an Intra-Group memorandum to Messrs. Lord, Kanzler, Covington, and Walsh from B. K.
Patterson, dated December 18, 1931, and reading as follows [reading].You are advised that the chief national bank examiner informs me, under
date of December 17, that National Bank Examiner Hopkins and two assistants
will be in Detroit Saturday a.m., December 19, for the purpose of beginning the
work of the examination of the Guardian Detroit Bank. Mr. Hopkins cannot be
here on Monday, December 21, but will leave his assistants here to continue the
work of examination, and Mr. Hopkins is to return on Tuesday to finish the job.
What were you going to say about it?
Mr. PATTERSON. I was going to say this, that arrangements had
been made for a consolidation of the National Bank of Commerce
and the Guardian Detroit Bank, the latter being a State bank, and
we had made arrangements with the Comptroller's office and had
requested, in fact, that an examination of the Guardian Detroit Bank
be made, and I had contacted Mr. Leyburn to ascertain when ther
examiner and his crew of men would be over to the State bank, the
Guardian Detroit Bank, for that purpose. We had ordered the
examination ourselves incident to the consolidation of the two banks.
The CHAIRMAN. Which bank was it that you said had 28 branches?
Mr. PATTERSON. The National Bank of Commerce.
The CHAIRMAN. They were all in Detroit?
Mr. PATTERSON. Yes,
sir.
Mr. PECORA. Did you know with reference to the dividend that
was declared for the last quarter of 1932 by the Guardian National
Bank of Commerce that in his report on the bank as of November 9,
1932, the national bank examiner said, in answer to the question,
" State reason, if any, why bank should not declare a dividend at the
end of current dividend period", as follows:
Statutory bad debts, doubtful assets and bond depreciation prohibit.
Did you know that?
Mr. PATTERSON. NO, sir; I have never seen that report, Mr.
Pecora.
Mr. PECORA. Let me read to you from the report of the National
Bank Examiner as of November 9, 1932, on the condition of the
Guardian National Bank of Commerce, as follows: [reading]:
At the present time a cooperative spirit toward the Department is evident
throughout this bank and their credit department and loan information is far
above the average. Also asset values are frankly discussed with the Department's representatives. This same spirit is not reflected in the Group by President Lord. It is believed that Vice President Covington of the bank should be
given full credit for the attitude in the bank, the improved condition of its loans,
and its very material improvement in its liquidity which is now 40.5 or better on
an average. However, in considering its liquidity full consideration should be
given to the vulnerable position of the bank as reflected in the attached list. The
real-estate situation in the bank is serious, and at the present time it is very difficult to determine values of any Detroit property. It is felt that eventually substantial losses will develop in some of these assets. The concentration in collateral of Guardian Detroit Union Group and Detroit Bankers Co. stocks is outrageous, and little if any value is given to either of these stocks by the examiner.
Some time ago the Detroit banks took over the American State Bank to avert
closing, and proportionately guaranteed the First National Bank, the absorbing
4516
STOCK EXCHANGE PRACTICES
bank, against loss. This bank's share is 18 percent. The reserve fund upon the
books of the bank has unquestionably lost $1,600,000, and an arbitrary default
classification of an additional $1,500,000 is estimated at this examination,
although even this figure is believed to be a generous classification.
Much depends in this institution on how much confidence the public will continue to place in the connection of Edsel Ford and C. S. Mott with this bank and
whether they will continue to assist. This will depend upon the trend of business
sX the present time.
Under the caption of "General Remarks" let me read the following
from this report as of November 9, 1932 [reading]:
The condition of this bank is very unsatisfactory, and the stock ownership by
the Guardian Detroit Union Group adds nothing to strengthen the picture. The
Group has heavy debts of its own, approximately $14,000,000, and it is necessary
for them to find ways and means to liquidate some of their own debts and have no
funds nor assets with which to assist the member banks. The Group assets consist almost entirely of bank stocks which are not productive of dividends. It was
frankly stated that the Group were very much interested in national legislation
in hopes that state-wide branch banking will be legalized and in that way rearrange their capital structure in such a way as to provide substantially for elimination of losses in their member banks. Just how far its capital structure will
go toward the accomplishment of this end is a problem, but it should only be
permitted to be done under the direct supervision of the Department. The losses
of this bank as estimated at this examination are nominal as compared with the
very questionable assets that it was desired to eliminate, and it was felt that in
view of impending legislation it would be the most desirable thing from the Department's viewpoint to postpone such classification until some future time when
the possibility of using a portion of the Group's capital structure can be determined.
Under the circumstances reflected by this report, do you think
the declaration of a dividend for the final quarter of 1932 by this
bank was advisable or justifiable?
Mr. PATTERSON. NO, sir.
Mr. PECORA. In the light of the condition of the bank as dis-
closed by these reports of the national bank examiners throughout
the year 1931 and the year 1932, do you agree with thfc opinion
expressed here by Mr. Lord before this committee week before last,
that this bank should not have been closed when it was closed, in
February 1933?
Mr. PATTERSON. Yes, sir; I do.
Mr. PscdRA. You do?
Mr. PATTERSON. Yes, sir.
Mr. PECORA. D O you disagree with the report of the national bank
examiners that I have read to you this afternoon?
Mr. PATTERSON. I think that their classifications were pretty
drastic at that time, throughout 1931 and 1932.
The CHAIRMAN. What do you mean by "classifications"?
Mr. PATTERSON. I mean the classification of its assets, as to slow
and doubtful, or loss. I think that that is borne out pretty much by
what has happened since the bank has been in the hands of a receiver,
and what is very likely to happen in the final liquidation of the bank.
The CHAIRMAN. In other words, you think the bank was solvent
when it was closed?
Mr. PATTERSON. I think it was; yes, sir.
Mr. PECORA. And that despite the fact that doubtful loans, the
item of doubtful loans alone, as of November 9, 1932, exceeded in
amount the entire capital funds of the bank?
STOCK EXCHANGE PRACTICES
4517
Mr. PATTERSON. That classification was made at the very lowest
point in all price history, almost, of this country; and in addition to
that I still say that the classifications were quite drastic. I think that
bank could have been saved.
Mr. PECORA. What report had your own examiners made to you
for the year 1932 concerning this bank?
Mr. PATTERSON. We had not been able to get into the bank in the
year 1932 with our own examiners.
Mr. PECORA. Why not?
Mr. PATTERSON. Because in the spring of that year, in March, it
became necessary to economize more and more in the Group Corporation, and all the examiners attached to the Group Corporation were
assigned to other duties, and practically no examination work was
done during that year by the Group Corporation.
Mr. PECORA. This bank was one of the most important units in the
group, was it not?
Mr. PATTERSON. That is true.
Mr. PECORA. Why were you not able to obtain a report from your
own examiners of the condition of the bank for the entire year 1932?
Mr. PATTERSON. I just said, Mr. Pecora, that in the interests of
economy we had detached all the examiners from the Group Corporation and assigned them to other duties, and all examination work on
the part of the group was discontinued approximately the 1st of
March 1932.
Mr. PECORA. Then how were you informed as to the condition of
the bank in 1932?
Mr. PATTERSON. Only by contact with the officers of the bank.
Mr. PECORA. That contact, or that information, did not consist
of any information you got from any of the national bank reports for
that year, because you have acknowledged this afternoon that you
are learning of the contents of these reports for the first time this
afternoon.
Mr. PATTERSON.
Mr. PECORA. It
Yes.
did not consist, either, of any information you got
from examinations made by your own men, did it?
Mr. PATTERSON. NO, sir.
The CHAIRMAN. In other
words, you had not made any classifica-
tions of your own?
Mr. PATTERSON. NO, sir.
The CHAIRMAN. YOU were not in a position to criticize?
Mr. PATTERSON. We had not made any examinations during 1932.
Mr. PECORA. Was not that the time when, in view of existing
conditions, it seemed most imperative to you that such examinations
be made?
Mr. PATTERSON. Yes,
Mr. PECORA. And in
sir.
the interests of economy those examinations
were not made?
Mr. PATTERSON. Apparently.
Mr. PECORA. Well, actually?
Mr. PATTERSON. Actually; yes, sir.
Mr. PECORA. Mr. Chairman, that completes this phase of the
examination.
175541—34—PT 9
21
4518
STOCK EXCHANGE PRACTICES
But, Mr. Chairman, I think this letter, which was read, in part
at least, into the record by Mr. Patterson, should be marked as an
exhibit.
The CHAIRMAN. Let it be appropriately marked.
(Thereupon the letter dated Jan. 10, 1929, from Mr. Proctor to
National Bank Examiner Moon, was marked " Committee Exhibit
No. 58," and will be found at the end of the day's proceedings.)
The CHAIRMAN. The committee stands adjourned until 10 o'clock
tomorrow morning.
Mr. PECORA. Witnesses now in attendance will be here at that time.
(Whereupon, at 4:30 p.m. Wednesday, Jan. 3,1934, an adjournment
was taken until tomorrow, Thursday, Jan. 4, 1934, at 10:30 a.m.)
COMMITTEE EXHIBIT NO. 58 JANUARY 3, 1934
TREASURY DEPARTMENT,
January 10, 1929.
Mr. EARL W. MOON,
National Bank Examiner,
164 West Jackson Blv'd., Room 1208, Chicago, Illinois.
DEAR SJR: Your letter of January 4, is received, requesting an answer to your
letter of December 19.
You state that the officers, directors, and stockholders interested in the Union
Trust Company, the Griswold-First State Bank, and the National Bank of Commerce, all of Detroit, Michigan, have organized a corporation known as the
Union Commerce Investment Company; that this corporation is in reality a
holding company for the stock of these three institutions; that the assets of
the Union Commerce Investment Company consist of the total capital stock of
these three institutions except the directors' qualifying shares, and request to be
advised whether the National Bank of Commerce may lawfully, and without
criticism, hold stock of the Union Commerce Investment Company as collateral
to loans.
The stock of the corporation referred to is not capital stock of the bank within
the meaning of Section 5201, U. S. R. S., even though a part of its assets consist
of stock of the bank. The matter of accepting stock of the company as collateral to a loan is one for the determination of the management of the bank, although this office does not look with favor on loans secured by stock of a company so closely allied to the bank and having little or no assets other than stock
in banks, national and state.
Your letter of December 19 was inadvertently placed in thefilesbefore being
answered.
Respectfully,
JOHN S. PROCTOR,
Deputy Comptroller.
STOCK EXCHANGE PEACTICES
THURSDAY, JANUARY 4, 1934
UNITED STATES SENATE,
SUBCOMMITTEE OF THE COMMITTEE ON
BANKING AND CURRENCY,
Washington, D.G.
The subcommittee met at 10 a.m., pursuant to adjournment on
yesterday, in Room No. 301 of the Senate Office Buijding, Senator
Duncan U. Fletcher, presiding.
Present: Senators Fletcher (chairman), Adams (proxy for Costigan),
Townsend, Couzens, and Goldsborough (substitute for Norbeck).
Present also: Ferdinand Pecora, counsel to the committee, Julius
Silver and David Saperstein, associate counsel to the committee, and
Frank J. Meehan, chief statistician to the committee.
The CHAIRMAN, The subcommittee will come to order. You may
proceed, Mr. Pecora.
Senator COTJZENS. Who will you have first this morning, Mr.
Pecora?
Mr. PECORA. Colonel Walsh.
Mr. LORD. Mr. Pecora, Colonel Walsh is confined to his bed at the
hotel, under the care of a physician and a nurse.
Mr. PECORA. IS he <iuite sick?
Mr. LORD. Yes, he is quite sick.
The CHAIRMAN. Then who will you have first, Mr. Pecora?
Mr. PECORA. I will recall Mr. Lord.
TESTIMONY OF ROBERT 0. LORD—Resumed
Mr. PECORA. Mr. Lord
Mr. LORD (interposing). Mr. Pecora, before you begin your examination of me may I make a statement?
Mr. PECORA. Yes.
Mr. LORD. During
the session of this committee held on Friday,
reference was made to certain annual statements for the years 1929,
1930, 1931, and 1932.
Mr. PECORA. What Friday do you refer to?
Mr. LORD. Friday, December 22.
Mr. PECORA. All right.
Mr. LORD. In regard to the Guardian Detroit Union Group, Inc.,
statements submitted to the Securities Commission of the State of
Michigan, photostatic copies of which statements submitted here,
were apparently made from office copies taken from the office of
the Group, which office copies made it appear that they were not
properly acknowledged before a notary public as required by law.
In addition, the photostatic copy from the office copy of a report of
4519
4520
STOCK EXCHANGE PEACTICES
one of the years made it appear that the record had been actually
signed by others than myself and Mr. Haberkorn, respectively,
resident and secretary of the corporation. I have secured and am
anding to this committee photostatic copies of the originals of those
four reports filed with the Michigan Securities Commission, which
show clearly that the originals, as required by law to be filed with the
Michigan Securities Commission, at Lansing, were complete as to
signatures, acknowledgment, and were in proper form. Furthermore,
those reports were at all times open to public inspection.
Now, the two reports which were referred to—and I should like,
first, to turn these photostatic copies of the reports over to you, Mr.
Pecora, so that you may have correct copies of them here, for the 4
years 1929, 1930, 1931, and 1932.
The two reports which were compared—that is, the Annual Report
to stockholders and the report of the Group Corporation individually—are not comparable at all. The annual report to the stockholders is a consolidated report for the year's business of all the units
that make up the group, including the Group Co. itself. While the
report to the Michigan Securities Commission is the report of the
holding company alone, which, under the requirements of the Michigan Securities Commission, does not and cannot reflect the earnings
or losses of the units of the Group or of their condition.
The earnings of the holding company come chiefly from dividends
from the units. If the holding company alone paid out more than
it received in dividends or other income, it would naturally show a
deficit. That, however, would not mean a loss on the year's business of the units making up the Group. It would merely mean a
deficit for the holding company alone and not of the Group as a whole.
Now, as perhaps further clarifying these Michigan Securities Commission reports, I should like to read the statement of Fred Guider,
the examiner of the Michigan Securities Commission, which statement appeared in a Detroit newspaper of Sunday, December 31,
1933, and which I think is quite clear. This article reads as follows:
Mr. PECORA (interposing). What article are you now referring to
and proposing to read?
Mr. LORD. An article from the Detroit News of December 31,1933,
and which contains a statement made by Mr. Guider, which statement I think will probably clarify better than I can just what these
commission reports mean.
Mr. PECORA. Well, we do not have to take our evidence from a
newspaper ^tory. That is not legal evidence.
Mr. LORD. This is a statement made by Mr. Guider as examiner for
the Michigan Securities Commission, and seems to me has a bearing
on these reports.
Mr. PECORA. If you want any views of Mr. Guider submitted to
this committee let Mr. Guider come here and submit to an examination about such views.
The CHAIRMAN. I scarcely think any newspaper account of what
Mr. Guider may have said would be proper testimony. We may disagree entirely with that statement and are entitled to examine him
and have the matter clarified.
Mr. LORD. It is not merely a question of commenting on the
reports. He is simply commenting on what the reports to the
Securities Commission are.
P
STOCK EXCHANGE PRACTICES
4521
The CHAIRMAN. But you do not know whether he reported right or
not.
Mr. LORD. Whether he reported right?
The CHAIRMAN. Yes.
Mr. LORD. He is employed by the Michigan
Mr. PECORA. The reports to the Securities
Securities Commission.
Commission speak for
themselves,.and they are in evidence here. They will tell what they
are better than anybody else can. Here they are, and have been
made a part of the record of this committee.
Mr. LORD. It seems to me, however, that Mr. Guider's comments
on those reports are quite pertinent to this inquiry.
Senator COTJZENS. I think the committee would have no objection
to Mr. Guider coming down here and testifying if he wishes to do so.
But we can hardly take a newspaper account of his comments.
Mr. LORD. I have no doubt that Mr. Guider would testify to the
same effect that he has written in regard to these commission reports.
Senator COUZENS. I think it is the committee^ rule not to take
any evidence unless the person himself comes and gives it. That is
the rule we have followed right along, not to take any newspaper
items as evidence.
The CHAIRMAN. I scarcely think a newspaper account of what was
said would be proper evidence here. However, probably that is not
very material anyhow. We know what the reports are, and we know
what the law required. Is there anything else you wish to say along
that line, Mr. Lord?
Mr. LORD. NO, I thank you.
The CHAIRMAN. DO you offer these photostatic copies of the
originals?
Mr. LORD. Yes, sir; I do.
Mr. PECORA. The annual
reports made by the Guardian Detroit
Union Group, Inc., to the Michigan Securities Commission for the
calendar years 1929, 1930, 1931, and 1932, respectively, have been
been presented by the witness. I ask that they may be marked in
evidence in the order in which I have designated them.
The CHAIRMAN. Let them be received.
Senator COUZENS. We are not making them a part of the record,
but are simply marking them in evidence.
Mr. PECORA. Yes; I just ask that they may be marked in evidence.
As I understand it, the only purpose Mr. Lord has in presenting
these photostatic copies is to show that the originals were duly signed
and acknowledged.
Senator COUZENS. Then these photostatic copies will be marked
as exhibits and held for the purposes of the committee.
Mr. PECORA. Yes.
The CHAIRMAN. Let
them be admitted as exhibits and filed.
(A photostatic copy of a report made for the year 1929 by the
Guardian Detroit Union Group, Inc., to the Michigan Securities
Commission, was marked " Committee Exhibit No. 59, Jan. 4, 1934 ",
and will be retained in the committee's files.)
(A photostatic copy of a report made for the year 1930 by the
Guardian Detroit Union Group, Inc., to the Michigan Securities
Commission, was marked " Committee Exhibit No. 60, Jan. 4, 1934",
and will be retained in the committee's files.)
4522
STOCK EXCHANGE PRACTICES
(A photostatic copy of a report made for the year 1931 by the
Guardian Detroit Union Group, Inc., to the Michigan Securities
Commission, was marked "Committee Exhibit No. 61, Jan. 4, 1934",
and will be retained in the committee's files.)
(A photostatic copjr of a report made for the year 1932 by the
Guardian Detroit Union Group, Inc., to the Michigan Securities
Commission, was marked " Committee Exhibit No. 62, Jan. 4, 1934 ",
and will be retained in the committee's files.)
Mr. PECORA. Mr. Lord, have you a copy of the statement that
you read into the record a few minutes ago?
Mr. LORD. NO. I have only my own notes that I used.
Mr. Pecora. You read from some manuscript, did you not?
Mr. LORD. I have some piecemeal notes of my own.
Mr. PECORA. Well, may I just have them for my guidance in
examining you about them? I want to have the exact text of your
statement before me.
Mr. LORD. All right [handing to Mr. Pecora a paper].
Mr. PECORA. NOW, I am interested particularly in this portion
of the statement which you read into the record and which I will
repeat to you:
The two reports are not comparable at all. The annual report to the stockholders is the consolidated report of the year's business of the units that make
up the group, including the Group Co. itself. The report to the securities commission is the report of the holding company alone, which, under the requirements of the Michigan Securities Commission, does not and cannot reflect the
earnings or losses of the units of the group or their condition. The earnings of
the holding company come chiefly from dividends from the units. If the holding company alone paid out more than it received in dividends or other income,
it would naturally show a deficit. That, however, would not mean a loss on the
year's business of the units making up the group. It would merely mean a
deficit for the holding company alone.
Now, Mr. Lord, in making that statement, the two reports to which
you refer as not being comparable at all were the reports respectively
made by the Group Corporation to its stockholders embodied in its
printed annual report, and the report made by the Group Corporation
to the Michigan Securities Commission, were they not?
Mr. LORD. Yes,
sir.
Mr. PECORA. NOW, why do you say that the two reports are not
comparable at all?
Mr. LORD. Because in the one case, the annual report to stockholders was a report of operations of the entire group including its
units. On the other hand, the report to the securities commission
was a report of the Group Corporation as such and did not include the
operations of the units that constituted the assets of the Group Corporation.
Senator COUZENS. Mr. Lord, is that a correct statement in view
of the testimony we have heretofore had in respect of the annual
reports to stockholders—that is, not including the many affiliates that
are units of the group?
Mr. LORD. Senator Couzens, I do not understand your question.
Will you kindly repeat it?
Senator COUZENS. AS I remember the prior testimony it was to the
effect that your annual report to stockholders did include the operating
results of the many affiliates?
STOCK EXCHANGE PRACTICES
4523
Mr. LORD. The annual report to the stockholders did include that
as I understand.
Senator COUZENS. Of the various affiliates?
Mr. LORD. Yes, sir; as I understand them.
Senator COUZENS. I did not recall that those reports included all
of the affiliates.
Mr. PECORA. It only includes the banking units that were members of the group.
Mr. LORD. WMch report are you now referring to?
Mr. PECORA. The annual report to the stockholders of the group.
Mr. LORD. For 1929?
Mr. PECORA. Yes; or any of the years reported.
Mr. LORD. A report of earnings and operations as included in the
annual reports covered the operations of all the units, including the
Group Corporation itself, according to my understanding. And I
think that is correct.
Mr. PECORA. Does it show earnings or deficits, whichever it may
be, that the group as a whole earned or suffered, as the case might
be?
Mr. LORD. DO you mean the Group Corporation?
Mr. PECORA. Yes; in its annual report to its stockholders.
Mr. LORD. My understanding is that it does.
Mr. PECORA. Will you point out in the printed annual report of
the group to its stockholders for the year 1929 where that may be
found?
Mr. LORD. The results of operations during 1929 according to
my understanding included the operations of all the units, and the
operations of the Group Corporation itself.
Mr. PECORA. Point out from the printed report of the group to
its stockholders for the year 1929 any statement which tells the
stockholder what the earnings of the group as a whole were for the
year, if any, or what the deficit of the group as a whole was for the
year, if any.
Mr. LORD. Mr. Pecora, this statement says:
The results of operations of the above unit institutions of Guardian Detroit
Union Group, Inc., for the year ending December 31, 1929, were satisfactory—
And then it lists them below. I admit that it does not state that the
operations of the Group Corporation as such are included, but they
were included.
Senator COUZENS. On what page is that, please?
Mr. LORD. On page 8 of the printed annual report for 1929.
Mr. Pecora. The annual report to which you have referred says:
The results of operations of the above unit institutions of Guardian Detroit
Union Group, Inc., for the year ending December 31, 1929, were satisfactory in
spite of the difficult condition which confronted every banking institution during
the last 10 weeks of the calendar year.
Mr. LORD. Yes, sir. And it then follows with the aggregate gross
earnings of the units of the Group, stating that they amounted to
$41,847,489.21. And it says:
From which all expenses (including taxes of all kinds, and depreciation of buildings and equipment) were paid to the amount of $32,435,031.08.
4524
STOCK EXCHANGE PRACTICES
Then it says:
Leaving net earnings from operations (after writing off all known losses) in
the amount of $9,412,458.13.
Then it says:
Or at the rate of 30.58 percent on outstanding capital stock of 1,538,801 shares
of $20 par value.
Then it says:
Of this amount, there was set aside reserves for unforeseen contingencies in the
amount of $1,704,732.73.
Then it says:
Leaving available for dividends $7,707,725.40, or at the rate of 25.04 percent
on outstanding capital stock of 1,538,801 shares of $20 par value.
Then it says:
Of this amount there was paid out in dividends during the year by the group or
by the member banks prior to affiliation with the group $4,246,359.04.
And then follows:
Leaving for additions to surplus or undivided, profits $3,461,366.36.
If you will look at that corporation report made to the Michigan
Securities Commission you will find for the year 1929 that the Group
Corporation did not incur any deficit, that its expenses equalled its
income.
When you come to the 1930 report you will find a deficit of the
Group Corporation, as stated, was $39,387.57. And the expenses of
the Group Corporation according to our auditors were included in the
earnings' statement of 1930.
Mr. PECORA. On what page?
Mr. LORD. On page 9.
Mr. PECORA. NOW, the annual report filed with the Michigan
Securities Commission for the year 1930 by the Guardian Detroit
Union Group, Inc., shows that the group as a whole incurred a deficit
for that year of $39,387.57, does it not?
Mr. LORD. Yes, sir; I believe so.
Mr. PECORA. Will you point out in the statement embodied in the
printed annual report to stockholders for the year 1930, which was
published and issued by the Guardian Detroit Union Group, Inc.,
which also states or which reflects the fact that the group as a whole
for the year 1930 operated at a deficit of $39,387.57, or operated
under any deficit whatsoever.
Mr. LORD. Mr. Pecora, the Group Co. as such did not make a
separate statement because it would not have been the true picture
of the group as a whole. The 1930 statement, however, showing the
combined Operating earnings and expenses of the various units of
the group, include the expenses of the Group Corporation. It includes that deficit of $39,387.57.
Mr. PECORA. Where do you see it in the report?
Mr. LORD. It is not specifically mentioned, but
Mr. PECORA (interposing). Well, where is it mentioned at all,
either specifically or generally?
Mr. LORD. It is included in these figures.
Mr. PECORA. Where?
Mr. LORD. In these operating figures, that deficit is included.
STOCK EXCHANGE PEACTICES
4525
Mr. PECORA. Will you take the figures shown on page 9 of the
printed report to stockholders of the group for the year 1930—have
you a copy there?
Mr. LORD. I have it here.
Mr. PECORA. And give us the calculation from which anyone could
deduce from it that the group as a whole that year operated at a loss
or a deficit of $39,387.57.
Mr. LORD. Mr. Pecora, the group did not operate at a loss. The
Group Corporation as such incurred a deficit after dividends and
after paying its own expenses, of $39,387.57.
Mr. PECORA. Well, I am talking about the group, or the company
called Guardian Detroit Union Group, Inc. That is a holding
company, isn't it?
Mr. LORD. Yes,
sir.
Mr. PECORA. NOW, that company, which for the sake of convenience
I will refer to as the group, in its annual report filed with the Michigan
Securities Commission showed that it operated at a loss, or incurred a
loss of $39,387.57 for the year 1930, did it not?
Mr. LORD. It incurred a deficit after dividends. This report
includes the operating earnings and the operating expenses of every
corporation in the group, including the Group Corporation itself.
Mr. PECORA. Well, show me in the printed report to the stockholders issued by the group or holding company, any statement
which indicates that the group incurred a deficit for the year 1930.
Mr. LORD. Mr. Pecora, that particular statement is not made, but
the statement shows that the combined operating earnings and expenses
of the various units of the group were as follows—and then the group
Corporation itself was included in those earnings.
Mr. PECORA. Well, show me any figures or any set or grouping of
figures in this annual report to stockholders, from which any reading
thereof could inform the reader that the holding company, otherwise
referred to as the group, incurred a deficit of over $39,000, or incurred
any deficit whatsoever in the year 1930.
Mr. LORD. There is no such statement in there, because it was our
best judgment—and I have conferred with Haskins & Sells to find
out if our judgment was wrong as to the fair and proper method of
reporting the operations of the group.
Mr. PECORA. Did Haskins & Sells advise you to make this kind of
report to your stockholders?
Mr. LORD. They did not. My conference with Haskins & Sells was
last week, to see if we had presented a proper report.
Mr. PECORA. And did they advise you that you had presented the
facts properly to the stockholders of the group?
Mr. LORD. They did, sir.
Mr. PECORA. And did they base that advice upon an examination
of the annual reports issued to the stockholders by the group for the
years 1929, 1930, and 1931?
Mr. LORD. They did, sir.
Mr. PECORA. Which particular member or members of the firm of
Haskins & Sells gave you that information?
Mr. LORD. Mr. Bontron, the partner in Detroit.
Mr. PECORA. Why did you consult him last week on this subject?
Mr. LORD. TO see if my judgment was correct as to the presentation
of those figures.
4526
STOCK EXCHANGE PRACTICES
Mr. PECORA. Then it was on your judgment that these annual
reports to stockholders were prepared and issued?
Mr. LORD. TO some extent, and on the judgment of the committee.
These reports went out on the order of the executive committee.
Senator TOWNSEND. Who were the members of the executive
committee?
Mr. LORD. There were different members at different times.
They are stated in here. The executive committee of the Group
Corporation in 1930 were: Henry E. Bodman, chairman; Frank W.
Blair; Harry C. Bulkley; C. H. Haberkorn, Jr.; Carl ton M. Higbee;
Sherwin A. Hill; Ernest Kanzler; Robert O. Lord; Charles S. Mott;
Fred T. Murphy; Edwin H. Nelson; Phelps Newberry; Murray W.
Sales; Henry H. Sanger; John N. Stalker; and James L. Walsh.
Mr. PECORA. NOW, Mr. Lord, will you be good enough to tell us,
in view of the fact that you consulted those accountants last week in
order to find out if your judgment with regard to the preparation and
issuance of these annual reports to stockholders was correct, why in
issuing the annual reports to stockholders the reports were worded
and presented in a fashion which concealed from the stockholders the
fact that the company incurred a deficit in each of those operating
years?
Mr. LORD. Mr. Pecora, there was no intention of concealing it from
the stockholders.
Mr. PECORA. Well, tell us why it was done, whether there was any
such intention or not. Tell us why reports were prepared in a fashion
to withhold that information from the stockholders.
Mr. LORD. The reports were prepared in a fashion that, in our
opinion, presented the full facts to the stockholders of the Group,
and the facts in which they were interested.
Mr. PECORA. Well, the fact that the company operated under a
deficit would be a fact in which any stockholder would be interested,
wouldn't he?
Mr. LORD. I would not think so, no.
Mr. PECORA. YOU say you would not think so?
Mr. LORD. NO. Because they are interested in the assets of the
corporation, and the earnings of the corporation.
Mr. PECORA. DO you mean to say he is not interested in whether
or not the corporation incurred a deficit in its year's business?
Mr. LORD. Not as such; no, I shouldn't think so.
Mr. PECORA. Have you always guided yourself in your business
transactions in corporate matters by that opinion or principle that a
stockholder is not interested in the fact whether or not his company
operated at a deficit?
Mr. LORD. Mr. Pecora, I have been guided in my business transactions by telling the stockholder all information, and presenting it in
the way I thought it gave him all the facts. Now, this may illustrate
what might happen: If you had published an earnings picture of the
Group Corporation itself, let us assume for the sake of the argument
that out of undivided profits account rather than out of current
earnings of the units, you had paid, we will also say for the sake of the
argument only, $6,000,000 in dividends to the Group Corporation.
Assume, then, that you encroach, in paying those dividends upon the
undivided profits account of the separate units. Then assume that
the Group Corporation had paid out the $6,000,000, and received as
STOCK EXCHANGE PEACTICES
4527
dividends $3,000,000, and show an excess of income over dividends of
$3,000,000. Had you presented that statement to the stockholders
in the face of paying out of undivided-profits account rather than
current earnings of the units, it would have been absolutely a misrepresentation of the situation. Now, we have shown in these reports
the income accounts for the various units, and we have included in
operating expenses in the combined figures, the operating expenses
of the Group Corporation. I do not know of any fairer way, any
fuller way, to present the proper picture of the Group Corporation
and of its units than that. Now, that may be an accounting matter
that somebody might differ about, but Mr. Bontron felt and told
us that the presentation in this report was absolutely the way this
matter should be handled.
Mr. PECORA. I should like to have Mr. Bontron, or whatever his
name is, to come down here and tell this committee under oath
what you say he told you.
Mr. LORD. Very well. Oh ! It was Price, Waterhouse & Co. and
not Haskins & Sells.
Mr. PECORA. It was a man representing Price, Waterhouse &
Co.?
Mr. LORD. Yes, sir.
Mr. PECORA. W3ll, my
desire stands to have that gentleman come
here and tell this committee what you say he told you.
Mr. LORD. Very well.
Mr. PECORA. NOW, in this printed annual report to the stockholders
of the Group for the yea/ 1930, the opening statement reads as follows:
To the stockholders of Guardian Detroit Union Group, Inc.:
During the past year the banks and trust companies affiliated in the Guardian
Detroit Union Group have conducted their operations along most conservative
lines, stressing safety and liquidity rather than profits.
Is that a correct statement of the facts, Mr. Lord, as you know the
facts?
Mr. LORD. I think it is, sir.
Mr. PECORA. In view of that statement of yours, isn't the fact to
your knowledge that during the year 1930 many of the bank and trust
company units of the Group paid dividends that were not justified
by current earnings?
Mr. LORD. I do not think so.
Mr. PECORA. Isn't it the fact that many of those banking units of
the Group during that year paid dividends partly out of capital funds
as well as out of earnings?
Mr. LORD. What do you mean by " capital funds? "
Mr. PECORA. The surplus and undivided profits. You know what
I mean by capital funds.
Mr. LORD. Not to my knowledge, Mr. Pecora. I haven't the individual figures here, but I can get them for you.
Mr. PECORA. Well, just check up on that, please.
Mr. LORD. All right. (Witness leaves the table and goes to his
papers for additional records.) I have here the operating earnings of
the units for 1930 and the dividends paid. Shall I read them
separately?
Mr. PECORA.
Yes.
4528
STOCK EXCHANGE PRACTICES
Mr. LORD. I might say here, while looking at this figure, that I see
the Union Guardian Trust Co. paid for 1930 $62,000 from its undivided profits account.
Mr. PECORA. From its undivided-profits account?
Mr. LORD. Yes,
sir.
Mr. PECORA. And not from earnings?
Mr. LORD. And the balance from current earnings. Now, taking
the units: The Guardian National Bank of Commerce, which is set
up to include both the Guardian Detroit Bank and the National
Bank of Commerce, which had not been consolidated, but these
figures are put together; in 1930 the earnings were $2,337,205.90, and
the dividends paid were $1,761,782.
Mr. PECORA. HOW much was paid out of undivided profits or
surplus account?
Mr. LORD. In their case they had an excess of earnings over
dividends of four hundred and odd thousand dollars.
Mr. PECORA. Well, were any reserves set up against losses that
year out of those earnings?
Mr. LORD. There were some charge-offs made probably from the
reserve account.
Mr. PECORA. Made out of the earnings for the year?
Mr. LORD. YOU cannot follow them separately. Earnings go into
undivided profits, and where you set up reserves, customarily you
charge the undivided profits account with the reserves. In other
words, it is a matter of two steps. Current earnings go into undivided
profits. Undivided profits are charged to create reserves or take
care of whatever charge-offs there are.
Mr. PECORA. Can you give the committee the amount of the
charge-offs or reserves set up by that bank for the year 1930?
Mr. LORD. The net amount charged off was five hundred twenty
and odd thousand dollars.
Mr. PECORA. Yes.
Mr. LORD. Those charge-offs
may have come from reserves already
created, or may have come from the undivided profits account.
Mr. PECORA. From undivided profits account as swelled by
current earnings?
Mr. LORD. Yes, sir; because earnings go into the undivided
profits account.
Mr. PECORA. In the first statement of the earnings of that bank
for the year 1930, then the amount of set-up for reserves against
losses or contingencies, this amount of charge-offs or write-offs appears
and this amount of dividends declared.
Mr. LORD. Yes,
sir.
Mr. PECORA. NOW, §£ve us those four figures for that year.
Mr. LORD. The earnings were $2,337,205.94. Now, what was the
next figure you desired?
Mr. PECORA. The amount set up as a reserve against losses.
Mr. LORD. The statement is not handled in that way. It shows
the net charge-offs. Do you want that figure?
Mr. PECORA. WelJ, give it as you show it there.
Mr. LORD. It is $520,678.35.
Mr. PECORA. Yes.
Mr. LORD. And dividends
paid $1,761,800*
STOCK EXCHANGE PRACTICES
4529
Mr. PECORA. NOW, in the earnings figure of $2,337,205.94 does that
represent gross earnings or earnings after expenses?
Mr. LORD. That is after expenses. The gross earnings were
twenty-seven million, six hundred and ninety-five thousand
Mr. PECORA (interposing). Oh, no. You do not mean 27 million
dollars, do you?
Mr. LORD. NO. That figure I gave you up there represented the
net earnings after operating expenses and reserves for depreciation in
the matter of furniture, fixtures, and so on.
Mr. PECORA. That means net earnings after operating expenses
and taxes?
Mr. LORD. Yes, sir.
Mr. PECORA. And the net charge-offs amounted to $520,628.35?
Mr. LORD. Yes, sir.
Mr. PECORA. That does not include anything set up for reserves,
does it?
Mr. LORD. It does not show any set-up for reserves in these
statements.
Mr. PECORA. Were there any reserves set up for that year by that
bank?
Mr. LORD. I cannot tell you from these figures.
Mr. PECORA. Well, you know that it was the policy of the group
not to have unit banks set up reserves, don't you?
Mr. LORD. NO, sir; I do not.
Mr. PECORA. Don't you know that that fact was adverted to
repeatedly by the national-bank examiners in their reports made
from time to time of the unit banks? Hasn't that fact been shown
in evidence here?
Mr. LORD. NO. I have never seen that.
Mr. PECORA. YOU have not?
Mr. LORD. NO, sir. The statements themselves show reserves, so
how could that be the policy?
Mr. PECORA. Well, it was the policy to set up as small an amount
for reserves as possible, wasn't it?
Mr. LORD. NO, that is not a fair statement, or at least I don't
think so.
Mr. PECORA. Well, now, let us take, for instance, the evidence
before this committee, which included Committee Exhibit No. 8,
December 19, 1933, consisting of an intra-group memorandum, sent
to you by Mr. John N. Stalker, who was then the president of the
Union Guardian Trust Co., one of the banking units of the group,
and which is dated June 26, 1930, and in which he said as follows:
MY DEAR BOB: I commented in a recent letter on the matter of the dividends
which should be paid by the Union Guardian Trust Co. the latter half of this year.
The loss of our bond department affects our earnings very seriously. For the 5
years from 1925 to 1929, inclusive, the net earnings of that department after the
payment of expenses average a trifle over $296,000 a year. If we had those earnings today, I believe we could pay a 20-percent dividend or $1, 000, 000 a year.
We do not in any way question the transfer of the bond department to the Guardian Detroit Co. This seems to us logical and proper. The effect on our earning capacity, however, cannot be ignored.
As against $500,000 in dividends which we are paying the first 6 months of this
year, our earnings will probably not run over $425,000, and this without setting
up any reserves at all. Our policy in the past has always been to set up liberal
reserves, although we were fortunate enough to need them only to a very limited
extent. At the present time we feel that reserves are rather urgently required,
and find ourselves unable to provide them.
4530
STOCK EXCHANGE PRACTICES
Now, doesn't that letter indicate what the policy of the group was
with respect to setting up reserves?
Mr. LORD. I do not think so, Mr. Pecora.
Mr. PECORA. What does that letter indicate to you, then?
Mr. LORD. It indicates to me that Mr. Stalker felt that dividend
was larger than it should be under the circumstances, and in view of
the fact that they, in that institution at that time, were not setting
up any reserves.
Mr. PECORA. And they were not setting up reserves because the
Group did not want the bank to set up reserves, isn't that so?
Mr. LORD. No; I do not think so.
Mr. PECORA. Well, doesn't that appear from the testimony given
here by Mr. Stalker, as well as the documentary evidence introduced
while he was on the stand, as well as while you were on the stand week
before last?
Mr. LORD. I think Mr. Stalker went into the details, or at least as
I recollect his testimony, as to the expectation of increased earnings
for the latter half of the year, and as to an expectation of economies
through the consolidation which had been made and just completed,
of the Guardian Trust Co. and the Union Trust Co. And the dividend, which as I recall it that the Union Guardian Trust Co. declared
at that time, was at a lower rate than the combined rates of the
institutions.
Mr. PECORA. And the earnings were much lower than they had
been in previous years, and the dividends were declared at a rate that
Mr. Stalker himself pointed out to you were not justified by current
earnings. Do you recall that testimony given by Mr. Stalker?
Mr. LORD. I recall that Mr. Stalker felt that that particular
dividend was larger than should be paid at the time.
Mr. PE€ORA. And nevertheless that dividend, larger than should
have been declared, was declared because the group asked that it
be declared.
Mr. LORD. N O ; because it was recommended to the board by him
and others, and the board of the Union Guardian Trust Co. declared
that dividend.
Mr. PECORA. Recommended by you, or requested by you, and
recommended by the board, including Mr. Stalker.
Mr. LORD. Well, now
Mr. PECORA (interposing). Well, that is a fact, as has been stated
here.
Mr. LORD. Yes, sir; I believe so.
Mr. PECORA. Aiid Mr. Stalker recommended that dividend after
he had first pointed out to you the unwisdom of a dividend at the
rate which the group has asked be declared.
Mr. LORD. Yes, but he recommended that dividend because he
must have felt that it was justified.
Mr. PECORA. HOW can you say that in view of Mr. Stalker's own
letters to you, in which he proceeded to state the situation, and
deferred to the rate suggested by you only in deference to the suggestions of the group?
Mr. LORD. Well, why should he have recommended it to the board
if he did not favor it?
STOCK EXCHANGE PEACTICES
4531
Mr. PECORA. Well, do you want me to answer that question?
If so, I will say it was because he was under the domination of the
group and its officers, if you want me to answer it.
Mr. LORD. NO.
Mr. PECORA. And
because his position as president depended upon
his retaining the good will of the group, which owned the stock of
his bank. And let me point out to you, on page 12 of the printed
annual report of the Group Co. to its stockholders for the year 1930,
the following statement:
In the case of the Guardian Detroit Co. a special inventory reserve of $4,500,000 has been made by the transfer of $2,900,000 from capital account and $1,600,000 from undivided profits.
Now, in this instance the Guardian Detroit Co. depleted its capital
resources to the extent of A% million dollars in order to set up this
reserve, didn't it?
Mr. LORD. Yes,
sir.
Mr. PECORA. NOW, how many banking units of the group for the
year 1930 depleted their capital resources in order to set up reserves
or in order to take care of write-offs or charge-offs?
Mr. LORD. Well, I can give you the totals. Do you want them
individually?
Mr. PECORA. I should like to have them individually, with a mention of the facts.
Mr. LORD. All right.
Senator GOLDSBOROTTGH. Mr. Pecora, how many institutions
constituted this group? Were there 22 or 23 banks, and how many
affiliates?
Mr. PECORA. I think there were 27 units all told. Is that right,
Mr. Lord?
Mr. LORD. N O ; I think there were more than that. Eight at the
time spoken of, including all the affiliates. But they were either
being liquidated or consolidated.
Mr. PECORA. Well, out of the units of the group, 20 of them were
banking units, weren/t they?
Mr. LORD. I think 21 at the time.
Senator ADAMS. Mr. Lord, you are using the term "depletion of
capital resources." Is this really a depletion or is it a recognition of
an existing depletion?
Mr. LORD. It was a recognition of the existing values of the
securities.
Senator ADAMS. This was a matter, rather, of bookkeeping entries,
which did not change the condition existing?
Mr. LORD. Those were merely taken out. I can give you from these
figures the capital funds and the reserves as of December 31,1929, and
as of December 31, 1930.
Mr. PECORA. All right.
Mr. LORD. Which I think will give the information you want.
Mr. PECORA. All right.
Mr. LORD. Under the Guardian National Bank of Commerce as of
December 31, 1929
Mr. PECORA (interposing). Well, the Guardian National Bank of
Commerce was not in existence on December 31, 1929, was it?
Mr. LORD. Well, they have lumped all these figures for the three
banks that afterward made up the Guardian Detroit National Bank
4532
STOCK EXCHANGE PEAOTIOES
of Commerce. By the end of 1930 I think the Bank of Detroit and
the Guardian Detroit Bank had consolidated.
The figure as of December 31, 1929, was $27,695,914.97. At the
time of the consolidation of the Bank of Detroit with the Guardian
Detroit Bank, the Bank of Detroit paid into the Group in the form of
Government securities 2% million dollars in the form of a liquidating
dividend. Taking that item out, there is a reduction in the capital
structure to $25,229,365.35. If you add that item back, it shows that
the combined capital structure, plus the liquidating dividend which
went to the group, is a little in excess of the capital funds as of
December 31,1929.
In the case of the Union Guardian Trust Co. as of December 31,
1929, the figure is $16,100,722.15. During 1930 the Union Guardian
Trust Co. declared to the Group Corporation as a liquidating dividend
the capital stock of the Union Building Co., which stood on the books
at 5 million dollars. That leaves the capital funds as of December 31,
1930, at $11,025,952.04.
Mr. PECORA. Why did that bank do that?
Mr. LORD. Because it would result in a very substantial saving in
the matter of taxes. In the State of Michigan bank stock is taxed on
its amount. And in addition the Trust Co. was paying taxes on the
real estate. In other words, there was a duplication oi taxes. You
are taxed on your building and real estate as real estate, and the
Union Guardian Trust Co. was also taxed on its capital.
Mr. PECORA. What was the value of the real estate at the time of
the transfer to the group?
Mr. LORD. Well, the stock stood on the books at 5 million dollars.
The Corporation owned this Union Guardian Building, which had cost
between 11 and 12 million dollars.
Senator GOLDSBOROTJGH. And the statute of Michigan does not
permit the reduction of real estate from bank stock?
Mr. LORD. Not to the full extent. I think it saved us between
$50,000 and $60,000 in the matter of taxes. Furthermore, we found
that by operating it as a separate unit and not a§ owned by the Trust
Co., wasvvery much more satisfactory from the standpoint of the operation of the building.
Continuing these figures as to capital structure: In the case of the
Highland Park State Bank, on December 31, 1929, it had a capital
structure of $3,488,594.87, and on December 31, 1930, it was $3,547,203.82, an increase of approximately $59,000.
In the case of the Highland Park Trust Co., the capital structure on
December 31, 1929, was $825,562.36, and at the end of the year 1930
it was $878,815,83, an increase of approximately $53,000.
In the case of the Union Industrial Trust & Savings Bank, of Flint,
the capital structure on December 31, 1929, was $3,765,420.29, and
at the end of 1930 it was $3,941,141.37, or an increase of approximately
$170,000.
In the case of the Grand Rapids National Bank, the capital structure
as of December 31, 1929, was $1,925,660.75, and at the end of 1930 it
was $1,743,919.30, or a decrease of about $180,000.
In the case of the Grand Rapids Trust Co, the capital structure as
of December 31, 1929, was $1,624,106.30, and at the end of the
year 1930 it was $1,595,932.48.
STOCK EXCHANGE PBACTICES
4533
In the case of the Union & Peoples National Bank, of Jackson, as
of December 31, 1929, its capital structure was $1,563,166.36, and at
the end of the year 1930 it was $1,632,968.37, an increase of approximately $69,000.
In the case of the Second National Bank & Trust Co. of Saginaw*
its capital structure as of December 31, 1929, was $3,187,985.08, and
at the end of the year 1930 it was $3,274,978.07.
In the case of the First National Trust & Savings Bank of Port
Huron, its capital structure as of December 31, 1929, was $1,406,605.20, and at the end of the year 1930 it was $1,458,181.64.
In the case of the Capital National Bank of Lansing, its capital
structure as of December 31, 1929, was $1,693,578.11, and at the end
of the year 1930 it was $1,797,443.46.
In the case of the First National Bank & Trust Co. of Kalamazoo,
its capital structure on December 31, 1929, was $1,188,277.15, and
at the end of the year 1930 it was $1,246,468.96.
In the case of the City National Bank & Trust Co. of Battle Creek,
as of December 31, 1929, its capital structure was $1,357,542.27, and
at the end of the year 1930 it was $1,393,219.52.
In the case of the Guardian Bank of Dearborn, its capital structure
as of December 31, 1929, was $979,162.49, and at the end of the year
1930 it was $985,635.02.
In the case of the Michigan Industrial Bank of Detroit, its capital
structure as of December 31, 1929, was $694,871.66, and at the end of
the year 1930 it was $706,923.97.
In the case of the National Bank of Ionia, its capital structure as
of December 31,1929, was $318,161.28, and at the end of the year 1930
it was $338,896.07.
In the case of the City National Bank & Trust Co. of Niles, its
capital structure as of December 31,1929, was $311,497.35, and at the
end of the year 1930 it was $318,985.02.
In the case of the Guardian Bank of Trenton, its capital structure
as of December 31, 1929, was $92,006.78, and at the end of the year
1930 it was $92,496.92.
In the case of the Guardian Bank of Grosse Pointe, its capital
structure as of December 31, 1929, was $135,023.94, and at the end
of the year 1930 it was $142,701.77.
In the case of the Bank of Hamtramck, its capital structure as of
December 31, 1929, was $248,775.57, and at the end of the year 1930
it was $227,919.34.
The CHAIRMAN. What does all that tend to show?
Mr. LORD. Mr. Pecora asked for the capital structure at the
beginning of 1930 and at the end of 1930, of these various institutions.
Mr. PECORA. IS it not a fact that at the end of 1931 the capital
structure of nearly all of these banks you have just alluded to had
become reduced still further than they had been between the beginning
and the end of the ^ear 1930?
Mr. LORD. Yes, sir.
Mr. PECORA. And also
between the beginning of 1932 and the end
of 1932 those capital structures in many instances were still further
reduced; is not that so?
Mr. LORD. Yes,
sir.
Mr. PECORA. Are you able to tell the committee, for the years
1930, 1931, and 1932, respectively, the banks which were units of the
175541—34—PT 9
22
4534
STOCK EXCHANGE PRACTICES
group which, in paying dividends for those years, had to dip into
their capital funds?
Mr. LORD. Which years, Mr. Pecora?
Mr. PECORA. 1930, 1931, and 1932. Take them for each year,
separately, if you will.
Mr. LORD. There are two ways of answering that question; that
is, to make it clear to you. In the first place, charge-offs were set
up for reserves. Keserves are usually taken out of undivided profits
and charge-offs are made direct out of the reserve accounts. If you
consider charge-offs out of reserves made out of current performance
rather than out of previous reserves, that is one thing; or if you want
me to show the earnings, and the dividends, that is, the operating
earnings and the dividends, I can answer it in that way and show
what institutions encroached upon their undivided profit accounts
to pay dividends during those years.
Mr. PECORA. Well, do it the second way.
Mr. LORD. We will take 1930. The Union Guardian Trust Co.
in 1930 encroached upon its undivided profit account in the payment
of dividends to the extent of about $62,000.
Mr. PECORA. HOW much?
Mr. LORD. About $62,000. The Grand Rapids National Bank,
to the extent of $73,000 odd. The Grand Rapids Trust Co., to the
extent of $5,900, about. Those are the only institutions in 1930 that
encroached upon their undivided profit accounts for the payment of
dividends.
Mr. PECORA. HOW many of the other banking units of the group,
during that year, out of undivided profits or surplus, set up reserves
or made write-offs or charge-offs?
Mr. LORD. They all made some charge-offs. They show figures
of net charge-offs.
Mr. PECORA. In how many instances in the year 1930, as among
the banking units of the group, were dividends paid by the bank
where the amount of the dividends paid, plus reserves and charge-offs,
exceeded the amount of net earnings?
Mr. LORD. DO you want them separately named?
Mr. PECORA. Yes.
Mr. LORD. The Guardian
National, or the combination of those
banks
Mr. PECORA. YOU had better take the banks as they existed at
that time.
Mr. LORD. I had not the separate figures at that time. The
Guardian National did not show a deficit after charge-off. The
Trust Co. did. The Highland Park State Bank did not. The
Highland Park Trust Co. did not. The Union Industrial Trust and
Savings Bank did not, or the Grand Rapids National. The Grand
Rapids Trust Co. did. The United States and Peoples National
Bank at Lansing did. The Second National Bank & Trust Co. of
Saginaw did not. The First National Trust and Savings of Port
Huron did not. The Capital National at Lansing did not. The
First National Bank of Kalamazoo did not. The City National
Bank & Trust Co. of Battle Creek did not. The Guardian Bank of
Dearborn did not. The Industrial Bank did not. The National
Bank of Ionia did not. The City National Bank & Trust Co. at
Niles did not. The Guardian Bank of Trenton did show a deficit after
STOCK EXCHANGE PRACTICES
4535
both charge-offs and dividends. The Guardian Bank at Grosse
Pointe did not; and the Bank of Hamtramck did, after its charge-offs.
Mr. PECORA. If I have followed your recital correctly, six of the
banks showed deficits after paying dividends, setting up reserves and
dharge-offs.
Mr. LORD. These charge-offs, Mr. Pecora, may have come from
reserves alreadj set up. All I have in this statement here is the net
charge-offs which would change the capital structure; and in capital
structure I have included capital surplus and reserves.
Mr. PECORA. Will you give us that information for the calendar
year 1931?
Mr. LORD. With the exception of the Second National Bank at
Saginaw and the Guardian Bank of Trenton, all made charge-offs
After dividends which ate into their capital funds in some form.
Mr. PECORA. Which what?
Mr. LORD. Which encroached upon their capital funds.
Mr. PECORA. That is, it really would yield a deficit for that year
after declaration and payment of dividends?
Mr. LORD. If you consider the charge-offs made during any year in
a bank as applicable to that particular year's operations; yes.
Mr. PECORA. That is an unfair way of looking at it, is it?
Mr. LORD. Yes; I think it is.
Mr. PECORA. For the purpose of declaring dividends is that an
unfair thing to take into consideration? Should not dividends, in
other words, be declared on the basis of existing condition?
Mr. LORD. N O ; I do not think so, necessarily, Mr Pecora.
Mr. PECORA. Well, we differ.
Mr. LORD. I would like to comment on that point in this way.
I am not going to name these banks, because we do not want to discuss
another bank's affairs; but here is a list of some of the leading banks
in the United States. Here is a bank—I will name them if you want
me to
•
Mr. PECORA. NO. I am not examining you about the activities or
the conduct of banks other than banks of your group.
Mr. LORD. N O ; but you are asking me on a question of policy.
Mr. PECORA. I am asking you on a question of what was done in
your case; that is, in the case of your group and its banking units.
Mr. LORD. I have answered that. We paid dividends at the same
time that the charges were made against capital account; and other
banks were doing it—some of the finest banks in the country.
Mr. PECORA. And you did it under circumstances which made
those dividends, plus the charge-offs, exceed the net earnings?
Mr. LORD. In the current year; yes.
Mr. PECORA. DO you think that is good, sound banking practice?
Mr. LORD. Under the circumstances; yes.
Mr. PECORA. DO you think it was sound banking practice particularly at a time when banks should have conserved all of their
resources in the interests of depositors?
Mr. LORD. Under the circumstances; yes. And I believe that the
boards and committees, if they had it to do over again, with conditions as they were, would do it the same way, Mr. Pecora.
Mr. PECORA. WTiat were the benefits accruing from that policy?
Mr. LORD. Stabilization of the whole situation.
4536
STOCK EXCHANGE PRACTICES
Mr. PECORA. What do you mean by that? That is rather a
mouth-filling phrase, and it is so general that I am not sure that I
know its full meaning.
Mr. LORD. The question of public fear, of panic, that prevailed at
that time was such that the action taken in regard to dividends was,
in our opinion, absolutely wise and the thing to do.
Mr. PECORA. DO you mean it was better to pay dividends rather
than to conserve the cash resources of the bank, in order to inspire
public confidence in the bank?
Mr. LORD. Infinitely better than not to pay dividends and lose
public confidence and have a run on the bank and have the depositors
destroy their own institutions.
Mr. PECORA. Were you not virtually trying to pull yourself up by
your own bootstraps by that process?
Mr. LORD. NO, sir.
Mr. PECORA. Were you not putting off the evil day of reckoning
and aggravating it when it should come?
Mr. LORD. NO, sir.
Mr. PECORA. Was it
not necessary, in your opinion as a banker,
for banks to conserve their resources in the interests of the depositors
during the period of depression?
Mr. LORD. Not if the payment of dividends was the wise thing to
do.
Mr. PECORA. That is begging the question.
Mr. LORD. Not to the extent of breaking down public confidence
if there should take place a rim on the institution.
Mr. PECORA. What was the sense of building up public confidence
upon a false basis?
Mr. LORD. It was not on a false basis.
Mr. PECORA. Was it not on a false basis, in view of the fact that
dividends were being paid not because earnings justified them, but
in order to maintain public confidence?
Mr. LORD. The operating earnings did justify it.
Mp. PECORA. When you say that operating earnings did justify it,
you are excluding from consideration the setting up of reserves and
charge-offs or write-offs for losses, are you not?
Mr. LORD. Yes,
sir.
Mr. PECORA. Well, that is not fair, is it?
Mr. LORD. Under the circumstances, I believe it is fair.
Mr. PECORA. What circumstances do you refer to?
Mr. LORD. I am talking about the conditions that existed in
regard to banks. I would just like to put into this record some of
these banks and what they did, to show
Mr. PECORA. Are you going to refer to your banks or to banks
outside of your group?
Mr. LORD. I am going to refer to banks outside of our group, to
show that the policy we followed was a sound policy in the opinion
of other banks.
Mr. PECORA. If you want to indict the judgment of other bankers,
that is one thins
Mr. LORD. I do not.
Mr. PECORA (continuing).
But if you want to indict the judgment
of banking executives generally, the information you want to give
STOCK EXCHANGE PRACTICES
4537
"the committee would be useful for that purpose and for that purpose
only.
Mr. LORD. I do not propose to indict the judgment of other banks.
I think they did the wise thing, just as I think we did under the
^circumstances.
Mr. PECORA. DO you think, in the light of all that has happened,
Uiat that judgment was vindicated?
Mr. LORD. Yes, sir.
Mr. PECORA. Are the
depositors better off today because that
judgment was followed?
Mr. LORD. I think they probably are, because of the liquidation
that took place in those banks while the banks were allowed to remain
open.
Mr. PECORA. And the amount of cash that otherwise should have
been available to pay depositors has been reduced by that policy,
lias it not?
Mr. LORD. Mr. Pecora
Mr. PECORA. NO. IS it or is it not?
Mr. LORD. It is in some respects; but don't forget that during the
years 1930, 1931, and 1932 the Group Co. put back into those banks
.$8,400,000 in cash.
Senator ADAMS. HOW does that compare with the amount of
dividends taken out in those years?
Mr. LORD. It was more.
Mr. PECORA. What?
Mr. LORD. It was more than was taken out during those years.
Mr. PECORA. Oh, just look at your figures, and I think you will
<5ome to a different conclusion about that. During those years the
amount of dividends received by the group totaled $9,744,064.09,
according to committee's exhibit no. 32 of December 20 last.
Mr. LORD. I was talking about the years 1930, 1931, and 1932.
Mr. PECORA. Well, I am adding the year 1929, which was one of
the years.
Mr. LORD. All right. We will take that, of course. The Group
Co. then took out $1,300,000 in dividends over four and a fraction
years less than they put in. They put in $8,414,000, as I remember
the figure.
Mr. PECORA. And took out how much?
Mr. LORD. $9,789,000.
Senator ADAMS. In what way was the money put back?
Mr. LORD. Paying for undesirable or slow assets.
Senator ADAMS. It was not in the shape of a loan?
Mr. LORD. NO, sir; they were purchased and the assets lifted out.
Mr. PECORA. And that left the group without assets to meet the
claims of depositors of the banking units under its liability as a stockholder of the banks, did it not?
Mr. LORD. NO, sir; I would not say that. It left the group with
an indebtedness; yes; but the group still had assets in the form of
the stock in these banks and a certain amount of cash.
Mr. PECORA. The group had the assets in the form of the capital
stock of the banks?
Mr. LORD. The banks which it owned; yes.
4538
STOCK EXCHANGE PRACTICES
Mr. PECORA. SO that that was not bringing into the banks for the
purpose of making funds avilable to depositors any moneys outside
of the capital stock of the bank itself, was it?
Mr. LORD. It certainly brought in $8,400,000 available to the
depositors of the bank.
Mr. PECORA. YOU know that a stockholder of a bank is under a
legal liability in favor of the depositors?
Mr. LORD. I do;
'
certainly.
Mr. PECORA. And the stockholder, virtually the sole stockholder
of nearly all if not all of the unit banks that composed the group,
was the group holding company?
Mr. LORD. Correct.
Mr. PECORA. The only assets that the group holding company
had, or its assets in large part, consisted of the capital stock of the
unit banks themselves?
Mr. LORD. Yes, sir.
Mr. PECORA. It had virtually no property outside of that?
Mr. LORD. A small amount of cash.
Mr. PECORA. SO that the situation thereby created was that
with
the Group Co., the holding company, as the sole stockholder of the
unit banks, the depositors of any of those unit banks could not look,
under the liability clause of the law imposed upon bank stockholders,
to any independent property which the stockholders owned outside
of the capital stock of the banks themselves?
Mr. LORD. That is true to a certain extent; but that did not change,
of course, the liability provision in the stock certificate which passed
on that liability
Mr. PECORA. And which is now very much in doubt in the courts?
Mr. LORD. I understand so.
Mr. PECORA. And some of the founders of the group itself who
are among the stockholders of the group are setting up in actions
now pending in the courts of your State the claim that they are not
liable as stockholders of the group to the banks that were units?
Mr. LORD. I understand so; yes.
Senator ADAMS. HOW much in dividends did the group pay out to
its stockholders during those 4 years?
Mr. PECORA. I have that amount here, Senator, as $9,293,639.90.
Senator ADAMS. Substantially the same amount was paid out by
the Group as came in in dividends?
Mr. PECORA. There is about a half million dollars difference. The
witness said it was paid back to the unit banks. Is not that so, Mr.
Lord?
Mr. LORD. They paid back to the unit banks $8,400,000 odd and
paid to the stockholders $9,200,000. That makes about $800,000
difference.
The CHAIRMAN. Would it not have better effected public confidence
Mr. Lord, to have stated to the public generally that whereas the
stockholders were entitled to dividends, they preferred to leave them
in the bank and not draw them but let them go to the undivided
profits of the bank?
Mr. LORD. That was not the judgment of the board. It is very
difficult, Senator Fletcher, for perhaps the members of this committee to realize fully the situation as it particularly was existing in
Detroit at that time. We had gone through a very serious situation
STOCK EXCHANGE PRACTICES
4539
beginning in March, 1931, when the American State Bank was about
to fail and the Detroit clearing house banks took it over. From then
on, all through the years following, covering October 1933, there was
a continuous story of bank failures throughout Michigan. I presented
the first day here a chart which showed the failures for about a year
and 2 or 3 months, and there were 195 bank failures in the State in
that period. In addition, we were very seriously affected by withdrawals at the time Chicago had its runs on the downtown banks,
and at the time approximately 200 of the Chicago outlying banks
failed. In Toledo, Which is only 60 miles from Detroit, in the summer
of 1931 I think all except one or two banks in Toledo failed. All of
that reacted on us so that the public mind was volatile, to say the
least.
The CHAIRMAN. I can understand that, and I can see how declaring
dividends might give the public the impression that the bank was
on a sound basis; but the stockholders, while they were entitled to
the dividends, might have left them in the bank and the bank would
have had the money available there.
Mr. LORD. That of course is a question of judgment; and it was
the judgment of the board and of the committee that the dividends
should be paid. You may recall that the dividends were cut down
gradually and finally cut off entirely after April 1931.
Senaitor ADAMS. Mr. Lord, with regard to the eight million-odd
dollars that you put back, did the Group have the money available
or did it borrow it?
Mr. LORD. It borrowed it.
Senator ADAMS. Where?
Mr. LORD. From New York and Chicago banks.
Senator ADAMS. It did not borrow it from its own banks?
Mr. LORD. NO, sir. It borrowed it, if you will recall, Senator,
partly on its own credit and partly on the endorsement of Mr. Edsei
Ford and Mr. Mott.
Mr. PECORA. The annual report for the year 1931 filed by the
group or the holding company with the Michigan Securities Commission, as has already been indicated, showed a deficit for the year
of $288,930.33
Mr. LORD. That deficit, however, Mr. Pecora, includes the carryover of $39,000 from the previous year. If you will notice
Mr. PECORA. Yes; I see that.
Mr. LORD. That is the accumulated deficit.
Mr. PECORA. It shows a deficit for that year itself of about $248,000, does it not?
Mr. LORD. That is correct.
Mr. PECORA. Making allowances for the carry-over of $39,000 of
deficit in the preceding year?
Mr. LORD. That is right.
Mr. PECORA/ Look at the copy of the printed annual report to the
stockholders for the year 1931 issued by the Group and point out to
this committee if you can any statement or any information therein
contained which informed the stockholders that the Group for the
year 1931 had incurred a deficit.
Mr. LORD. There is no direct statement to that effect.
Mr. PECORA. IS there any indirect statement to that effect, or
any statement of any kind which so informed the stockholders?
4540
STOCK EXCHANGE PRACTICES
Mr. LORD. I would say so; yes.
Mr. PECORA. Where?
Mr. LORD. The statement on page 7 shows the net earnings of the
banks and trust companies of the Group after all expenses of operation and after setting aside adequate reserves for taxes and depreciation, banking quarters and equipment, $3,887,000 plus. That
takes only the banks and trust companies. On the next page, in the
middle of the page, the total operating loss of institutions other than
banks and trust companies amounted to $542,957.68. That loss of
$542,957.68 included also a deficit of the Group Corporation for that
year.
Mr. PECORA. HOW can anybody reading this report and even putting emphasis on the portions thereof that you have just read deduce
that for the year 1931 the Group or the holding company had a
deficit, exclusive of the carry-over of the deficit for the preceding
year, of nearly $250,000?
Mr. LORD. It cannot. This was a picture of all of the units, including the Group.
Mr. PECORA. There was no annual report issued to the stockholders
of the group for the calendar year 1932, was there?
Mr. LORD. There was not.
Mr. PECORA. Why not? But before you answer that question,
which I will withdraw temporarily, let me ask you this: Is it not a
fact that the annual report filed by the group for the year 1932 with
the Michigan Securities Commission showed that the deficit incurred
by the group for the year 1932 was $714,331.26, which included the
carry-over of the deficit for the two preceding years, aggregating
$288,000?
Mr. LORD. That is correct, sir.
Mr. PECORA. NOW I will ask you the question, why wasn't an
annual report made of the group for the calendar year 1932?
Mr. LORD. There was a verbal report made to the stockholders by
Mr. Kanzler, chairman of the board, at the annual stockholders'
meeting held, I believe, on January 28.
Mr. PECORA. Was there any minute anywhere or any document
which shows what that verbal report or oral report was?
Mr. LORD. Any stockholders' minutes?
Mr. PECORA. Showing just what the report was that you say was
made?
Mr. LORD. I don't know.
Mr. PECORA. What is that?
Mr. LORD. I don't know of any. I know that there had been in
course of preparation the document itself. After the meeting of
January 28 Mr. Kanzler by appointment left for Washington in connection with the Trust Co. loan from the E.F.C.
Mr. PECORA. I know, but why wasn't an annual report printed and
published and given to the stockholders for the year 1932?
Mr. LORD. Because Mr. Kanzler was then in negotiation in connection with the loan from the R.F.C. and expected to include in the
annual report a separate statement as to the result of those negotiations.
Mr. PECORA. My dear man, anything done in 1933 should not be
contained in the report for 1932, should it?
STOCK EXCHANGE PRACTICES
4641
Mr. LORD. He wanted to bring the stockholders down to date.
Upon the conclusion of the
Mr. PECORA (interposing). An annual report merely embraces the
operations for the calendar year for which it is issued, does it not?
Mr. LORD. Yes; but it seems to me
Mr. PECORA (interposing). Then why wasn't an annual report for
the year 1932 issued?
Mr. LORD. I just stated, Mr. Pecora, that Mr. Kanzler left the day
after the meeting. So fai^as the annual report is concerned for 1932,
that was in charge of Mr. Huelsman, Mr. Kanzler, and Mr. Waldow,
the auditor.
Mr. PECORA. Was it not also in charge of you?
Mr. LORD. N O ; it was not.
Mr. PECORA. Why wasn't it
for the year 1932, although it apparently had been for the preceding years?
Mr. LORD. It was for this reason: The executive committee meeting at which the annual report to be issued was discussed was held
on January 20.
The CHAIRMAN. What year?
Mr. LORD. In 1933. And at that time I was spending most of my
days and some of my nights at Port Huron, where our competitive
bank had failed across the street, trying to save our own institution.
I was not at that meeting. I had no activity and no part in the preparation of the annual report for '32 at all.
Mr. PECORA. NOW let me ask you to tell this committee how many
stockholders actually attended the annual meeting of the Group which
was held on January 24, 1933.
Mr. LORD. I would say 30 or 40.
Mr. PECORA. Out of a total of how many stockholders?
Mr. LORD. Eight or nine thousand.
Mr. PECORA. Those 30 or 40 for the most part were men who were
either officers or members of the board of the group, were they not?
Mr. LORD. I should say—when I said 30 or 40 I meant outside
stockholders besides the officers, Mr. Pecora. I should say there
were 50 or 60 there perhaps out of 8 or 9 thousand.
The CHAIRMAN. About how many?
Mr. LORD. Eight or nine thousand stockholders.
Mr. PECORA. NOW, let me read to you from photostatic copy which
I have of the minutes of the annual meeting of the stockholders of
the group held on January 24, 1933, in which it appears
Mr. LORD (interposing). When was that?
Mr. PECORA. January 24, 1933—in which it appears Mr. Ernest
Kanzler presided as chairman of the board. I will read from the
minutes as follows [reading]:
Whereupon the chairman presented the annual report of the corporation for
the year ended December 1, 1932, which, upon motion duly seconded and carried
by unanimous vote, was approved, and a copy of said report was ordered placed
on file with the corporate records of the company and similar copies mailed to all
stockholders of record.
Now, where is that report that was placed on file and which,
according to this motion which was unanimously carried, was ordered
mailed to all the stockholders of record?
Mr. LORD. I attended that meeting, and my recollection is that
Mr. Kanzler gave a verbal report, reading from some various notes.
4542
STOCK EXCHANGE PEACTICES
There certainly was not at the meeting any printed copy of an annual
report to my knowledge.
Mr. PECORA. There was a written copy, was there not?
Mr. LORD. Not to my knowledge. He had a typewritten paper.
Mr. PECORA. Then what does this motion mean?
Mr. LORD. I don't know. I don't know what—I should say that
is incorrect, because I remember Mr. Kanzler standing there and
reading from various notes that he had in his hand and discussing
the situation in regard to the various units*.
Mr. PECORA. Well, it is customary for the head of a corporation
at the annual stockholders' meeting to present to the stockholders
a full report, is it not?
Mr. LORD. He did.
Mr. PECORA. Of the corporation for the preceding
Mr. LORD. He did, verbally.
Mr. PECORA. But apparently, according to the
year?
minutes of the
annual stockholders' meeting of the group held on January 24 last,
the report which was presented to the stockholders by the chairman
of the board, Mr. Kanzler, was approved "and a copy of said report
was ordered placed on file with the corporate records of the company
and similar copies mailed to all stockholders of record."
Mr. LORD. Mr. Pecora, I
Mr. PECORA (interposing). Is that minute of the meeting wrong?
Mr. LORD. I should say the minute is incorrectly worded. There
was not, I am certain, at that meeting a printed copy of an annual
report.
The CHAIRMAN. Or a written copy, any kind of a copy?
Mr. LORD. AS I say, Mr. Kanzler stood there, as I recall it, and he
had various notes, sheets, and he took up one subject after another
and read it and talked about it verbally.
Mr. PECORA. IS Mr. Kanzler here?
Mr. LORD. He is in town.
Mr. PECORA. D O you know where he is at the moment? I want
him here this afternoon.
Mr. LORD. I will try to reach him. Do you want me to reach
him now or this noon?
Mr. PECORA. Mr. Chairman, would you allow the witness to suspend just a few minutes? I would like to find out if Mr. Kanzler
will be here this afternoon?
The CHAIRMAN. We will adjourn very soon now.
Mr. PECORA. YOU can do it at 12 o'clock when the committee will
take a recess.
Now, do you recall an instance where, as a result of the consolidation of two of the banking units of the Group, the capital structure
of the consolidated corporation was reduced and a dividend of
$2,500,000 in bonds was declared to the Group Co.?
Mr. LORD. I do, sir. Consolidation of the Guardian Detroit
Bank and the Bank of Detroit.
Mr. PECORA. Yes. When did that take place?
Mr. LORD. My recollection is in the middle of 1930. (After
referring to data.) I haven't the information right here. I think
it was the middle of 1930. Do you want me to give the exact
date?
STOCK EXCHANGE PEACTICES
4543
Mr. PECORA. NO. Mr. Chairman, that would involve considerable examination of this witness. It is 5 minutes of 12. I suggest
we recess.
The CHAIRMAN. YOU spoke about Mr. Kanzler's coming on to
Washington to negotiate the loan from the R.F.C. Did he get that
Joan?
Mr. LORD. It is a long* story. He did not.
Mr. PECORA. I am going to go into that in detail, Mr. Chairman.
The CHAIRMAN. We will take a recess now until 2 o'clock.
Mr. PECORA. Will you be good enough to ask Mr. Kanzler to be
here?
Mr. LORD.
Yes.
(Accordingly, at 11:55 a.m., a recess was taken until 2 p.m. of the
same day.)
AFTER RECESS
(The subcommittee reconvened at the expiration of the recess at
2 p.m., Thursday, Jan. 4, 1934.)
The CHAIRMAN. The committee will come to order. Proceed, Mr.
Pecora.
Mr. PECORA. Mr. Ernest Kanzler.
TESTIMONY OF ERNEST KANZLER, 2501 IBOQUOIS AVENUE,
DETROIT, MICH.
The CHAIRMAN. YOU solemnly swear that you will tell the truth,
the whole truth, and nothing but the truth, regarding the matters
now under investigation by the committee. So help you God.
Mr. KANZLER. I do.
Mr. PECORA. Mr. Kanzler,
will you give for the record your full
name, address, and business or occupation?
Mr. KANZLER. Ernest Kanzler; residence, 2501 Iroquois Avenue,
Detroit, Mich.; president of the Universal Credit Corporation, with
addresses at 1700 United Artists Building, Detroit, Mich.
Mr. PECORA. Mr. Kanzler, were you connected, as an officer or
otherwise, with the corporation called the Guardian Detroit Unior)
Group, Inc.?
Mr. KANZLER. Yes, sir. I was chairman of the board during the
year 1932.
Mr. PECORA. Were you connected with that corporation as an
officer or director from its inception?
Mr. KANZLER. Yes, sir. I was one of the organizers. Do you want
me to sketch the history?
Mr. PECORA. Yes. Just give an outline of your connection with
the company from its inception.
Mr. KANZLER. In 1926 I was interested in organizing a bank,
which was later called the Guardian Detroit Bank, with five other
gentlemen. This bank opened its doors in June 1927.
Senator COUZENS. That was under a State charter, was it not?
. Mr. KANZLER. That was under a State charter, Senator Couzens,
in June 1927. The bank was affiliated with the Guardian Trust Co.
and the Guardian Detroit Co. I was the vice president of this institution and a director in the Trust Co., and in the company. I left
the active operation in March 1928, but since that time, and up to
February 11,1 retained a directorship in several of the affiliated insti
4544
STOCK EXCHANGE PRACTICES
tutions connected with the companies growing out of that original
organization.
Mr. PECORA. February 11 of what year?
Mr. KANZLER. 1933. I presume I continued beyond that, but it
was not active.
Senator COUZENS. When you left in 1928, Mr. Kanzler, when did
you return to the organization?
Mr. KANZLER. I returned—I never was on the pay roll of the
organization. Whenever I have served, I have served in just what
time I could devote from my credit company business. I served as
chairman of the board of the Group Co. after my election to that
office, I think, from January 26, 1932.
The CHAIRMAN. What has been your business?
Mr. KANZLER. What is my business?
The CHAIRMAN. Yes.
Mr. KANZLER. The Universal
Credit Corporation, which is an
automobile financing corporation with branches in 35 cities, financing time sales of automobiles. This is a rather extensive business,
and it has occupied a considerable amount of my time. We have
done about $900,000,000 worth of financing since 1928.
Mr. PECORA. DO you recall attending and presiding over the
annual meeting of the stockholders of the Guardian Detroit Union
Group, Inc., which was held on January 24, 1933?
Mr. KANZLER. Yes, sir.
Mr. PECORA. And which,
as I understand, was the last annual
meeting of the stockholders of that company.
Mr. KANZLER. Yes, sir. I conducted that meeting.
Mr. PECORA. About how many stockholders attended that meeting?
Mr. KANZLER. I should judge there were about 130 or 140 people
there. There must have been about 20 rows, and about 8 or 10 in a
row.
Mr. PECORA. At that meeting do you recall whether or not an
annual report was submitted or presented in any form whatsoever
to the stockholders for the year 1932?
Mr. KANZLER. At that meeting I made some remarks to the stockholders from notes that I had which I read, because it was the first
meeting I had ever conducted, and I was not quite sure of myself as
to how to conduct a meeting of that kind, so I had prepared some
notes which I read to the stockholders, and I also had prepared some
charts which indicated the growth of the various institutions that
were members of the group, and after T had read up to the point
where those charts were material, I left off the writing that I had
prepared and continued an informal discussion about each of the
various units, and commented on the conditions in those cities as
illustrated by the charts.
Mr. PECORA. DO you know whether or not there is in existence
either the original or any copy of the notes from which you read your
report, or part of it, to the stockholders at that annual meeting?
Mr. KANZLER. I have the actual notes which I prepared for my
own reading and which I read.
Mr. PECORA. DO you have them with you?
Mr. KANZLER. Yes, sir; I have.
Mr. PECORA. Will you please produce them?
STOCK EXCHANGE PRACTICES
4545
Mr. KANZLER. Yes, sir [producing a document].
Mr. PECORA (after examining document). Mr. Kanzler, did you
read to the stockholders at the last annual meeting all of the matter
which is typewritten and handwritten on the document which you
have handed me?
Mr. KANZLER. I have not changed the document any, and I
presume I read it all just as it is.
Mr. PECORA. IS it fair to assume that those portions of this document which are deleted by lead pencil lines were not read?
Mr. KANZLER. Yes, sir.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted and entered in the record.
(Kanzler notes, annual meeting of stockholders, Guardian Detroit
Union Group, Inc., Jan. 24, 1933, were received in evidence,
marked " Committee's Exhibit No. 63, Jan. 4, 1934/' and the same
were subsequently read into the record by Mr. Pecora.)
Mr. PECORA. The document, which has been marked " Committee's
Exhibit No. 63", reads as follows [reading]:
Annual reports of 1932 are hardly complete without reference to economic
conditions, to the need for drastic curtailment of governmental expenditure, the
necessity offindingsolutions for the European situation and unemployment, and
the desirability of enacting banking legislation.
These problems are controversial. They have been debated by experts;
writers of authority have discussed them in the public prints.
We have very definite opinions on these problems and our organization has
contributed
liberally in time and effort to help solve them.
But,8 since the full discussion of even one of these problems affecting the
economic situation would, were it adequately treated here, consume infinitely
more time than is at our disposal, we want you to know that we are constantly
on the alert to changing conditions. We have at our disposal the best obtainable
counsel and in our operations during the past year we have been guided by this
counsel and have charted our course accordingly.
The safety of funds which our deositors have entrusted to us is paramount to
every other consideration. From this viewpoint, 1932 was a year of notable improvement.
Despite the generally adverse business conditions which prevailed, no less than
$100,000,000 of assets of our banks and trust companies are held as cash or invested in United States Government securities against aggregate deposit liabilities
of $290,000,000. This degree of liquidity is not excelled by any bank or group of
banks in the entire State of Michigan.
Mr. KANZLER. Mr. Pecora, may I interrupt? I think you will
find "any bank" is crossed off.
Mr. PECORA (reading):
This degree of liquidity is not excelled by any group of banks in the entire
State of Michigan.
Is that the way you think that was read?
Mr. KANZLER. I am sure it was, because I remember it at the time.
I thought it was an overstatement, and that there might be* some
bank that was 100 percent liquid, or 90 percent liquid, and so that
was crossed off.
Mr. PECORA (continuing reading):
While bettering their liquid position, our banks have at all times continued to
render constructive, helpful service to customers and have played an important
part in encouraging industry to maintain employment and in rendering distinct
assistance and cooperation to their respective communities.
The pursuance of this sound policy of looking first to the stability and liquidity
of our banks and trust companies necessarily affected our earning power—for
liquidity can be maintained only at the expense of profits. For the year 1932,
4.546
STOCK EXCHANGE PRACTICES
operating earnings of the banks and trust companies in the Group, after all
expenses of operation, taxes, depreciation on banking houses and equipment and1
losses on securities sold, but before reserves, were $2,619,443. On the same
basis and for the same period, the consolidated net operating earnings of the
Group Co., banks, trust companies and all other affiliated companies, amounted
to $1,316,952.
Dividends paid during the year amounted to $375,134. Conservative policies
made advisable the discontinuance of dividends during the second quarter
of 1932. The remaining earnings of $941,818, together with recoveries of
$1,131,005, from items charged off in previous years, plus sums taken from capital
funds in an amount of $8,966,932, totaling $10,939,756, were transferred toreserves.
Computed on the basis of the aggregate capital, surplus, and undivided profits
of the unit banks and trust companies, as reflected by their published statementsof December 31, 1932, plus the net worth of the other affiliated companies at
market prices of securities on December 31, 1932, the book value of the groupstock amounts to $17.04 per share. This figure does not include total reserves
remaining in the banks and trust companies exceeding $6,700,000, nor does it
include a reserve of $5,000,000 on the books of the Group Co. for contingencies
not determinable at this time, but which your management has deemed it prudent
to create, in view of the present business situation.
The policy of liquidating securities affiliates which was initiated in 1931 has been
continued during 1932 in an orderly manner. During 1932, a difficult period for
liquidation, securities carried on the books at $1,712,821 were sold with a resultant
net loss of only $42,201, accomplishing this liquidation by the sale of the least
desirable holdings and retaining only the highest grade securities. , On*Etep©in,ber
31, 1932 the aggregate market value of securities owned by these companies wa&
$5,688,797.
Outside of the banks and trust companies whose statements are regularly
published, and in addition to the securities companies which are in liquidation,
as stated above, there are included also in the Group the following three operating
companies—the Union Title & Guaranty Co., the New Union Building Co., and
the Guardian Safe Deposit Co.
The Union Title & Guaranty Co. depends upon real estate activity for its.
profitable volume of business. During 1932 there was continued stagnation of
real estate activity in the metropolitan Detroit district. In spite of the greatly
curtailed field for title-company operations, this company was able to show a
small profit ($1,600) in 1932 as against a $47,000 loss in 1931. Though its operating income declined 20 percent, its expenses were cut about 30 percent to produce
this result.
The year 1932 has been one of continued difficulties for office-building operation.
Under the existing leases with the New Union Building Co., the Union Guardian
Trust Co. handles all details of building management, and all results of such
operations are reflected in the trust company statement as published. Under
this arrangement, the New Union Building Co. made a profit of $219,000 before
depreciation. Depreciation of building and equipment amounted to $290,000.
The funds which are being accumulated in the reserve for depreciation are used
to make principal payments on the mortgage obligation of the building company.
Since completion of the building in 1929, the building has been written down by
$1,227,916.66, and during the same period its mortgage indebtedness has been
reduced by $575,000 to $6,425,000. This indebtedness is now being reduced at
the rate of $250,000 per year. Except for current operating accounts, the building
company has no obligations other than the mortgage debt.
There was a greater than normal demand for safety-deposit boxes this year,
and a as result the Guardian Safe Deposit Co., which operates all the safe-deposit
business in metropolitan Detroit and a few other units, had a sligHt increase in
its earnings, the total for the year being $4,800.
Drastic economies of operation were continued during the year with satisfactory
results. In spite of the fact that total operating income of banks and trust companies decreased 18.32 percent, the controllable operating expenses—i. e., other
than interest on deposits—were reduced 25.41 percent.
To effect further operating economies, the Grosse Pointe unit, the Guardian
Bank of Grosse Pointe, was merged with the Guardian National Bank of Commerce on December 31, 1932.
FINANCIAL STABILIZATION
In the latter part of December 1931 the American State Bank of Lansing, one
of the three largest banks in Lansing, had been forced to close its doors. Public
STOCK EXCHANGE PEACTICES
4547
confidence in Lansing was badly shaken. The public hysteria was directed
almost entirely against the City National Bank, whose deposits were rapidly
being withdrawn.
To protect the citizens of Lansing from a catastrophe from which the city would
have taken many years to recover, and to establish financial stability for the city
of Lansing, the Capital National Bank of Lansing, our unit, on December 28,1931,
took over the City National Bank of Lansing, which then was an institution with
total footings of approximately $9,000,000.
To protect our unit against possible loss in taking over the assets of the City
National Bank, certain of the directors of that institution, together with some
public-spirited corporations and other individuals, put up in trust as a guaranty
fund, securities having a market value of $1,500,000.
Announcement that one of the Guardian units had guaranteed deposits of the
City National Bank immediately quieted the fears of the Lansing public and
financial tranquility was reestablished within short order.
The wisdom of this action has been fully demonstrated and public confidence
in Guardian institutions and Guardian policies has increased in no small degree*
On January 14 of this year, the only other bank in Port Huron outside of our
unit was compelled to close its doors. At the same time, two small banks, one
in Algonac and one in Marine City, nearby communities, also closed their doors.
As was to be expected, the public in Port Huron became apprehensive as to the
safety of their deposits. For a day or two even our own bank at Port Huron suffered withdrawals. These withdrawals have ceased, and funds which had been
placed in safety-deposit boxes by frightened customers have already begun to
return to our bank.
It is an inherent feature of the present banking situation, involving as it does
such a delicate and fragile thing as credit reputation, that the many instances of
assistance rendered by the group to communities and institutions of Michigan
can never be detailed. Actual results, however, have developed an understanding
in many quarters of the effectiveness of group banking as conducted in your corporation, and have made for our units many new friends and an enhanced
reputation.
The banking units of the Guardian Detroit Union Group are located in 16
communities
It is interesting to note that, as measured by deposits, in 11 of these communities the Guardian units are first in size; in 4 cities they are second in size; and
1, in Hamtramck, is in third place.
Putting it in another way, in 3 cities our units have 100 percent of the
deposits in the city; in another 3 cities our units have more than 75 percent
of all deposits; in 2 cities our units have more than 50 percent; in 5 cities our
units have more than 25 percent; and in 3 cities we have less than 25 percent.
That our units are gaining in good will and strength in the eyes of the. various
communities of the State is best demonstrated by the fact that two of our largest
out-State units, which at the beginning of the year had been in second place,
went to first place in their respective cities. Two other units advanced their
position from third place to second. Only one unit in the Group, namely.
Dearborn, lost its relative position during the year, the same having been passed
by the Deaborn State Bank.
Fourteen of the twenty banks and trust companies in the Group are 20 years
old or more. Seven of these are 60 years old or more—the average age being
35 years.
Mr. KANZLER. Mr. Pecora, if I may interrupt here, it was at this
point that I brought out the charts, and in connection with this
information I discussed the situation of each unit and the community.
Mr. PECORA. YOU have not any copy of those charts?
Mr. KANZLER. They were all extemperaneous. I think the charts
probably are still in Detroit.
Mr. PECORA. I will resume my reading of Committee's Exhibit No.
63 [continuing reading]:
The stock ownership of your corporation is the best evidence of the confidence
the directors and officers have in the future of the group. Its institutions are
manned by men who are outstanding citizens in their respective communities,
who have for years been identified with their institutions, and who are familiar
with industrial and economic conditions of each city. They are men who are
4548
STOCK EXCHANGE PRACTICES
themselves large holders of stock in your corporation and whose every effort is
devoted to an interested development of service to the public and the community in which they are located.
Shares owned by officers and directors of units of the group as of January 12,
1933, amounted to over 400,000 shares, or more than 26 percent of the total of
1,544,844 shares outstanding; 1,435,978 shares, or 93 percent, are owned by
residents of the State of Michigan. There was a substantial increase in the
number of shareholders during the last year. There are now 9,837 shareholders,
compared with 8,945 on December 31, 1931. Ownership of large holdings of
stock remained practically unchanged during the year.
IN MEMORIAM
It is with deep regret that we report the great loss the Group has suffered by
deaths during the year—
On March 26: Edwin H. Nelson, president Nelson, Baker & Co.
On April 1: John R. Russel, vice president Clayton Lambert Manufacturing
Co.
On June 23: Daniel D. Brown, chairman First National Trust & Savings
Bank, Port Huron.
These men were all directors of the Guardian Detroit Union Group, and their
memory is warmly cherished by those with whom they were associated.
Notwithstanding the exceptionally trying times and their effect upon our
banking institutions during the year, our unit banks are entering the new year
prepared to furnish better and more efficient banking service to the communities
which they serve.
Perhaps never in the history of banking has more been demanded of directors,
officers, and staff than in the past year. It has been an inspiration to note the
unselfishness with which our organization has faced its daily problems.
We wish to take this occasion to express to them our appreciation for their
zeal, loyalty, and cooperation which has been shown.
We also take this opportunity to thank our shareholders for their splendid
support during the year 1932, which has resulted in an increased amount of business being directed to units of the Group. Continuance of this confidence during
1933 will stimulate the operating staff to even greater endeavors in the interest
of the stockholders.
The preeminence of the Guardian Detroit Union Group, Inc., as a vital factor
in the economic and financial life of Michigan becomes impressive when one
considers the outstanding men representing its affiliated institutions as directors. With these contacts, any economic improvement or further development
of Michigan's industries will directly reflect such prosperity within our own
institution.
Mr. KANZLER. This next was not read, Mr. Pecora. That was just
a computation.
, The CHAIRMAN. And right after that meeting you proceeded to
Washington to get a loan from the Reconstruction Finance Corporation.
Mr. KANZLER. Yes, sir.
Mr. PECORA. Does this comprise substantially what you gave to
the stockholders orally at the meeting of January 24 last, as the annual
report of the Group or holding company for the year 1932?
Mr. KANZLER. It does, plus the remarks I made in commenting
on the situations in the local communities that were represented by
those charts.
Mr. PECORA. Could you give this committee now, from your recollection or from any notes that you may have, the substance of those
remarks you made?
Mr. KANZLER. I had no notes. I commented on the conditions of
the banks throughout Michigan, as I recall it, and the fact that there
had been many banking failures. I commented on the—well, I cannot
generalize, Mr. Pecora. I would have to sort of think back over each
city. I remember I commented on the fact that the automobile
STOCK EXCHANGE PRACTICES
4549
industry had very seriously affected conditions in Flint and in Jackson; that conditions were a little bit better in Kalamazoo, because the
paper business had been rather satisfactory. I had commented on the
tact that in Port Huron the situation was particularly difficult because
of the fact that it was so easy for depositors to take money across the
river and put it into Canadian banks. I commented on the general
real estate situation involved in all units. I think that about repre*
sents it. There probably was some more said, but I do not recall
exactly what it was.
Mr. PECOEA. Mr. Kanzler, who prepared this document which
has been marked in evidence as Committee's Exhibit No. 63 of
this date?
Mr. KANZLER. Most of the text was prepared by myself. I
asked for the figures from different individuals who were operating
men in the group.
Mr. PECORA. Did you know whether or not, at the time you made
this report to the stockholders on January 24 last, the group had
incurred a deficit for the year 1932?
Mr. KANZLER. Are you speaking of the group as a group company, or of the banks and trust companies and affiliated institutions
of the group?
Mr. PECORA. I am speaking of the group as a separate corporate
entity.
Mr. KANZLER. I do not recall that I was particularly conscious
of what the particular books of that one corporation shQwed. Any
interest of the stockholders was in what their combined investment
had done during the year, and that was the figure I was trying to
give them. I did not think it was particularly important to know
just what one of the corporations in the group had done.
Mr. PECORA. The.stockholders to whom this report was made were
stockholders only of the group, were they not?
Mr. KANZLER. Yes,
Mr. PECORA. And,
sir.
as such, do you not think they were interested
in the financial condition of the group as a separate corporate entity?
Mr. KANZLER. I can only answer that by saying this, that we had
prepared and had before our executive committee a form of. the consolidated figures of all the banks and trust companies and all the
affiliates and the Group Co., and we were publishing that because
the stockholder then could see what the whole picture amounted to.
Mr. PECORA. Did you personally know, when you made this report
at the last annual meeting of the stockholders of the group, whether
or not the group, for thfe calendar year 1932, had done business at a
net profit, or showed a deficit at the end of the year?
Mr. KANZLER. Mr. Pecora, I will have to answer that question this
way. We did not pay any attention to the amount of dividends that
might be received from gjroup units to the Group Co., because we
were not on a dividend-paying oasis. The Group Co. paid no dividends.
It was of no material moment at that time as to whether or not the
casl* position of the Group Co. was larger or less by reason of some
dividends that either had been declared or had not been declared; and
toother reason
Mr. PECORA. One moment. You said the Group 0o. paid no dividends. . You mean it paid no cliyidends during that year.
Mr. KANZLER. N O ; at that time.
175541—34—FT 9
23
4550
STOCK EXCHANGE PRACTICES
Mr. PECORA. It did pay some dividends during the year 1932, did
it not?
Mr. KANZLER. Yes, sir.
Mr. PECORA. DO you know
what the aggregate amount of those
dividends was?
Mr. KANZLER. I think it is stated in the report as something like
$375,000.
Mr. PECORA. $375,134?
Mr. KANZLER. Yes, sir. That was the first quarter of 1932.
Mr. PECORA. Well now, can't you answer the question which I
put to you before and which I think is rather simple and which I will
repeat perhaps in another form: When, on January 24 last, you as
chairman of the board of the Group made this annual report to the
stockholders that were present, did you or did you not know that
during the calendar year 1932 the Group as a separate corporate
entity had incurred a deficit of $714,331.26, which included the carryover of deficits for the 2 preceding years amounting in the aggregate
to $288,930?
Mr. KANZLER. In the way our reports were being made that was
not material, to my mind.
Mr. PECORA. I have not asked you about its materiality or immateriality. I ask you if as a matter of fact you knew that during the
calendar year 1932 the holding company or the Group had incurred a
deficit in the amount stated?
Mr. KANZLER. The reason I am answering the way I am is because
it never was material, and I do not know whether I ever saw a sheet
showing a deficit or not, because of the manner of our keeping the
books.
Mr. PECORA. Did you know whether or not the company had
incurred a deficit for the calendar year 1932 when you made the
annual report for that year to the stockholders at the meeting held
on January 24, 1933?
Mr. KANZLER. I cannot say now, because I do not recall having
placed particular emphasis on what the holding company position was.
Mr. PECORA. What was your purpose in making an annual report
to the stockholders of the group if it did not include the purpose or
object of stating to the stockholders whether or not their company,
the group, the Guardian Detroit Union Group, Inc., had developed
a deficit or a surplus for the year 1932?
Mr. KANZLER. The purpose was to tell them what the combination did, and that is what was told them.
Mr. PECORA. For the purpose of telling them what the combination did. Eliminate from your purposes that of telling them what
the group as a separate corporate entity did on the whole.
Mr. KANZLER. Well, the Group Co. figures, whatever they were,
wfere included in the consolidated figures. Nothing was eliminated.
There was no deficit that was not stated if there was a deficit. There
was no profit, if there was a profit, that was not stated in the combined figures.
Mr. rECORA. Have you a copy of committee's exhibit no. 63 of
this date? That is this report or document that you handed me and
which you say you read to the stockholders.
Mr. KANZLER. I just gave one away. I think I have another one
here.
STOCK EXCHANGE PRACTICES
4551
Mr. PECORA. Will you look at it, please?
Mr. KANZLER. Yes, sir!
Mr. PECORA. Look at it
carefully. Point out to this committee
anything therein stated which indicated in words or substance that
the Guardian Detroit Union Group, Inc., for the calendar year 1932
had shown a deficit of any amount.
Mr. KANZLER. We stated this on page—I think it is marked
"pagel":
That on the same basis and for the same period the consolidated net earnings
of the group companies, banks, trust companies and all other affiliated companies,
amounted to—
this figure.
Mr. PECORA. Where do you see that?
Mr. KANZLER. That is on page 1.
Mr. PECORA. I don't see it on page 1 of my copy.
Mr. KANZLER. Maybe if I can see your copy, Mr. Pecora, I can
clarify that. [Pointing on Mr. Pecora's copy.l Beginning with that
sentence.
Mr. PECORA. It is really page 3 of the document you handed me,
although at the bottom of the page there appears the numeral 1.
Mr. KANZLER. That is right. I was looking at that when I said
page 1.
Mr. PECORA. All right. Now read the portion that you said informed the stockholders of the group that they had a deficit for the
year 1932.
Mr. KANZLER (reading):
On the same basis and for the same period the consolidated net operating
earnings of the group companies, banks, trust companies, and all other affiliated
companies, amounted to $1,316,952.
Mr. PECORA. IS that the statement that you say informed the
stockholders that the group operated at a deficit that year, or had a
deficit at the end of the year?
Mr. KANZLER. That would include any operations of the Group
Co., and if there had been a deficit or if there had been a profit that
could have been included in that figure.
Mr. PECORA. Where is the language, figures, or statement of any
kind here that by any manner of construction or interpretation that
you choose to apply to the words used here, informs the stockholder
that the group or the holding company showed a deficit at the end
of the year 1932?
Mr. KANZLER. Mr. Pecora, I can only say this, that that was a
clearing company and we did not show the exact earnings of some of
the other affiliates here, because the whole picture was a consolidtaed
picture, and we felt that whatever was material in the operations of
a clearing company which could have been changed by the mere
declaration of a dividend or by the transfer of some expense would
have changed that figure. So it really was not a figure that the
stockholder should have been or would have been interested in.
Mr. PECORA. Why do you think a stockholder would not have
been interested in any figure or statement that would have informed
him exactly to the effect that the company, the Group Co., for the
year 1932, showed a deficit at the end of the year? Why didn't you
consider that a thing that the stockholder of the Group Co, would
be interested in?
4552
STOCK EXCHANGE PRACTICES
Mr. KANZLER. For this reason: It might have been very misleading
information. You might have had a subsidiary company making a
great deal of profit and holding that profit, but simply not declaring
it to the Group Co. Then to bring out a statement and say that the
holding company was operating at a deficit because it had not transferred a dividend from a subsidiary company to a holding company
and that for that reason it ran at a deficit, would not be telling an
intelligent story.
Mr. PECORA. DO you think an intelligent picture of the financial
condition of the Group Co. was conveyed to the stockholders through
the medium of this report?
Mr. KANZLER. I think so, when taken in conjunction with the
balance sheet.
Mr. PECORA. What balance sheet?
Mr. KANZLER. Well, we had a balance sheet that we were to publish with this report.
Mr. PECORA. That you were to publish?
Mr. KANZLER. Yes, sir.
Mr. PECORA. Why wasn't it published?
Mr. KANZLER. Because the next day I took
the train to Washington, and from that time on until 2 and 3 o'clock every morning we
were engaged in the operations which finally led up to the holiday.
Mr. PECORA. Those operations were necessitated by reason of the
financial condition of the banks that were units of the Group, were
they not?
Mr. KANZLER. They were occasioned by our desire to provide for
the future of what we thought might happen in certain eventualities.
Mr. PECORA. And what you thought would be a proper provision
for the future was the obtaining of loans?
Mr. KANZLER. Yes, sir.
Mr. PECORA. And you sought
those loans from the ^Reconstruction
Finance Corporation?
Mr. KANZLER. Yes,
sir.
Mr. PECORA. And that was occasioned by the financial condition
of the banking units of the Group?
Mr. KANZLER. NO, sir; it was occasioned by the financial conditions throughout the whole State of Michigan, by the financial condition of institutions in the cities where we had units. Our units were
in comparably better position than many of the units in cities where
we were doing business, and in conjunction with Mr. Leyburn we had
thought it was essential that we develop a position for this Grouj), so
that regardless of what might happen economically or what might
burst out, what flame might burst out somewhere in Michigan, we
would have spinal column of banks that would maintain itself regardless of what happened.
Mr. PECORA. IS there anything set forth in this report which you
made to the stockholders which reflected that that was the situation,
the situation which prompted you the day after you delivered this
report for the year 1932 to the stockholders, to rush to Washington to
seek financial assistance from the E.F.C.?
Mr. KANZLER. Why, I think so, decidedly. We had told them
about the experience we had just had in Port Huron. They knew the
conditions throughout the State of Michigan. They knew how many
STOCK EXCHANGE PRACTICES
4553
banks had failed. These were the strongest, practically without
exception the strongest, surviving units in every city.
Senator COUZENS. Including Detroit?
# Mr. KANZLER. NO. But stockholders there knew the Detroit
situation. There was no need describing to them the condition in
which the city found itself and that we were working day and night
to keep the city bonds from going into default. The general conditions of the country were well known.
Senator COUZENS. YOU said a while ago that some of the units, or
the units of some of your competitors or the other group, were worse
off than you were and that you had the strongest chain, if I interpret
your testimony correctly. Is it not a fact that some of your units
were in equally bad condition?
Mr. KANZLER. Well, I don't know what you call in bad condition.
Certainly there were some units that we wanted to make more liquid,
because were there a run to start in some of those cities it is obvious
that they would have had a difficult time.
Senator COUZENS. YOU made a comparison between the units of
the other group. I assume there was only one other group?
Mr. KANZLER. NO, sir; I did not mean it in that sense. I was
making a comparison. If I may state an example: We might have a
unit, we will say, in Saginaw. There might be other banks in Saginaw
that might not be as strong as our units. Should there be difficulty
in one of those other units, it would immediately react upon our unit,
and therefore it was our desire and our purpose, and that was why we
came to the R.F.C., to make that Saginaw unit—I am just using that
as an example—so powerful that it could withstand any difficulty in
that particular city. Now, as a matter of fact, Saginaw we felt was
such a strong bank that we did not ask for any assistance for it at all.
Senator COUZENS. What banks did you ask for assistance for?
Mr. KANZLER. I haven't a recollection of all that now, Senator.
That is, I think, a matter of record.
Senator COUZENS. Where?
Mr. KANZLER. Oh, I think the R.F.C. must have all those applications.
Senator COUZENS. Did you not make an application for the
Group as a whole and take securities from a number of your units
to make up the aggregate security for the R.F.C?
Mr. KANZLER. NO, sir; that was not the original application.
Senator COUZENS. I am not talking about the original; I am talking
about the final application.
Mr. KANZLER. Well, the final application it was a question of
applying for a loan for a mortgage company.
Senator COUZENS. Yes.
Mr. KANZLER. And the mortgage company was to receive assets
from individual units throughout the State.
Senator COUZENS. That is the point I am trying to get at. What
individual units throughout the State?
Mr. KANZLER. May I refer to a record that I have here?
Senator COUZENS. Yes; certainly.
The CHAIRMAN. Had the mortgage company been organized and
was it operating, or were you going to organize one?
4554
STOCK EXCHANGE PRACTICES
Mr. KANZLER. The Mortgage Company, Senator Fletcher, was a
company that developed about February 3 or 4 or 5. The holiday
was declared on the night of the 13th. Mr. Allee of the R.F.C.
came with Mr. McKee on Saturday, January 28, and as a result
of some phone conversations from Detroit to Washington that plan
was finally decided upon, and then counsel in Detroit and Mr. Allee
representing the R.F.C. had the mortgage company papers all prepared and it was ready to function for that purpose as of that week
end that the holiday was declared.
The CHAIRMAN. I did not mean to interrupt your answer to the
other question.
Mr. KANZLER (after referring to data). To answer your question,
Senator Couzens, in its final form—and by final form I must recall
those days which were very hectic—the application had been handled
and rehandled from January 26, when it was first proposed to the
R.F.C, until the final date when the holiday was declared, and originally there were many more banks included in this application.
The final proposal from the R.F.C. was an offer with a condition
attached to it that if those conditions were satisfied they would loan
on collateral as offered 37 million dollars, and under that offer as it
was then scheduled the recipients of those funds, banks in the State,
were the Guardian National Bank of Commerce
Senator COUZENS. HOW much?
Mr. KANZLER. $10,500,000. Union Industrial Bank of Flint—do
you want to know the collateral on those? Shall I give that detail?
Senator COUZENS. Yes; I would like to have it.
Mr. KANZLER. The Guardian National Bank of Commerce of
Detroit required a loan of $10,500,000. It offered $11,655,000
worth of securities, which consisted of $3,200,000 of city of Detroit
bonds, $1,100,000 of Fisher & Co. loan, whch incidentally has been
paid, approximately $2,300,000 of Simmons Co. bonds—that is
Simmons Bed Co.—and approximately $5,000,000 of selected first
mortgages.
The Union Industrial Bank of Flint was to receive out of this
$37,500,000, $1,500,000, and for this it was offering a first mortgage
on two banks and office buildings, one of them being the largest office
building in Flint, which had just been then built, and the cost of these
two buildings was $3,772,000, and there was no mortgage debt, but
the amount required was a million and a half as against that 3 million
seven.
The next bank was in Grand Rapids, the Grand Rapids National
Bank. This was for a loan of a million dollars, and it was offering
a first mortgage on a 13-story bank and office building in the heart
of the city, which had been built some time before. The cost was
$2,160,000.
We wanted $600,000 for the City National Bank of Battle Creek.
That bank incidentally is open today. This bank was offering a
mortgage on its bank and office building, which cost $1,204,000, the
loan being $600,000.
The next bank that required liquidity was Jackson. The loan
was $500,000. It offered a first mortgage on its bank and office
building, 20-story building, the outstanding building of the city,
which had been built about 2 years before, cost about $3,489,000.
STOCK EXCHANGE PRACTICES
4555
That made a total of $14,100,000. Then tihere was an additional
loan asked for the Union Guardian Trust Co. of $13,077,000. They
already had a loan or a commitment of $14,000,000. The combined
total for the trust company would have been $27,800,000. I am
giving more or less round figures.
For this collateral had already been pledged of $31,790,000, and
additional collateral of $6,300,000 was being offered, which was
accepted by the R.F.C.
In addition to that collateral the Group Co. offered $898,000 of
marketable securities and its building, the Union Guardian Building,
in which it had an equity of $4,100,000, and all its assets in the
Congress Corporation, which had some but uncertain value, which,
while their face was 4 mijlion five, that is not a representative figure
as to what they were worth. They were worth less than that. They
were worth very much less than that, because of items which had been
lifted out from the various banks by the Group Co.
That made a total loan required of $41,000,000, and this collateral,
including that 4 million five of the Congress Corporation, was
$67,947,000.
This loan was offered us on condition that we raise 2 million dollars
for the capital of a mortgage company and an additional $4,218,000.
Senator COUZENS. What was that additional for, in cash?
Mr. KANZLER. That was cash, yes; to further secure this loan.
Senator COUZENS. Was there any other promise made to the
R.F.C. as security for the loan?
Mr. KANZLER. NO, sir; not that I know of.
Senator COUZENS. What did the R.F.C. value that at, the amount
of the offer,' 37 millions plus?
Mr. KANZLER. They offered $37,720,000.
Senator COUZENS. And that is what they valued the security at,
is it?
Mr. KANZLER. That is the loan value that they attached.
Senator COUZENS. Yes; that is what I mean.
Mr. KANZLER. Yes, sir.
The CHAIRMAN. That is
to all trust companies, banks in the Group,
all together?
Mr. KANZLER. Yes, Senator Fletcher. We never knew how much
lqan value they would put up against, for instance, this item or that
item or another item. We were just told that the total that we had
offered had a loan value of $37,720,000.
Senator COUZENS. Was there not at that time discussed the subordination of somq large deposits?
Mr. KANZLER. Yes, Senator Couzens; that is included in this figure
that I have here.
Senator COUZENS. For the Union Guardian Trust Co.?
Mr. KANZLER. Yes, and when I say the Union Guardian Trust Co.
asked for a certain amount, tliat subordination is included.
Mr. PECORA. Mr. Kanzler, in the preparation of this report which
you read to the stockholders at the last annual meeting of the (Jroup
this report was calculated to give the stockholders a rather pleasing
find confidence-inspiring picture of the situation, wasn't it?
Mr. KANZLER. Well, I don't think we inspired their confidence b;y
telling them that we just had a run in Port Huron particularly, I
think we tried to tell them about what the conditions were.
4556
STOCK EXCHANGE PEAOTICES
Mr. PECORA. Well now, among other things, you said:
The safety of funds which our depositors have entrusted to us is paramount
to every other consideration. From this viewpoint 1932 was a year of notable
improvement.
Had it been a year of notable improvement in that respect?
Mr. KANZLER. It certainly had. We had increased the liquidity of
the Guardian National Bank of Commerce from 30 percent to 40 percent.
Mr. PECORA. Yes.
Mr. KANZLER. We
had been very highly complimented on that.
That certainly was a notable improvement. In other units, the
exact conditions of which I cannot recall right now, there had also been
great improvement. It is obvious, of course, that the depression was
not getting any better. The depression was getting worse, and everybody knew it.
Mr. PECORA. But you were improving your condition according to
this report?
Mr. KANZLER. I think by comparison with what was going on we
certainly were improving; our operations were improving.
Mr. rEcoRA. No, not by comparison with what was going on, but
by comparison with the preceding year, had the safety of the funds of
the depositors, the various banking units of the group, been improved
over the preceding year?
Mr. KANZLER. Certainly you impr
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